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Edited Transcript of EDUC earnings conference call or presentation 16-Jan-20 9:00pm GMT

Q3 2020 Educational Development Corp Earnings Call

Tulsa Jan 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Educational Development Corp earnings conference call or presentation Thursday, January 16, 2020 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dan E. O’Keefe

Educational Development Corporation - Corporate Secretary & CFO

* Heather N. Cobb

Educational Development Corporation - Chief Sales & Marketing Officer

* Randall W. White

Educational Development Corporation - Chairman, President, Treasurer & CEO

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Conference Call Participants

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* Mike Schellinger

MicroCapClub LLC - Partner

* Paul Dwyer

Punch & Associates, Inc. - Director of Research

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Educational Development Corporation Third Quarter Fiscal 2020 Investor Conference Call. (Operator Instructions) I would now like to hand the conference over to your speaker today, Mr. Randall White, President and Chief Executive Officer. Please go ahead, sir.

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Randall W. White, Educational Development Corporation - Chairman, President, Treasurer & CEO [2]

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Thank you, Angela. Welcome to the -- you guys to the -- welcome to the third quarter investor call. Along with me today on the call are Heather Cobb, Chief Sales and Marketing Officer; Craig White, Chief Operating Officer; and Dan O'Keefe, Chief Financial Officer. So with that, I want to pass first off to Dan, so he can talk about the financial results for the third quarter, and then I'll come back and have a few more comments about the results. Dan?

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Dan E. O’Keefe, Educational Development Corporation - Corporate Secretary & CFO [3]

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Thank you, Randall. Net revenues for the third quarter of fiscal 2020 were approximately $40.8 million, an increase of $0.3 million or 1% from approximately $40.5 million reported in the third quarter of fiscal 2019. Earnings before income taxes for the third quarter totaled approximately $3.8 million, which was consistent with the earnings before income taxes of $3.8 million that we reported in the third quarter last year.

Pretax profit as a percentage of net revenue was also consistent between the common third quarters, coming in at approximately 9.4% for the quarter. Net earnings in the third quarter of fiscal 2020 totaled approximately $2.7 million compared with approximately $2.8 million in the third quarter of fiscal 2019. Earnings per share on a fully diluted basis decreased $0.01 a share, from $0.34 a share reported in the third quarter of fiscal 2019 to $0.33 per share reported in this third quarter of fiscal 2020.

This concludes the earnings results, and I'll pass the call back over to Randall.

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Randall W. White, Educational Development Corporation - Chairman, President, Treasurer & CEO [4]

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Okay. Dan, thank you. I'll give you guys a few comments here of the operations, what's happened. The business is seasonal, as you probably know, and the third quarter is our largest volume quarter of the year. So it's kind of not to have an increase in the largest quarter. Also the 2 previous one were down a bit. So to be up in our largest quarter to me is significant.

UBAM division reported a 2% growth over the third quarter last year, with the growth primarily coming from new sales associates that signed it. We ran a special in the second quarter. We ran a 30th anniversary special, and we brought in 10,000 new consultants, and they're probably the primary reason why we grew a little bit, but there's always things that we're not sure about.

As we reported in the last quarter earnings, we expect these new consultants to contribute to our growth, and that expectation did become a reality. We also have some nice expectations going forward. If you have a question about it, we can talk.

The Publishing Division is down a little bit, and that's primarily due to one seasonal promotion we did with a very large vendor. And these promotions are sporadic and occur mostly when they want to, not necessarily have to do with our sales force. So they come and go. I wouldn't think too much about that. Those generally end up at the year-end pretty even.

So with that, I'm sure you must have some questions about what we're doing here, and I'll be happy to now answer your questions. So Angela, turn their sound back on.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Randall W. White, Educational Development Corporation - Chairman, President, Treasurer & CEO [2]

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I'm just going to say, a 45-second explanation answered every question anybody has. Okay. Is that one? Yes. Okay. There you go, Paul.

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Operator [3]

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And we have a question from the line of Paul Dwyer with Punch.

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Paul Dwyer, Punch & Associates, Inc. - Director of Research [4]

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type="A" />

I wanted to ask you about your inventory. It looks like the purchases are down pretty materially in the quarter related to Usborne. Could you just talk a little bit about how inventory management has gone and maybe any benefits you've seen over the last 2 years here?

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Randall W. White, Educational Development Corporation - Chairman, President, Treasurer & CEO [5]

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Well, inventory management over last 2 years. Well, a lot of things come into that. We were growing at a high fast rate, and you had -- when you realize we have about 6 to 7 months lead time on inventory, we have to guess. And we were guessing in kind of blind because we know what we've done, but we don't know for sure where we're going. So we had a buildup in inventory. And then the sales didn't meet them. So in the period, we have a period of reducing our inventory. It's a battle every day to try to keep inventory to meet the demand. And it's mostly important in a company like this because the bulk of our sales are prepaid. And when people pay you before you send them the product, we need to have the product because it's very difficult to get the money back to them in a -- not to get the money back to the way our organization is set up in a multi-level organization. So the inventory management, yes, we're on it because that's confidential cash flow.

Dan thinks he wants to tell me something.

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Dan E. O’Keefe, Educational Development Corporation - Corporate Secretary & CFO [6]

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No. I was just going to add to that, Randall, that the third quarter -- Paul, we started off this fiscal year kind of at a high inventory level because of a couple of reasons. One is, we started off the year in March with -- we just received in our Spanish titles, which was a block of about $2.5 million in new inventory. And so that increased our inventory. We hadn't been selling it before then. And now we were at a point where that's more of a staple of our inventory, and we've been able to work some of that beginning inventory down.

And then last year, at this time, we acquired a little more inventory from Usborne because we were looking at a volume rebate that they gave us at the end of last year. And so we bought a little more towards the end of the year because we were getting -- hitting a rebate threshold that had a good return on it.

So we were a little heavy on inventory in March of the beginning of this year. And then now we're kind of at a low point because after the third quarter, which is our [busiest season during] the year, typically, inventory is at its lowest point of our 4 quarter cycle.

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Randall W. White, Educational Development Corporation - Chairman, President, Treasurer & CEO [7]

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Yes. Inventory is a real challenge in this industry because of the large difference in the volumes quarter-by-quarter. And also, you're guessing, if it's a new title, we're guessing how it will sell. We have 2,000 titles. There's a lot of -- you hope you guess right most of the time and the fact that we have reduced inventory, we're -- I guess we're guessing right most of the time.

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Paul Dwyer, Punch & Associates, Inc. - Director of Research [8]

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type="A" />

Yes. So I guess, a follow-up question would be, to be specific, you bought about half of the amount of books from UBAM as you did last year this time. Should that have any implications for how you're thinking about future growth? And maybe any commentary on future growth as -- that you're willing to talk about?

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Dan E. O’Keefe, Educational Development Corporation - Corporate Secretary & CFO [9]

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Yes. So you're looking at just the purchases for the quarter, right, that we disclosed in the 10-Q. Yes. That's just really just a function of -- last year, we bought more associated with the rebate that we were going after. And so -- and the Spanish titles, too. And so now that's more of our consistent inventory. So we don't have to buy as much. If you go back and look at our same third quarter from a year ago and look at the purchases of the third quarter of our fiscal 2018, I think you'll see it more in line with what we did this last quarter.

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Randall W. White, Educational Development Corporation - Chairman, President, Treasurer & CEO [10]

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The sales breakdown between Usborne and Kane Miller still is pretty close to this 35:65, so inventory should follow that fairly consistently because we did buy Spanish titles from the Kane Miller side as well as Usborne. So the inventory should follow pretty much that model that Kane Miller is increasing faster than Usborne.

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Paul Dwyer, Punch & Associates, Inc. - Director of Research [11]

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type="A" />

Great. Nice job on the inventory management. And then, Randall, anything -- it sounded like you might have had some more thoughts about outlook for 2020 and 2021. Anything you want to comment on for growth expectations?

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Randall W. White, Educational Development Corporation - Chairman, President, Treasurer & CEO [12]

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Everybody in here has got a big old stick. And every time I start to talk about, next year, they want to knock me out. But I'm always optimistic. I've been here long time. And I will tell you, I feel very optimistic right now. We did just return from a meeting just this past weekend and with 130 of our top leaders around the country who paid their way to be there, by the way, so they wanted to be there. And we're announcing a lot of new innovations, not for us, in technology that we think will really help the growth of the company.

The people now, the young ladies, they're very impatient with technology. They want to take that phone and punch a button and a drone deliver about 10 minutes in the front door. So what we're announcing is a new back office system, which has been announced. We're announcing a new -- all new e-commerce site that will come to make it pretty fully mobile compliant. And all these things have effect on sales.

We started taking PayPal a few months ago. All these -- these are little things, they're not little, but they're pretty significant that we think will put us market even, and we're up with our peers now. I'm not saying we're the best in the world, but you can now pretty much operate your business from your mobile phone. And the new people, they like that. That's a very strong feature. And if they don't have it, they're just going to go someplace else. So we're pretty excited about that and the impact it will have on 2020.

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Operator [13]

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(Operator Instructions) And our next question comes from the line of Mike Schellinger with MicroCapClub.

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Mike Schellinger, MicroCapClub LLC - Partner [14]

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In Q2, you had that rather large increase of 10,000 sales consultants. And I was wondering, sort of, if you could give us some information on how the onboarding of them is going. And maybe sort of historically, how you see the onboarding process goes? And maybe how it's the same or different with the large number that you brought on in Q2?

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Randall W. White, Educational Development Corporation - Chairman, President, Treasurer & CEO [15]

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Okay. I'll address it, and on the line you can have Heather. But onboarding goes -- we hope it goes pretty fast. This meeting we had this past weekend, we have a speaker who's telling me how we did, and she onboards them really fast. And I was sitting and obviously watching her talk about they sign up on Wednesday, and by the next Wednesday, they have -- or even before that, they have their first online event. And after that there comes a book a couple and run 2 at the same time. It's pretty fascinating to watch the technology now and how adept our sales people are with the Internet trade. And so the onboarding process really goes pretty fast. And Heather, why don't you jump in here and certainly closer to it than I am.

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Heather N. Cobb, Educational Development Corporation - Chief Sales & Marketing Officer [16]

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Sure. I think that, overall, the onboarding process looks the same regardless of whether we bring in 10 consultants or 10,000. We certainly run numbers to see what their sales looks like within their first few months. And the percentages all tend to fall through approximately the same. So we didn't see any difference from that with this kind of 10,000 that we had come in over the summer.

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Randall W. White, Educational Development Corporation - Chairman, President, Treasurer & CEO [17]

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And they have -- we do monitor them. I will tell you that there's not a lot of change probably over the years to the onboarding or given the one process because everybody wants them to get started in the very first week because if you don't get started, you just don't get started. And so we have incentives, and every company does, to want them to really -- the highest peak of enthusiasm is when they sign up, it's kind of like buying that new car. Boy, you're so excited. You get in, smells good. Well, that's the way that we are that they're excited about the products. And if we can get them to have an event and have success, the rate of people staying with the company is significantly increased.

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Operator [18]

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(Operator Instructions) And we have another question from the line of [Frank Heyer] with -- he's an investor.

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Unidentified Participant, [19]

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My question is relating to school sales. And I just saw a article from Scholastic that they purchased Mrs. Nelson's Book Fair, which I know nothing about, but I'm wondering, would that -- did they buy from you guys? Or is your book fairs totally representative based?

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Randall W. White, Educational Development Corporation - Chairman, President, Treasurer & CEO [20]

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We are not involved with any other book fair company. We run our own. And so we have a consultant base. We think we're well positioned in the book fair market. And we have a new person. I'm not saying new. She's been here about a year, but definitely got her feet on the ground, came to us from Barnes & Noble, by the way. And we think it's a really big market.

The -- we can also compete better with any other book fair because with a consultant on site, maybe in the same town, we -- most likely same town, they come in and they run the book fair, whereas Scholastic drops off bins of books and then teachers have to run the book fair. Well, we run the book fair. They love that. Somehow they don't have to.

So we feel like we're very competitive with Scholastic. And we'll do -- we're optimistic about the year. We've had some very nice orders just come in recently from our marketing efforts. And the fact that, again, that we're on site, run the book fair, do everything for the teacher and turn over the proceeds, they're very happy with that. And I think the book fair -- I think you'll see an increase in that division this year. We're pretty optimistic about that.

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Unidentified Participant, [21]

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Okay. Can I ask another question now?

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Randall W. White, Educational Development Corporation - Chairman, President, Treasurer & CEO [22]

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Sure.

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Unidentified Participant, [23]

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Last year, you had a big shareholder have a position in the company. Does that position been unwound? Or do they still have quite a few shares?

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Randall W. White, Educational Development Corporation - Chairman, President, Treasurer & CEO [24]

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We were notified in December that they were going to dispose of their shares. They're in the process of that, you might notice that maybe, I'm not sure. But -- so there's all kinds of different ideas about how to proceed with that because that is a large amount of shares in a company as thinly traded as we are. So it's an interesting thing. They're wanting to sell their shares, but they want to maximize the share price, so they don't want to drive it down, but they also want to sell the shares. So we're in a cash position that we're looking -- we've been buying shares back, I guess, what we said about 3% a quarter?

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Dan E. O’Keefe, Educational Development Corporation - Corporate Secretary & CFO [25]

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Yes. Yes. We bought back 80,000 shares last quarter.

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Randall W. White, Educational Development Corporation - Chairman, President, Treasurer & CEO [26]

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We bought back 80,000 shares last quarter. As long as -- we have positive cash flow. We have positive cash flow, and we have cash, so we have an option of paying out a dividend or buying shares back. That's basically the 2 options other than giving me a big fat bonus. And so the first 2 would be the primary one we choose from. And I think they both are beneficial. We have people who love a dividend. And we have people who recognize when we buy shares back. It increases each shareholder's value. So we're in a position to continue the dividend and buy shares back. And the overhang from the shareholder with a large holding, we'll work with that.

We do go to conferences where we present our company, and we were in Chicago some time ago. And at that time, there was no shares available. And sometimes you present your conference and then you don't have any shares. That's not a very good solution. So we have a good solution. We may want to buy them out. But we'll work through that one way or the other. We have before. And so they're moving on, and it's fine, and we'll work with trying to not hurt the market.

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Operator [27]

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(Operator Instructions) And we have no further questions in queue.

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Randall W. White, Educational Development Corporation - Chairman, President, Treasurer & CEO [28]

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Okay. Well, in our marketing program, Heather has named it as the year to rise. We've had great years when we had huge sales increases, and then a couple of flat years. And we think that a lot of good things have happened here that we can now head into 2020 as -- dubbed as year to the rise -- to rise, and we're very optimistic about that.

We've also kind of named -- dubbed it as maybe the roaring '20s. This place has got a lot of potential. We're -- we have adversely like any company does with different things, but overall, we have the very best products in the world right now. And we have the best sales force, and I'm the best or Chief Executive Officer. So I don't know any hurdles that we can't overcome. So thank you, guys, for attending, and look forward to you on the next call.

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Operator [29]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.