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Edited Transcript of INQ.TO earnings conference call or presentation 13-Sep-19 12:30pm GMT

Q1 2020 Inscape Corp Earnings Call

HOLLAND LANDING Sep 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Inscape Corp earnings conference call or presentation Friday, September 13, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Aziz Hirji

Inscape Corporation - CFO & Secretary

* Brian A. Mirsky

Inscape Corporation - Vice Chair & CEO

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Presentation

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Operator [1]

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Greetings and welcome to the Inscape First Quarter Fiscal 2020 Financial Results Shareholder Call. (Operator Instructions)

As a reminder, this conference is being recorded, Friday, September 13, 2019.

I would now like to turn the conference over to Brian Mirsky, CEO. Please go ahead.

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Brian A. Mirsky, Inscape Corporation - Vice Chair & CEO [2]

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Good morning. Welcome to the First Quarter of Fiscal '20 Investor Update Call. I'm joined this morning by Aziz Hirji, Inscape's Chief Financial Officer.

We will be reviewing our financial results in 2 parts: first, I'll provide my perspective on the Q1 results in terms of how they contributed to achieving our 3-year growth plan; and second, Aziz will provide a detailed analysis and insights from a financial perspective.

As a reminder, fiscal '20 represents the final year of our growth plan. We established stretch objectives in order to become a leading performer within our industry.

Our goals, which have never been changed or adjusted over for the past few years, are monitored quarterly by the Board, they include: deliver above industry-average sales and EBITDA growth; invest in marketing sales and differentiated new products to drive sales; improve our gross margins to help self-fund and sustain our investments; improve our executional capabilities by hiring and retaining top-tier talent; and protect our solid financial base built on cash, liquidity and no debt.

At the beginning of our final year of the growth plan, we've made significant progress. We have reconfigured our portfolio, exiting unprofitable businesses, and we have replaced all of the sales with higher margin Furniture business. Inscape sales growth is in the top quartile of the industry and significant margin improvement driven by manufacturing efficiencies have been achieved. However, our challenge is to better translate the sales growth into consistent EBITDA and cash generation.

Now let's review Q1 performance. The key takeaway is that we are close to achieving profitable growth, excluding onetime charges for severance and exiting unprofitable customer contracts. We essentially broke even in a historically low revenue quarter. We have improved our performance by focused activities designed to generate profitable growth. Specifically, our Furniture business has grown organically plus 21% versus Q1 last year. This represents in the top 10% of our peer group.

In our Walls business, we've reengineered our process, restructured our business model and upgraded our talent. Gross margins achieved 27% plus 2 points versus fiscal '19. However, Furniture margins are higher and have posted significant improvement. In the Walls division, we saw sequential improvements month-over-month in gross margin, excluding onetime charges. We have completed the restructuring of our plant operation, generated $1 million per year in additional savings.

To summarize, we have completed significant heavy lifting in Q1 in order to drive profitable growth. As a result of our Furniture business as being revitalized and delivering against our growth agenda, progress has been made in our Walls business, but it still is a work-in-progress.

I would now like to review in more detail the progress we're making against our 5 key growth initiatives.

Our first initiative is to build Inscape brand awareness and engagement among our key influencer group, architects and designers. Our current brand awareness is lower than the industry average. However, among those, who know us, we continue to have one of the highest overall positive brand impressions in the industry. Therefore, our core challenge remains build awareness of our product lineup by improving the quality of our message and the quantity of marketing support. We've executed our marketing plans based on research study that confirms our opportunity and reinforces our strong points of difference. The following actions have been taken to exploit our brand differentiation: adoption of a clear brand message, "Work for tomorrow;" new or updated showrooms in Washington, Toronto and Chicago; profit has increased significantly year-over-year with a 40% increase in traffic at our Chicago showroom during NeoCon.

Importantly, our next generation of new product opportunities driven by these visits, has been over $9 million in this challenging year alone. We've significantly improved our website to ensure ease of navigation, a user-friendly experience and increased investment in social media to reinforce our brand message while supporting the introduction of new products. The impressions in our major social media channels has increased 120% over the prior year.

Our second initiative is to accelerate new product developments to fill critical gaps in our portfolio. We have identified 2 furniture products, including RockIt and a line of private office line up. In addition, we're improving the design for 2 wall products to support our adaptable interior strength. Our new product pipeline is filling up with ideas that will transform our product lineup or increase our differentiation versus our key competitors. Based on recently completed research, we are investing in 2 platforms to complement our Furniture lineup.

Our third initiative is to build committed distribution. The initiative focused on growing our platinum dealer network and our platinum customer base. We continue to be encouraged by our recent results. Platinum customer sales have increased 25% year-over-year. We've added 2 new Fortune 500 companies and have identified 5 new candidates in the early stages of engagement. In terms of platinum dealer sales, we are up 10% during the same period. We continue to test and evolve a new platinum dealer distributer model as a means to fuel growth after a slow start. We are starting to post growth and the pipeline is building with this new venture.

Our fourth growth initiative is identifying cost savings above our normal rate. We have largely completed our initiatives that will lower our operating and labor costs, we estimate annualized savings of $1 million. We've identified and embedded 3-step change projects that could generate $2 million additional savings. We are in the planning phases of implementation.

And finally, we continue to execute against SG&A savings opportunities, as we reengineer our processes and our go-to-market approach. We have recently completed a restructuring that resulted in $250,000 severance charge that will be EBITDA-accretive for the full fiscal year.

Our fifth and final growth initiative is replacing the discontinued joint venture with an equally profitable growth enabler. As discussed, the key issue is making Walls a profit generator. Our 2 focal areas are margin growth driven by net price improvements and significantly reducing quality errors.

Over the past quarter, we've completed the following actions: increased net pricing; implemented more strict criteria around bid selection; completed the reengineering of our core processes; upgraded our talent; and executed importantly unprofitable customer contracts, which had a significant dampening impact on our gross margins. We are closely monitoring the impact on our Q2 performance.

To summarize, we've made progress in making our business top performing in terms of sustainable profitable growth. On the revenue side, we invest in targeted marketing, new products and customer initiatives that are generating top quartile returns. On the cost side, we've identified and taken clear actions, including exiting unprofitable businesses, improving client efficiencies and restructuring our organizational structure. The challenge for us to ensure that these investments initiatives deliver a sustainable profitable growth model this year. I will now turn it over to Aziz for further comments.

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Aziz Hirji, Inscape Corporation - CFO & Secretary [3]

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Thank you, Brian. Good morning, everyone. I will begin the call by discussing key aspects of our results of operations, cash flow and U.S. currency hedge position. After the presentation, we will open the lines and be pleased to answer your questions.

Before I begin, I'd like to preface my remarks with the caution that during the course of this conference call, we will be presenting forward-looking information regarding future events, plans and the future financial performance of the company. We caution you that such information is subject to a number of risks and uncertainties. Actual events or results may differ materially from the conclusions, forecasts or projections made. Certain material factors and assumptions were applied in drawing the conclusions or making the forecasts or projections. Additional information about the risk factors and assumptions are contained in our fiscal 2019 annual report and our quarterly MD&A, both of which are available on the SEDAR website or from us here at Inscape. We disclaim any intention or obligation to update or revise any forward-looking information, whether it is a result of new information, future events or otherwise.

Now let me begin my presentation. The first quarter of fiscal year 2020 ended with a net loss of $0.7 million or $0.05 per share, compared with a net loss of $3.2 million or $0.22 per share in the same quarter of last year. Net loss in both quarters included certain unrealized noncash expenses and onetime items that have significant impact on the net loss per GAAP. With the exclusion of these items, the first quarter of fiscal 2020 had an adjusted net loss of $1 million, compared with an adjusted net loss of $2.5 million in the same quarter of the previous year. The year-over-year improvement is due to improved gross profit and lower SG&A spend.

Adjusted net income or loss is a non-GAAP measure, which does not have any standardized meaning, prescribed by GAAP, and is therefore, unlikely to be comparable to similar measures presented by other issuers. The press release we issued yesterday contains a reconciliation of the GAAP net loss to the adjusted net loss.

Sales of $20.7 million in the first quarter of fiscal year 2020 were 3% lower than the same quarter of the previous year. Excluding sales from an unprofitable business unit, sales in the first quarter increased by 5%, compared to the previous year, mainly driven by strong Furniture sales. Gross profit as a percentage of sales for the first quarter of fiscal year 2020 at 27.9% was 200 basis points higher than last year's 25.9%. Favorable product mix and improvement in supply chain efficiencies contributed to the improvement in margins.

Selling, general and administrative expenses, or SG&A, in the first quarter of fiscal year 2020, were 35.1% of sales, compared to 37.8% in the same quarter of last year. The dollar amount decreased by $0.8 million. SG&A in the quarter included $0.4 million of severance accrual and refinancing fees. Excluding these costs, SG&A would've been $7.2 million or 34.8% of sales.

In accordance with the IFRS requirements, deferred tax benefits relating to tax loss carryforwards were not recognized during the first quarter of fiscal 2020. The basic loss per share for the current quarter was $0.05 per share, compared to a loss of $0.22 per share for the same quarter of last year. The basic earnings per share calculations are based on a weighted average number of shares outstanding of $14.4 million.

Now turning to the cash flow. The first quarter of fiscal 2020 had a cash outflow of $1 million from operations before changes in working capital, compared to a cash outflow of $2 million in the same quarter of the previous year. Improved operating results lowered cash outflow. Net decrease in the working capital of $5.2 million and the cash outflow of $4.3 million from the investing activities consisted primarily of the new IFRS 16 standard, which introduced these changes to the lessee accounting, which the company adopted in fiscal 2020. We continue to be debt free and had cash of $3 million at the end of the quarter. We have access to an operating credit facility that is not used.

Moving on to our hedge position. As at quarter end, we have outstanding hedge contracts to be settled over the next 15 months ending October 2020. The contracts allow us to settle a total of USD 37 million to USD 46 million at $0.787 to $0.709 depending on the U.S. spot rate on the settlement date of each contract.

This concludes the financial review of Inscape's First Quarter Fiscal 2020 results. We will now open the lines for your questions.

I would like to turn the call back to our operator, Daisy, to conduct the question-and-answer period.

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Operator [4]

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(Operator Instructions) There are no questions at this time.

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Brian A. Mirsky, Inscape Corporation - Vice Chair & CEO [5]

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Okay. We're okay to conclude the call then.

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Operator [6]

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Thank you. That does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your lines.

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Brian A. Mirsky, Inscape Corporation - Vice Chair & CEO [7]

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Thank you.