Educational Development Corporation
Q3 2016 Earnings Call Transcript

Published: 30 Jan 2017

[Operator:]

Good day, ladies and gentlemen and welcome to the Educational Development Corporation Third Quarter Results Call. My name is Jonathan and I will be your coordinator for today. All this all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. As a reminder, this conference call is being recorded for replay purposes. For opening remarks and introductions, I would like to turn the call over to Randall White, President and CEO of Educational Development Corporation. Please go ahead, sir.

[Randall White:]

Okay, thank you, this is the first time I have done this, I hope it goes well. Welcome to our first quarterly shareholders call. I think I will start off by giving you the structure of the Company. This is a publicly traded Company; we were original members of -- original forming members in NASDAQ when NASDAQ was formed. We have two divisions in the Company; we have a direct selling division called Usborne Books & More where we have the independent consultants selling directly to the marketplace. We have a retail division where we sell to retail stores, toy stores, bookstores, museum stores, etc. We have around 5,000 stores that we currently sell to, Barnes & Noble being our largest single customer. The products that we sell primarily come from Usborne Publishing in England. We have been together since 1978; I think the original contract -- pretty unusual for two people -- two companies to stay together that long. Just returned from England, a nice visit with Peter Usborne, so they supply the bulk of our products, and then about eight years ago we bought a company, Kane Miller, which is primarily fiction, nonfiction titles that would be supplemental to the Usborne line. So to give you a little idea about the products, imagine the most beautiful color illustrated book you have ever seen and then imagine there are no words on the page. So what Usborne does is create the products and the first print run, maybe they will do a 50,000 copy print run with no words on the page. Then they will -- they have already taken our order for maybe 15,000. They'll run it back through the press and overprint 15,000 words in English. They then can run other copies; they have the ability to print in over 100 languages. It is a very unique concept that Usborne has created, which allows us to spread the cost of color production over a much larger print run which allows us to have less -- more of a practical, cheaper, less expensive products, certainly not cheaper -- the best in the world. Usborne has also been named the Publisher of the Year and Children's Publisher of the Year in England. So, we feel like we have the absolute best products in the world at our disposal with a long-standing contract. Eight years ago we bought Kane Miller, it is a small company and has since moved -- it has grown significantly since we bought them and now represent about 28% of our sales volume. Our Company is -- I have to say is completely different from two years ago. I have been here 35 years and I think I am a 34-year overnight success here. From two years ago, the sales growth has been spectacular. We recorded 35 million in sales two years ago, the past year 65 million, this year we will finish up around 110 million. And the growth continues. I am not going to throw out any large numbers here that will make everybody nervous, but the growth is continuing at least on that pace, if not better. The growth -- the primary growth is coming from the UBAM division, it is a direct selling organization with independent reps all over the country. A year ago we had 7,000 reps, and now we have around 28,000. This growth has presented significant challenges. Over two years ago, we began to see this sales growth and we realized we needed a new software platform to handle this growth in the direct sales division. And we reviewed -- did an extensive search of companies and reviewed several vendors who supply the direct selling industry. The decision was made to go with a veteran company in the industry that was ranked in the top five of software suppliers in the direct selling industry. While they have a basic package, many modifications were necessary to meet the unique nature of our needs. For example, we have five distinct marketing programs in our division. You can have a home party with them; you can have a Facebook party, which is kind of a virtual home party on the Internet. We also school book fairs. We have a reading and singing program and a fundraising program, each with a different compensation for the reps. Now, software has never really fulfilled the promised results that they promised us since -- as being implemented on September 1. And to give them a little credit, no other direct selling company in the industry has five distinct markets that they try to hit. So it was very difficult for them and unfortunately it didn't work and we had a real struggle computing the income for our sales reps. And when you can't pay people right not very much good happen after that. So we have struggled for quite some time in implementing the program as it should have been. So the decision was made just recently, very recently. We keep thinking it is going to work. We keep thinking because the -- they're trying -- they tried. And everything we send them they fix. But more keep cropping up and so we had no choice but to roll back to our old system. Now you think

[Operator:]

[Operator Instructions] And our first question comes from the line of Jeff Bronstill [ph] from -- he is a Private Investor. Your question please.

[Unidentified Analyst:]

I have some questions about your latest quarter. In the other income line, you reported about 0.5 million and I know most of that is it your lease income from Hilti. But it is usually about 320,000 a quarter. So what is the difference between what you reported the 0.5 million and the monies you receive from Hilti, about 180,000?

[Randall White:]

Well, we did receive some other income from other sources that fall to the bottom line. It was just some royalties on things from -- through the Kane Miller side of the business.

[Unidentified Analyst:]

Okay. You think those are one-time items?

[Randall White:]

Those are one-time items, yes.

[Unidentified Analyst:]

Okay, okay.

[Randall White:]

However, we hope they continue.

[Unidentified Analyst:]

Okay, okay. All right. And then you mentioned in your 10-Q about a $350,000 advance that you had to make to the Company I guess due to some cash flow challenges, and that amount was supposed to be paid back by the end of January. Is that still the case?

[Randall White:]

That is still the case. I was discussing this with Peter Usborne last week or this week actually. I told him, I said, this Company has come full circle because when I became CEO in 1986 we had a cash flow problem and we couldn't meet payroll. And on Friday afternoon I called everybody together, which is 22 people, and we didn't have enough money to pay them. But we got money in on Monday and it all worked out. And here we are 35 years, later it came down to a specific payroll that was underfunded. And so, I personally loaned the Company the money. And I have reasonable assurance that they are going to pay me back one of these days -- I hope they will.

[Unidentified Analyst:]

Okay, but I mean --.

[Randall White:]

I believe, Jeff, Jeff, I believe in the place, hey --.

[Unidentified Analyst:]

Oh, I know.

[Randall White:]

I mortgaged my house when I got this Company, I will do it again. There is no problem in me being all in, I am all in. If you had breakfast this morning and you had bacon and eggs, well, that chicken was involved, that pig was committed. So I am the big fat pig. I am all in, brother.

[Unidentified Analyst:]

Yes. Yes, we know your ownership, there is no question. So, yes, I was just concerned about the Company's I guess liquidity and making sure it had the ability to pay you back and that things were going to improve.

[Randall White:]

Well, I appreciate your concern.

[Unidentified Analyst:]

Yes, okay. A few more questions if you don't mind. Can you comment on the January sales trends a bit? I know we are not done with year-over-year. You've still got the growth like you were commenting on before?

[Randall White:]

Jeff, you want me to give you inside information here on a conference call? My goodness, well, okay, here is the deal. This is public information now. I am going to put it out there. In January we had the largest month in our history, $14 million -- I mean, December. Excuse me, December, I am sorry, December.

[Unidentified Analyst:]

Right.

[Randall White:]

However, I will tell you that some of that was carryover from November.

[Unidentified Analyst:]

Sure.

[Randall White:]

Now January, you want to know about January also?

[Unidentified Analyst:]

Sure.

[Randall White:]

We are currently up about 87%. So the same number of days last year compared to the same number of days this year we have revenue of, I am looking, 4.7 million, and the same number of days last year in January we had 2.7 million. So is the trend continuing? Yes. And I will tell you, if you talk to our field salespeople they are so excited about the fact that we have caught up on shipping. And there are people who've been sitting on the sidelines and said I am not going to order anything until they get that straightened out. And by the way, that includes our retail stores. It may take a little bit longer for them, but we have every hope that we will get the retail stores' business back and the customers. And so, that is where the growth is coming from in the future. And if you talk to them they will tell you it is going to come back stronger than ever if we can maintain our timely shipping like we are currently.

[Unidentified Analyst:]

Right. Yes, that is the best news I heard on the call was the fact that your backlog was gone. I know you have been working so hard for many months on that. But that is great to hear. So being out of compliance, I know you are trying to get back into compliance with the banks. What about the dividend? Do you feel like it is still safe?

[Randall White:]

Well, I tell you, Jeff, when you have a cash flow problem certain things have to go. I cannot tell you what I am going to do with the dividend. But I am trying to change our capital structure because the last person who wants to stop the dividend is me because I get most of it.

[Unidentified Analyst:]

Yes.

[Randall White:]

So, I can't tell you what is going to happen with the dividend. I can't tell you what is going to happen with the capital structure. But promise you I am working diligently on that program to get my money back from the Company and a dividend.

[Unidentified Analyst:]

Yes. Yes, well I guess is it fair to say that a dividend is still in your long-term plans even if short-term you have to potentially cut it?

[Randall White:]

Absolutely. However, people will tell you if you have a growth Company like this and we can restore profitability, dividends become secondary to growth. But again, for people on the call -- I have talked to Jeff before, we've been through this. For many years, we had no debt and we had cash. And so, you could buy stock back or you could pay dividends, we paid dividends. And I think that is part of our long-term idea of how to run the Company.

[Unidentified Analyst:]

Yes. Okay, last question I promise, the direct selling.

[Randall White:]

Jeff, hey, Jeff?

[Unidentified Analyst:]

Yes.

[Randall White:]

They are either going to have to keep the dividends or raise my salary.

[Unidentified Analyst:]

Yes, well, yes. All right, last question. The direct selling software that you are talking about you reverted back. I know you mentioned in your 10-Q you potentially might have to impair that. Are you saying now that you are at that point because you reverted back or is this still under determination?

[Randall White:]

We haven't made the final determination but we are rolling back some of it. But I will tell you that impairment, I don't know if anybody knows me very well, but I don't give up money that easily. I paid a lot of money for something that didn't work. So, the final chapter hasn't been written on that. I may have to have a little meeting with Weber Manville [ph] on this. But their software did not work and it caused us significant loss of revenue and consultants and customers. And so that story is not over.

[Operator:]

[Operator Instructions] Our next question comes from the line of Jim Westfall ph from LBFC. Your question please.

[Jim Westfall:]

Just as a technical matter in the accounting. When you talk about the deferred revenue going away, is that going away to equity or is the offset there that the inventories are declining? And it is kind of on a dollar for dollar basis?

[Randall White:]

Well, it goes through the system. You get an order for $100 and in that is inventory, there is hopefully profit, there is payment to the sales reps, there is shipping. So it flows through the whole system. What happens is the order was paid for, for the $100, we couldn't ship it. So it goes to deferred -- the entry is debit to cash, credit, deferred income, I know you appreciate me being an old account here, but that is basically the way it happens. So then when you reverse that it just flows through all the accounts that would happen if we would have shipped it.

[Jim Westfall:]

Okay, so there is roughly $10 million of deferred revenue at the end of -- at November 30 and there is $34 million of inventory. Are you shifting --

[Randall White:]

Yes, okay. It is 8 million and so roughly $2 million of that would be reduction of inventory approximately. Because we are about a 20% -- somewhere around 24% cost of goods. So, if you have $8 million that is roughly $2 million of inventory without any being added in that same period of time.

[Jim Westfall:]

Okay. I am just looking at the November 30 balance sheet. It was 9.557 million of deferred revenue. But --.

[Randall White:]

Oh, I am sorry. I am looking at old stuff. You are right, sorry. Yes. So now that goes up to --.

[Jim Westfall:]

2.5 million.

[Randall White:]

Yes, yes, you are right.

[Jim Westfall:]

Okay. And then is cash going down as well then if you incur the cost of shipping it? Because the question I have is is what is kind of happening to the rest of the balance sheet here as the deferred revenue goes away? Because it seems you are kind of -- you are pulling additional cash out of the business if that happens. Or you are pulling some other account out of the business, the inventory and a combination of the inventory and cash.

[Randall White:]

Well, you are getting a little complicated here because I will tell you, we got so far behind in orders to the field that normally previously when an order came in we paid the commission when it was shipped. When we got three or four weeks behind the sales consultant say, that dog doesn't hunt, brother. I want my money. Okay, so we started paying weekly commissions on receipt of the order. So when the cash come in we paid the commission on it and that was again a reconciling. It just became a nightmare to try to reconcile all these things because you have -- with the direct sales you have levels of payout. And so it is not a simple answer. But I will tell you that everything -- when the order came in things got paid. The shipping was paid at that time, the consultants were paid. And so, it affected all those accounts as it would had, we shipped it. But the main question is, yes, inventory would be reduced by about $2.5 million plus what we brought in that same month.

[Jim Westfall:]

Okay. So, if it is 9.6 billion and inventory is being reduced by 2.5 million and some piece of it is going to profit, right. Can you just give me some rough figures in terms of is the cash going out by 7.1 million or is it going up by 3.5 million and the equity is going up by 3.5 million?

[Randall White:]

Well, we didn't make 2.5 million on that if that is what you are --.

[Jim Westfall:]

No, I didn't think so, but --.

[Randall White:]

No, no. That month was again very inefficient. We threw everything we had at it to get it out the door to try to mitigate customer service issues because it was a nightmare. And so, the profitability increase is going to come in I hope future periods including December, January and February. I am just telling you we are working on that. We just try to get everything shipped we could because of so many service failures.

[Jim Westfall:]

Okay. But it sounds to me like the cash is going to have to be lower than what is in your previous balance sheet or the debt is going to have to be higher to accommodate this reduction in deferred revenue then.

[Randall White:]

Well, yes and no. We do get orders in every day with cash.

[Jim Westfall:]

Okay, because you are getting more in. Yes, I understand that, that is right. Okay, just, in and of itself, if you weren't getting the new orders in?

[Randall White:]

Yes.

[Jim Westfall:]

Yes. And that is a nice business that you are getting the cash upfront on it. Okay, understand that.

[Randall White:]

And that is continuing. Over the weekend we got 10,000 orders. And those orders are, again, increasing daily from last Monday -- two weeks ago Monday they are up about 80%. So, yes, and that is more cash that comes in. But we have bills to pay. We have to pay for inventory and UPS and salaries and so normal stuff. But we didn't stop -- we didn't continue to grow at an exponential rate.

[Jim Westfall:]

Okay, just one final question then. Do you have a good idea of where the inventory sits once it gets out of your system? In other words, is it there any concern that the reps or the retailers are holding a lot more inventory and they've kind of bought into this stuff but they are not necessarily selling it? There is the possibility of a slowdown going that a lot of the recent growth has been as a result of them building inventory?

[Randall White:]

Okay. There is two pieces of this business. I can assure you the retail stores aren't billing inventory. That would be a crime because we couldn't ship it to them because they have got kind of a second shift in this. And as far as the individuals in the field, this is not a multilevel scam, let me tell you. Let me tell you one thing we are different from any other Company. We will provide inventory to consultants in the field because they go in and compete with Scholastic for book fairs and you cannot have $500 worth of inventory and think you are going to replace a $15,000 Scholastic book fair. We have a program that is called Consignment. We don't charge the consultants, but if they have enough credit we will give them inventory on consignment, they don't pay for it until they sell it. So are they building up inventory? No. No. There is nobody buying inventory that will come back or is in their hands. No, they were crying about where could -- they get more. We had absolutely zero problem with a multi-level pushing inventory on the consultants, zero.

[Operator:]

Thank you. Our next question comes from line of Paul Carter from Adaptable Capital Management. Your question please.

[Paul Carter:]

I apologize. I got disconnected there for a little bit. So I apologize if a couple of my questions here are repeats. So first of all, on your guidance, Randall, you adjusted your revenue outlook for fiscal 2017, but were silent on the $1 to $1.10 EPS guidance. Do you still expect that or, if not, what is your expectation at this point?

[Randall White:]

Well, I got a little silent on it because you guys are pretty nasty if I miss a little bit. I'm doing the best I can. When I gave that guidance at one time when we were going to do around $125 million to $150 million we would have if we could have shipped it. The issues with the software caused us so many issues I can't tell you. And literally there was $150 million of revenue, could we have handled it? All right, well, then because of the software issues and the back up in shipments we threw all kinds of -- everything we could to get it out the door, we were very inefficient. And so, our earnings estimates that were valid we used to make 8%, 9% pretax. Well, we didn't this fall and because of all of the technology and what we were implementing. But we expect that to continue or to come back in the fiscal year we are heading into. Sorry about that. I am not trying to tout the stock. I am not trying to puff anybody up. I am just telling you that is what we used to do. This fall was a nightmare. When you get 90,000 orders -- really? So, we did the best and we want us profitable. But go forward we think we will.

[Paul Carter:]

Okay. And then, so your operating and selling expenses they have been hovering around 30% of gross sales for the last year, which is obviously more than 1,000 basis points higher than they were a couple years ago. And I understand obviously that is because your growth has caused some inefficiencies and warehousing cost, etc. I know you don't present like adjusted income or EBITDA. But how much of that $10 million of operating and selling expenses this quarter would you consider like either one time in nature? Or if not one time, at least kind of unusually high that you will be able to work down in the near-term?

[Randall White:]

Well, I do. For example we doubled -- tripled customer service because everybody is calling in, where is my order? Well, you don't have to call that anymore because they are all shipped. There is inefficiencies everywhere. And for lack of training we shipped to the wrong people. I have no idea how we put something in a box and ship it to the wrong person. I work that line and see how can that even happen. I don't know. But we had 8,000 customer service orders in November that we had to ship. If you want to do a little math on that, what if it was $40 in there? That is $320,000. I certainly hope that doesn't -- that is not going to continue or there will be somebody else here, maybe me, because you can't -- that is way too much service failure. So, that is one thing. The payroll, the overtime going through temporary personal agencies which has about a 20% markup in it -- yes, those things are now under control. Again, warehouse management, training, yes, we definitely expect that to come down. And that and then the reduction in the cost of our goods will make a significant difference in the upcoming year.

[Operator:]

Thank you. Our next question comes from the line of Tony Chiarenza from Key Equity Investors. Your question please.

[Tony Chiarenza:]

My question is on capital structure. You mentioned about raising equity. Now to me it doesn't make much sense, given how low the stock is, to kind of be selling stock at $8 or something like that. Is it something you are thinking about? Is there other ways that we could do this?

[Randall White:]

Tony, I totally agree with you. It is dilutive, but if you've got a $7 million cap on your bank loan and you're going to go from $110 million to maybe $200 million, you know you are going to do what you've got to do. I don't have the answers all here, but equity is one of them. I do not want -- my plan was if the profits had been comparable to the revenue and we had the stock at $15 to $18, it was $17 a year ago. At $17 you put out 1 million shares from 4 million and get up to 5 million that is not dilutive at all. And that is what I had in mind. $8, I am not crazy about that. I agree with you, but a growing Company cannot be totally funded on bank debt. And it is -- if we have $34 million I think the whole next year we won't increase as much as we did this year. I can't see our inventory growing more than $15 million because what happens is when you get up to a certain volume you can reduce the amount of the orders. So instead of if your orders double from 40 to 80 or you do 40 twice and then you get terms. So, we can control inventory. We talked about that fairly extensively this week with our major supplier, how we can control these inventory costs, which is cash. And that is a major part of our program going forward.

[Tony Chiarenza:]

So there might be a way with the existing cash flow to kind of, as you are saying, make do with what you have now?

[Randall White:]

Well, no. I don't -- a $7 million bank loan is not going to do it. I will tell you that I kind of -- we grew so fast that I found out that our suppliers in Kane Miller had very onerous terms because we grew so fast and these are foreign publishers, they don't know us. And the terms that they gave us were very onerous. And when I discovered that I called them up and said how are you doing? How do you like that business? And they like it. And I said, well, here is the new deal, we have to have daily because our major supplier, Usborne, gives us very favorable terms. Of course they have known 35 years too. But so the other companies said, well; I said, okay, it is up to you, pal. I am not buying any more books from you unless we get terms. I can't do this anymore. And that was just in July. That so that has had an immediate impact, but there is still a significant amount of that in our inventory. So that will help us on a go forward basis as we get better and better terms from the suppliers, non-Usborne, they have already given us terms which are more than generous. And the other publishers have to match that or we will go someplace else. Because I promise you, we have no problem in attracting products today. People come to us every day, please sell my products. Okay, well I am not paying COD. So we expect that to impact cash and inventory levels also.

[Operator:]

Thank you. Our next question comes from the line of Fred Orr [ph], Private Investor. Your question please.

[Unidentified Analyst:]

Randall, I fully sympathize with your operational issues. No small company could have coped with what happened to you operationally. So I am sure you will get it worked out sooner or later. However, you made a big mistake in my opinion in putting by based on your description in the call today, now $33 million worth of illiquid real estate on your balance sheet. I think addressing that issue before you address expanding the equity in the Company should be a top priority. I think you should reverse the decision you and the Board made to buy all that real estate. I think it should be sold and leased back, and I think the fact the stock is down from 17 to 18, well, yes, it is partially due to the operational issues. A very big chunk of it is due to the market simply displacing debt for equity value in the marketplace. You still have an enterprise value of 14 to 15 a share. But a big chunk of it is debt. And I think -- nobody has invested in your Company to have you reinvest in real estate. They have invested in your Company based on --

[Randall White:]

Hey, Fred.

[Unidentified Analyst:]

-- the excellence of your operations.

[Randall White:]

Whoa, time out.

[Unidentified Analyst:]

Yes, sir.

[Randall White:]

Hey, calm down, time out, I got it, I got it. I don't agree with you and I will tell you why. Because Hilti pays the debt.

[Unidentified Analyst:]

It doesn't matter. That is a minor income statement benefit. It is a very small income statement benefit.

[Randall White:]

The mortgage on this property is backed by a 15-year lease by a AAA company. And so that is our decision and I don't agree. So best of luck to you, pal.

[Unidentified Analyst:]

Okay. Well, that is where your liquidity can come from if you need it other than an equity offering.

[Randall White:]

Fred, we have been pals a long time. I don't -- maybe we ought to get on a phone call, you and me. Believe me, I appreciate your input because we go back a long ways. And that is something I think why don't we talk on the phone because I don't -- when you buy a building, the building has increased because they spent money on it and they pay the lease. So, anyway, let's plan to talk next week.

[Operator:]

Thank you. Our next question comes from the line of Marty Marks [ph], Private Investor. You question please.

[Unidentified Analyst:]

Hey, real proud of how you guys have handled the struggle with both the inventory stuff and also some of the back office stuff that your consultant base has to deal with. The real backbone of the Company, you know this, is your sales force and your consultant force. Your ladies are awesome. They believe in you, they love you. Kind of tell us your vision for the future as you kind of recover from some of these struggles, stuff you are doing to kind of rebuild confidence for them. But at the end of the day, them selling books is what is going to make the Company make money to make us investors get our dividends and that kind of stuff. So talk about what you guys are doing for the future with that.

[Randall White:]

Well, I'll tell you, we recently had a meeting about two weeks ago with our top leaders in Dallas. We had 135 of the top people in the organization. And I was warned that they were going to make a big pinata out of me and beat me up really bad. And I was surprised because I laid out our plans, what we are doing and what we had in store for the future and I thought the meeting went very well. And they are all on board, I think -- what I heard. And that is to the growth is coming, Marty. The field people, this is not my forecast, but I am telling you the people in the field think that we can do 300 million this year. Did you hear that? I didn't forecast that, that is a forward-looking statement, and if you talk to people in the field that is what they expect this year because the market is there. There seems to be the insatiable appetite for the products and almost never ending supply of people who want to join and sell them. So, once I explained to them and what we are trying to do and the fact that we have got all the back orders shipped, shipping improved and working on efficiencies I think they are on board. And they feel like the second wave of growth will be bigger. So, I certainly value them, they are the lifeblood of this place, they are out selling the product. It seems like the hardest thing for most companies is to generate revenue. Well, that is not our hardest problem, our problem is shipping it. So that is something that we feel like ought to be able to be handled operationally. The sales are the hardest part. People in Oklahoma right now would die to have a 100% growth rate because we have got -- we are in an oil patch here and there is companies about dying down here. And so here we are having this explosive growth. But anyway, I hope that we have explained the program to them and they are on board and this growth is going to continue.

[Operator:]

Thank you. And this does conclude the question-and-answer session of today's program. I would like to hand the program back to you for any further remarks.

[Randall White:]

Okay, well, if there is anybody still here, guys, we have a very unique Company here, I get that. And explosive growth, 100% growth from a sleepy little Company of 35 million to 100 million to 200 million. So we have unique challenges here. We have heavy product. We ship books. We have competition in the direct selling industry that put their product in an envelope. We have 2,000 items. There is no other direct selling company that has 2000 items. We are very unique, and to handle this growth because of the increase in cash utilized for inventory is a challenge. But I hope I have cleared up questions. And, by the way, anybody have later I'm sure my email is posted. If you email me I will try to answer those. But I appreciate people being on the call and listening to me, I am happy anybody even thinks about us. But appreciate your call. This is a great Company. I have always said it is a great Company to work for and a great Company to own. Thanks for your attention.

[Operator:]

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.