Q3 2022 Educational Development Corp Earnings Call
Thank you for joining the educational development Corporation third quarter earnings call.
Before beginning the call we would like to remind you that some of the statements made today will be forward looking and are protected under the private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those expressed or implied due to variety of factors.
Were you to educational development Corporation <unk> recent filings with the S. E T for a more detailed discussion of the company's financial condition with that I would like to turn the call over to Craig White, the company's President and Chief Executive Officer.
Okay.
Thank you and welcome everyone to the call with me today are Randall White, our executive Chairman of the board Heather Cobb, Chief sales and marketing officer, and Dan O'keefe, Our Chief Financial Officer.
Before I turn it over to Dan to go over the financial results I'd like to recognize what a challenging years been probably mostly from a staffing perspective.
I'm so proud of the team that we have here is at EDC as it as the team just continues to get better and better.
We handled most of the staffing challenges very well predominantly in the warehouse and really didn't Miss a beat with the challenging staffing environment out there. We didn't have any outbreaks in the office has really had mostly are healthy and safe environment here at EDC.
No.
I wanted to recognize that first.
Now I'd like to turn the call over to Dan O'keefe, Our Chief Financial Officer to provide a brief overview of the financials.
Thank you Craig.
Now for a brief overview of our third quarter financials, our net revenues for the third quarter totaled $45 1 million a decrease of $21 7 million or <unk> 32, 5% compared to 66, 8% compared to $66 8 million reported in the third quarter of.
Last year.
Earnings before income taxes for the third quarter totaled $3 6 million, a decrease of $2 2 million or 37, 9% compared to $5 8 million reported in the third quarter of fiscal 2021.
Net earnings totaled $2 6 million compared to $4 3 million.
A decrease of $1 7 million or 39, 5% from the third quarter last year.
Earnings per share totaled 31 cents compared to 51 cents down 39, 2% on a fully diluted basis.
That concludes the report for the third quarter financial results and I'll now turn the call back over to Craig.
Thanks, Dan.
Couple of items I would like to begin with today that you may have heard from me in the last couple of quarterly calls and at conferences and whatnot.
The Covid pandemic affected most businesses in the world either positive or negative last year and our company was no different.
Fiscal 2021 was an anomaly year for us along with the initial surge in sales from the pandemic last summer we experienced an increased demand for non traditional income opportunities from parents that we're looking to supplement or replace pre COVID-19 income streams.
These factors and other opinion gimmick related issues drove our revenues to record levels last year.
Our fiscal third quarter is typically our largest sales quarter of the year due to the seasonality of the business.
This year's third quarter sales were more in line with pre Covid years and that is why we presented them.
Our most current pre COVID-19 year comparison in todays press release.
While our.
Third quarter revenues are down significantly from the third quarter last year. They are up over pre COVID-19 levels, primarily due to an increase the publishing division sales and the impact of our Eubam divisions increased consultant count we see both of these contributors continuing to drive sales in fiscal 2022 and into fiscal 2023.
So in the last couple of quarterly calls I've said, you know we had a incredible.
Unusual year and while we're still facing unusual factors that the pandemic has not gone we've kind of had this.
In and out of school in and out of work and all of those things, it's just incredibly challenging year to compare to.
So let me next.
Turn it over to Heather Cobb, our chief sales and marketing officer to discuss our sales.
Thanks, Craig.
Third quarter, we continued to experience an increase in our publishing division sales and a decrease in sales from our you've aimed at they say when compared to last year on the threat.
Our publishing division sales increased 44% at $3 $7 million in the third quarter due primarily to the return of business from customers that were temporarily closed last year due to the guidelines published by local authorities in.
In addition, our publishing division has added several new customers and experienced growth with existing customers that are driving this division sales to record levels in fiscal 2022.
Are you being sales declined 35% to 41 $4 million in the third quarter of fiscal 'twenty, two primarily due to the anomaly that last year was.
Last year, we experienced unusual growth in our active consultant count that began in the summer of 2020 and peaked at around 60000 in November last year. This growth in active consultants drove our revenues to record levels during fiscal 'twenty one.
Throughout fiscal 'twenty, two we've seen our active consultant count decline due to consultants returning to full time work as well as the drain on parents available time navigating the issues associated with the continued pandemic and their children's returning to school the recurring obstacles of new strains of the pandemic continue to impact our consultants.
A little time to run their business.
But while our consultant counts have declined they are still considerably above the pre pandemic level that Craig mentioned and our consultants are still having success generating sales, earning commissions and building their business.
This was evidenced during this third quarter as our active consultants generated similar sales and commission heard consultant to the third quarter of last year and the pre pandemic third quarter of fiscal 2020. These.
These sales and commission results give us support that our existing consultants are experiencing a consistent level of success as they achieved without benefiting from the increased demand that occurred in the early days of the pandemic, most notably noticeably in that first and second quarter of fiscal 'twenty one.
In addition, we continue to introduce new technology based tools to help our consultants be more successful in reaching new customers and expand their recruiting and business building effort.
We believe that this will help retain the current consultants, we have as well as recruit new people to the business.
Two upcoming enhancements that we expect to roll out in the next three months include upgrades to our training platform with additional features that will improve our new consulting experience as well as our new E Commerce platform.
We delayed rolling out that ecommerce platform in the third quarter of this fiscal year, because our internal team as well as our top level leaders had valuable insight to make that platform even better.
These new technologies are expected to have a positive impact on both new consultant experience.
Customer experience as well as the sales and commissions earned by those new consultants during their initial period with the company with that I'll turn the call back over to Craig.
Thanks Heather.
One other impact you see from a recently published financials is our continued high levels of 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.
Inventory turns of cash we'll pay down our borrowings do you expect to be back to a more normalized working capital within the next year.
And the good news is that the cost of carrying this inventory is less than the current replacement cost given the unusual ocean shipping challenges that are occurring.
One of the other highlights of our third quarter was our strong pretax profit levels, our pretax profit as a percentage of net revenues totaled 8%. These pre tax results.
The results on lower revenue levels in the third quarter of last year reflect the strength of our business model and the management's attention to cost containment.
We are excited to see the rebound from certain sales channels that were negatively impacted by the pandemic, including sales through school book fairs, while they started to returns. This year. The new version versions of the COVID-19 virus has stalled the return of this income stream the return of booths and fair events, which also continued to be impacted by the new COVID-19.
These two sales channels combined for about $30 million of the business that we expect will be returning to us in future quarters. We saw evidence that they were kind of starting to come back and then again with this new variant kind of shut those things back down a little bit.
So I can expand on any of those points, but at this point, where you want them.
Want to open it up to questions from our investors.
Yes.
Yeah.
As a reminder to ask the question you will need to press star one on your telephone to reach all your question press the pound key.
Again, if we would like to ask a question press Star then the number one on your telephone keypad. Please standby, while we compile the Q&A roster.
Your first question comes from the line of David Wright from Henry Investment Your line is open.
Afternoon.
Hey, David.
New year's greetings.
Thank you.
Is your inventory higher than you'd like it to be right now.
Absolutely no question.
I've had I'm glad you asked well do you have a follow up question were trying to answer that one I am pleased to.
Okay.
So I was asked I've been asked every phone call with investors every Investor conference absolutely on our inventories a little bit high Wow, we didn't expect to increase sales, 80% or 50% or maybe even 10% to 15% this year.
Last.
Third quarter was it was a disaster as far as inventory levels. So we ramped up our inventory levels, which we purchased in January February March and we're just now receiving that in the September October November timeframe, we have not actively purchased any new batch.
<unk> title inventory in six months, the only inventory purchases that we've made in the last six months, our new title inventory, which as people know is the lifeblood of.
Our sales organization so.
While there is some silver lining to that that as I mentioned in the script.
We mostly not completely but we largely missed all the chaos that is the supply chain right now we saw.
Our.
Container cost coming from China go from 5000 to sometimes $35000 of container and so while we were over inventoried, we largely missed all of that increase in cost and the delays coming from China. So.
Yeah, we're over inventoried it helped us get through a tough time, but none of it is obsolete. It will also and over the next four or five months, we expect that to sell down and turned it into cash and we'll be in great shape by next summer or third quarter.
Right. So with your just looking historically your.
Your line fourth and first quarters, where your fourth quarter is typically your slowest quarter and your first quarter is only a little better.
So.
You know, what what where would you like inventories to have been November 30th based on current business conditions. Yeah, you know for the for the current sales levels.
Probably $45 million to $50 million would have been in a more appropriate level. I think we peaked at 70 or just slightly north of $70 million. So we have about $20 million to $25 million too much inventory, but again.
We're not actively purchasing except for new titles and we'll sell that down over the next couple of quarters.
Okay and then the other thing that I wanted to ask your ties in with the cash flow.
Cash flow from operations through the first six months was positive $12 4 million.
Now negative seven 4 million, which means it's $119 8 million in the third quarter.
What are.
Do you think the fourth quarter is going to generate positive cash flow from operations.
Craig can you want me to address that yeah, that'd be great. Okay, yes.
Yes, David Thats a good question.
As you mentioned the first the fourth quarter.
Is typically not our biggest quarter of the year as far as sale.
But we do we're not going to be we don't expect to increase inventory.
When we look at cash flow from operations is really going to be two things three things driving it youre going to have your income from the business.
Which is going to be positive and then youre going to have your change in inventory and your change in accounts payable, which youre going to be the other two major drivers of that.
We don't see inventory, increasing so that shouldnt negatively impact our cash flow from operations AP will be coming down a little bit, though because we do have some payables coming due.
So that would be the other element there.
We're still in the fourth quarter and only in the first month of it so I don't want to make.
Make a commitment that it's going to be cash flow positive but.
I mean those are the only three elements that are really going to drive it and as.
As you said kind of David when you started your question our fourth quarter is typically not the biggest of the year. So it's not going to really see a lot of impact on inventory dropping.
We see that being bigger in the first quarter of next year.
The April.
In March April may quarter, because thats. When we have that are our second largest quarter of the year that involves our you know the Easter holiday and we have a lot of school activities.
Associated with that quarter of March April and May so.
We expect to see a bigger dent in our inventory coming down in that in that first fiscal quarter and then also in the second fiscal quarter in third fiscal quarter as Craig was saying so.
As Craig mentioned earlier were 25 million more in inventory than we would.
Normally be had had it been a more predictable.
Last 24 months.
But.
There's also some positive elements of being a little over inventory right now and that's the fact that the.
The replacement cost right now is much higher than our carrying cost.
Of inventory and so.
We feel like we're a little heavy on inventory and our working capital position, but it will be.
It will be corrected here over the next three quarters, Okay, well good luck, there and thanks for taking my questions.
You bet David Thanks.
Thanks, Dan It seems like an appropriate time also to mention that we have very solid relationship with our bank and their involvement and support of our business is very strong so.
That's that's a positive as well.
Okay.
Ask a question press Star then the number one on your telephone keypad.
Your next question comes from the line of Randy Frac from R. L Capital. Your line is open.
Hello.
I'm not sure who this question could be directed to but its probably either cracker Dan.
I'm looking at the table in the earnings announcement near the near the beginning where you talk about the average number of consultants and then the net revenue and net earnings after tax profit percentage.
Yes.
I'm trying to reconcile in my own mind. Some of the statements you made a little bit past that in the next paragraph or two and a couple of statements. You made on this call where you said that you're happy with the strong pre tax profit levels and you're very happy with the cost containment.
When I'm looking at this table here for the current quarter.
And I'm comparing it to the one from two years ago.
I see after tax profit margin of five 9%.
Versus years ago was six 7% and.
And I see the NIM earnings down just very slightly compared to the one from two years ago, even though the sales were up about 10%.
So that's the problem I'm, having in my mind reconcile sort of what's going on I was wondering if maybe something happened this quarter and there was an unusual expense or something and I hope you're right.
Yes, Craig.
Okay, I'll take that one or.
Yeah go ahead, I have some things to add to it but go ahead okay.
Good question Randy.
The third quarter can typically it's typically our biggest quarter of the year the highest profit percentage of the year, because you're spreading your fixed costs, obviously over a bigger revenue base.
And.
So the difference between pre Covid. If you look at those profitability percentages now is we're really dealing with a little.
Different freight costs on our outbound trade has the biggest impact.
We have a contract with our small parcel carrier.
And when Covid occurred last year they started implementing.
Two different layers of surcharges, one was the peak season surcharge and.
And the other one was a.
You know just an unusual.
The holiday season on top of the peak season surcharge.
So we've we've kind of had to bear some of those costs and they they've hit or.
Bottom line here in the third quarter of this year that weren't in place pre COVID-19.
And so that's what you see that the.
Other thing I would like to point out to you is that if you can look at the year to date numbers.
You can see our year to date numbers for for this current year after tax or six 7% in the in the in.
In the table there and then the pre Covid numbers are five 5% so.
While we've had some seasonal holiday season.
Peak surcharges this year and even last year.
Overall that the peak season surcharges haven't.
Hurt us.
And we've implemented some rate increases this year that have actually helped us generate the.
After tax margin of six seven year to date.
Yeah, Let me, let me add to that as well.
Kind of internally use pretax profit as a K P I.
And so we had a.
Very challenging September actually that would seem to be the most.
Chaotic as it related to the pandemic as kids were kind of going back to school, we seem to be coming out of the pandemic with people going back to work. So there was a little bit of Chaos September was not good and then we followed that up with October with our best pre tax profit did I remember in years.
And then and then November we did a lot of promotions with some free shipping some things, but it was still very solid pre tax profit. So.
Yeah.
Like we're saying that the sales are way over third.
During the quarter.
Or not way over there over the third quarter of 2020 and considerably lower than.
Third quarter, but we're maintaining good pretax profit levels.
Okay and thank you for that and then also thank you for that I didn't notice him. What you said to about six seven versus the five 5%, but that sort of brings me to the next question. If you look at the fiscal year to date for the sales front.
From two years ago versus this year for the first nine months it looks like it was up about 28%.
From two years ago for the first three quarters added up but this year it was up about 10 or 11%.
So I did notice that too so it looks like.
I mean, the sales are higher but they're they're not as high in the whole fiscal year.
As a percentage.
Well.
That's not exactly accurate one 2% on the $5 five is more like.
Yeah.
23, or 24% so it's not 10 or 11, it's it's about 20%.
No I was talking about that I was talking about the sale I'm sorry, the net revenue.
He was talking about one of them doing that payable. Okay. I thought you were talking about the after tax profit I'm sorry.
No that's fine and let me just ask one last question. Thank you very much for all that.
So you're talking about strong pre tax profit levels et cetera.
And I know you really cant project this at all but.
For the next fiscal year, which I guess talking about March 1st of this year for the 12 months after that.
I mean, you've talked a lot about a fishing season.
And things like that do you have any idea or that you think that that's.
Pre tax or the after tax profit levels are going to be.
It's pretty consistent.
If you look at this whole payable here you can see no matter, what you you're talking about they're pretty consistent right between five five at the worst and $6 seven at the Bath just looking at the table, which I know there's different colleges there, but do you sort of project that as being a roughly the same or do you hold that.
Potentially could increase.
In the future.
Yeah, I think you probably recognize kind of our model and we have 25% of our business. So.
Now, we're getting eight to 10, and maybe a little bit north of 10 on a pre tax profit, but the chances of getting much higher than that or are are challenging I think it can be very consistent what I will add is that we could have been more efficient. This third quarter of this year because the staffing challenges were crazy we hired.
Roughly 300 people in about 30 of them stack. So that took time and effort to train people for them to leave at lunch and never come back or not come back the next day.
For all of those factors, we could've been a little more efficient this year, even in this third quarter, so, but still I I expect them to remain consistent yes.
Okay. Okay. Yeah. Thank you for that that's what I was hoping you could get into a little bit of what you. Just said that you know there was a lot of challenges this quarter and like you said with staffing and people not coming back and then but Dan already talked about with the freight costs in the peak season surcharges, So and thank you for that information.
Thank you all that's all I have.
Thank you.
Okay. No further question at this time presenters you may continue.
Okay great.
So.
While we're not ecstatic about.
So far this year, we are encouraged and happy we're considering ourselves still in a growth mode. As we're comparing to the last normal year. We've had two very unusual non normal years, but.
Sure.
The growth pattern of about 30% to 40% over the same time period in calendar 2019. So.
We have nothing but good forecast, we're looking forward to this next year.
We're not ecstatic, we're still pleased with what we've accomplished.
We appreciate you all joining us and.
Our key next time thank.
Thank you.
This concludes today's conference call. Thank you for participating human now disconnect.
Okay.
Yeah.
Okay.
Yeah.
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