Good day, ladies and gentlemen and welcome to the Tandy Leather Factory Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session and instruction will follow at that time. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to Shannon Greene, Chief Financial Officer. Ma'am, you may begin.

Thank you. Good afternoon, everyone and thank you for joining us for our third quarter 2015 earnings conference call. I am Shannon Greene, Chief Financial Officer of Tandy Leather Factory, and I am joined by Jon Thompson, our Chief Executive Officer, and Mark Angus, our Senior Vice President. Before I begin, I call your attention to the fact that these conversations will contain forward-looking statements to the extent we speak today of any future event or make other forward-looking statements. You are reminded of the inherent uncertainties of looking into the future that there are risks to Tandy Leather Factory that could prevent these events from occurring in a manner foreseen. Please see our Form 10-K for 2014 and subsequent forms 10-Q for a discussion of some of these risks. Copies of these documents are available through the SEC's EDGAR system and from our Investor Relations office. Also, statements made today by us as Management of Tandy Leather Factory are made as of this moment and we disclaim any duty to the update of those statements. Our third quarter results from not what we've grown accustomed to in recent years, did not catch up by surprise. It has been a tough year on a lot of front. But even despite the quarterly results, we're right on target with our financial projections. As of September 30, compare to last year our sales were up approximately 2%, while earnings were down 23%. Gross profit margin is down but is still comfortably over 60%. We ended the quarter with $7.2 million in cash and $35 million in inventory. We paid off our debt on our corporate headquarters approximately 2.5 years early and incurred a $200,000 prepayment penalty as a result, that penalty, which was recorded in the third quarter was essentially the same…

[Operator Instructions] our first question is from Mike Nery with Nery Asset Management. You may begin.

Couple questions. So what were shares out at the end of the quarter and what is the rate on the line of credit?

Shares outstanding at the end of the quarter were 9.7 million, I think 9,753,000 actually and you're talking interest rate?

Yes.

LIBOR plus 185. So about 2.05 at this point.

2.05, okay great. Let me just add, I think its great move to buy back stock. You've a very strong balance sheet, your stock is cheap and you're doing it in a low interest rate, so I think it's a good move and I appreciate the fact that you're actually getting some stock done. Can you talk a little bit more about international? Thanks for giving the clarity on the 2% in constant currency basis. When do margins internationally come back to normal given the price increases that we have put through or do they, at these exchange rates?

Mike, historically. We opened the first UK store in 2008 and if you look at gross profit margins of that store plus the others that have been added. They're always higher than what we do in the US and Canada and the reason for that, primarily is because we saw a lot more of the non-leather items, all the tools and hardware. They're more so, than we sell the leather. So you know how the product mix works and the gross profit margins that are earned on the non-leather stuff versus leather. And as long as they're ratio, their sales mix is as heavily weighted toward non-leather as it is, their margins are always going to be higher than what we're normally used to in the US and Canada, but it's strictly a matter of how much leather they sell in relationship to the tools and the hardware that they sell, the non-leather stuff.

Right, but so when do they get back to more normal operating margins? You mentioned the price increase October 1, when do we get to the point where these are generating nice operating profit for us again?

So they are, the stores are profitable. We're obviously spending an awful lot of money on advertising doing trade shows and heavy investment there because even in having a store that opened in 2008, still a new market. I think you'll see some improvement from October 1. One of the things that, that we were probably slow to do based on currency exchange rate is, change price in our international market throughout the year. And so the increases that occurred on October 1, were fairly significant especially for us. And I'll be real honest, there is some sticker shock on the part of the customers because the increase was a significant as it was, instead of adjusting prices that all along, we held them sacrificed the margin as a result and then, but decided that the rates weren't getting any better any time soon, so we made those adjustments on October 1. There's going to be some sticker shock, but customers will come around. We'll do what we can to continue to work with them as they get used to it and then I think you will see things getting better in terms of margins because now the rates, the prices that we're charging over there are more in line with, what they really should be based on converting the US Dollar, our US Dollar prices to their local currency.

So this year, international I think is average about 5% operating margin, last year was 13%. So next year we should start seeing more normal operating margins. Maybe not a 13% yet, but significantly better than where they are.

I think so.

Okay and then can you talk about a little about margins in the US and what we're doing to improve or maintain margins. You've done a good job in the past at cutting cost, where you need to and I just want to find out what your thoughts and plans for next year?

Hi, Mike its Mark. Well, like we've talked before in the past calls. The whole year, we've not seen a lot of those opportunity purchases and opportunity buy at least in leather that we've seen in the past. Although, they're coming through them. We're getting some, we're not getting them in great abundance like we were very fortunate of getting last year. So the hopes are, that those constraints won't be there become the first part of next year. We're seeing an improvement in it. And we're seeing an improvement going into the first and next year. But as per our regular line of merchandise, there is really nothing wrong with that. Everything is good. It basically just boils down to just as opportune buy in that leather field. So if we can see some more of that in greater quantity come on the market and we're out there all the time looking for it, then that's what you're going to see bring those margin back a little bit. Even though, slight drop in that is very little, it's still that is the area in which it's happening from. We know exactly what it is.

I'd also add Mike that in terms of expenses, when we analyze what's going on with our expenses. The big increases relative to year ago are, advertising. Well you're not going to see make significant cuts in advertising because if we do that, we guarantee ourselves of sales decline. Employee comp, we're trying to manage the headcount in stores appropriately, so that we have to sufficient staff to work the stores and also be out doing demonstration and trade shows and all of that. So you're seeing an improvement or an increase in employee comp. But again, cutting that means, we either can't do, of course can't do trade shows and be out doing demonstrations etc. because we got to have sufficient people in the stores to cover the stores. So there are couple of, I mean those are probably the two biggest operating expense increases. But those aren't really good areas to cut. So yes, we look at - I mean, we're looking at everything that we can certainly get rid of as far as expenses go, but you know improving the gross profit with strong sales and better gross profit margin, a lot of that would fix itself. The margin you're looking for would be there on an operating margin line. There's not a lot of dollars to cut elsewhere in terms of when we look at expenses compared to where we were a year ago. It's employees and advertising.

Well, I think 99% of retailers right now would love to down inventory as year-over-year so, I know you guys are missing some of the great deals in the buys, your balance sheet is in very good shape. So thanks very much.

Thank you. [Operator Instructions] [Indiscernible] with [indiscernible] Road Capital.

Had a few questions, to start with on accounting issues. If you provide discounts or incentive, does any of that flow to marketing or does it lower your gross margin?

No it lowers. It's a debit to sales, discount for affecting sales it's not down below.

Okay, thanks. And then one thing I'm trying to do is figure out, how your profitability would look if you were LIFO reporter and I was hoping you could give me the tools to do that. So I guess the first question is, the IMF publishes rawhide price data, is that a decent proxy for how much it costs you to buy leather?

That report?

Yes.

Not really because again, when we look at buying leather we're actually getting the price from the tanneries including whatever it cost them to produce the leather. So normally that's about the only thing you're saving when you switch countries or buy from different countries as the labor. Pretty much everything is equal to everybody, say for instance. If they're buying US hide in China or Mexico or South American and the tanning the only difference because the chemicals cost the same, is the labor to produce them and the freight [ph], I think.

I see, okay. So in the last few months, have you been in inflationary environment on leather prices or deflationary or, what's that been like.

Well, we've seen a quite a run up in hide prices. It's probably been the highest, it's been 30 years. But you now we're seeing it go the other way and it happens every time. The market runs up and then it will run out of steam when people stop buying and it will drop back the other way and we're seeing drops of 25% to 35%. So it happens every time, I mean for us it means you're selling hides now or hand leather at maybe lower prices. But the thing is, that it usually brings more people back to the market and maybe dropped out before. You're just not making as many gross profit dollars per hide as you were before.

Yes, that makes sense.

More volume and luckily for us and you know they kind of go hand-in-hand with market [ph] would thing. When you get more people back in the market, then it also becomes odd lots on the market. So it kind of helps us in other way. If more people come back and start producing them, then we'll probably buy more odd lots, that we can get jump into that will also help our sales.

Yes, that makes sense. And then, what portion of your cost of goods sold is the raw leather?

You're talking hides. I mean, you're talking finished leather right, when you saw raw leather.

Yes.

So I was - looked that up. We do, all right so listen close 2015, of our sales mix, we're doing 41% of our sales in leather, 59% as a non-leather for 2015 year-to-date. Cost of goods, leather makes up 57% of our cost to goods, while the non-leather cost of goods at 23%. So 41% accounts for 57% of our cost of goods.

Yes, that's helpful. Okay. And then, can you give me sort of a rough sense of how much of the impact you would have over the last 12 months, if you were LIFO reported to your net income?

I don't know the, I mean prices haven't changed that drastically. So I don't think at any given point that I would have a huge impact. I mean, maybe, I mean I'm kind of guessing here but maybe a $0.01 or $0.02 on EPS but maybe. But it wouldn't be any more than that. You don't see big adjustments, big price points. No matter what's going on, we either buy extra when we think prices are going up as far as leather goes or we hold off and say go the other way and then on the non-leather, there is the tools and hardware and all that, those prices don't change by any even measurable amount. $0.01 or $0.02 on something on an item, but not enough to have any significant impact, I don't hint.

Okay, I think I'll jump back in the line. In case other people have questions. So thanks.

Thank you. I'm currently showing no further questions at this time. I would like to turn the call back over to Shannon Greene for closing remarks.

Very good. On behalf on Jon Thompson, Mark Angus and myself. Thank you for your participation in today's call. Have a great day.

Ladies and gentlemen. This concludes today's conference. Thanks for your participation and have a wonderful day.