Educational Development Corporation (EDUC) Q3 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to your Educational Development Corporation Third Quarter 2019 Results Call. At this time all participants are in a listen only mode. Later we will conduct the question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder today's call is being recorded. I would now like to turn the call over to Randall White. Sir, you may begin.

Thanks, Sydney. Welcome to our earnings call guys. We have in the room with us today to assess within any further information we got Heather Cobb, who is our Chief Sales and Marketing Officer; Craig White, Chief Operating Officer; and Dan O'Keefe, which is our Chief Financial Officer. So I think as usual, we'll start off with Dan giving you a little overview of the earnings results.

Great. Thank you, Randall. For the earnings results for the quarter net revenues grew $1,572,700 or 4% from $38,909,900 reported in the third quarter of fiscal 2018 to $40,482,600 reported in the third quarter of fiscal 2019. Earnings before income taxes grew approximately 10.8% from $3,432,800 in the third quarter of fiscal 2018 to $3,804,200 in the third quarter of fiscal 2019. Earnings after taxes grew approximately $687,200 or 32.3% from $2,128,400 to $2,815,600 over the common third quarter period. Earnings per share on a fully diluted basis increased $0.08 a share or 30% from $0.26 a share reported in the third quarter of fiscal year 2018 to $0.34 per share reported in the third quarter of fiscal 2019. This concludes the earnings results reported for the quarter. And so I'll turn the call back over to Randall.

Dan, thanks. Well revenue growth of 4% certainly didn't meet our expectations, but it is still the largest quarter in our history and those who've been around a while that was more than our entire revenue in 2015, which is a couple of years ago. But again, didn't meet our internal expectations, we thought we would go more than that. Our consultant count had a little decrease in quarter three of last year and did not grow as we had expected and planned, and I guess is a good side, if there is that even though the headcount is down the revenue is up. So this reflects that active consultants sold more made more commissions and were more successful. So along with other change in the organization it makes us continue to believe that our consultant count will return to growth in the future. We certainly think that's going to be the case. Also we are having an uptick in publishing division, I think I told you on the last call that we've got a change in management there and the first trip we made to our major retail account we book sales and that will need more than we had in the entire year last year and this continues we're going to see a very nice increase during the year in the retail section of the business. So -- but that's small, that’s been around $10 million, so if we grew at 20% it's just a couple of million. So our growth -- we really want growth in the UBAM Division and that's what we're expecting. We also again we made improvements in our bottom line and that's always good. Our pre-tax profits are going to grow faster than revenue, maybe we've got some good ideas coming up in the future months. We've had some issues on growth and some challenges that we've identified and we think that we can address these and help real estate growth. And we also have a pretty nice new program that will be developed here in the next few months that should have growth continue. So if you'd like, I could take questions now, I can go into more of what you think that that will boost our growth. So why don't you ask me something that you want to know, instead of me of just rambling on here. So, Sydney, we’ll open the earnings call up to some questions from the participants if we can.

Yes, of course. [Operator instructions] And our first question comes from the line of Sam Degreen [ph]. Your line is now open.

Hi, there Mr. White.

Hello, Sam.

So last summer largest external shareholder of the company submitted a book in record request, what is the status of that?

Well, there is not an ongoing status for that request. So…

Okay. So that has been taken care of.

Yes. It's not an open issue at this time.

Okay. Do you fill us in a little bit more. Is that something you'd be able to do?

Well certainly we can -- and by the way this is, Dan, so maybe I am answering this question for Randall, but books and record request becomes a discussion of legal, and what is -- should be properly disclose and what we should not disclose as a company. And so we followed our guidance from our attorneys and responded accordingly, and we've not really heard any additional requests for additional information at this time.

Okay. Now that the growth -- that the company's growth has stalled. Mr. White, you're getting close to 80 years old, when will the Board retain an investment bank and pursue all strategic alternatives for the company if it hasn't already?

Haven’t really thought about that. Yes, I'm kind of an old guy been around long time, know a lot about the business and have a really strong team here now, strongest we ever had. I feel better about the organization than I ever had. Literally few years ago, I feel like I had this place on my back and had to do everything and that's not the case anymore. We've made significant improvement in all areas, not the growth of the business just recently. But stalled is a temporary basis. I think I like to use the word stalled and say stop, it does haven't stop, it’s stalled, but not looking for an investment bank to come in and do an evaluation. We're -- we'll have an orderly change of leadership at some point in time. We're addressing that internally. So not interested right now and have an investment bank come in. We're not a company that is in trouble in anyway. We have record profits. We're in the best position ever in cash. So I don't know why I would -- why we'd bring an investment bank, but if you have another question about that, I'd be happy to try to answer it, but never thought about that.

Sure. Last question. What initiatives have been put in place to reaccelerate UBAM consultant growth? And when do you expect this to be reflected in your active consultant count?

Well. We recently had -- well, recent last weekend, we had 118 of our top people across the nation submission come to a four-day seminar, three-day seminar in Dallas, and we -- at that point, we had really good discussions with our field sales force and the leaders and they’re reinforced what we were doing. We -- there's things that impacted our sales that we know about and have not much to do with us, but we're addressing those. Things -- just small things that happened to you in the industry. In the past year, Facebook has been a little bit squarely [ph] not a very professional sounding change, but they changed their rules a lot. And what it does is cause our field sales force to adjust what they're doing. We had a lot of growth this coming through internet Facebook parties. And when they change the rules, we really just have to -- we're going to have to find a way to adjust their business to meet Facebook’s format and we're doing that. So it's content thing [ph], and -- but we feel like that’s happening. I actually was talking to them and said I kind of feel bad that I feel like we were responsible for sales growth to stall a bit because of our shipping two years ago issues. And he goes as get over that, that wasn't the case. There's other factors that are involved. And so that was reassuring, but there's things like this is considered by some people be part-time. Now we have people to make over $200,000 and make over $100,000 that doesn't sound part-time to me, but a lot of people look at this as part-time income. And one of the things you face is we got the lowest unemployment since 1950. We now have people who always telling in for everybody we think we have the easiest sale in the industry, because it's most value-priced product in the industry. But we're also facing competition from either Uber drivers. You can go out and going to make $20, you go back home, if you want to. And so some people who do not think they are salesman, there is just other competition for people who joined our organization. So these are the things that -- some of the things that we're addressing and why we think that sales have stalled a bit. But again, the latest this weekend reassured us that the plans we have go forward are what are going to get us back on the growth mode. I could tell you a couple of them. We've announced them last time, but it takes a long time when they go into effect and one of them is we have one on planning about 200 titles in Spanish that are being added to our product line. Now we don't expect that to be big in the retail market. The big retailers like launched mobile books [ph] and what have you. They don't think that's a major market. What will impact us is we go into schools, they want Spanish titles. So by having these additional titles, we think it will allow us to book more -- book fares in schools which, will of course increase revenue. And the other thing is we changed out the leadership in the school and library, and it's been revamped to meet new requirements that are in schools, you just can't walk in a school anymore, so we've had to revamp that. And now to become a school rep to represent us in a school, you have to go through a training program including background check, and it costs $150. So they had to invest in the business, just to be able to go into schools. But that's today's market. You can't, obviously -- you just can't go into school. So we think that is now in place and this coming year with the Spanish titles that we can see a significant increase. Our lady that we hired in that division is very interesting, she had been a store manager for Barnes & Noble and knows the market because she had been a consumer...

Community Business Development Manager.

Yeah. Community Business Development Manager, which means she run a community. And she gave us little startling statistic, that Barnes & Noble in Oklahoma, last year, did $1 million in book fairs. Now what's remarkable about that is they got their worst book fare program in the world. The school gets 5% and all you do, as you go and buy a book in Barnes & Noble, may keep track of it and give a school 5%. Oh my gosh, I don't know how they ever book a book fair. But, they do, and that was shocking. So that gives you an idea of what we think that market can be because, we give school books with us, if they buy at -- the parents buy $2,000 they get $1,000 free, so it’s a 50% match. So we think a new direction there will really help. And again, there's low-hanging fruit in Publishing division, we're seeing nice growth from our largest customer in that area. So there's where we think that the things that we're doing that will benefit us in the future months, we'll be in this -- some in the next quarter and then on the quarters going ahead.

Okay, thank you.

Okay.

Thank you. Our following question comes from Dennis Amato. Your line is now open.

Thank you. Thank you. Just a follow-up on the consultant count, I know in the past, a lot of direct selling companies have indicated that a strong economy can be a headwind in acquiring people, because they find either other jobs or full time when they were working part-time, et cetera. What portion of your headwind, do you see, maybe being attributable to the strong employment economy, at the moment?

Well, Dennis, I'll tell you, I've been here a long time, as somebody mention there a while ago. But here's an interesting thing about that, a bad economy can work for you because more people need part time income. A good economy can work for you, because more people have spendable income. And the product we have, which is early childhood literacy, we just think it's a strong market. So it is a headwind and we think because of the low unemployment that people have a lot of alternatives now. So it's a headwind, it's not going to keep us, it's not anything we can't overcome, we're pretty upbeat on where we're headed next few months. But that's an excellent question. But again, I've been here through several trends and we see one helps us and -- but it can be helped in another way to that. But that's a good question. Thanks.

The part that helps you shouldn't that show up in better productivity per consultant, if it's an easier selling environment?

Well, that's what happened in the third quarter. We had less people selling more, making more and the more they make, the more people they tell about it. And this is unusual businesses, the only business in the world where someone comes up and ask you how much you make? I bet you had anybody ask you that lately. But they say well, how much money you make. And then the more they make and again, we had 12 people, I think last year earned over $100,000 working around their family schedule from home. That's pretty enticing business, but most people never think they can do that. So with a meeting like this weekend and we show them how, and the ladies well I could never be her. I said, well listen, Susie, you don't have to be her, you have to be yourself. But she's already gone ahead and showing you the way and what you have to do is listen to her and follow footprints in the snow. It's already -- the program is already successful, you just have to follow and it's building confidence among the sales force. Oftentimes many have never been in a sales position before don't think they are now. They're just sharing books with their friends who have children. So, yes, I think that we're going to do very well in the environment we're in.

Okay, thank you.

[Operator instructions] And our next question comes from Andrew Barclays [ph]. He is a private investor. Please proceed with your question.

Yes. It sounds like there is some excitement around the Spanish language titles. I wonder if there's a similar interest and focusing on building out a Spanish speaking consulting force.

Well, there is, and that takes a little investment in materials to publish them in Spanish. But, yes, we think that there's a market there. There's a market there that people who want them. So we're trying to look ahead, we have people on staff that can translate into Spanish. So that's a project, by the way it’s not our number one, we have other projects that are very important right now. But that's one that we'll get around to. And I think there's a market to recruit Spanish speaking people as consultants.

Great. And you’ve got hires in place to do that?

Hires in place, is that what you said.

Do you have the people onboard with the training to build a Spanish speaking sales group. Or are you planning to hire people with that background?

Well, we have Spanish speaking people and the programs are in place. So I think the answer to that is, yes. But have we done it, rolled it out, no. But, yes, we're capable of doing it in-house in the upcoming months. But we do have request for it by the way. We have people of all kinds. There was a woman at the leadership commerce and will not tell you there was 118 people. That’s to the top out of 30,000. There was a lady who is crippled could only had to use -- she show her hands, showing out a couple of fingers. But the fact that she can do everything online, she was in that leadership group in Texas with severe disabilities. Very proud of that actually that there is no exact model of who's successful in the business. So we think Spanish people can. We have people of other colors and that are successful. So we think this program and its ability to fit to about anybody who will apply themselves.

Got it. I asked because there is -- it doesn't seem like there's currently a Spanish version of the consultant hub online. And it seems like that would be low hanging fruit for bringing in more Spanish people quickly.

Yes, we don't have and you’re right, that would be one of the first steps. You're right.

Is that the first step that's planned?

We don't have a plan. I can tell you it's going to happen in the next quarter.

I think to further Randall's earlier point the number one -- so the feedback that we're getting, we've got all of our consultants in the field 30,000 plus consultants in the field to giving us feedback. And the number one thing that they're asking and several of them, well, not several, just like a demographic of the population, as you look at percentage of them are bilingual and speak Spanish and the number one thing that we've heard from them is bring titles to us so that we can offer these titles. And because they are sometimes being turned down for book fairs and being turned down by schools because we don't offer products in both languages. And so, we -- our number one benefit we see or target that we're going after is to be able to offer Spanish books to book fair opportunities that will open schools, that will bring our consultants in front of additional parents, which create new recruiting opportunities. So increased sales and increased recruiting opportunities through book fairs is the initial target. But where it goes from there as Randall was saying is, it will -- that initial target will not be the final destination, we will then take that further with bilingual consultant materials. And I don't know, if we've necessarily heard the request and Craig is in here as well, heard a request from any consultant for it just the Spanish website by itself. I'm not sure that's been anything that we've heard, Craig.

That hasn’t been a request, at this point. Like Randall has just said, we just sell the products and take it from there.

I think Dan made a point, I don’t sure he meant to, but we have a lot of bilingual people and again their request is to get Spanish books and we can address the market that way. I certainly agree that we have more Spanish only speaking that would increase it. But we think we can increase the market with the bilingual people in our organization already. So we'll see how it goes.

Great, thanks.

Thank you.

Thank you. Our following question comes from Paul Dwyer. Your line is now open.

Hey, guys. I guess, first question I wanted to dig into is on the UBAM's discounted allowances. Can you talk about what's going on with the mix that discounts and allowances is up 100% where sales is only up about 20?

I’d tell you it's a product mix. And as an example on a internet home show, Facebook Home Show, you have not much discounting because it's at retail. But when you do a book fair, if the school -- if the patrons in the school buy $10,000 they get $5,000 of books free. And so all these fit in to discount and allowances and so it's a variable we just come through a very good book fair market. So the mix can changed and it doesn't really matter because each program is designed to yield the same amount of product. So example, on a book fair the commission paid is 17% and the override is half because the schools gets 50% free books. So the consultant of book fair get 17%, but on an internet home show gets 25%. So the each program is weighed to somewhat to yield the same amount of profit, so we don't have to investigate necessarily what kind of sale it was, doesn't matter it is, so you can turn it however you want to. It makes it little bit hard to analyze sometimes because it’s not always the exact program that they turning to sale in as. They may have a booth at a some type of event. And they turn it into book fair because they’ll get the 50% free books, well they make less money in commission but they -- then they get the books and sell those and they make more. So this kind of allowances can vary. I hope I'm telling you it doesn't matter, the bottom line they all yield about the same amount of profit.

Okay. And then, so I guess where I'm still struggling a bit is what changed specifically in the quarter that [indiscernible] about the consultant count. On the last call you talked a lot about you expected a strong recovery this quarter. Uber driver that's not necessarily a new phenomenon in the summer. So what's really going on in terms of what changed from when we talked last?

Well, I tell you one thing is that we were comparing against a pretty strong quarter of the previous year. The previous quarter was up 35% over that previous quarters. So we were -- while we were up, it was a pretty tough quarter for comparison. But other than that, there are some things like I said, the thing I heard a lot in Dallas last weekend was Facebook and how they are changing their rules almost weekly, which is causing the ladies to juggle and find a way to still make their business work. And for anybody who knows about it one thing, you can -- a change where this program is out there now, this internet phenomena is really amazing, and somebody can probably explain a lot better than me. But one of the things that Facebook changed last year, these ladies can put together in the entire party and not even have to be there. They start off an introduction, they talk about the best sellers, they do this, they do this, they do this. And it’s all posted and then they post automatically. Well, Facebook says no, you can't do that because that's a -- it's like a fraud or something. And so now you can do the same thing with each individual post you have to post it rather than it being a -- their computer programs once call Beasley [ph] that did this whole thing for you and you put into words and then it would post it. And they could have three of them going at one time and they're just in and watching them. It was really automated. So what happened -- one of the things that happened and by the way I'm just talking about information that we heard last weekend that I thought was very interesting. And that is, well, then it's a little harder to do it. It’s all have to post manually. Yes, I guess, so. So that's been an adjustment forum and we've lost consultants who like I said you had three [ph] at one time and it gets right down to the -- how much you sell, because they're spending same amount of time. That's just one of the things that we've heard.

Now what -- I mean the -- I will also say as to Randall’s point, Paul, we kind of mentioned that we didn't have the growth that we were hoping for and expecting for we don't publish guidance, but internally we were hoping to have some growth in our headcount. However, when you look at the number being down 900 consultants on the 30,000 active consultant count is -- can be a pretty small difference. So from a macro perspective, we look at it as why aren’t we growing the count. It's relatively flat, why is it? What do we need to do to get back on that growth pattern of going from 30 to 35 to 40. And as Randall mentioned before, the number one driver in consultant growth is successful consultants. If they're selling more, they're making more commissions. And the more commissions they make, the more successful they are, the better they're going to be at recruiting. And so, Randall's mentioning some of the some of the challenges that we've had over the last three months and six months with Facebook changing some of the dynamics of posting parties on that platform. But we're really focusing now on and some of these changes that he has mentioned before about Spanish in the book fair market on how to make our consultants that we have right now more successful.

One of the things that came out of that’s -- go ahead, Sydney.

I was just going to jump in and say Paul that you very rarely ever hear anyone that is responsible for sales or supposed to be driving sales say that lower numbers are okay. But I think if we only look at that number in a vacuum or through a microscope, we would see that that number is down. While it's down just 900 consultants, it's still down. But the overall numbers of sales attributed to those consultant is up. So that’s the number that we're focusing on at how to make more successful consultants.

To add to that -- Heather, thank you. This past weekend we heard things like this a training, what you have you got your top leaders that will have 20-30 minute speech to the group and they’ll tell you what's working for them. And I heard one of our very top people who said you know what, we've been trying to do this, do that, and they get fancy and improve the deal, we're going to go back to basics, because that's what's working. And we may have made it a little complicated. It's not too complicated for them, it’s too complicated to people trying to teach and recruit and start from the bottom. So it's a constant searching for what works the best. And when you've got a Hitch Stone [ph] ask you about Facebook that makes it even little more difficult. But again, we're optimistic very enthusiastic about where we're headed and we came out of that meeting again with our top people with renewed enthusiasm that we are having placed things that will impact us in the future quarters.

Okay, that's it for me, guys. Thank you for your time and good luck.

Thanks Paul.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back to your speakers for any further remarks.

Okay. Let me just give you a little recap, it's not all gloom and doom here. If you look at our operations for example, our cash position is significantly improved. Even though our inventory is up $6.5 million, and we reinstated dividend this year, our cash position is still about almost $2 million better than it was the same quarter last year. And also guys two years ago in November, we had 127,000 orders prepaid to ship and then at that time we can ship about 8,000 a day. Well, from that, we -- and $3 million investment by the way, we are now pretty much close to state of the art. We were just written up in modern material handling magazine with the cover, we have a cover a 9 page article, about how we are now one of the most efficient operations in the industry. So in a two year span we've gone from the outhouse to the throne so to speak. So I think it's not all gloom and doom here and also Publishers Weekly, which is the magazine of our industry. Rick and I started company as a notable company in the industry for what the innovations we've done. And the growth that we've had has allowed us to improve our product line. Because now when we go to select books from other publishers, we're getting top of the line. And so everything is in place. We're in place to move forward and resume growth. I'm not certainly going to predict 100% or 50%, but we're not stalled out. We've had a little low, but we now have the operations, we can handle the business. And the ladies got that message. One just little thing that a year ago, we give them guidance about when is the last day that they can put an order in to get it before Christmas. Well, this five zones in UPS and we started in Oklahoma right in the middle and zone one is one next is and they goes out to zone five the time you get to California to New York. So we tell team by zones. Well a year ago, they added another week because they didn't believe this. And so the sales stopped. This year we gave them guidance. And they didn't move it back a week. And so we actually got another week’s business in December. So we're getting there. Things are good are happening we're reinstating confidence in our shipping and the fact that getting up in two magazines in December was pretty significant for us. So we're still optimistic. We're a growth company and solid cash. The inventories are right amount. And so we're looking for 2019 to be an excellent year. Thank you guys for joining us and we're on track here, we’re on target. Thanks for joining us.

Thank you everyone.

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