Educational Development Corporation (EDUC) Q3 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Educational Development Corporation Third Quarter 2018 Results Conference Call. [Operator Instructions]. And as a reminder, this conference may be recorded. I would now like to introduce your host for today's conference, Mr. Randall White, Chief Executive Officer. Sir, you may begin.

Thanks. Hi, Randall White here. Welcome to our call. This is our fourth one. Hopefully, we get better with each one. We'll practice. We have a really good quarter to talk about and a few other things. So what I'd like to do is, first off, turn this over to Dan O'Keefe, our Chief Financial Officer, who will talk to you about the quarter that this is about, our November 30th quarter, third quarter for our fiscal February 28 year-end, so it's the third quarter of our fiscal '18. So Dan, you want to recap our quarterly report?

Sure. Thanks, Randall. Hello, everyone. Just to highlight and recap of our third quarter fiscal 2018 results. In the third quarter of fiscal 2018, revenues were $38,908,000, an increase of 27% over the quarterly revenues reported last year of $30,697,600. Our third quarter earnings after taxes were $2,128,400 or an increase of 67% from the earnings -- quarterly earnings reported last year of $1,274,100. Our year-to-date fiscal 2018 revenues were $90,020,100, an increase of 12% over the prior year-to-date revenues of $79,374,800. And our year-to-date earnings after taxes were $4,390,600, an increase of 98% over the prior year-to-date earnings after taxes of $212,800. That concludes the earnings announcement for the call. Randall, I'll turn the call back over to you.

Okay. Well, guys, this company has really grown and a year ago, we had rapid growth and our earnings weren't as -- didn't follow this year. We've had an increase in sales but what we've really done is consolidate our expenses and really honed in on how to increase the profit margins, which I think that's what happened. Our third quarter revenues of almost $39 million were our highest ever. And I've been here a long time, it's just three years ago when we did $35 million a year, so it's a pretty heady stuff for me. In the third quarter, earnings per share of $0.52 is the most we ever made in a quarter and again, that used to be a year, and $0.31 per share for the third quarter were also -- it's a significant increase over the $0.31. Year-to-date, $1.07, up almost 100%, I'm pretty happy with that. I think that we have really worked on containing cost and starting to see the benefit of the revenue gain. Our daily shipments peaked at doubled the volume of last year with the -- a year ago, when we went from 65 million to 109 million, we weren't really able to ship that many. We could ship about 8,000 orders a day. And since that period of time, we've constantly upgraded technology and our shipping procedures and we now think we can do 16,000 a day and actually, we could crank that up to probably 20,000, depending on the number of shifts you wanted to work. So we are geared up to see a significant increase in our volume. Now, we just returned from Dallas where the management team spent Thursday, Friday and Saturday with our top leaders around the country. They came in about 130 of our top leaders, which by the way, they pay their own expenses to be there, so they're pretty motivated people. And I will tell you, it's maybe the most energetic group I've seen. So I think we're finally past our year ago fall when we had our shipping problems. It takes a long time to get people's confidence back and we have done that. So we're really looking forward to see earnings sales pick back up again. When we got back from Dallas on Monday, we had the largest orders, number of orders that we've had in about five, six weeks, probably. So we're seeing it pick back up. It does slowdown in January. The ladies kind of take it off a little bit, but we've seen it pick back up. We're very excited about that. So what we're going to do, by the way, to help generate interest in our company, next week, the management team is going to New York and we have meetings scheduled with what we think are potential firms that might be interested in small-cap stocks like ourselves. And for fun, on the 22nd, we're going to ring the closing bell at the NASDAQ stock market. It's kind of a bucket list for me, I've never done that, and it's -- that's for fun, but the main reason of the trip is to try to present our stock to potential investors, funds and anyone who haven't heard about us, which I would say, that'd be most. So that's a fun trip coming up, they're not fun. It is fun for me because I love to tell the story. I think it's an incredible story. I think this quarter is incredible from where we've been because we literally have gotten control of our operations. We got them all shipped last year, but it was painful and this year, it's very smooth and we're aiming to process today, of even installing more technology. We've got our pick lines down, I mean, our packing lines now and installing new packing tables to double our capabilities of shipping. So a lot of good things happening to us. We think the volume is there. We're in the direct sales industry and we see companies doing significantly more sales than we are and we think we can join that list. 100 million is a kind of a benchmark and from there, we've seen the explosion in other companies and so we kind of -- we think we're going too, we expect that. So very optimistic about going forward. We have a very motivated sales force and one thing that motivates them is to get paid. And last year, we paid out $45 million in commissions and overrides to the field sales force. And nothing more than trying to get someone to join your sales team when they ask you how much you made, and you can tell them, a lot. It's how it works. And the more you make, the more people who want to join you because they're independent contractors and they get paid for what they sell and the people under them sell. So we're very optimistic about the year coming up, that we can keep our costs under control and grow our revenue. We had growth in revenue then we had cost control and now this year, we're heading in the, we think, both and are very, very excited about it. So Dan, you got anything to add to that?

No.

Anybody got any questions, anything possibly I didn't answer, you're welcome to jump in here and ask me anything you like.

[Operator Instructions]. And the first question will come from the line of Edward Marsini [ph], Private Investor.

Randall, great quarter. I appreciate your hard work. My question is, what are your plans with the older building now that you've moved into the newer facility?

Yes, that's a good question. We anticipated selling it and consolidate it into this facility. Right now, it's full of inventory, but that's still our plans. It's about 12 blocks away. By the time you get over there, it's a little farther time that you go around the corner as you get there. It's not too unhandy, but we would like to consolidate here. It's got a lot of inventory right now, but our plans are to -- and we've had offers for it, so it's not like it's a dead asset. We've been offered $3.5 million for the building, which is -- it's a good price for us. So we look this year to see about how to make it more efficient. We looked at a lot of things like narrow aisle, forklifts, if you know what that is, that cuts about half the space between the pallets, this is the racks. And that's another way to pick up space and consolidate. There are several things to go, but we would like to sell that building and consolidate into one facility because it certainly would be more efficient.

Okay. Speaking of inventory, what are your inventory needs for the upcoming fiscal '19?

Well, inventory needs are always based on sales forecast and the problem is, we don't get to this in Kansas City just in time. The time we think -- if you wait 'til you need it, it's too late because it's about a minimum of a five-month order time and with some books, it's seven. So you really have to be careful in your forecast and it's very difficult because forecasting in the past is easy and forecasting in the future is a little more different there, guys. And a year ago, we forecast that we could probably do $150 million. Well, we could have if I could have gotten it out of the door but we couldn't. So it looks like we had too much inventory, no, we didn't have enough capacity. So we've cut way back on our inventory. We sold through that inventory and at one time, we peaked about 34 million?

Yes, 38 million.

38 million in inventory and...

And now we're down to 24.5 million.

Yes, down to 24.5 million so you know what's happened. Our credit line is zero. Yes, we have no debt, I like that. Well, besides the building and that. But, the reduction of inventory to match the sales happened cash and now, we're looking at rebuilding to the sales volume that we anticipate this coming year, and you got to forecast that out. Today, in a month, when you have January's tradition, the lowest month of the year and you've got to forecast inventory for November of next year. So it's tricky because we had one book this year. In November, we sold 38,000 copies. It's fascinating how this works and what catches on, and what's going to be a big driver, and that book sold 200,000 copies this year. So it's -- forecasting inventory is tricky but we do it. We have a very sophisticated model and it's working. We had too much, we sold it off and now we got to make sure we don't have not enough. Because lost opportunity is worse than the carrying costs on too much. Because orders came in prepaid and if someone sends you $100 and we don't have the books, getting it back to them is very difficult because you go through a line of multilevel like we do and it's tricky. So a little excess inventory is not a problem, it's being out of stock.

Okay. My third question is, do you expect more big capital projects this year coming up in the calendar year 2018?

I want to let Dan answer that. You'll hear from a different voice here.

Thanks for your question, Edward. Yes, we do have some planned capital expenditures. We started a $2 million project earlier in this fiscal year and over the summer, we had about half of it done. And that was the adding automation and technology to our distribution pick, pack and ship process. So over the summer, we got done with the picking side of it and during January now, we're in the process of tearing out all of our packing stations and putting new packing stations in with automation associated with the orders that will bring the orders directly to the packing stations and allow the packers to pack and be more efficient in packing and also be able to let the orders ship away from them with a lot less movement and physical effort. So we'll have another $1 million going out this month approximately in capital expenditures. And then we still have on the agenda or on our calendar, some minor upgrades to our facility that are trying to improve our front entrance and just some other minor capital improvements. But as far as large capital projects, the only one we've got is the pack station, which is about $1 million.

I might add just a little bit to that. It's because I've been here when we picked, packed them off the shelves by ourselves. But today, the technologies, we have three major types of packaging. One's called cold sealed when you have one or two books and then you have a four fold or cardboard's folded over. You've probably got something from Amazon that looks like that, and then our large order is a box. And so the technology is being put in place is, when it comes over, after it's been picked, the computer actually directs it to the line it needs to be. Dan mentioned to you, it will go straight to the four fold, it'll go straight to the cold pack, cold seal, and then direct to the packers. And the packing tables now have been redesigned where they don't have to go to the line, pick it up and put it on the table. It comes straight to the table so that's just efficiency as well as we think less chance for workman's comp. It's really fascinating. We took out 24 tables, we'll be putting in 42, and much more efficient. So it's very exciting and I don't know if I really made the point a while ago. A year ago, you may have noticed that we stopped the dividend. That wasn't my choice, by the way. And because we had some people say we didn't make enough money or maybe the bank. But today, we've paid the debt down from I think the max we got there is somewhere around 10, we paid it down to zero. So we're very happy with the way the year turned out, that we'll pay off our line of credit. And looking forward now, if we build up much inventory, we'll get back in that line, but nothing like we did. So we have a very optimistic look for the year coming up.

Okay, great. Also one question, I don't know if you want to answer it, but do you expect you'll reinstate the dividend?

I'll take that one.

Yes, I've got a personal interest in that.

So at this point right now, with our debt agreements, our debt agreements restrict our capability of doing dividends. So right now, underneath our current agreement structure with our largest financial lender, we don't have any ability to reinstate the dividend. But we can see that, that's something [Technical Difficulty] continuing to evaluate. It's something we'll be discussing with our lender in the not-too-distant future to allow us at least, the flexibility to reinstate the dividend if we think we have the cash flow to do that and don't need to use that cash flow to increase our inventory.

And if anybody's betting money on it, I would bet yes, but that's -- we're in good shape. So I think the dividend is important to some people, not so much in others. We've had a lot of growth, but dividend, people bought it for the dividend so it was hard for me after 20 years to suspend that dividend. But it wasn't my choice, but I think we have an optimistic look going forward.

That's great. Okay, Randall. I was originally a long-term stockholder, I bought the stock for the dividend. I miss it a little bit, but it's not the end of the world.

Hey, wait a minute. I miss it a whole lot more than you do because I get most of it, so thank you.

[Operator Instructions]. And the next question will come from the line of John Peters [ph], a Private Investor.

I want to congratulate you on a very nice quarter. Nice to see both the sales growth resuming as well as the operating leverage working in your favor. I'm trying to look out just a little bit farther and get a sense of what you think the addressable market is, longer term. One of the things that I really liked to see was the growth in your average consultant count during the quarter. How big can that population become? I don't know if you look at it perhaps, the demographics, certain age ranges and things like that. And also, what's your market share for children's books right now? I get the sense that you're still a very, very small fish in the pond, but I want to think a little bit more expansively about how you can grow going forward, what the opportunity is.

Well, we're in two industries. We're in the publishing world and the direct sales world. And direct sales, we're so small, they hardly know we exist because, if you don't do $500 million in that arena, you're kind of the small potatoes. So the children's book market in the publishing side of the business is about a $3 billion market. The direct sales market is about $25 billion. So which one are we in? Well, we're in both. And what caused us to have not explosive growth and continued growth was all the way back to November, December of last year when we had 127,000 orders and I could ship 8,000 a day and they were Christmas presents. And that upset a lot of people, I understand that. And I keep telling our sales people out there, the best, the most important thing I can do for you is pick it right, pack it pretty and on time. And that's what's happening now and I expect consultant headcount to increase. We have -- it's a soft number, guys. I know somebody wants to pin you exactly how many we have. I don't know how many exactly we have today because I don't know who's quit today, I don't know when you start, but somewhere around...

31,000.

Around 31,000. But when you can ship on time accurately, it really builds confidence in your sales force where they can go out because they're selling to their friends. If it doesn't work right, then they catch the blame and they don't want any blame, they're just moms. So I really expect that what we've done to improve shipping will significantly increase sales volume, and there is no ceiling on it. As you hear, $3 billion just in children's books and direct sales, $26 billion, $28 billion. So we're just becoming a player but what's happening with us becoming a player is we are now presented the best, the best titles with Kane Miller. And what's recently happened, a guy in England, Bear Grylls, some of you may have heard of him, he's an adventure guy and he's written six children's books. He saved them for us. So we are now publishing the Bear Grylls' book from the guy in England, and that's what's happening. People now -- we're going to Bologna. Bologna is the world's largest children's book fair where publishers outside the United States who want products sold in the United States present there. We go there and what's happening now, instead of getting the bottom of the list, people save the best to show us because nobody has 30,000 people selling them, nobody is selling $100 million like we are. So we have arrived in which means that we can get better terms, we can get better products, and it's kind of a self-fulfilling prophecy. So we're very excited about where we can go with this because it just keeps getting better.

Can you talk, just as a quick follow-up on that, about the different things that are within your control that you can do to accelerate the recruitment of new consultants or if necessary, to pull it back? I mean, what kind of governors can you put on your growth rate?

Governors to accelerate it or decelerate it? Governors sound like a decelerate. What's your question?

Well, if you wanted to push it into high gear, is that a matter of offering additional incentives? Is it advertising? What can you do to bring on the rush. And then conversely, if things start really going very quickly again, are those things that you can pull back on? Because I get the sense that this is sort of an organic process of recruitment and you don't always have complete control over the growth of your business, maybe nobody does. But just can you give us just a little information about how that process works for you?

I can and you're right. You don't have control over it. If you did, we wouldn't have had the problem that we did a year ago and this year, we'd have more sales if I controlled it. But I will tell you that we're geared up for it. And how do you accelerate it, if not advertising? It's not doing anything. It's the people out there in the field who are recruiting this -- so what do you make? Well, in November, I made $30,000. And you made $30,000 working part-time out of your house? Yes. Well, that word spreads, there's nothing we need to do. And we met with this one lady and she's a schoolteacher. Well, that's the best, if you can get a sales personality of a schoolteacher because you're recommending educational products. And she said her goal is to make more of them up than she did in a year at teaching school and that's going to happen this year. So in direct sales it's the only place that I know of where you tell people how much you make. I doubt there's anybody on this call has -- maybe brokers, who can -- well, how much money do you make? Well, in direct sales, you have to tell them. You have to put on your Facebook page, oh my gosh, look at this new house, it's our dream house and I got this by being a book lady. And I got this, I got that and people go, really? That's how you recruit by publishing success stories and we have thousands of them and it's very, very heartwarming to me to see these ladies who come up and thank me. I got to tell you a story. This weekend, a lady told me a story about a person in her downline. She said she's had a stroke, she's 100% disabled and she's crippled. She said but you know what, she has one finger on each hand that's mobile enough to use a computer. And she's able to do Internet Facebook parties. And the lady is having success and she said, thank you so much for this business that allows me to be human again. And it really kind of brings tears to your eyes that what can happen in this organization, selling a very reasonable price children's book that this person now can be a viable part of humanity. So we have a lot of nice stories, and that's how the business grows.

And I will add to that, Josh, because I wanted to also share kind of just a quick tidbit as far as you mentioned how can we spur growth or spur consultant growth. We do run recruiting specials at certain times of the year. We just -- part of our ELC, our executive leadership conference that we were just at, we announced a recruiting special, trying to recruit 10,000 people in the month of February. Now that's not a projection that we're posting out there and Randall and I are projecting 10,000 new additions in February, but that's our goal. And our leaders, we challenged our leaders, our 125 leaders that were there, that we want 10,000 new recruits added in the month of February. And one of the reasons we are excited about throwing that aggressive goal out there for them is we think that now with our increased daily shipping capacity, we can keep up with that level of growth. So we are challenging our existing consultants to recruit more. We're also trying to help facilitate that by offering a new special for recruiting where the new consultant kit comes at an even lower price. And so they get to buy some of the best books that we offer and have them delivered to their house for the lowest price that we've offered, Randall, what, in a couple of years, right?

Yes. We haven't run bigger recruiting specials because we couldn't handle it. Believe me, that's the last thing I want to do, is to get more orders in here a year ago. Today, we're ready to go and so we're going to throw that out there and see if we can just get a nice little bump in the first quarter. And I can't tell you and emphasize it enough of how important it is that this growth has gotten us better products. We have three major publishers in Europe that are coming to Oklahoma in the next 30 days to present to us. That's kind of heady stuff for somebody to fly from England to come over and try to sell us the very best products. So we're -- and Bear Grylls is an example of that. So success, breeds success basically in direct selling. When you tell somebody how well you're doing, you bought a house, you bought a car, you paid off your student loans, whatever is important. And the best is we probably have 15 people in our organization who have adopted children from China in -- I don't know if anybody's seen that, but I'm going to tell you what. They don't give you their stars. They were showing -- you saw Molly, Mandy, they gave -- she came back with a baby she's so proud of and she had a picture of it, the worst cleft palate I have ever seen in my life. I didn't know you can even do that, and today, that is one beautiful young girl and we're very proud of that, that we probably have 10 people. A couple of people got notified about their acceptance when they were on a trip or a function with us. We were actually in a bus in Las Vegas going to a show for some of our top leaders when she got the call. Now, that's pretty exciting. So this is a nice place and we're very happy about that and we think we've got pretty much unlimited growth, Josh.

It's good to get a sense of the real culture and purpose of the business like that. Just one final question for Dan on tax. Can you talk about what the corporate tax cut is likely to mean for earnings going forward?

Yes. So Josh, in our current quarter, since the Tax Act was passed after November 30th of this year, we don't have any of the benefits of the Tax Act, the jobs and tax -- jobs, cut and Tax Act in our third quarter financial results even though they obviously will happen this year. Because we are a February filer, we'll actually have 2/12 of our year will be at the new 21% tax rate, federal tax rate versus the historical 34% federal tax rate. And so if you blend that in together, our effective tax rate for our fiscal year will end up just being under 32% for the year. But we really look forward to next year, starting in March of 2018 when our effective tax rate on a federal level will be dropped to 21%. And for a company like us, that's real cash dropping to the bottom line because we are a taxpayer and don't have any carryforwards and don't have a large deferred tax credit or debit. What you see on the P&L was a lot of times, pretty much what we pay. So we are really looking forward to and I'm sure our shareholders are looking forward to seeing some tax savings in the upcoming years with the tax cut and jobs act.

Hey, Josh, I got one more story for you because I'm kind of a -- I'm an old guy that has done very well here and I'm very fortunate and feel very fortunate, but what I like are stories where other people have benefited and here's one for you. There's a lady in our office who's worked there 20 years. She started as a part-time clerk, but we have a 401 50% matching grant and she has been in that plan for over 20 years and I didn't even know that. Dan said, do you know who has -- and so this weekend, she was telling me, with tears in her eyes, she said Randall, I've got 40,000 shares. Oh my gosh, good for you. So happy about that. And we have other people here in this building who have been in the plan for over 25 years and now have over $1 million. I love that and we have people in the field that own stock, I'm happy about that, they're happy about it. So this is not about me, I'm a happy guy. I really -- my mission now is for other people to benefit through the sales and commission and ownership. So it's been a pretty good year and I'm very humble about it. And if anybody knows you, that's quite a statement for me.

And I'm showing no further questions at this time.

Okay. Well, just thanks, everybody, for your time and look for us on the NASDAQ globotron next Monday on the closing bell.

Yes, by the way, anybody selling stock, the good news hasn't stopped. That quarter is not the end of good news, but everybody has their own choices about buying and selling stock. So thank you guys for joining us and we hope we have another successful report for you next time.

Thanks, everyone.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.