Thank you for standing by. Welcome to the Educational Development Corporation Second Quarter Fiscal Year 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker's presentation there'll be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over your speaker today, Craig White, Chief Executive Officer and President. Please go ahead, sir.

Thank you, Norma. As Norma said, my name is Craig White. I'm President and CEO. And with me on the call today are Randall White, our Executive Chairman of the Board; Heather Cobb, our Chief Sales and Marketing Officer; and Dan O'Keefe, our Chief Financial Officer. At this time, I'd like to pass it over to Dan to announce our earnings results.

Thank you, Craig. Now we're going to announce our second quarter results. NET revenues for the second quarter of fiscal 2022 were approximately $33 million, a decrease of $26.3 million or 44.4% from $59.3 million reported in the second quarter of fiscal 2021. Pretax profits in the second quarter totaled $2.7 million, a decrease of $3.1 million from $5.8 million, representing a decrease of approximately 53.4%. Net earnings in the second quarter of fiscal 2022 totaled $1.9 million, compared to $4.3 million, representing a decrease of $2.4 million or 55.8%. Earnings per share on a fully diluted basis for the quarter totaled $0.23 per share, compared to $0.51 per share reported in the second quarter last year, a decrease of 54.9%. This concludes the earnings results for the second quarter and I will pass the call back over to Craig.

Thanks, Dan. Okay, so my personality is to tell you like it is. The COVID pandemic affected most businesses, either hugely positive or hugely negative last year, and our company was no exception. Our second quarter last year was a monster quarter. Sales in the second quarter are historically not very strong. But last year this quarter, we saw a strong increase in the demand for our products due to school closures and travel restrictions. Our business model and our consultants capitalized on that opportunity. The results from this year's second quarter is more in line with pre-COVID quarters, fiscal 2020. And that is why we presented the most current pre-COVID year comparison in the press release. While our quarter two revenues are down significantly from the second quarter last year, they are up over pre-COVID levels, primarily due to our increased consultant count. We see our active consultants continuing to drive sales in fiscal 2022. So what we're trying to say is fiscal 2021 was an unusual year. We took it, we are poised and ready and we took advantage of it. And it's a very difficult comparison as we've been saying, that we still see continued growth. And I'm going to hand the call over to Heather to talk more about our sales opportunities.

Thanks Craig. During the second quarter, we experienced an increase in our publishing division sales and a decrease in sales from our UBAM division. Our publishing division has experienced a steady increase in sales, as stores have begun reopening and restocking their shelves. We've had over $1 million in net sales each month from this division in fiscal 2022. And we see this growth trend continuing in the fall and into the next fiscal year. Our UBAM sales declined primarily due to the anomaly that last year was, especially in relation to the overwhelming demand for our product. Our average active consultant sales were unusually high during the second quarter last year, which is typically not a strong selling quarter for us. During this year's second quarter our sales per average active consultant was more in line with previous pre-pandemic years. During the second quarter, we saw a pullback in the average number of active consultants. And while there's no magic formula to maintaining and growing active consultants, there are several things that we are doing to help them be more successful. And when existing sales consultants are successful, they in turn recruit more, and that success builds on itself. One of the items that we are looking at rolling out is our new e-commerce platform. This new platform will be mobile-friendly and offer our consultant customers a better online shopping experience. With the rollout of this new platform, our IT team will have additional bandwidth to work on several new projects that will also make our consultants' job much easier. These projects are still in the development stage, but will also provide a more streamlined consultant experience leading to more success. And as I stated before, success builds more success. With that, I'll turn the call back over to Craig.

Thanks, Heather. One other impact you see from our recently published financials is our increased working capital. We have increased inventory levels and increased working capital borrowings. These increased levels are temporary and will rebalance as we turn inventory into cash over the next few quarters. As inventory turns to cash, we will pay down our borrowings and expect to be back to a more normalized working capital level within the next year. And while we are currently heavy on inventory, we expect this will be a good benefit for the next several quarters as several companies have already announced supply shortages that will impact them through the holiday season. What we've been saying internally is our shelves are full and we're ready to have products to sell. One of the other highlights of our second quarter was our strong pretax profit levels. Our pretax profits as a percentage of net revenues totaled 5.8%. These pretax results at our much lower revenue levels reflect the strength of our business model and our management's attention to cost containment. As you can probably tell, we are very excited about our accomplishments and where we are headed into fiscal 2022. We are also excited to see the rebound from certain sales channels that were negatively impacted by the pandemic, including sales through school book fairs and in-person events. These two sales channels combined for about $13 million of business which we haven't fully realized yet. We're still in a strange year. The face-to-face events are coming back, but they're not completely back. So that's still potential that we could see coming up. So those are our highlights. We've provided historical and current information, and I want to open it up to questions from our investors.

Thank you. Please stand by while we compile the Q&A roster. Our first question comes from Tony Chiarenza with Key Equity Investors. Your line is now open.

Good afternoon. Congratulations on a good quarter, even though it's down, but still I think you're still doing well. First question is on the average number of consultants. Obviously, last quarter, it was like 55,000 or so, now it's down to 46,000 for the average for the quarter. Where do you expect that number to stabilize at some point? Obviously, it's coming down, obviously from the peak of the pandemic. Where do you see stability?

I hope we're approaching the bottom now. Our active count refers to those who made a sale in the last six months. The second quarter is typically our weakest for headcount since some consultants only sell during the fall and after Christmas, which means they don't contribute to the next fall's sales. Many of these individuals have left, and we usually reach the bottom around this time before beginning to increase again as we move into the third quarter.

Okay, I don't want to put words in your mouth, but is 45,000 or 46,000 the figure where you would stabilize as you reach the bottom? I know that number is an average and doesn't reflect what it likely was at the end of the quarter.

I wish I had a clear answer. COVID is still somewhat of a barrier for both customers and individuals looking for additional income opportunities. It's challenging to predict. As I mentioned, we are optimistic about seeing a rebound in the third quarter, but I cannot guarantee a specific number.

Understand. Now you mentioned that the inventory levels are high. Now that is just something that developed. Was that intentional or the sales came in lower than you expected. Can you give us some more color about why the inventory has built up so much?

Certainly. In the fall of 2020, we achieved record-breaking sales despite being out of stock on 25% of our titles. While we did not experience the 80% growth we anticipated this year, we expected some modest growth or possibly flat results. To prepare for this fall, we ordered inventory months in advance, as required. However, since sales are currently down, our inventory levels are higher than we would like. It's important to note that we have not increased our inventory purchases since April, as we adjusted based on observed trends. While new titles are essential for our business, we will focus on reducing our inventory over the next six months.

And you would expect it to go down. Can we expect it to go down back to the $50 million level or so from the $65 million? Is that your objective or so?

Absolutely, maybe even more?

Okay, okay.

But like I said in our script, it puts us in a great position for the fall. A lot of our competitors are going to run out of stock and their shelves will be empty. So we are poised and ready to have a great fall.

Everyone is currently out of inventory, which is the challenge with supply chains. Every company I'm associated with is facing difficulties in securing inventory at this time. You're exactly right about that. Additionally, the inventory situation has resulted in increased long-term debt, which has risen slightly. Can you tell me how much liquidity you have left at this point regarding both your revolver and your term debt?

I'll take that, Tony. This is Dan O'Keefe. We currently have a working capital loan of $20 million. Over the last year, we focused on reducing our debt. In November of last year, we had $30 million in cash and used part of it to pay down about $10 million of building debt. Therefore, we still have significant resources available if we need to raise additional capital through further bank borrowing, and we expect to have ample capacity to do that.

Okay, but you're not anticipating needing it given that you have the inventory that you need, when you buy some of your titles, but as you're trying to work it down. So I'm assuming you're not going to need additional liquidity at this point. Is that correct?

Well, it just depends on two, we're hitting our busy selling season right now. So there's no crystal ball for what's going to happen over our next 90 days, which is where we typically will have 40% to 50% of our business. So it all depends on how these next 90 days come, if we'll need to borrow a little more, but if we need to borrow more, the point I was trying to make is we certainly have a strong enough balance sheet to allow us to borrow more with our existing lender.

Well, and I will also add to that I said we purchased in April. So all those titles are coming in now. So in the next 90 to 120 days, we got to pay for that inventory. So we're reserving the right to need more money.

The good news is we aggressively paid down debt last year. We reduced our building debt by about $10 million, which has created a lot of available assets that we can use as working capital along with our inventory.

Right, right. So you'd have something in the neighborhood of $5 million to $10 million in additional availability. I'm just making a number off the…

At least at least $10 million.

At least $10 million, oh, good. That should give you tremendous amount of flexibility. That sounds good. And then that kind of gets worked up. And after we go through the selling season that'll get worked down again as we go into January and February.

Exactly.

Right. Okay, great. Thank you so much for answering the question, and best of luck as you go through the Christmas season.

Thank you, Tony. I really appreciate it.

Thank you. Our next question comes from Walter Shanker with Mars Partners. Your line is now open.

I think I have two questions. Hi. One of which came up from the last question and answer, if you order inventory in April, when does it show up? A, when do you actually pay for it? This is the movement of cash. And B, at what point does it show up on your balance sheet? So if you order in April and you don't pay till September and isn't delivered till September, then it doesn't show up anywhere on your income or balance sheet statements question, to get income on the balance sheet.

Walter, this is Dan again. So when we buy, it depends on the product that we're buying, and where we're printing it. We print some in China, we print some in Arab Emirates, some in Malaysia, typically title passes. When we get control of it, either once it boards the boat, or once it hits the U.S. shore, one of the two. And at that point, we take control of it, and we book the inventory and the payable. But as Craig mentioned before, that can be six to eight months, or longer, sometimes, depending on the complexity of the book that we're ordering. Some of our books have very long lead times because they take a lot of handwork to build them. So but six to eight months from the time we order it to the time we take control of it is kind of the typical scenario.

Okay. Although from a cash generation standpoint, when your sales associates place orders, they pay. So as you receive sales in the fall, the cash comes in through credit cards or other means even before you ship the products out, correct?

Absolutely. So like you said, we're 120 days from shipping, which means shipping times are delayed right now. So we may have it on the premises between 60 and 90 days. So yes, we can start selling some of it before we pay for it. So it helps but it doesn't cover it all.

Okay, too much on cash, it's not going to be a problem. And over the last few months, however we might define a few months, the company repeatedly, and to its credit went out of its way to point out that you were a beneficiary of COVID last year, that this was a very difficult comparison in the quarter you just reported.

That's a fact. And we did it again and again. So it was no secret.

We did it again and again.

I heard you do it again and again. So I know you did it again and again. On this call, okay, we're going into the seasonally stronger period. You have not said and I know you're not going to make a forecast, last year was so extraordinarily strong, it's always going to be very difficult to do as well as we did last year. And listening to this call, and you don't know the answer. But it would appear that you do not have the same concerns you had about the quarter just ended. And in fact, it is possible without making a forecast, that the next, that the selling season this year could be comparable to the selling season last year or better. But you would not expect it to be down substantially.

No, we would not expect it to be down substantially. For example, the second quarter last year was extremely high, while the fall selling season had modest increases compared to fiscal 2020. We hope to align with last fall's selling season. To support our pretax profits and improve our margins, we are becoming more efficient in the warehouse. Our new capital expenditure project for warehouse expansion has been running for about two months now, and we are seeing excellent results from it. We are preparing to staff the two lines we paused over the last couple of months to be ready for the fall selling season. Everything we are observing is positive.

Okay, just one last question. While the Federal Reserve may consider inflation to be temporary, it is uncertain. Many costs have increased significantly. I understand that you placed orders for a lot of items some time ago and those orders are now being fulfilled. However, as you plan for new orders and additional inventory later this year and into next year, are you experiencing cost pressures?

This is Dan. Looking back over the past year, we faced some challenges with paper in the late winter and early spring. However, due to our increased purchasing volumes, the volume discounts helped mitigate those issues. Recently, we've encountered shipping challenges over the last two months. Luckily, we had placed and received most of our large bulk orders from last fall and winter, allowing us to avoid much of the recent shipping disruptions. We still have some products on the way, but these shipping difficulties have been quite unusual. It appears that the shipping problems stem from a supply and demand imbalance, and insights from major vessel carriers suggest this imbalance will persist for the next six to twelve months until new vessels are operational in 2023. Fortunately, our inventory levels provide some buffer against these current issues, and we hope that new vessels will come online soon enough to stabilize shipping costs.

Okay, again, just to repeat myself to make you repeat yourself, the comparisons in the next six months are more comparable last year to the year before. They were only up modestly. And with the sales base and the inventory, and the better economics, you are reasonably optimistic about the comparisons for the next six months.

We're cautiously optimistic. We're seeing some short term things. We put out new titles Monday. We have a smaller release in October, and we've had incredible results this week. So that's all I'm going to say as far as the forecast. We're.

No, no, I understand. Okay, thank you very much.

Sure. Thank you, Walter.

Hi, I apologize, I got on the call a little bit late. So I apologize if somebody has already asked this. The capital expenditures, I know, a little bit of an elevated level, if I remember something related to warehouse or an extra line extension or something, How much longer do you expect that sort of higher level to remain and sort of get back to what was usually very low level of capital expenditures?

Well, that was to increase capacity in our warehouse fulfillment. We don't anticipate needing any further CapEx for quite some time. We think with that addition, we can get to sales levels of $400 million to $450 million without further CapEx. Now obviously, we're going to be paying down this project for a little while, but no further large CapEx at this point.

Appreciate, can I ask one more question. And I appreciate all the discussion of the inventory, because that was actually the big question I had also. So once the inventory is sold, and pay down some of the debt and so on, presumably, again, this becomes a pretty high cash flow business. And I remember the last conference call, there was some talk about the stock buyback or increasing dividend and I assume that's on hold now temporarily, because of the buildup of the inventory. But has more soft and given sort of long term, how to use the extra cash?

Well, I've only been in my position for two months. Give me a little time to think about it.

Sure. Fair enough.

Obviously, we're not increasing the dividend right now or buying back stock because of our inventory levels. But I'm telling everybody, I'm kind of aggressive and everything's on the table. Everything is up for discussion, but not right now.

Hello, yeah. He kind of just asked the question I was going to ask. I was going to ask why you guys choose to pay a $0.10 dividend instead of trying to chew up the float with a share buyback. You guys have a pretty low flow. I would think that eating up that flow, and then when the demand comes in, that would send the stock price up pretty well.

We don't disagree. I think this cash flow is a short term problem. I think changing the dividend down sends a more negative message than working through our temporary problem. So we've chosen to keep it.

I'll add to Craig's comment that the Board of Directors authorized us to buy 800,000 shares of company stock about 18 months ago. We have that option available. As Craig mentioned, we are currently focusing on investing in inventory, as it is essential for driving sales growth. Therefore, we are holding a significant amount of inventory at the moment. However, as we manage through this larger inventory and improve our working capital balance, we will have the capacity to buy shares, and we will have the cash flow necessary to do so.

All right. Sounds good. That's all I had for you, guys. Thank you.

Thank you, Adam.

I have a question. Since 2019, your average revenue per consultant has increased by about 30%. Do you expect it to decrease back to 2019 levels, or do you see some momentum that suggests revenue per consultant will continue to rise? Additionally, are you noticing that some of the new consultants view this role as a viable job option compared to traditional employment? Do you believe this trend will continue, or do you see COVID as just a temporary shift? Before COVID, your total consultant count was already increasing, and you said that COVID acted as a catalyst rather than the cause. Could you elaborate on this? Thank you.

Sure. Marty, this is Heather. I want to discuss revenue per consultant. During COVID, we saw an increase in average revenue per consultant due to high demand for our product. While we believe our sales consultants excel at generating sales, they were somewhat on autopilot last year compared to pre-COVID years, and it required less energy and effort from them. Therefore, we might return to figures closer to pre-COVID levels. We hope to increase those numbers, but our main priority is boosting the number of sales consultants. Referring to your second question about supplemental income, it's challenging to fully assess the situation while still navigating the pandemic. Our business has been in this industry for over 30 years, enduring various challenges, including recessions and economic fluctuations. I believe it will remain a viable option for supplemental income. Especially as we observe, people seem to be returning to basics, including having books at home for kids. Both our business model and product are significant advantages for us.

Hey, Adam, I might or I'm sorry, Marty, I might add, my first love is IT. I came from being over IT. So I hope that we can increase revenue per consultant with our new e-commerce rollout and some of the other IT projects that we're working on. So I just wanted to throw that in as well.

Okay, thank you very much.

Hi, how are you all doing?

Great.

I want to go back to Walter's last question which he restated, and I'll take a third track at it. The third quarter revenues last year were $66 million. Your commentary suggests that it's not pie in the sky, outrageously impossible that your third quarter revenues this year could get close to that. Is that what you're saying?

You know, I'm an eternal optimist. So I would like to think that's what I'm saying. But we just don't know yet. There's still too many unknowns. It's possible. But I'm not committing to that.

I think…

David, to the opposite of that, I don't think we're going to see the disparity that we saw in the second quarter, between the second quarter of this year and the second quarter last year. I think that the two quarters have a more similar volume than what we saw. There was just a huge demand in the second quarter last year, and that caused a big delta between the second quarter of last year and the second quarter of this year. We don't see that delta being nearly as significant. Whether or not that delta is tiny or not tiny, we don't see it being as nearly as significant as the Delta in the second quarter.

David, I'll just add one more thing to that. It's hard to assess, we've called last year as a whole an anomaly. And so it's hard to know if the increase and the surge that happened in the third quarter can be attributed to COVID, or can be attributed to it being the fall selling season. And so, as Craig said, the reception that we've received to the mid-season releases that we made available this Monday, make us really optimistic, but we also still feel like it's early, really early to feel like our crystal ball is close enough to be able to answer your question, probably to the extent that you want us to?

I think it's important to note that in the three years leading up to COVID, from 2017 to 2019, your average revenues were about $112 million. It’s clear that after COVID, your business will exceed $120 million. The earnings per share will also be higher, which is a great sign. You're doing an excellent job, and I appreciate the dividend as well.

We appreciate you recognizing that we're not necessarily going back to pre-COVID or lower numbers. We know with pretty much certainty that that's not the case. So yeah, it's good to see that we're getting that story across.

Yeah, well, good luck. Good luck going forward.

Thanks, David.

Thank you, David.

Thank you. And I'm currently showing no further questions in the queue at this time. I'd like to hand the conference back over to Mr. Craig White for any closing comments.

All right, thank you, Norma. Obviously, we want to be back in high growth mode. We feel like we're doing pretty well again, not to beat it to death, but we're trying to compare it to 2019. And we're up in the 35% to 40% range. So two back-to-back years of 20% growth is not bad. And that's where we want to get back to. So thank you for being on the call. I appreciate it.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.