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Edited Transcript of INQ.TO earnings conference call or presentation 6-Mar-20 1:30pm GMT

Q3 2020 Inscape Corp Earnings Call

HOLLAND LANDING Mar 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Inscape Corp earnings conference call or presentation Friday, March 6, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian A. Mirsky

Inscape Corporation - Director

* Eric K. Ehgoetz

Inscape Corporation - CEO & Director

* Jonathon Szczur

Inscape Corporation - Interim CFO

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Presentation

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Operator [1]

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Greetings, and welcome to the Inscape Third Quarter 2020 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded, Friday, March 6, 2020.

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

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Brian A. Mirsky, Inscape Corporation - Director [2]

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Good morning. Welcome to Third Quarter Fiscal '20 Investor Update Call. Joined today by Eric Ehgoetz, the newly appointed CEO; and Jon Szczur, our interim CFO.

I will provide my perspective as Outgoing CEO on the quarter results, followed by John, who will provide more details and insights on our Q3 performance. Finally, Eric will provide his thoughts on the current state and future of the company.

Today's call comes in an important time for Inscape. We have largely completed the execution of our fiscal '18 3-year strategic plan. Over the past 2 days, the Board and leadership team have reviewed the progress we have made against our strategic plan. We have identified issues that will be addressed in our new plan going forward.

From my perspective, we've made progress against our strategic plan. We have focused our portfolio. We exited non-profitable businesses and product lines. We have grown our Furniture business and identified 3 growth platforms. We have grown our platinum customer base. We've made significant progress in cutting price, the supply chain and SG&A base. And finally, we have improved our capabilities via talent and process improvements.

That being said, we have several large and immediate challenges to be addressed in order to drive sustainable, profitable growth. Eric will give his perspective on these. In summary, we have miles to go and promises to keep.

Turning to our Q3 performance, I wanted to note the following comments. Q3 was disappointing but not unexpected. Q3 fiscal '20 sales were compared to an 8-year record high in fiscal '19. Many of our platinum customers had large 2-year volumes in November and December of 2018. In addition, several large projects in fiscal '20 have moved out.

In addition, our Walls business declines were due to the exit of unprofitable projects and customers. While sales declined sharply, our year-to-date gross margin increased 3 points versus fiscal '19. And while Q3 sales were disappointing, our pipeline remains solid, and we have won several large multimillion dollar projects.

Gross profits provide you unfavorable product mix and lower sales volume in the quarter. The decline was partially offset by manufacturing efficiencies and cost savings realized in the quarter.

Our SG&A spend has continued to decline as we successfully restructured our organization. In summary, our Q3 performance was disappointing and drives our commitment to achieve sustainable, profitable growth through our focus on building our pipeline, exiting unprofitable businesses and improving our efficiencies.

I will now turn the presentation over to Jon Szczur to provide more detailed financial information.

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Jonathon Szczur, Inscape Corporation - Interim CFO [3]

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Thank you, Brian. Good morning. I will begin the call by discussing key aspects of our results from operations, cash flow as well as our U.S. currency hedge position. After the presentation, I will be followed by the new CEO, Eric Ehgoetz, then 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 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 current -- and our quarterly MD&A, both of which are available on 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 result of new information, future events or otherwise.

Now let me begin my presentation. The third quarter of fiscal year 2020 ended with a net income of $0.1 million or $0.01 per share compared with a net income of $1.3 million or $0.09 per share in the same quarter of last year.

Net income loss of both quarters includes -- included certain unrealized noncash expenses and onetime items that have significant impact on the net income loss per GAAP. With the exclusion of these items, the third quarter of fiscal 2020 had an adjusted net loss of $1.6 million compared with an adjusted net income of $1.1 million in the same quarter of the previous year.

The 9-month period of fiscal year 2020 ended with a net loss of $0.2 million or $0.01 per share compared with net loss of $4.3 million or $0.30 per share for the same period of last year. Net income loss of both periods included certain unrealized noncash expenses and onetime items that have significant impact on the net income loss per GAAP.

With the exclusion of these items, the 9-month period of fiscal year 2020 had an adjusted net loss of $2.9 million compared with an adjusted net loss of $3.5 million in the same period of the previous year.

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

Sales in the third quarter were 39.8% lower than the same quarter of the previous year due to a 45.5% reduction in Furniture sales and a 20.3% reduction in Walls sales. Sales in the 9-month period of fiscal year 2020 were 14.7% lower than the same period of the previous year, mainly driven by a decline in Walls sales.

Gross profit margin as a percentage of sales for the third quarter of fiscal year 2020 at 25.2% was 330 basis points lower than the same quarter of the last year's gross profit of 28.5%. Manufacturing efficiencies realized during the quarter were offset by an unfavorable product mix and lower sales volume.

For the 9-month period of fiscal year 2020, gross profit margin as a percentage of sales of 20.6% was 60 basis points lower than the same period of the previous year. Higher fixed and variable cost of sales contributed to the gross profit margin decrease.

SG&A for the quarter was 34.8% of sales compared to 25% in the same quarter of last year. The dollar amount decreased by $1.2 million compared to the same quarter of last year due to reductions in incremental investments in marketing, sales coverage and supply chain initiatives. Lower sales volumes impacted the overall increase in SG&A ratio to sales as compared to the prior year. SG&A for the 9-month period of fiscal year 2020 was 32.3% of sales compared to 33.2% in the same period of the previous year. During the current 9-month period, SG&A of $19.8 million was $4.1 million lower than the same period last year, again, mainly driven to reductions in incremental investments in marketing, sales coverage and supply chain initiatives.

On December 31, 2019, the company completed a sale and leaseback of certain land and buildings related to the Walls segment. The sale generated proceeds of CAD 3.5 million compared to a carrying value of $2.3 million, which resulted in a gain of CAD 1.2 million, recorded in gain on loss and capital assets and intangibles.

Following the sale, the company leased back a portion of the property in 2 phases expiring in May 2020 and August 2021, for lease payments of CAD 0.3 million and CAD 0.2 million, respectively. The sale and leaseback resulted in the recognition of a lease liability and right-of-use asset of CAD 0.4 million and CAD 0.6 million, respectively, at January 31, 2020.

On December 31, 2019, the company sold its DC Rollform business, which engaged in metal fabrication within our Walls segment. The assets and liabilities disposed of at December 31, 2019 consisted of inventory, machinery and equipment and tools for proceeds of CAD 1 million and a gain of CAD 0.6 million, recorded within our gain on disposal of capital assets and intangibles.

The DC Rollform business did not represent a strategic shift in our business and will not have a major effect on our operations and financial results. In accordance with IFRS requirements, deferred tax benefits related to tax loss carryforwards were not recognized during the third quarter of fiscal 2020.

Basic earnings per share for the current quarter was $0.01 per share compared to earnings of $0.09 per share for the same quarter of last year. Basic loss per share for the year-to-date 9-month period was $0.01 per share compared to a loss of $0.30 per share for the same period of last year. The basic EPS calculations are based on a weighted average number of shares outstanding of 14.4 million.

The third quarter cash flow from operations worsened to $0.7 million compared to the same quarter last year's inflow of $1.6 million, primarily due to lower sales volumes. The net decrease in working capital of $0.7 million consisted primarily of accounts payable settlements.

The 9-month period ended with cash outflow from operations of $0.6 million compared to the same period last year's outflow of $1.9 million, again, primarily due to improved operating performance. The net decrease in working capital of $1.6 million consisted primarily of higher accounts payable settlements. We continue to be debt-free and had cash of $2.7 million at the end of the quarter. As at quarter-end, we have outstanding hedge contracts to be settled over the next 16 months ending May 2021. The total notional amounts under these contracts are USD 37 million to USD 46.3 million. Depending on the Canadian-U. S. dollar spot rate on the settlement date of each contract, the company can sell U.S. dollars at rates ranging from $1.27 to $1.41.

I will now turn the presentation over to Eric, who will provide his thoughts on the current state and future of the company.

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Eric K. Ehgoetz, Inscape Corporation - CEO & Director [4]

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Thank you, Jon. I look forward to my new role at Inscape. Brian has set the foundation for additional improvements to operations and profitability through concentrated efforts to realign the company's existing product offerings, develop new products and focus on key channels for sales growth. These efforts include the recent restructuring of our Walls operation, which is currently in progress and is not yet reflected in our results.

Working with a strong team, my efforts will focus on enhancing revenue growth and profitability, finalizing the company's improvement program for Walls, improving supply chain costs and capacity utilization of our manufacturing facilities and broadening our routes to market in order to improve overall profitability for all of our stakeholders.

We will now open the lines and be pleased to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of [David Wilcox] of [Eleven Point Capital].

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Unidentified Analyst, [2]

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Actually I got a few here, if you don't mind. First one, just on the, Eric, you mentioned, Walls restructuring there. Any sort of color you can put on that or quantum in terms of what kind of cost savings you would expect to see as a result of that work?

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Eric K. Ehgoetz, Inscape Corporation - CEO & Director [3]

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I think it's a bit of a work in progress. But right now, what I can tell you is that we are exiting a certain product offering in Walls, and that's going to result in about a 60% reduction in the plant workforce because that was a very labor-intensive product line. So we're continuing to evaluate what that's going to be at this point.

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Unidentified Analyst, [4]

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Right. Okay. And that would be over -- roughly what period of time do you figure?

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Eric K. Ehgoetz, Inscape Corporation - CEO & Director [5]

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I think that, that will be sort of out of the pipe, if you will, at -- within 2 to 3 months. So you're going to see it, David, we're only going to start to see the impact of that at the beginning of fiscal '21, which starts in May.

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Unidentified Analyst, [6]

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Right. Okay. And then perhaps a question for all 3 of you here. Just on -- in terms of biggest opportunities to further reduce costs perhaps separately from the Walls discussion, where do you see those kind of -- those biggest opportunities? Where is the lowest-hanging fruit to further reduce costs?

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Eric K. Ehgoetz, Inscape Corporation - CEO & Director [7]

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I think appreciating that this is very preliminary. At this point, we see opportunities to further reduce our inventory. We see opportunities to extract some additional costs and consolidation of some of our operations. And we see operations -- opportunities to -- we're kind of improving our methods to deliver to the end client that we believe we can become more efficient.

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Unidentified Analyst, [8]

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Right. And then just last question, if you don't mind. At what point do -- does the Board and Eric, do you sort of consider it's in the shareholders' best interest to look at monetizing the Canadian real estate, had that through a sale leaseback transaction, similar to what you might have done in the U.S.? Or some different type of transaction to access that value for shareholders?

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Eric K. Ehgoetz, Inscape Corporation - CEO & Director [9]

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I think you could probably take it as illustrative that the Board has -- having been a member of the Board for 3-plus years, has continually looked at value-creation opportunities like that and continues to do so. And Felcor would be the most recent example.

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Operator [10]

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(Operator Instructions) I am showing no further questions at this time.

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Eric K. Ehgoetz, Inscape Corporation - CEO & Director [11]

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Thank you.

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Operator [12]

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