Transcript
Ladies and gentlemen, thank you for standing by, and welcome to the Educational Development Corporation Fiscal 2021 Third Quarter Earnings Conference Call. Please be advised, today's conference is being recorded. It's now my pleasure to hand the conference over to Chief Executive Officer, Randall White. Please go ahead, sir.
Holly, thank you very much. Great introduction there. The first thing I'm going to do is introduce who's here on the call with me. I've got Craig White, who's our Chief Operating Officer; I've got Dan O'Keefe, who's our Chief Financial Officer; and I've got Heather Cobb, Chief Sales and Marketing Officer. I think the first item on the agenda today is I'm going to hand it over to Dan to give us the information about our third quarter results. Dan?
Thanks, Randall. Here are our third quarter results. Net revenues for the third quarter of fiscal 2021 were approximately $66.8 million, up $26 million or 64% from approximately $40.8 million reported in the third quarter of fiscal 2020. Pretax profits for the third quarter totaled $5.8 million, an increase of $2 million over the pretax profits of $3.8 million reported in the third quarter of last year. Pretax profit as a percentage of net revenues decreased from 9.4% in the third quarter of fiscal 2020 to 8.7% in the third quarter of fiscal 2021. Earnings in the third quarter of fiscal '21 totaled $4.3 million compared to approximately $2.7 million reported in the third quarter of fiscal 2020. Net earnings grew by 59.3% over the third quarter last year. Earnings per share on a fully diluted basis increased $0.18 a share from $0.33 a share reported in the third quarter of fiscal 2020 to $0.51 a share reported in the third quarter of fiscal 2021. Earnings per share for the quarter increased 55% over last year. This concludes the earnings results, and I will pass the call back over to Randall.
Okay. Dan, thanks. Well, I think you can see that we keep reporting record sales. I'm very happy about that. And I think one of the most critical things is during this busy Christmas season, we kept up with the shipments. That's really important when we have an Internet business, and we think we may have been right there with the leaders on shipping. I think we were within 2 or 3 days from receiving orders getting shipped out the door. However, along with that, we had some nonrecurring expenses that I thought I might tell you about. We increased our shipping charge to the consumer for the first time in about 8 years. We added $1 a box. Of course, we're very concerned about that. We didn't know what it would do to affect our revenue, but it seemed to have had very little effect. So we're happy about that. So we were able to increase the revenue. Unfortunately, during that same period of time, UPS had a freight rate increase as well as a surcharge, the surcharge on their largest customer because apparently, we were clogging the system. I'm not quite familiar with that economic theory, but that was theirs. I will tell you that the surcharge has now expired, and we have negotiated a new contract at a lower price for the upcoming year. The net of those two things, our increase in revenue and the increase in shipping, actually was a negative $350,000 or so for the quarter. So the fact that they will not be recurring, I think that our increase will largely continue, and we believe that we'll see margins increasing coming up. Also, I've got a couple of other things I don't want to talk about, but I will say that because of putting in an extra night shift and another temporary line, we have estimated that this quarter was impacted around $575,000 with additional cost. The second shift is certainly not as efficient as the first shift, but you have to do it. We're happy about customer service, but not happy about the cost. Now, why do I think this is nonrecurring? Well, I'm going to turn you over to Craig here for a minute. Craig, what do you think about how we are going to do with these recurring charges?
Thank you, Randall. To kind of reiterate a little bit, we put up a temporary pick line in the middle of the third quarter, and it wasn't as efficient. It was completely a temporary line. It was up and running mid-October, and we actually tore it down mid-December to make room for our new CapEx project. While it only lasted 6 to 8 weeks, we did ship about 45,000 orders on the temporary pick line. So it was necessary but not the height of efficiency. We tore it down to start our new CapEx project in that same space, which is a double-decker pick and packing system using a mezzanine. So it's 2 stories and will basically double our current capacity, which would allow us to not have a second shift this next year. This project should be complete by the 1st of April to mid-April, so that should be much more efficient. Also, as Randall mentioned, we did have some increased freight costs from UPS. They had a pandemic surcharge throughout most of the year, and then a peak surcharge in the third quarter, which ends tomorrow. However, we signed a new contract in October that capped some of our surcharges and offered a better discount structure going forward. We will recoup all of our surcharges from the last couple of quarters, so I'm very happy about that. Additionally, the second shift was difficult for us to maintain a stable workforce; we were constantly hiring and training new people, which added to what we'll call a one-time nonrecurring cost because we shouldn't have that second shift next year. So anyway, thanks, Randall. I'll hand it back to you.
Okay. Yes, we're excited about that. A 2-deck, latest technology pick and packing system is incredible. We feel like this is installed online sometime around the 1st of April. Without these what we call one-time recurring charges, and they are nonrecurring because the surcharges will stop tomorrow, we believe that when we do our analysis, without those charges, we would have hit a little over 10% pretax, which is what our goal is. We did about 8.7%. Now last quarter, we did about 9.5%. But as we reported, we had a $350,000 one-time revenue from having a virtual conference. Without these factors on a go-forward basis, our margins are not declining. If someone in your backroom is telling you, 'Oh, no, alert, their margins are going down,' we have fixed it, guys. We just need to invest to make it more efficient, which we are doing. Our growth continues to be driven from our increased volume of active consultants in the UBAM division. To give us a brief update on the active consultant status, Heather Cobb, our Chief Marketing Officer, would you please talk to us a little about that?
I'd be happy to. Thanks, Randall. Last November, we ended with 32,900 active consultants. This November, we closed with just over 60,000 active consultants. As we've shared on previous calls, I'll just share again, there isn't any one factor, but we do see a combination of factors that have contributed to that growth over the past year. We are experiencing increased demand for supplemental or replacement nontraditional income to lost income due to the COVID-19 pandemic. We also introduced a new, lower-priced entry kit for new consultants in June. In the past, we have done new consultant kit specials lasting about a month, but we shifted our focus to making that available to everyone every day, which we believe has significantly impacted the number of people choosing to join our company. In addition, in February, we rolled out a new consultant success program called Climb. By the time we entered this quarter, we feel like that had really taken hold, and people were using it to its maximum potential. We saw technology improvements, both customer-facing and with our consultant back-office product suite, as well as continued demand for educational products for use at home, not only for teaching but also for keeping younger siblings busy while teaching children who were distance learning at home. We strongly believe that all those factors combined really had a significant impact over the year, causing this significant increase. Now, I'll pass the call back to Randall for further information.
Yes. Heather, regarding Investor Day, I think that's critical because some people think our business was affected by COVID. If it ever solidifies, that will drop back. We're not expecting that at all because, as Heather says, that's not what's driving our sales right now. It's more people working out there, feet on the street. We're expecting the increase to continue, and it has right along. We started back up in January, and we're pretty happy with what's coming in. Now, another element I might want to mention is we have a pretty nice balance sheet. In the past year, we paid $8 million in long-term debt. Today, we eliminated all short-term debt, by the way. So today, our current debt level stands at $11 million.
We have $11 million in debt, secured by 2 buildings with a value of about $35 million. We consider ourselves very conservative in that area. Plus, we increased the dividend from $0.24 annually to $0.40, all from our cash flow. You will see on the balance sheet that we have $31 million cash. I love that. It's great. The problem is we need to increase inventory as our sales increase. If we build our inventory, it's already ordered. It's on the way; it's on the water. Unfortunately, one ship is partially underwater with 11 containers on it, but we have significant inventory coming in. By the fourth quarter into the second quarter, that will be in the hands of our customers, and we may even dip over the line a bit, but that's because we're building inventory for the sales we anticipate in the coming year. With that, I hope I've explained that we feel like our profit margin is increasing as we eliminate these one-time nonrecurring costs and get our efficiency back to levels it has been.
Our first question will come from Bill Anderson with Bard.
I got on the call late. I haven't seen if you've released the Q. But I'm wondering, is there any leverage in this model as your sales are increasing more than your operating income or earnings per share even though you're buying back stock? Did you cover that? Or is there something I'm missing there?
We haven't bought stock back in a while, but when you talk about if there is leverage in our model, we have a pretty consistent model. We allocate 25% for the cost of goods, 50% for marketing costs, and about 25% left to run our operations, generate profit, and pay dividends. This model has been the same for about 30-some years. While we have nice revenue increases, it doesn't fall through incrementally as some companies do because the overhead general investment goes up significantly with revenue. Other than that, I think that's a pretty nice profit level we have.
Well, yes, I mean there's no economies of scale. There's no volume discounts from the publishers, as you...
We do have volume discounts for all of them, which is why we can have profits exceed revenue growth. But you may not see that this quarter. Your operating income was up less percentage-wise than the revenue increase, and the same goes for earnings per share, right? Or am I missing something?
Yes, we published the Q, and it's available.
With a 10% increase in revenue, you should see at least a 10% increase in operating income and earnings per share. That's essentially the point I'm trying to make.
We think so. We have some unusual things this quarter. When you grow like this, it doesn't happen accidentally, and I will tell you that one of the best things that happened to us was that we didn't have an outage in our system. Many companies experienced outages due to increased internet volume this year due to COVID. We didn't experience that; we went right through it and maintained great customer service, but we spent a lot of money to accomplish that. Yes, I agree that growing sales should lead to increased profits, and that's what I think will happen.
Do you think margins are going to be back to normal in Q4?
Q4 is already halfway done. The surcharge doesn't expire until tomorrow. Q4 is the smallest quarter in the year, so it’s hard to increase margins unless volume blends well. Let’s look at the first quarter, and I say yes.
Our next question will come from the line of Denis Amato, private investor.
I had one comment and then one question. Comment: You had a great quarter, and the stock didn't respond even in a good market, which I suspect is related to what you were talking about a minute ago. It might have been prevented if you had included that explanation in your news release because you didn’t get credit for what was really a pretty good quarter. My question is...
Denis, let me address the comment. You're right. Traditionally, if you look back, I've been doing this since I came in as an accountant, and we reported about the same for all these years when we report quarter to the same quarter the previous year. I received a call from a friendly fund who pointed out, 'Hey, here's your problem.' I said we have a great report. What's going wrong? He said, 'Well, people think your margins are going down because they're not better than the second quarter.' So we will address that; I agree with you.
I was curious how you obtain new consultants. I checked the website the other day, and I noticed there's very little on there. If someone heard about your company and wanted to become a consultant, there was very little information regarding that.
Heather, do you want to talk about that? How do we get new recruits?
Yes, we actually don't do much advertising or promotion from the corporate standpoint. As I shared at the end of the third quarter, we have over 60,000 active consultants, and we rely on them to tell their friends and family about the business opportunity. They do it through parties, conversations, and wearing the UBAM logo attire into the community. There are various different methods.
We have a controller who's been here three years. He signed his wife up to be a consultant because he wanted to study it. He found it to be a blessing, not just financially, but for the families that benefit from the books. He encouraged her at first, and she achieved enough success in her first year to walk across the stage and even earned trips to Hawaii. Our corporate website is more geared towards our retail division rather than for recruiting consultants, which is why there isn't more information there. If you Google it, you could get a lot more attention than you might imagine.
Our next question will come from the line of Joseph Buller, private investor.
I'm wondering, what's the basis for your conclusion that sales are driven by the number of active consultants rather than the pandemic? Is it due to the type of books being sold?
What’s driving it now is we have very successful people in the organization who talk about making money selling books. For example, a lady who was a school teacher tried to join five years ago but couldn’t due to credit card issues. Last month, she made $60,000. People are hearing they can earn money while staying home and taking care of their family, which is a strong recruiting driver. We must be cautious about exaggerating income claims, and while we can’t showcase everyone’s earnings, I believe people are actively discussing these opportunities.
We offered learning at home categories during the pandemic, which saw increased shopping initially. Now, we’ve reached a point where we’re achieving pure momentum and not merely a catalyst for growth.
With the economy improving, how much attrition do you expect among the new consultants? Are you anticipating any decline in numbers as people go back to work?
It’s hard to guess. Many people lost solid jobs and are uncertain about the future. Some may find it enjoyable to earn some supplemental income and keep doing it on the side. I believe we have not tapped an entire market due to the pandemic, missing about $35 million from not being able to have school book fairs or face-to-face sales. I think there will be significant additional volume once those opportunities return, along with the strong positive stories from participants.
Our next question comes from Ed Norcini, private investor.
I have a question about the pick and pack line. Is this like putting another container on top of a train? Does it increase output? Also, with your inventory being at $47 million now, is that adequate for your capabilities? Are you planning for any adjustments?
That's a good analogy. Our pick and pack system will be more efficient because it allows increased output while maintaining technology that handles orders better. We’re excited about the improvements. Regarding our inventory, if you could contact all our 60,000 consultants to determine how much they'll sell next year, I'd feel more confident. We believe we have adequate inventory, but at present, we likely still have over 100 titles out of stock. Fortunately, our consultants have been proactive and continue selling even when we experience stock issues. We have significant inventory incoming that we believe will adequately service sales. We are looking at the needs for future inventory placements.
I see. I also noticed an increase in accounts payable, from about $9 million last year to $45 million now. Why aren't these bills getting paid?
Let me clarify; about three years ago, we established longer terms with our suppliers, moving from 30- to 60-day terms to 120-day terms for most vendors. Yes, we have a significant amount of accounts payable, but we also have $31 million in cash, along with a $10 million line of credit that allows us to cover our payables.
We pay all our bills when they are due; we have the cash and credit to cover every payable on the balance sheet.
Lastly for Dan, can you summarize on HEICO? Did they pay all their rent last year? Did you have to make any concessions?
Hilti is a worldwide tool manufacturer. When the pandemic hit, they requested 90 days of rent deferral for relief, but in return, they agreed to extend their leases by 90 days. We were happy to accommodate them because they are excellent tenants, and we’ve developed a great relationship.
During this arrangement, we have benefited significantly from Hilti's tenancy, including furnishings and warehouse equipment, and their relationship has been advantageous for us. They contribute much to the community and operational efficiency. I’m very pleased with the arrangement.
Our next question is a follow-up from Bill Anderson with Bard.
I’d like to reiterate what someone said about the website; it feels outdated. Have you considered making improvements?
We don't place much emphasis on the corporate website as it doesn't generate revenue directly. Most recruiting is done through existing consultants and related channels; the website serves more as an informational resource.
We do have projects lined up to enhance the corporate site, while also maintaining robust sites for all our 60,000 consultants, which link to our e-commerce system. We acknowledge the need for improvement for our corporate site.
While we focus on other priorities, we appreciate your feedback and recognize the importance of managing our resources effectively. Our profit margins are not declining, so if that’s why you're selling stock off, then you've made a miscalculation. The news will only get better, and we are growing and profitable. Thank you, everyone, for being investors, and if you have further questions, feel free to reach out to me.
Once again, we'd like to thank you for participating in today's conference call. You may now disconnect.