Good day, ladies and gentlemen, and welcome to the Tandy Leather Second Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Shannon Greene, Chief Executive Officer. Ma'am, you may begin.

Thank you. Good morning, everyone, and welcome to Tandy Leather's Second Quarter 2018 Earnings Conference Call. We will be discussing our second quarter 2018 results as well as our plans and expectations for the rest of the year. I am Shannon Greene, Chief Executive Officer; and I'm joined today by Tina Castillo, Chief Financial Officer; and Mark Angus, President. Before we get started, our earnings release and related SEC filings are available on our Investor Relations section of our website, and a replay of this webcast will be available later today. Also, I need to remind everyone that there may be forward-looking statements on the call today. Statements would include words like expect, believe, anticipate, plan, intend, target, or words with similar meaning and are based on our beliefs and expectations and are subject to certain risks and uncertainties that may cause actual results to differ materially from our forward-looking statements about those results. These risks are detailed in our various filings with the SEC, such as the most recent Form 10-K and 10-Q as well as in news releases and other communications. We do not undertake to update or revise any forward-looking statements, which speak only as of the time they are made. As you may have seen in our earnings release, our overall results for the second quarter were encouraging and reflect that we are seeing progress across the business as evidenced by the improvement to our operating income. While we didn't see the top line growth, our gross margins continue to remain strong and we're seeing some favorable impact in our operating costs from changes in our marketing and advertising spend. From a top line perspective, sales were little tough this quarter with the same-store sales loss of 1.5%. By customer group, we gained 2.2% in sales…

Thank you, Shannon. Our second quarter consolidated sales totaling $19.2 million, decreased 0.5% from last year's second quarter sales, with International reporting a sales increase of 5.6%, and North America reporting a 0.8% sales decline. North America contributed 95% of total sales, while International contributed 5%. The sales decrease in North America consisted of a 1.8% decrease in same-store sales offset by $311,000 in sales from 3 new stores. North America same-store sales decline was due to lower sales to our non-retail customers and lower sales of leather, offset by the effects of foreign currency translation of the Canadian dollar. Our international segment reported a sales increase of 5.6%, which was primarily due to recent price increases and favorable foreign currency translation. Consolidated gross profit margin for the quarter was 68.4%, improving from 66.9% in last year's second quarter. The improvement was the result of the continued shift in customers with more retail than non-retail sales as well as product mix with more higher-margin products sold. In addition, for international, this segment's gross profit margin improved due to pricing increases that we implemented last fall. Consolidated operating expenses this quarter decreased $103,000 or 0.9% compared to a year ago as we reduced our advertising and marketing spend, partially offset by a higher personnel and occupancy cost. Income from operations was $2 million for the quarter or an increase of $0.3 million from the comparable quarter in 2017. The increase was primarily attributable to the improvement in gross profit and cost controls. For the year-to-date, our consolidated sales totaling $39.5 million increased 0.1% from last year sales for the same period. North America reported a 0.2% decline, which consisted of a same-store sales decrease of 1.5% and new store sales of $628,000. Our International segment reported sales increase of 5.7%, which…

So in summary, while second quarter was encouraging, there's so much work to be done and we're diligently focused on developing and are signing our strategic initiatives to continue the trend of improvement. We're excited about our initiatives to grow the top line while remain focused on protecting margins and controlling costs. With respect to our outlook, we are not updating our full year guidance at this time. We continue to estimate sales to be in the range of $82 million to $84 million and fully diluted EPS in the range of $0.63 to $0.68 based on $9.2 million of average shares outstanding. More specifically, we expect our top line to grow modestly for the second half of 2018 in the range of 0.3% to 0.5%. And then our gross profit will be more comparable for last year's second half margins. Our effective tax rate will likely be in the range of 24% to 25% with the new lower federal rate of 21% plus the effects of state income taxes and global foreign income taxes. As always, I want to thank all of our dedicated Tandy Leather team members who work so hard to move this company forward. That concludes our prepared remarks. We appreciate your time today and your interest in Tandy Leather. Operator, we are now ready to take questions.

[Operator Instructions] Our first question comes from George Kelly, who is a shareholder.

So I just have a few for you. First of all, wondering if you're planning any additional new stores in the second half of this year?

Doubtful. We are -- we've got several on the list but I don't know that we're going to get them done in the end of -- in the second half of 2017. We got basically 5 months left, we're in the process of relocating. I think we still have 4 stores that we're moving within their cities, that we got to get done in the next couple of months. And we tend to avoid trying to open a new store in late November, early December, if we can avoid it just because we miss the advertising opportunities with the holiday shopping season. So it's possible, but I would say unlikely at this point. You should see stores opening in the early part of 2019.

Okay. And you mentioned moving 4 stores. What is the -- what's the reason for that?

So whenever a lease -- if we're coming up on a lease expiration, we look at a lot of factors, the size of the store, the current location that it's in and what the neighborhood and surrounding area looks like. Those are probably the 2 big factors. Pricing can come into play, but generally, if we're in a place we've been for a while, that's not too critical. But we've got some stores that are in -- when we open them 10 or 15 years ago, they were fine. Here we are now later 15 or 10, 15 years later and they're just not in really great parts of towns, parts of cities. And so we look at -- and size may be a factor as well. We got some stores that are under 1,500 square feet. And generally, we're trying to kind of be somewhere between 15 and 2,000 square feet generally speaking. So if we're coming up on the end of a lease and have an opportunity to move without paying any kind of early term fee, of course, that's what we look at. So we've got; one, it's in a really lousy neighborhood. Even the staff worries about going to work there; second one, the building that we're in is basically falling apart, the landlord doesn't want to do anything about it; where the other 2. So that's generally -- but we don't move for the sake of moving. We move if we need to improve the location and the presentation of the store.

Okay. And then, gross margin looks really outstanding in the quarter. I was just wondering if it's more of a raw material sort of things that are out of -- is it a different strategy that you're pursuing to really go after gross margin? Are you being more aggressive in pricing? Or is it more of just sort of a quarterly thing that' hard to control, and you benefited from some unexpected pricing?

It's Mark. It basically is just a lot of the product mix. I mean, we look at it very hard when we develop and we work on designing new products that we introduce. We always look at these particular factors. And a lot of it is a lot of new products that we've introduced, and that has come in, that's attributed to some of the margin increases. But overall, it truly is a product mixing. We were very fortunate to have just a very favorable mix of sales throughout this time period.

Okay. And then, I guess, beyond just this quarter, it has improved now. First quarter looked good -- that has been a trend. So do you feel like it's sustainable to a certain degree going forward?

At those levels, I wouldn't -- I would like to hope so, but I doubt it very seriously. I think it will be more in line with last year's margin going into the fall. We have a lot of large promotional type things with Black Friday and Super Saturday and going into that fall season. We're pretty excited about a lot of the new product line up that's going to be rolling out for fall. So but overall, I think it should be right in line with what we did last year.

Okay. And then just 2 last questions. What are your expectations for same-store sales growth in the back half? And how is this new Sunday? Should that start to become a benefit for that trend for same-store sales growth trends?

Hi, George, it's Tina. As we -- as Shannon indicated, we're looking at just a very modest second half growth. And so I would say that our same-store sales will be flat, if not slightly down. And as far as Sundays, it's pretty early. When we first started in early June, the numbers were good, but they are a lot better 2 months into it. And we expect it as more customers get familiar with the hours, as people aren't vacationing as much during the summer. I think that we're going to continue to see Sundays improve. We've heard that Sundays generally are the most productive hours. And yes, there's only 5 hours that we're open from 12 until 5. And so we really do anticipate that Sundays are going to help. Right now, I think it's more of a convenience for our customers because we haven't seen it expand the top line, but we do think that once they get used to it, it will certainly help.

Okay. And then last question for me, just around your balance sheet and same stuff that I generally bring up. Where -- your guidance would get you to what -- can you -- given year-end cash number that you expect and very modest buyback again in the quarter? Or do you feel like you're getting any closer to having a bigger sort of cash use? I don't know if it would be a bigger buyback? Or do you feel like you're getting near to making a decision on how to use your cash?

George, that's a great question. I know that's one of your favorite ones. And I can tell you that we do discuss how to use the cash and make sure that we maximize the yield that we have on it. As we've said in the past, we do look at our debt levels. We do look at how we want to make the best use of that. Right now, with interest rates low, the fact is they're starting to rise. We are looking at that, looking at the yields that we can get where the cash is. We haven't historically projected what our cash levels are going to be, but I will say that looking at the trend over the last couple of years we continue to add to our cash level, I would say that we're currently at $19 million and looking at what we have projected for the second half. I think definitely, we'll be within $21 million to $22 million of cash easily. Assuming sales and margins and all those good things are in line with our forecast. But yes, we do look at our cash. It was a very modest buyback. This quarter, constantly, a discussion topic among our board and making sure that we are doing what we can do best. Always looking.

[Operator Instructions] Our next question comes from Jeff Bailey [ph] with Pacific Beach Capital.

Segueing on to George's question, so recently the buyback authorization was extended till this time next year. And I'm wondering if, assuming current prices prevail, how committed is the company to that roughly 1 million share buyback between now and August '19?

George, this is Shannon. George -- [Jeff], sorry. I think we're very committed. It's -- I mean, I would love to see it pick up that extra million or that additional million shares that's available or that's authorized. It's a catch-22, we obviously -- from a company perspective and a cash perspective, we want to buy the shares as cheap as possible just like you guys. So it'll be that the board has a special committee that sets pricing and kind of sets the target in terms of what we're willing to spend. But given the prices that the stock price holds, and it stays consistent like it seems to have done, I'm sure, they will be discussing now that our second quarter is out. That committee will be having discussions in terms of what the target range is and how we can get there. But I think, the simple answer is, we want to buy all we can, but we just want to be reasonable in terms of the price.

Okay. And then given the somewhat limited volume on the shares that trade every day, does the company predict it's going to have be creative in meeting that 1 million share goal in the next year? Or can you do it just with open market purchases?

I don't see it happening with just open market purchases. I mean you already know that the volume's not high enough to buy very much. And I don't remember off the top of my head what the rules are, but you can't buy -- you can't be the first trade of the day, you can be last trade of the day. You can't buy more than some small percentage of what's on the open market. So generally speaking, with very few exceptions, the shares that we have purchased since this buyback program was put in place in always block. If sellers looking to sell and have as a reasonable block sides, that's generally where we get them. Those are, obviously, the hardest to get, but those are the most effective. So -- and that's just the matter of -- I mean, if somebody wants to sell, then they reach out to -- I'm not sure how the mechanics work, but anyway our -- the broker on our side connects with and tries to pick them up that way. So that would be the logical way to get 1 million shares. I don't see with our limitations in terms of volume, it would be a pretty big feat, I think, just to end up buying 1 million shares off the market over the course of the next 12 months just because of all the limitations that are put on it by the SEC's rule.

Okay. So if we know anybody that wants to sell a block, we will put them in contact with you. And it's an advertisement going out to anybody listening.

Well, sure.

Yes. Have the South Dakota wayfare decision had any effect on the company's Internet sales either the direct Internet sales or through third parties?

Not yet. We are already in 43 states -- so if I remember correct, 43 or 44. So there is only a handful of states that we're not in, that if we were shipping into that state, we would not be collecting sales tax because we don't have a physical presence there. So I don't think it's going to have a significant impact on us because we're already in so many states. We're waiting on -- we're watching the developments. We're waiting on the other -- the states have to make some changes or adopt some changes. It is my understanding (inaudible) last I've seen in order to determine that they're going to go along with that decision. So -- but given that we're in so many states, it's -- we're going to end up collecting sales tax in 6 more states, but not significant relative to what we're doing already.

The press release talks about a reduction in advertising and marketing. And I'm wondering what you all were able to find in your advertising and marketing programs that was prudent to reduce a little bit for the following quarter? Or for the past quarter? And if you expect that to continue in following quarters?

This is Mark. Basically a lot of it is attributed to -- we cut back and really took a hard look at a lot of the trade shows that we had done. And so in comparison, we're doing quite a few -- fewer of those. And how we're handling them a little more structured out of our main office here. And so just keeping a tighter grip a little bit and just watching things a little tighter. Overall, that's basically the most of it that you see there. And that will continue throughout the rest of the year.

Okay. Does the company have a capital expenditure estimate for the remaining 6 months in the year?

We have a capital expenditure budget, $800,000 to $1 million. And that was really for the new stores and relocations. And I would expect that the second half is going to be similar to the first half .

Great as well. So that's another part about it. I would say, of the capital expenditure budget half was fleeted towards the new stores, relocations, and the other half is just routine maintenance.

Understood. And then the international stores are obviously doing well and the strong dollar isn't helping too much with the translation, but do you expect any more growth internationally?

It's -- yes, of course. It's a slow process. The international segment operate -- the strategy with them is somewhat different because there's a few stores as there are. So the part of the strategy that we're pushing in the U.S. is the whole in-store customer experience. The teaching classes, the hands-on try out the tools, sit down and sit at the table and try some things and get some quick tips from the staff. When you have -- let's take Australia, for example. We've got 1 store among the -- on the entire continent. We're pushing that locally, but we're also trying to take care of the entire continent in terms of the market and customers. So it's a little bit different strategy trying to kind of straddle the fence there if you will because they've got to cover such a large area. And it's -- I will tell you it has not been super easy. We have to think about them differently, but the potential is still very much out there. We see opportunities to open more stores eventually. I don't think that's unrealistic, but that's not short-term focus at this point. It is continuing to have a larger web presence, continuing to grow the local market as best they can with the single store that they've got. And then, obviously, pricing is a continued issue. Everything that's coming out of -- I mean, more and more companies -- more and more customers find products on the Internet from all over the world that's cheaper. They don't have the guarantees that we do, but when you're looking, it's all you can do is, look at price the competition worldwide for a tool or a [concho] is definitely out there and continuing to grow. So I think, we've got a good team of staff in all the stores. They are basically working in those sites, working sales business customers on the continent or in their country. And then, also trying to develop that retail hobbyist by getting them into the stores, taking the classes, et cetera, et cetera. So it's a different type of animals if you will. A little bit different strategy than what we're doing in North America just because the limited number of stores. But we will -- I think the potential -- I've always thought the potential internationally for the products that we offer, the services that we provide, from an education standpoint, are needed and wanted. We just have to market a little bit differently, we have to have a slightly different approach strategy-wise in order to stores head in the right direction.

Is it also a factor of a simple logistics, whereby, the company's model is so hands-on, so customer-centric that it's just difficult to implement that in an international store as opposed to a domestic store, which you can go and visit? Does that play into the difficulties as well?

Absolutely, absolutely. The farther away they are, the harder they are to proper -- or to effectively manage and stay in touch with. And as I said, the managers in those stores are phenomenal. They've got great team. They're still on the other side of the world. The time difference can make a difference. Yes, and then, just as far as product goes, we're not big enough in any place yet to have like a D.C. so to speak for them. That would just -- I don't think that's, we just don't run enough volume yet. So they're getting all of their products from our Fort Worth central warehouse. And so that is another issue rather than getting direct from vendors, everything comes here and then we send it to them. So it's kind of some growing pains and if we can get bigger, run more volume than we may be able to justify having a D.C. I'm not really thinking Australia, I'm more thinking Europe and the U.K. Maybe that will make sense down the road, but just right now when we look at the finances, that doesn't -- it just doesn't make enough sense to do that yet. But yes, all of that is through logistics from the operation side, logistics from the supply side. All of it is different and harder than what we do domestically and in North America.

I'm not showing any further questions at this time. I would now like to turn the call back over to Shannon Greene for any further remarks.

Thank you all for participating in the call today. We look forward to speaking with you, again, next quarter. Have a great day.