Earnings Call Transcript - JCTC Q3 2025

Operator, Operator

Good day, and welcome to the Jewett Cameron Third Quarter Fiscal Year twenty twenty-five Conference Call. All participants will be in a listen-only mode. Please note that this event is being recorded. I would now like to turn the conference over to Robert Blum, Lytham Partners. Please go ahead, sir.

Robert Blum, Lytham Partners

Thank you very much, Nick, and thank all of you for joining us to discuss, as the operator indicated, Jewett Cameron's fiscal year twenty twenty-five third quarter financial results, and this is for the period ended 05/31/2025. Us on the call representing the company today are Chad Summers, Jewett Cameron's Chief Executive Officer, and Mitch Van Domelen, the company's Chief Financial Officer. At the conclusion of today's prepared remarks, we'll open the call for a question and answer session. If you are listening to the webcast player and would like to ask a question, you can submit your question through the Ask a Question feature in the webcast player. We'll do our best to get you as many questions as possible. Before we begin with prepared remarks, please note that statements made by the management team of Jewett Cameron during the course of this conference call may contain forward-looking statements within the meaning of U.S. Securities laws. Forward-looking statements describe future expectations, plans, results, or strategies and are generally preceded by words such as may, future, plan, will, should, expected, anticipates, or similar words. Listeners are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events, or results to differ materially from those identified in the forward-looking statements as a result of various factors and other risks identified in the company's 10-Ks for the fiscal year ended 08/31/2024 and other filings made with the Securities and Exchange Commission. A webcast replay for today's conference call will also be available online on the company's Investor Relations page. With that said, let me turn the call over to Chad Summers, Chief Executive Officer for Jewett Cameron. Chad, please proceed.

Chad Summers, CEO

Thank you, Robert, and good afternoon. I appreciate the opportunity to speak with everyone here today. Let's jump right into it. Clearly, the topic of conversation for us and all other retailers that source a portion of their product from overseas has been the impact from the tariffs, which were announced beginning earlier this year. At a high level, the uncertainty surrounding tariffs negatively impacted our third quarter results as many retailers and consumers have deferred purchases of imported metal products until further clarity on prices is available. Further, the rapid and unpredictable changes to rates, product components impacted, and which countries are affected have stressed key logistic lines and increased costs. Fortunately, we have been proactive to implement a variety of initiatives designed to mitigate, in part, the impact from the rapidly evolving and volatile tariff environment. The decisive actions we have taken to manage what is within our control have significantly improved the position of the company from where it would have been without these strategies, some of which began nearly two years ago. It's our belief that resolution to the ongoing tariff negotiations will provide a pathway to more normalized customer purchasing patterns in the future, which will once again highlight the numerous positive initiatives we have implemented to once again drive growth and efficiencies at Jewett Cameron. Mitch will provide a detailed breakdown of the quarterly results, but a couple of key points I will make upfront here is that while the revenues were down 21% for the quarter as a whole, our metal fence business was only down 4% from the year-ago period as we were able to somewhat mitigate the tariff impact through the expansion of our lifetime steel post business, which was up 85% in product sales compared to Q3 of twenty twenty-four. We once again incurred an increased number of LTP displayers placed through May 2025, with total displayers up by approximately 88% compared to the end of the period November 2024 when we expanded our focus on this initiative and 21% compared to February 2025. Today, over 422 displayers have been installed at the Home Depot and Lowe's stores, allowing the company's products to be highly visible and easily accessible for professionals and do-it-yourselfers. As a reminder, metal fencing represents more than half of our overall business. This relatively positive progress given the tariff backdrop within our metal fence business was offset by continued weakness in our pet business, which was down 44% compared to last year's Q3, but up slightly from the most recent sequential quarter. The buildup in the supply chain post-pandemic has continued to impact that component of our business as it has for the past year and a half or so. We also saw a pullback in our wood fence or lumber business during the third quarter. Here, we experienced interruption to our ability to fulfill our cedar fence orders ahead of the spring season. We have since expanded our supplies and are on track to meet all demand in July and are well positioned to support this program through the remainder of the calendar year. We have also implemented important process changes to prevent shortages like this in the future. Overall, I think it's a fair statement that the delta between us reporting a profit during the third quarter and the $650,000 loss which was reported can be directly related to the combination of the impact from tariffs, which deferred customer purchases coupled with lower gross margins primarily due to higher tariffs and transportation costs. To that point, as a bit of a reminder, tariffs on Chinese goods were originally subject to a 25% tariff implemented in 2019. But more recently, additional China-specific tariffs were added in February, March, and April 2025, with further increases announced in May 2025. The diversification of our suppliers to additional countries beyond China successfully allowed us to initially mitigate, to some extent, the recent tariff increases as those new suppliers outside of China were primarily subject only to the universal 10% baseline tariff rate as a floor. However, some nations, including those where our new suppliers are located, have been notified of possible additional country-specific tariffs, which are subject to further negotiation. Steel and aluminum imports were initially assigned a global 25% tariff rate. Subsequently, that rate was doubled to 50% as of June 4, just five days after it was announced on 05/30/2025, leaving importers such as Jewett Cameron with no time to plan or adjust import shipments or costs. As a result of these wide and unpredictable new tariffs, these new rates and threats of further significant increases, many retailers and consumers have deferred purchases of imported metal products until further clarity on prices is available. We have made strenuous efforts to adjust our selling price to correctly reflect the new tariff rates, but the rapid and unpredictable announcements of new rates over the last six months have made that process extremely difficult. It takes time to compute the new prices, communicate that to the customer, and have them accept for future shipments. Because the rates have changed frequently, many of our new prices have become obsolete before they were able to take effect. Therefore, it has caused our customers to pause their purchasing until they receive greater certainty on tariffs as they are reluctant to make long-term purchases at contracted prices that may decline based on the rapidly changing tariff rates. The current trade negotiations occurring between the United States and multiple nations to set country-specific tariff rates provide optimism that clarity and stability on final rates may be forthcoming. We have consulted with experts and legal counsel to accurately interpret how to properly apply the rates to our products to ensure compliance and to make sure our prices remain competitive. Although consumers will eventually adjust their buying to accept higher prices over time, it will likely continue to dampen demand in the short term until consumers and retailers become more accepting of the higher prices. But as I said at the beginning, we have been proactive to implement a variety of initiatives designed to mitigate, in part, the impact from the rapidly evolving tariff environment. First is the development and utilization of new strategic sourcing partners to create less dependence on the countries that carry the highest tariffs. We began these broader supply chain initiatives about two years ago now to multi-source our production. Our initial dependence on a single supplier had been eliminated and our expansion to sourcing countries outside of China have helped us to offer competitive pricing and to some extent lessen the impact of the current tariff situation. Our multi-sourcing strategy now spans suppliers in Vietnam, Malaysia, and Bangladesh, further strengthening our supply chain flexibility and resilience. The effort and fortitude to tackle multi-sourcing hundreds of products into various countries starting in 2023 cannot be overstated, which has not been an easy task, but has given us options that many other importers may not have at their disposal at a time of rapidly changing tariff policies. We remain committed to building a resilient, cost-effective supply chain that allows us to navigate evolving tariff and macroeconomic environments while continuing to serve our customers with high-quality competitively priced products. Second, we are developing strategies to implement price increases across our product portfolio to better align costs. As I mentioned a moment ago, us and many other retailers in the United States are trying to rapidly navigate efforts to adjust our selling prices to correctly reflect the new tariff rates, but the rapid and unpredictable announcements of new rates over the last six months have made that process extremely difficult. Fortunately, I believe we have enhanced our pricing management process to respond quickly to the rapidly changing environment to provide our customers with accurate pricing adjustments inclusive of these tariff costs. Third, we are evaluating and implementing process improvement initiatives and technology to drive efficiencies, enhance cash flow, and improve customer satisfaction. Finally, we have enacted operational efficiency efforts through a series of organizational changes, including an approximate 20% reduction in personnel implemented in April of twenty twenty-five. We have been extremely proactive in identifying and executing meaningful changes that will increase productivity and reduce structural costs without compromising quality or service. So while tariffs have created a near-term headwind for us, and we have been proactive in our approach to mitigate, in part, the impact as best we can, longer-term, it is our expectation that we will return to a more normalized state, and it is the broader growth, efficiency, product innovation, and asset monetization strategies that will ultimately drive the company going forward. A few key updates here. As I already mentioned, our LTP, Lifetime Steel Post Displayer Expansion program has been a key growth driver for us. We saw 85% product sales growth during the most recent quarter. I will state that we have temporarily paused adding new display units to prioritize our existing inventory to support existing display replenishment demand. We are actively managing production capacity constraints and logistical issues from new factories outside of China, which naturally impact our previous schedule of deliveries designed to support continued display expansion efforts. A quick update on our sustainable solutions. Our transition from the Lucky Dog poop bag brand continues toward MyECO World. The ability to more broadly brand these bags beyond the pet market is a key component to how we can grow this area to consumers who continue to look for high-quality, sustainable products as alternatives to disposable, traditional single-use plastics. MyECO World sales for the current nine months are up 265% over the comparative period in fiscal twenty twenty-four. We will continue to focus on expanding upon our successful introductions in the big box stores, where we have existing strong supplier relationships and into foreign markets that are unburdened by the new U.S. Tariffs. We have been receiving strong demand from big box stores in Mexico where the lack of new U.S. Tariffs has allowed the product to be more competitive. Sales at Greenwood decreased 24% from the current quarter to $700,000 compared to $900,000 in Q3 twenty twenty-four as a non-Greenwood supply issue continued to slow production across the bus industry. We believe this segment has significant growth potential in both our primary transit sector and in new markets such as construction. However, possible new tariffs on Canadian wood products could raise prices for our raw materials in future periods. And the final item I will touch on before I turn it over to Mitch to review the financials in more detail is our seed cleaning facility. A quick reminder to those that may not be familiar, we have a six-acre property in Oregon that was previously used as a seed cleaning facility. That non-core component of our business was shut down over the past year or so. The company continues to market for sale or lease its property based in Hillsboro, Oregon, and will provide updates when a definitive arrangement is entered into. The property has a book value of just over $550,000, so any sale of the property above that value will bring incremental income to Jewett Cameron and increase shareholder value. As you might suspect, the broader markets have been challenging, but potential buyers who fit the rural industrial use classification of the property have reviewed the listing and the property, and we continue to have meaningful discussions with interested parties. Before I turn it over to Mitch, let me just reiterate that I believe we are solidly executing on our long-term objectives. The tariff situation has certainly created some near-term challenges, but I believe we are taking the necessary steps to mitigate the impacts as much as possible. That said, the challenges we experienced in the third quarter will likely extend into our fourth quarter as well. The frequently changing tariff rates are continuing to cause hesitation and uncertainty among both retailers and consumers, and we expect this will continue until those rates are finalized and buyers can accurately estimate costs. Demand for our metal goods has picked up in June as our customers begin to run low on their inventory and they become more accepting of the new tariff-caused price hikes, but we will still not be at normalized levels. It's certainly disappointing that our highest seasonal selling season was impacted the way it has, but like at all challenging times, we will likely be better for it in the long run as we continue to work to improve our operational efficiencies, further develop our flexible multi-sourcing strategy, expand our automation and use of AI and other technology to resolve the logistical impediments to reduce our costs and better serve our customers. With that said, let me turn it over to Mitch for a detailed review of the financials. I will then provide some brief closing comments and turn it over for any questions. Mitch?

Mitch Van Domelen, CFO

Thank you, Chad. Good afternoon to everyone on the call today. My comments will focus on adding color to the key areas and events that had a material influence on the quarter's performance. Let's start on the revenue line. As a reminder on something that Chad just touched on, our revenue tends to be very seasonal with the majority of our impactful sales occurring in the third and fourth quarters of our fiscal year, March through August. Revenue for Q3 twenty twenty-five was $12,600,000 compared to $15,900,000 in Q3 of twenty twenty-four. This was up compared to the second quarter of this year, which was $9,100,000. As Chad mentioned, sales of metal fencing products were only down slightly and outperformed the rest of the business driven by the ongoing load in of new lifetime steel post in-store displayers. Sales of compostable products were down just slightly in the quarter as compared to the same quarter last year. And as Chad mentioned, we're experiencing growth in the MyECO World product line as we transition our marketing efforts towards that brand. Sales of our Greenwood operating segment for the current quarter were $700,000 compared to $900,000 in Q3 of twenty twenty-four. Our wood fencing product sales decreased compared to the same period last year due to material constraints that Chad touched on, and demand for our pet products continues to be weak as sales in the third quarter declined compared to Q3 of twenty twenty-four. Overall, the uncertainty in cost increases due to the changing tariff rates and our shortage in wood fencing contributed to the broader revenue decline. Turning to gross margins. Gross profit margins for Q3 twenty twenty-five were 15% compared to 18.6% in Q3 of twenty twenty-four. The decline in gross margins was due to a combination of higher tariff costs, higher shipping costs, expenditures on the continued rollout of the in-store display units and a shift towards lower margin products during the quarter. The company has made strenuous efforts to adjust its selling prices to correctly reflect the new tariff rates, but the rapid and unpredictable announcements of new rates over the last six months have made that process difficult. As increased pricing initiatives to better align with increased costs take hold, it is the expectation that gross margin will ultimately revert to historical levels. Turning to OpEx. Operating expenses for Q3 twenty twenty-five were $2,600,000 compared to $2,900,000 in Q3 of twenty twenty-four. The decrease in operating expenses is due to the initiatives taken by the company to implement operational efficiencies and realign headcount to new business processes. Net loss for Q3 twenty twenty-five was $600,000 or negative $0.18 per basic and diluted share compared to net income of $200,000 or $0.04 per basic and diluted share in Q3 of twenty twenty-four. The change is primarily due to the impact of the tariffs, which deferred retail customer purchases coupled with lower gross margins primarily due to higher tariffs and transportation costs, however, partially offset by lower operating costs due to operational efficiencies enacted by the company. As Chad mentioned, I think it's a fair statement overall that the delta between us reporting a profit during the third quarter and the $650,000 loss that was reported can be directly related to the combination of the impact of the tariffs, which deferred customer purchases, coupled with lower gross margins primarily due to the higher costs of tariffs and transportation costs. Finally, a few comments on the balance sheet. Due to the decreased customer purchase levels and our efforts to secure additional cedar lumber, our inventory levels increased slightly from the end of the second quarter to $15,300,000 versus $14,900,000 at 02/28/2025. As I communicated last quarter, based on the seasonality of our normal cash cycle, we typically see our working capital needs spike in the early spring as we transition our inventory to sales and collections. Beginning in early Q3, we began to draw on our line. At the end of the third quarter, we had drawn $2,400,000 against the line. As receivables are collected, we expect to revert back to normalized levels later this calendar year. Subsequent to the end of the third quarter, we were also able to extend our line of credit through June 2026. The cash balance at May 31 was $1,200,000. Finally, our stockholders' equity at 05/31/2025 was $23,100,000 which compared to $23,700,000 at the February. The decrease relates to the net loss during the quarter. Also, as Chad touched on, we continue to market our 11.6-acre seed processing facility, which has a carrying balance of less than $600,000. The successful sale or lease of this real estate and facility would dramatically improve shareholder equity. We hit on some topics from a pretty high level and covered a lot of them pretty quickly, but I'm happy to answer any questions that may arise. Now let me turn it back over to Chad.

Chad Summers, CEO

Thanks, Mitch, for the overview. Let me just wrap things up with a few key comments and takeaways. First, our focus remains on driving shareholder value. Our strategy is focused on four key areas: growth drivers, product innovation, supply chain and operational efficiency, and asset monetization. These strategies remain our focus despite the near-term impacts of tariffs, which have created many challenges. But as I mentioned, we have acted decisively to address these head-on in order to mitigate the impact to the maximum extent possible. While it's anyone's guess when there will be some general level of reduced volatility to the tariffs, it is our belief that it will occur and once it does, it will provide a pathway to more normalized customer purchasing patterns in the future, which will once again highlight the numerous positive initiatives we have implemented to drive growth and efficiencies here at Jewett Cameron. I thank you all for your continued interest and support of Jewett Cameron, and we'll now be happy to take any questions. Robert, can you let me know if there are any questions from the webcast player?

Robert Blum, Lytham Partners

Absolutely. Thank you, guys. Again, as a reminder to everyone on the webcast player, if you'd like to ask a question, you can type it into the Ask a Question feature there on the webcast. A couple of them here, I'll sort of summarize, tariff related, maybe speak just more broadly to some of your tariff mitigation strategies. I know you talked about some in the prepared remarks, but maybe is there anything more you can add there?

Chad Summers, CEO

Yeah, thank you for the question. We are fortunate that we began this process in early twenty twenty-three to multi-source our production to countries other than China. That was the main focus. And this did help reduce our dependence on a single source of supply, and to some extent, mitigate the higher tariffs imposed on goods coming from China.

Robert Blum, Lytham Partners

Okay. Maybe another question here. Talk about maybe your revised OpEx expectations or what are your revised OpEx expectations expected to be?

Chad Summers, CEO

Yes, good question. We have historically, we have not provided projections and do not intend to now, but the bottom line, I would say to that is we are trying to be more efficient across our operation. This is one of our key pillars. So in addition to our focus on, as I mentioned before, what growth drivers, product innovation, supply chain, and asset monetization, while we reduced our workforce, we continue to pursue talent in key areas to better serve our customers, as well as evaluating technology that will enhance our efficiency further.

Robert Blum, Lytham Partners

Okay, another question here, and again, you just sort of hit on the end there, but any updates on your property for sale?

Chad Summers, CEO

Yes, while we have been actively marketing the property for some time, we will provide further information in the event that a definitive arrangement for that property is secured. So stay tuned. We'll announce when anything does happen.

Robert Blum, Lytham Partners

All right. A couple of other questions here. Maybe this one's for Mitch. What percent of total sales are the lifetime steel fence posts? I don't know if that's a number you're able to provide.

Mitch Van Domelen, CFO

One moment. Currently, it is 8% of our operating or our gross sales.

Robert Blum, Lytham Partners

Gross sales. Okay, great. Another question in here is, what is the overlap, if any, between customers who purchase steel fence posts or other metal fencing products and customers who purchase pet fencing products or MyECO World products?

Chad Summers, CEO

Yes, I'll take that question. If I understand the question correctly, looking for customers who buy maybe our gates and posts that also buy MyEcoWorld, if I'm hearing that correctly, and I don't think we have a direct visible connection in our database. However, most of those, many of the fence products that are purchased are to help contain animals in their backyards, so we suspect there's overlap in that target audience. Also, that like to garden for some of the food organic bags or bin liners and yard debris bags. So there are likely some overlap, but we don't have definitive evidence of them being the same consumers directly.

Robert Blum, Lytham Partners

Okay. Again, I just want to remind everyone, if you'd like to ask a question, you can type it into the Ask a Question feature in the webcast player. Perhaps our last question here is, have you considered cutting support for products that may be destroying value from an ROIC perspective? How might that affect relationships with key vendors, I guess, if you were to do so?

Chad Summers, CEO

Well, I would say that we're always evaluating our performance of different products. So the first part there is that's an ongoing discussion to have. Obviously, as it relates to what I believe the tail part of that question was, the impact it might have on our suppliers, the people we purchase these from or work with, that would be an ongoing negotiation with them. I guess it would depend on the size of the product that would be under consideration. But right now, it's a continual evaluation of product contribution to Jewett Cameron's business and to the value it has to the shareholders.

Robert Blum, Lytham Partners

Okay. Very good. I am showing no further questions at this time. So Chad, with that, I will turn it over to you for any closing comments.

Chad Summers, CEO

Well, thank you, Robert. Again, I want to thank you all for your continued interest and support of Jewett Cameron. Thank you again for your participation. Have a great afternoon.

Operator, Operator

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.