QEP Co Inc

OTC:QEPC

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, ladies and gentlemen, and thank you for holding. Welcome to Q.E.P.'s Financial Results Conference Call for the First Quarter of Fiscal year 2022.

[Operator Instructions]

My name is Katie, and I'll be your conference coordinator today. As a reminder, please note, this call is being recorded. At this time, I would like to introduce your host for today's call, Stan Berger, Q.E.P.'s Investor Relations representative.

[Stanley Berger]

Thank you, Katie. Good morning, and thank you for joining today's conference call to listen to our discussion of Q.E.P.'s financial results for the first quarter of fiscal year 2022. We which were issued in a press release on Wednesday, July 14. If you have not had a chance to review the press release and our audited financial statements, they are available on the Investors section of the Q.E.P. website and on the OTC market website.

I am joined today by Q.E.P.'s Executive Chairman, Lewis Gould; its President and CEO of the Americas, Leonard Gould; its Chief Financial Officer, Enos Brown; and its Chief Legal and Administrative Officer, Adam Morgan.

On today's call, Lewis and Leonard will review the recent developments as well as the highlights of the first quarter of fiscal 2022. We will then give you an opportunity to ask questions.

[Operator Instructions]

Before we begin, we would like to remind you that certain statements made on this conference call may be forward-looking statements within the meanings of the federal securities laws. These statements can be identified by words such as expects, plans, projects, will, may, anticipates, believes, should, intends, estimates and other similar words. Any forward-looking statements contained on this call are based on current expectations and beliefs and are subject to a number of risks and uncertainties.

These forward-looking statements include, but are not limited to, the emergence of the world from the COVID-19 pandemic and the company's belief that it is positioned to respond to the evolving uncertainties relating thereto and shifting of the company's focus to new challenges presented by the scarcity and rising cost for raw materials and transcontinental freight, the weakening U.S. dollar, shifts in global sourcing patterns and general inflationary pressures.

Forward-looking statements also include statements regarding economic conditions, sales growth, price increases, profit improvements, product development and marketing, operating expenses, cost savings, acquisition integration, operational synergy realization, global sourcing, political uncertainty, cash flow, debt and currency exchange rates.

Forward-looking statements may be adversely affected by general market factors, competitive product development, product availability, federal and state regulations, manufacturing issues that may arise and patent positions and litigation. The forward-looking statements contained on this call only as of the date the statements are made, that the company does not undertake any obligations to update forward-looking statements, except as required by law.

I will now turn the call over to Q.E.P.'s Executive Chairman, Lewis Gould. Lewis?

[Lewis Gould, executive]

Stanley, thank you very much, and welcome all of the participants in our conference call. In the review of last quarter, we've had a pretty large increase, over $28 million in increased sales. That was made up of real price increases and also cost increases that we passed along to our customers, which is becoming almost an everyday fixture for us.

We've had some highlights in the quarter that I want to pass along to you. In South America, we're very active. -- internationally and we've picked up a very large chain in Peru called Pro Mart. And in another part of the world, we picked up 2 major home centers which cover -- which are located in North America, maybe about 100 stores roughly. We've also faced challenges internationally, both England, Canada and Australia, with opening and closings due to the COVID problem that's happened on a worldwide basis. And that's affected us in Australia, for example, where we're rolling out our ceramic tile initiative to the Bunnings stores. Several of the provinces in Australia have been closed, creating problems for us.

One of the headwinds that we're struggling with that almost everybody is right now is our supply chain. Our cost of containers has gone up significantly from about 3,500 to an average of about $16,000 in that quarter and the inflationary pressures continue, they haven't moderated on almost everything we do on our glue business. We were in force majeure for a period of time and that has eased a little bit now we're on allocation.

Another casualty that all firms have to reckon with is the insurance. For example, on cyber insurance because everybody is moving towards an e-commerce platform has gone up significantly. So those are some of the challenges. However, obviously, the company has met the challenges and we've posted more than a $5 million EBITDA.

I do want to make one comment regarding the EBITDA and a growth company, which we believe we're on the right track to do. We're an inflection point and the company is 46 years old at this point. And we have to start modernizing the plant, our distribution footprint and the technical and IT systems that we have here. That requires a lot of capital, which effects on how we give our returns to the shareholders.

So I do want to say that at our next Board meeting, we will discuss some of the strategic implications of this and also our dividend policy will be discussed in the next Board meeting for those people who have an interest in that. Our listing for the QX will be completed before the end of August. We're working on that diligently. This mirrors almost a full 10-K for New York Stock Exchange companies. And it's taking us an awful lot of time to do, but once it's done, it will be a good template for that to happen.

I can tell you that the first month of the quarter in June was a good month for us. I don't want to give any specific numbers, except to tell you that it was a good month and it's continuing the process that we've started. We also have a team that I want to make everybody aware, Leonard, who's the CEO of this side of the world and Paul, who is the CEO of the other side of the world, I'm very pleased with the progress we're fixing all the stuff that requires the normal day-to-day stuff plus the incentives to grow and improve the EBITDA.

I'm very pleased to see that where we have a solid management team, those managers who are on the conference call now know who you are, and we're very pleased to see that, you're on the call and that you're recognized significantly. We've made heavy investments internally that you don't see both in people capital to make this happen and especially looking at our e-commerce, which Leonard will talk about very shortly.

Debt has been pretty flat. We haven't paid off whole lot of money in the quarter. We've faced a lot of headwinds and increase in inventory, other working capital components, et cetera. The book value of the company went up from about $21 roughly to roughly $22. Gross margin, which is amazing considering the way the world is right now, has had pretty steady at about 27.5% for the sake of argument.

Our liquidity that we have currently with the cash on hand and our availability from the bank is about $46 million. And incidentally, we're fully taxed. We have a little bit of an NOL as we go forward from our past acquisitions, but we pay a lot of taxes going forward. But generally, looking at the operations in the quarter, it was pleasing to see. We're wrestling with an awful lot of headwinds and, and I think we're going to be more than successful, I think you'll be proud of us.

I'm going to turn the meeting now over to Enos Brown, who'll review the financials. Then after that, Leonard, who will speak about some of the larger initiatives in the company is going through. Enos?

[Enos Brown, executive]

Thank you, Lewis.. As Lewis indicated, we are pleased with the company's financial performance for the first quarter of fiscal 2022. Net sales of $114 million, was a quarterly record high and 33% above the prior year's comparable quarter. This increase was a combination of strong growth in the current period and the prior year's negative impact from the COVID-19 pandemic.

Most major channels and markets experienced good growth, particularly U.S. retail and U.S. flooring along with our European operations. Gross profit as a percentage of net sales remained steady at 27.4% despite the initial headwinds associated with scarcity and rising cost of ocean freight, raw material and labor.

Operating expense for the period, while lower as a percentage of net sales compared to the prior year increased in absolute amount as the company begins to invest in sales support personnel and infrastructure. The [indiscernible] resulted in net income for the quarter of $2.6 million or $0.79 per diluted share compared to $0.7 million or $0.21 per diluted share in the first quarter of '21. EBITDA over the same period more than doubled to $5 million from $2.5 million.

With respect to cash flow, the company has made some working capital investment in inventory to mitigate longer lead times on imported products and reduce the potential for lost sales due to stock outs. As Lewis indicated, net book value per share increased by 3.5%.

In closing, management continues to be vigilant in light of the current inflationary pressures and is assessing its various options to protect the company's profitability. That concludes my initial overview of the financial results. Let me hand you back to Lewis for additional commentary and observations.

[Lewis Gould, executive]

Enos, thank you very much for that. We'll open this up for questions. After, Leonard gives his commentaries. Leonard?

[Leonard Gould, executive]

Thank you, and thank you, everybody, for taking the time out of your morning to join us on the call today. For us, it's essentially about relentlessly executing and following our strategic initiatives. We have enormous initiatives across the breadth and depth of this company on the customer-facing side, on the structural side, the IT side operationally.

And for us, it's about positioning us to be long-term winners in the space that we occupy. So Lewis very succinctly describe the challenges that we and all of our competitors face around the world. And we are proud of what we've done, but we are going to be more proud of what we will be doing. So why don't we open it up for questions.

[Operator]

[Operator Instructions]

Our first question comes from Jamie Wilen with Wilen Management.

[James Wilen, analyst]

I wanted to ask Leonard a question about, as the company moves forward and we're having some of our unique and newer product lines with opportunities, specifically wood flooring and the Kraus carpet tiles and the ceramic. What are we doing to enhance our visibility and market share in these more of our emerging product lines that we haven't had for ever in size for the company.

What's the outlook in this business as far as the industry growth rate? And can we achieve some penetration there? And lastly, on this, what are the margins here versus our historical business.

[Leonard Gould, executive]

Jamie, there's a lot to unpack there in that initial question. So I'll do my best to answer each topic that you brought up. For us, the flooring side of our business needed lots of attention. It needed some modernizing, some changing out some spec enhancement.

We're now at the point where we are ready to do some damage in the marketplace. So what I can tell you is that carpet tiles, in particular, under the Kraus brand recently launched at a few nontraditional large Q.E.P. customers. And the reception has been -- it's doubled our forecast. So it's early, but if this is indicative of the opportunities out there for us, then I'm very pleased about what lies ahead.

The second question in terms of the type of business and the margin that this will bring to the company. The honest answer is, as we participate at every level of the price continuum. So I'll have a better, more accurate answer for you in the future because right now, the sands are shifting in the flooring industry. So that was your next question.

The CAGR on the flooring industry over the last -- since the COVID pandemic began 18 months ago is staggering. It's this north of -- I would guess, as my Len Gould-guess, 15%. The issue is that because of the supply chain issues around the world it's opened up opportunities for people like Q.E.P. and others to sort of cross-pollinate into businesses where we maybe have not been as traditionally strong.

And there, again, the flooring becomes another leverage because we are just a different sort of animal to deal with in some of our more larger faceless competitors.

[James Wilen, analyst]

Because of the supply chain issues around the world and we look at Harris Wood being one of the few, if not only domestic manufacturers of wood flooring, and I'm not sure where Kraus' carpet tiles are made. Does that give you any advantage in being able to source things that other people have more difficulty because of the shipping expenses and the time to ship those things to backlog from the ports?

[Leonard Gould, executive]

Boy, that's a great question. I mean, honestly, it sort of speaks to sort of the heart of our strategy. So yes, it's a tremendous asset having the factory there. here in the States and Made in America is something that we see a rising tide of -- some of that is due to convenience, though, because it's here and it is expensive to get product from overseas.

So the nice thing about wood flooring is that -- it's still the only flooring that people will mention in the ads when they sell their houses. No one's putting in there, hey, I have beautiful vinyl in my bedroom. So while vinyl has been a -- that's had a real big impact on the domestic manufacturers and there are a few of us, Jamie. What it did is it pushed wood up the continuum. So it almost at removed the opening price point pain from the company. And we're now navigating the business to that other price point with an assortment of different customers at the dealer distributor and the retail levels.

[James Wilen, analyst]

Can you talk a little bit about the volumes in Harris Wood, a, have we picked up any new major accounts? And b, how would their growth rate be versus the 15% CAGR you're looking at in the industry?

[Leonard Gould, executive]

I don't want to get into specific customers, honestly. What I will tell you is, yes, there are significant opportunities for us that are volume related. Inputs are very tough, and we are making sure that we support the right partners, and we support Q.E.P.'s healthy growth through the sort of transitory period. But yes, there are some larger opportunities for us.

[Operator]

[Operator Instructions]

Our next question comes from Dennis Reiland with Private Management Group.

[Dennis Reiland, analyst]

Lew, maybe you could give us a little more color behind the increase in shipping and the 2 line items, I guess, that stick out, are the selling and marketing. And maybe the ability to kind of pass through those cost increases over the next couple of months? And maybe a little bit more color as far as when you increase prices to offset some of those expense increases?

[Leonard Gould, executive]

Dennis, this is Len here. I'll answer this one -- the container overseas freight issue is -- it's frankly very well documented and well known. And our position as a company, our strategic decision is to be the one who has the ability to fill the shelves. So you're seeing big spikes there because we're not turning down the opportunity to bring in product.

The price increase question that you asked is something that is essentially an ongoing thing. The rules of the way we used to do it are so far out the window that it's scary. And it's just a fluid topic depending on that moment in time that new business is being launched.

In terms of it moderating and getting better I could tell you that yesterday, one of the executive team sent me an article that the U.S. government now is going to investigate the 9 largest freight carriers globally. And they're now looking into this situation. So I wish someone could tell us when it's going to end. If you find that person, let us know. What I can tell you, though, is that we're not letting that hinder the relationship we have with our customers.

[Operator]

[Operator Instructions]

Our next question comes from Rick Hicks, Private Investor.

[Unknown Attendee]

Looking for ways to enhance shareholder value you appear to be moving out of the pink sheets and that is surely a plus, even opportunity for the larger investors to invest in your company. And also your dividend policy needs to be reexamined, based on your earnings, you appear to be able to pay much significantly larger dividend and that would enhance the value of the company in the event that you're using your stock as currency to buy other companies that would also have a positive impact.

So you mentioned that you're going to take up the business dividend policy at your next Board meeting, and when is that going to occur ?

[Lewis Gould, executive]

We have a Board meeting every 3 months, Rick. And...

[Unknown Attendee]

So we wait another 3 months?

[Lewis Gould, executive]

That's correct. You know, one of the things that the world appears to be changing almost on a daily basis and I could tell you some anecdotal things we've had, I think, only one person in our plant that had COVID, and we hope that, that stays that way. But because there's so much unevenness going on right now, we have to make investments with the Board scrutinizing modernizing our plant, which is, I think, a shareholder investment.

Looking at our IT systems and helping the value of the company become more efficient, more profitable. But I also recognize as a shareholder, we are a public company. And I want you to know we're doing almost everything we can. We're still relatively small in the scheme of things. And on the daily plate, so many things happen, we are only able to attack 300 of them at a time. The other 400 have to wait a little bit. But we understand the shareholders' point of view, I'm a shareholder, too. And we're cognizant of those facts, I just want to assure you of that.

[Unknown Attendee]

What is the timetable moving out of the pink sheets?

[Lewis Gould, executive]

It will be before -- well, we know that our application, we're just about done with it. We hope that in the next few weeks, we'll finally have it done. And then the Board will take a look at the amount of shares outstanding, et cetera, et cetera. But roughly my guess is we should have something in place depending on the exchange, how fast they move because if you're not aware of it, the rules change in September with the reporting even for small caps on over-the-counter folks. So we should have all of our work done, which will be similar to a 10-K in the next 3 weeks.

[Unknown Attendee]

Well, no problem, Lew. And you surely are doing a good job in a difficult environment, so congratulations.

[Lewis Gould, executive]

Very, very difficult environment, but our peers. Many of them are not doing well, but we're paying attention. We now have to look for the efficiencies in the business, and Leonard and Paul are doing that on a daily basis.

[Operator]

[Operator Instructions] Our next question comes from Jamie Wilen with Wilen Management.

[James Wilen, analyst]

As far as the dividend policy, one would think that because I would assume most of your Board meetings are telephonic that it's pretty easy to convene the board together to create that dividend policy without having to examine every aspect of the company in a 7-hour Board meeting. And I hope you wouldn't have to wait 3 months for that before you arrive at a conclusion for what would be an appropriate dividend policy, given how much money we're earning?

[Lewis Gould, executive]

It's very difficult to answer the question, just saying we should go ahead and do it based on past performance. The difficulty all firms, including us have are -- what is happening in the marketplace over this next quarter. Our quarters generally are 1, 2, 3, 4, if you look at our earnings. I want to make sure that our earnings this quarter are satisfactory before we move to the next step of giving the money out due to the fact that I told you we have to invest quite a bit of money in our plants, manufacturing, distribution, et cetera, and I think you'd want the same thing.

So we're watching the quarters very, very carefully. And I can tell you the expenses have not stopped. And it's a real struggle. I'm very proud of what we did. But now we have to make sure that we turn that into long-term value for all of us. I'm a shareholder also, and I'm the biggest beneficiary of that also. So I want to do the right thing. So I want to look at the next quarter very, very carefully and advise the Board of where we are.

And at that point, we have a great outside Board of Directors if you've done your homework, you see who they are. We want to be very, very careful because it's very hard to make money in this environment. I'm not trying to tell you long stories, I am trying to tell you that everything changes and we have to watch this quarter very carefully. So, please bear with us.

[James Wilen, analyst]

Okay. As you look at the revenue increase in the quarter that just ended, how much of that is from inflation price increases and how much of that is from volume?

[Lewis Gould, executive]

Truthfully, I wish it was all price increases. That isn't the case. We've taken on several new customers, which made a difference there. The price increases are continuous almost on every order. It's almost on an individual basis. And Enos, can we quantify the first quarter?

[Enos Brown, executive]

The first quarter was predominantly volume increases. Most of the price increases took place late in the quarter and going into quarter 2, Jamie.

[James Wilen, analyst]

Got you. I mean the question was asked earlier about kind of the sequencing of these price increases that we're tending to lag on when we are receiving the supply increase and when we're passing it on to our customers. As you talk about the lag, have we been able to -- are we increasing prices now to offset all those cost increases as it's happening? Or will we continue to have a lag moving forward?

[Lewis Gould, executive]

Probably, there'll be a lag because a lot of the folks, if you announced, for example, and specifically on our Kraus line of products, we have to give the individual retailer or distributor, we've got to give them 30 days notice. So in many cases, the increases that we've asked for are over the actual cost almost in every particular case.

And on the other side of our businesses, the larger customers, it's much more difficult walking in and saying, give me a 10% increase. It takes a little bit longer time. But we've been successful, obviously, because our gross margin is holding up. But this quarter, we've been affected by the availability of containers and also the container rates, domestic freight even freight on the railroads have gone through the roof. And we want to watch it very, very carefully. But the answer is, this is an everyday thing. We're not shipping anything we don't make money on.

[James Wilen, analyst]

Okay. And if the previous quarter, most of the increase was volume. And now we've increased prices, I would assume somewhere between 5% and 10%. If that -- if those volume increases are holding steady, would it be logical with additional price increases to assume our revenues might be even stronger at a higher level than they were in the previous quarter?

[Leonard Gould, executive]

So the answer is, yes, if all things -- this is Len. If all things are standard and concurrent then yes. But we sell a large assortment of different SKUs that are all to varying degrees under stock-out pressure. So yes, if the supply was constant, yes, you would see it literally just step up. but it really is like a sea of change every day.

[James Wilen, analyst]

Does Home Depot have a full stock of your merchandise now? Are you out of stock and things there?

[Leonard Gould, executive]

I don't like commenting on any customers. What I would tell you is that they, like everybody else, have holes throughout their assortments throughout their stores.

[James Wilen, analyst]

Okay. And then lastly, on the tile business, you've mentioned a little bit of the slowness in Australia because of COVID. You were testing that with a couple of other national chains, I believe. Could you tell us about any of the progress you're making there?

[Leonard Gould, executive]

Sure. I would just describe it as slow and steady. So we're dealing with in the most part, very large retailers who they're already vendored up in the categories and our job is to show them a new pathway to a new customer and a new opportunity. So while I would tell you that I feel we've been very successful in pitching that out, the implementing of that throughout the pandemic has been a struggle but more to come. This is not something that we have remotely given up on.

[Lewis Gould, executive]

We'll see in Australia and certainly perhaps in the next 2 months, probably around another $4 million boost from the ceramic tile as it rolls out.

[Operator]

Our next question comes from Gary Winston, private investor.

[Unknown Analyst]

Congratulations on a great quarter. It's good to see the company generating $5 million of EBITDA. Lew, you mentioned that Australia's -- some of the provinces suffering from closure of COVID. How is that -- how many stores -- how many Bunnings stores were affected by the closures?

[Lewis Gould, executive]

I don't even know if they're closed. There's about a couple of hundred Bunnings stores, but half our business is Bunnings. The other half of our business is our own distribution where we have 20-some-odd stores. We're affected just generally everywhere. In Western Australia, for example, the Bunnings folks, the distribution centers may be closed where they're open in the Sydney area. And a lot of our stores have been open and closed because of the COVID and the local provinces.

Australia has had a very, very low rate of COVID because they keep closing the place up anytime they get something. We're also greatly affected New Zealand, which is part of that and New Zealand has been almost closed everything for a longer period of time. But our expectation is that by the end of September, all of the inventory we have on that should have been shipped by that time. And maybe [indiscernible] it will be reorder time at that point.

[Unknown Attendee]

Are you pleased with the ceramic tile rollout? What are your expectations for the future in terms of revenue or penetration, both in Australia and here domestically?

[Lewis Gould, executive]

Well, it's a forward question, and there are so many uncertain things, but I'm positive on it. I don't know how to quantify it yet because we're in the midst right now of so many different rollouts. And when you talk about tile, Paul, our CEO of Europe, is on the line, and -- we have a lot of presentations there. The actual company that we're a minor owner of, actually is booming. And we have some worldwide rights to that. But I guess everything is going to take a little bit of time because this is more of a fashion item, ceramic tile. It's taking us longer than we want, certainly. But I think if you ask on a personal thing, I love ceramic tile. And I think we're going to do well with it over a long period of time.

[Operator]

I'm showing no further questions at this time. I would now like to turn the call back over to Lewis Gould for closing remarks.

[Lewis Gould, executive]

Thank you. I want to thank everybody for joining us for the conference call. I certainly appreciate it. And I want to say hello, Steve who'd gone back, and Mr. Hicks and a few of the other folks that are there. It's appreciated. I want you to know, without our employees and the folks that work for the company, absolutely nothing would happen.

We have, I think, top talent working for the company and we continue to grow in depth, and we continue to grow and being smarter just generally as the company gets larger, and that wouldn't have happened without the input of the team that's making this all happen. It's not me, it's not Len, it's the whole team. So to all the team thumbs up, thank you very much.

And for our investors, I want to assure you that we answer the phone 24 hours a day when we don't answer the phone, they pick it up in Australia. We're working hard all the time, and we're going to continue to do our best to earn money and look at all the strategic possibilities everywhere. And thank you for joining us. Stay safe, God bless America. Thank you, operator.

[Operator]

This concludes our program for today. You may now all disconnect.