QEP Co Inc

OTC:QEPC

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, ladies and gentlemen, and thank you for holding. Welcome to Q.E.P.'s Financial Results Conference Call for the Third Quarter and First 9 Months of Fiscal Year 2023. [Operator Instructions] My name is Brittany, and I will 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, Brittany. 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 third quarter and 9 months of fiscal year 2023, which was issued in a press release on Tuesday, January 17. If you have not had a chance to review the press release and our financial statements, they are available in the Investors section on the Q.E.P. website and on the OTC market's website.

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

On today's call, Lewis, Len, Paul, and Enos will review developments as well as the highlights of the third quarter of fiscal 2023. We will give you an opportunity to ask questions.

Before we begin, we would like to remind you that some of our comments today will include forward-looking statements within the meaning of the current U.S. federal securities laws. Actual results may differ materially from those projected or implied due to a variety of factors. We refer everyone to Q.E.P.'s more robust forward-looking statement, disclaimer, and discussion of the risks facing its business in Q.E.P.'s earnings press release and its filings with the OTC markets. I will now turn the call over to Q.E.P.'s Executive Chairman, Lewis Gould. Lewis?

[Lewis Gould, executive]

Stan, thank you, and I want to thank all of the people that are on the conference call this morning. In fact, I believe that we have a record number of people. So good morning to everybody, and we'll try to give you a review. One small correction, Leonard is not here this morning. He's calling on customers. So we'll do the best we can to fill you in on the activities that Leonard was involved in.

First, I'd like to say, I hope everybody had an opportunity again to look at the press release, because it was quite detailed, and it had a lot of information that will explain some of the things that affected us in the last 9 months, I can tell you that we've had a tough last quarter. And in that particular quarter, we've had some unusual things that have happened. Of course, everybody is aware of interest rate increases. We also had an issue with ransomware. We had, on top of that, the government came back to us after 4 years and we had to pay some additional kind of funds on that.

We're also experiencing wood sales that are not up to snuff, which affects our top line generally. Overall, if you look at the press release, you can notice that our sales were very aggressive and maintained pretty well, but that was an issue for us. I do want to tell you what we're doing about these and go through this and then specifically will answer questions that may make a difference, and then Paul will review some of our international operations.

International is about 30% of our total business, which consists of Australia, England, and the European continent. And we'll get to that in just a moment. But I do want to tell you a few things that would make a difference to the shareholders who are close to us. First of all, there were no bonuses paid on the American side. Last year, we did pay bonuses. The bonuses are reflected on our profitability, and that includes myself.

We did consolidation of several of Q.E.P.'s warehouses. We're now primarily located in the Dalton, Georgia area, where we had locations in Pennsylvania and other areas. We had redundancies that went on in the last quarter that were very significant that approached $1 million in cost. We've rationalized our wood business. Right now we're going through the same process, looking for additional savings on that side and going through a strategic review of the wood business generally.

I do want to tell you the questions that usually come, our inventory is coming down on a regular basis, which resulted in paying back debt of about $11 million in the last quarter. We've noticed, and most companies noticed, there had been increases -- decreases in freight, which are now starting to come through, which affects our gross margin positively. So that, we hope, will be a regular fixture as we go forward.

We also -- for those who know Q.E.P. and in the inside of Q.E.P., we had a company in Ohio called AC Products. We have closed that company and discontinued it, and we took a charge for that also. I do want to tell you, though, positive as we go forward, sales have not fallen down. The bank is on the conference call, and we appreciate the bank's interest. We're okay with the bank. Our customers are okay. And generally, we look forward to the next quarter being positive, if you will.

Our book value is still around $24 a share, and our bank balance is roughly $43 million, which is almost what it was last year at this time. So I'd like to give more in-depth on the international side. And Paul, we'll ask you to speak for a little bit on what we do overseas.

[Paul Boyce, executive]

Okay, Lew. Thanks. Good morning, everyone. Very briefly, in Europe, our results through quarter 3 were quite pleasing, but that's despite the softness of the market, the headwinds, a lot of inflationary issues, particularly with the unrest in Eastern Europe. The pound, you probably saw, took a significant hit in the quarter. I believe the pound went down to as low as about $1.07. I think we're already back around to about $1.20, that's a significant part of what we do with our imports from Asia.

Look, the support of our partners, those suppliers, and customers has helped us through that period, which has been quite good. In terms of the teams in Europe, probably activities at an all-time high at the moment, lots of trials and tests with most major chains on different categories. And some of those are actually lining themselves up for some ongoing commitment, which is great. An example of that is the Homelux trim offer. That's now extended to another 140 retail outlets, and that's been supported with a major refresh of our tool sector as well. So in all in Europe, we're quite happy with what's happened there.

In terms of Australia, sales actually booked the trend with a resurgence in the retail sector, really positive period for that in Australia. Our trade and AFS business, which is predominantly contractor-based business remained flat. However, the trends just recently starting to move in the right direction in that area. Our margins through November were as expected. We had some larger-than-normal direct ship sales, which is generally a little bit softer on the margin, but that was offset with some cost-saving initiatives we've managed and some expanded product sales in different categories.

So we're just launching a range of new engineered flooring and a rollout of a decorative wall paneling program, which aligns itself with what we're doing with the tower business there as well. We've also recently secured what we call site management program, which is everything from ballast chains and everything you'll see relating to site work. So overall, results and activity through November were as expected. So I'll hand back to you, Lew. And if there any questions at the end, I'm happy to answer.

[Lewis Gould, executive]

Paul, thank you very much for the report. I do want to just make a couple of comments as we go forward. We're working on a variety of issues. I do want to say I'm disappointed in the price of the stock as most of the investors are on the largest single loser on that. I'm doing everything possible to make sure that we're profitable.

I can tell you that we're working around the clock. We have recovered from our computer ransomware. We didn't pay the ransom. We fixed it internally, but it cost us a significant amount of money as we go forward. And we're up and running now all over. We have almost 300 users on our system. And we're highly computerized as we go forward.

I'd like to turn this over to questions, please, and see if we could give you more color on some of the items you want to hear about. Please, operator?

[Operator]

[Operator Instructions] We will take our first question from Jamie Wilen with Wilen Management.

[James Wilen, analyst]

Just wanted to look at gross -- I wanted to look at gross margins moving forward, how much the shipping cost decline will impact you positively, and how that flows through to your inventory decline. Is the pricing of what we buy to distribute the tools, has that gone down at all and selling prices to our customers? Where do you expect gross margins to trend as you look forward?

[Lewis Gould, executive]

You asked 4 questions, and I'm going to put Enos on for the first 2 questions if I may.

[Enos Brown, executive]

With respect to the gross margin, I think it's instructive to isolate Q3 when the gross margin was 26.9%, which is the -- higher than the previous 3 quarters. That's principally reflecting the moderation in terms of the inbound freight costs. You'll recall that for the full year last year, our gross margin was 27.1%. So we are trending back to the prior fiscal year levels. And we expect that to continue into Q1 at a moderated rate. We do have -- still have a significant inventory position despite the fact that inventories went down by about $7 million or 7%.

And the inbound freight component of the on-hand inventory is in excess of current inbound freight rates. So again, it's going to take us a little bit of time to work through the current inventory levels but the general trend will be a steady, gradual improvement in gross margin, all other things being equal. Certainly, we are in discussions with our customers with respect to any sort of pricing adjustments that would be necessary as a result of this trend. And I'll hand over to Lewis for some additional thoughts.

[Lewis Gould, executive]

To give you some flavor of that, we bring in probably 20,000 containers a year. Historically, we were paying about $3,500 a container, maybe $4,000 depending on the location. During the peak season, when we had a problem at the beginning of the year, we were paying for a container sometimes as high as $30,000 on a container value that had $12,000 or $15,000 in it.

And right now, we've seen a lot of moderation coming down where the average cost for us is about $6,000. So it's moderating. But it'll have to throw through the inventory before we see all the benefits of that. But as you know, our year-end is coming up very shortly, February 28. And Grant Thornton will make any adjustments that are needed on that and everyone will see it. But we feel a little better about the cost situation.

Now regarding your question, as far as pricing, Paul covered basically the international side of price increases, which we have gotten, and we've asked for. The same thing has happened here domestically. We continue to ask all of our customers, and in many cases, we have lost some customers, but the price increases will have to happen. The things we can't control, our interest rates, et cetera, but those will be built into our price increases as we go forward.

This is the quarter that we start doing our budgeting for the coming year. And I saw Jamie Dimon on CNN this morning. He was talking about something that we called a mild recession or a slowdown. He didn't want to characterize it. But so far, we've only seen a minor decrease in our sales. Our customers seem to still be busy. And maybe with interest rates dropping, housing will pick up and that will have a beneficial effect on the company also, but we appreciate it. I hope that we've answered the question.

[James Wilen, analyst]

Yes. And profitability-wise, Paul's report on the international operations was much more encouraging than the company as a whole. Am I to assume that profitability internationally was actually strong and maybe ahead of last year and we had, basically, the difficulties were domestically, where we incurred a lot of charges to rightsize our operations?

[Lewis Gould, executive]

Well, we generally don't break down the segments where you're able to identify those, because on Paul's overhead, we supply a portion of it. We do the computerization for him. We do a lot of the banking and some of the other stuff. Paul has had more successes maybe because of the size of the operation that we have. And he's done a lot of hard work on it, not to say that we haven't done hard work.

But generally, as a general statement, he's doing better than we are overseas than we are domestically. Domestically, we have some very large customers. Getting a price increase from them is quite difficult and lengthy. We do get them eventually, but it takes longer to have those in effect.

[James Wilen, analyst]

Okay. You also mentioned the wood products division. You were looking at opportunities or some sort of strategic review. Could you talk about that business, how it's going? And what are you actually looking at to improve profitability there?

[Lewis Gould, executive]

We're looking at all sides of the wood business. The wood business is connected to our Kraus business, and we're selling a lot of dealers directly and some distributors at the same time. We also are a manufacturer in Johnson City of engineered wood, and we also have a distribution company in California called Naturally Aged Flooring.

What has happened was if you're a manufacturer, I'm not telling you anything you don't know, everything is volume dependent. The more volume that you put through a particular factory, the lower the cost. If the volume tapers off, your costs go up and it's harder to sell and your gross margin goes away.

So what we're looking at with outside help is we're strategically looking at the components and what it adds to Q.E.P., what it detracts from Q.E.P. We're doing that process right now because, essentially, what we're doing is we're looking at all points that make a difference in our profitability. So we're in the process of looking for some outside help right now to see the value, what happens, and generally the value overall.

This is a work in process right now. If this was in the next quarter's call, we'd have some definite information. But right now, this is a work in progress. But we are looking at it. We've given away, last year, millions of dollars' worth of samples, racks, et cetera. And we haven't seen a lot of return on that. So we're looking at it very, very carefully. See if that's the -- if we're doing this the right way. Time will tell very shortly in the next 60 days. So on the next conference call, we should have some real stuff to give you.

[James Wilen, analyst]

Okay. And lastly, Lew, could you talk about any progress with some of the other major mass merchandisers that you've been trying to penetrate domestically?

[Lewis Gould, executive]

Yes. First, I'll tell you, the end of this month is a major show called Surfaces, January 28 to February 3 in Las Vegas. This is our premier show, where we'll be showing our ROBERTS products and our wood products. And generally, we get a bump from that. The show hasn't been going for at least 3 years because of COVID. So this will be the first time when we'll know about the deals in a variety of other things that go on. But generally, I'm trying to find the right words that will not be forward-looking statements, but we're looking at everything we possibly can at this point to make it more profitable.

[Operator]

And we will take our next question from Gary Winston, who is a private investor.

[Unknown Attendee]

I just had one question. There was an announcement some time ago about the bank line being renewed, and there was a statement on a carve-out that there were additional -- I think it was, like, $10 million that was approved for refurbishing the factory. And I just -- I remember a few conference calls ago, there were studies ongoing as to the cost of refurbish. And just wanted to know what that looks like today.

[Lewis Gould, executive]

One of our key components of Q.E.P. generally is our ROBERTS adhesive business, where we produce generally in Arizona, we produce in Canada, we produce in Dalton, Georgia. And we're a prime manufacturer of adhesives that are primarily latex-based, SBR-based.

The machinery that operates in the Dalton facility is old. It's probably 30 years old, and there have been constant problems that are costing us profitability, whether it's fixing the boilers, et cetera. So we initially had an engineering survey done extensively by some good, certified companies and said, you can move it, you could close it, the usual strategic things that come back. But at the end of the day, we've decided that, since it's a most important part of Q.E.P., what we would do is we would fix it. We'd make it more efficient, and it will provide us growth in the future.

The initial finding came back that it was about $10-some-odd million to do partial automation and replace a lot of the mixes and metering functions in the pipes and everything else. Since that happened, we made the announcement, internally, we thought that what we would do is because we're not 100% sure of what will happen with the cost of materials. Oil is a component of it. That we would limit the spending right now to about $3 million, even though we have that availability, that carve-out.

Since we made the announcement, we spent about $300,000 on making some in-house improvements using our own staff. But we're watching this carefully. We haven't spent the money yet, but it's a work in process where we have, I think, 19 mixers, and 3 or 4 of them, we're in the process of rebuilding right now. That sold under the ROBERTS brand, really great products. And you can see it most, the mass merchandisers.

Additionally, we have activities and incentives going on with many of the other major chains to add the addition of glues, adhesives, tools, et cetera. But we're watching this very carefully. We have good people working in the factories. And things break, especially on the 30 years old. So we don't have a choice because a lot of the stuff that goes through the piping is abrasive and the piping has to be replaced. I hope that gives you a good flavor of it.

[Unknown Attendee]

You mentioned there was a charge on the discontinued operations from AC Products. Can you share what that was?

[Lewis Gould, executive]

I'll tell you approximately, because we didn't break it down. But AC Products was a manufacturer of accessories, ceramic accessories like salt dishes, and towel bars that are used primarily as replacements, not necessarily new construction. It was located in Ohio with 2 components, it was the factory component, and the other component was the real estate. We sold the real estate for about $1.5 million, probably spent about $2 million years ago buying it. So there was a charge for that, and there was a small charge on the inventory, and the machinery was auctioned off.

But we did lose money on it, but it wasn't significant compared to the size of everything else we're doing. But there were 26 people roughly, and we've lightened the payroll. We continue to do that. We're down roughly, since the last quarter, almost 100 people in all of our factories and facilities.

[Enos Brown, executive]

Gary, this is Enos. The loss on the disposal of the business, including the land-owned building was under $200,000. And at this point in time, the operation has been completely closed.

[Unknown Attendee]

Okay. The hurricane that you had in Florida, you have a business down there that repairs. I guess it's some sort of compound chemical that's used to repair pools and roofs and foundry items. Can you talk about what your expectation for that business is going forward?

[Lewis Gould, executive]

We have a small business that is a star. It's called Imperial Industries. We bought this years ago from the shareholders on the American Stock Exchange. Their specific business is they make mortar for barrel roofs and they make coatings for swimming pools, but they also use tools, obviously, like trowels and other items that are used in the installation of these products.

This company, Imperial, is a star. We're currently not only supplying the market here. One of our best customers is a New York Stock Exchange company that has thousands of locations. We're being qualified to sell all of them. And we're in the process right now of expanding that business, which hopefully will be from a small business, $7 million, $8 million, or maybe a $30 million business throwing off at least a 10% EBITDA.

And we're in the process right now, almost completion of having a second -- I'm sorry, a third location in Texas to serve our Texas customers on pools, et cetera. But it's been a star, and it's been consistently a leader in profitability in the company. But we don't break down the specifics. I can tell you that it's added quite a bit of profit to the corporation.

[Unknown Attendee]

We have a relationship with the Gayafores folks in Spain. Can you talk about how that product is performing in the domestic market?

[Lewis Gould, executive]

In the domestic market, we have only 1 SKU, which is a major home center. We have exited our investment in the Spanish company, but we maintain our distribution agreements and rights all over the world. It's being sold in Australia through one of the major home centers, which is a bright spot. It's profitable. It's in several hundred stores in Australia, and it continues to grow.

But what has happened was, in Europe, the price of natural gas became prohibitive cost-wise for us to sell ceramic tile domestically in the United States because there are too many domestic manufacturers, and we were not competitive. We exited our investment, and they returned our funds. So we are -- we work with super wonderful people, and any opportunity that we have, we'll certainly try to capitalize on our relationship.

[Paul Boyce, executive]

And Gary, I'll just jump in there and support what Lew's comments were there. Gayafores, they are a real serious partner to us. And as Lew said, we have successfully worked with one of the major home centers in Australia. Looking at the sales in Australia, the retail sales of the product since we put it in, it's about 25 SKUs.

Sales this 6 months versus the previous 6 months are in the region of 20% up on that same period. And we're also now working with a couple of our subsidiaries and customers here in the U.K. as well. But as Lew pointed out, the gas prices have been a little bit high over the last 12 months, and things are starting to settle but that -- we will remain in our distribution agreement with them, which is a very strong partner.

[Unknown Attendee]

I appreciate that. I just want to clear up a discussion about the inventory and the shipping costs, how they have moderated. So I didn't quite follow the point there. When you were beefing up your inventory last year because of the disruption in the supply chain and the fact the company had excess capacity in terms of cash and working capital, you invested heavily in inventory when shipping costs were much higher.

So you capitalize -- I assume you capitalized the cost of the shipping into the inventory. And so now as you're planning on reducing your inventory levels, you're carrying inventory that has higher shipping costs than the new inventory being brought on. I just didn't -- I didn't follow how that's going to flow through the P&L.

[Enos Brown, executive]

So you're correct, Gary. We capitalized the inbound freight costs into our inventory values as they are received. And we then sell that inventory on a "First In, First Out" basis. So at this point, with freight value -- inbound freight rates declining, our inventory is still valued above the current rates as we work through the on-hand inventory.

So you are going to see a gradual improvement in our gross margin as we work through the higher-than-current-value inventory and begin to get the benefit of the current lower inbound freight rates. And we are already beginning to see the [ leading ] edge of that.

[Unknown Attendee]

Okay. But presumably, with all the inflation that was going, that the actual carrying value -- the value of that inventory has gone up as well, correct?

[Enos Brown, executive]

Well, we have not really seen a lot of inflation in terms of the inventory that we're purchasing from overseas. Those costs in terms of U.S. dollar, excluding freight, the straight purchase price has been pretty stable.

[Unknown Attendee]

Okay. Okay. I get it. And then last question. So it sounds like Australia is really, really strong. And I know you don't break that out, but it's 30% of the company's revenue in terms of profitability, what percentage is it?

[Lewis Gould, executive]

Well, we just -- we have to look. The 30% includes England, our overseas operation. Paul's in charge of all of them. But let's hold on a second. We'll just try to add it up and give you a number.

[Enos Brown, executive]

The operations are marginally profitable. Gary, I wouldn't want to give you the impression that the overseas operations are significant contributors in terms of EBITDA. They're an important part of our EBITDA profile. But again, they face many of the same challenges that we face here in the U.S. in terms of inflation and challenges in terms of sales growth. Australia has been successful in growing sales, but we all continue to be challenged in terms of profitability. I hope that addresses your question. I really wouldn't want to get more specific.

[Operator]

And we do have a follow-up from Jamie Wilen with Wilen Management.

[James Wilen, analyst]

You just mentioned some figures on Imperial. I didn't quite know if I heard them correctly. You said when you purchased Imperial, it was doing $7 million and it has the potential to do $30 million. Where -- I didn't know where in the continuum you were talking about Imperial.

[Lewis Gould, executive]

Imperial continues to do better every year, and it's one of the stars in the company. Imperial, without giving you a forward-looking statement, the business has quadrupled. I think this year, they will do $25 million, about $25 million for the sake of argument. Their EBITDA is about a 10% return on the EBITDA.

And we're now building a third plant. We have one plant in Orlando, if you will, Winter Springs. We have a distribution facility in a small plant in Hollywood, Florida, and we're building a third one. This is a manufacturing plant in Texas. The name evades me. It's a small little -- what is it -- a small thing. But it continues to grow. It beats its budget every month.

[James Wilen, analyst]

And what you're building in Texas, obviously, this is a rather heavy material to ship. So you can't -- I don't know if you can service the whole country. But how large is the facility in Texas? And how broad is the market that you're looking to expand to in the Southwest?

[Lewis Gould, executive]

You can ship about 400 miles successfully from every plant that you have. After that, the freight becomes prohibitive. The market for the products that we sell, the motor, for example, on the roofs and the swimming pools would be larger in the South, Southwest because of the temperature in the Northeast and the swimming pools are not as big a deal up there as they are certainly down here.

The plant we have is -- we're getting a little bit of financing from the local government there. But the plants are modest-sized. It's going to be about a 30,000-foot plant and it will have the production capability, we don't know yet, depending on what it looks like because it's not quite complete. But as a good guess, I would say that probably it'll be able to produce about -- when it's up and running, perhaps around $5 million at retail.

[James Wilen, analyst]

Okay. And you also mentioned the potential for national distributorships within Imperial. Was that on the roofing side? Or the swimming pool side?

[Lewis Gould, executive]

On the swimming pool side. There's a New York Stock Exchange company that has thousands of stores. We sell in a lot of the stores, but we're not considered a national vendor. We will be considering a national vendor when we open up in Texas. And then we'll have the opportunity to sell in all of the distribution outlets throughout the country. Right now, we're confined primarily to the Southeast.

[James Wilen, analyst]

And with -- obviously, you mentioned that it was -- you had a 400-mile shipment radius. But how does this -- you're talking about being nationally distributed. How can you go well more than the 400 miles with them?

[Lewis Gould, executive]

It's going to be very, very difficult to do, but we do have some specialty products that people will want -- because we're not getting technically grind our own courts, and we flavor it and we have -- there are only 2 or 3 big guys in this business, and we're becoming disruptive. It will never be a national company selling in Washington State of Oregon or places like that. It just won't be. But in the Southwest, we'll become a good competitor.

[James Wilen, analyst]

Okay. And lastly, as far as what occurred in the third quarter, where you exited some warehouses, you moved some things around, you reduced overhead to getting -- lessening by 100 people, I think you said, what were the charges in total that you took in the third quarter that's onetime in nature that won't be reported?

[Lewis Gould, executive]

Okay. Enos, do you want to -- we'll have to give you a highly educated estimate of this.

[Enos Brown, executive]

Yes. We did gain a onetime charge associated with that relocation was in the orders of magnitude of about $700,000.

[James Wilen, analyst]

So in total, in the quarter, there are about $700,000 in charges? Or does that not include the Ohio business? Or that includes everything?

[Enos Brown, executive]

It doesn't include the Ohio business.

[Lewis Gould, executive]

And it doesn't include the employees' layoffs either.

[James Wilen, analyst]

So you're talking more than $1 million then of a hit in the quarter in total.

[Lewis Gould, executive]

Yes, without a doubt.

[Operator]

I am showing no further questions at this time. I will now turn the call back over to Lewis Gould for closing remarks.

[Lewis Gould, executive]

I want to thank everybody who joined the conference call. This is a record today for us, the number of people on the call, which is appreciated. And we want to thank also the shareholders and the stakeholders and our employees for sticking with us in good times and bad times.

I do want to tell you, this August, we're in business of roughly 45 years. It's been a long road doing this. We're strong. You can find our products almost in every country, every part of the world within 72 hours, and that includes China, which we export. We're one of the good guys exporting adhesives in China.

We have subsidiaries all over the world. We're solid. We've been -- as a side, just as a historical fact, we've been with Grant Thornton, fully audited for almost 43 years. I'm pleased to say we have been with Bank of America for at least 44 years, one iteration of another. I don't think we've ever written a bad check. And we were mentioned by Brian Moynihan. We have some letters from him congratulating on us for being such a long-term customer.

So everybody wants to know what the future will be like. I want to know what that's like, too. But I think we're preparing for a mild recession. We continue to pay debt down. We continue to be aggressive in the marketplace, and this wouldn't happen without the dedication of all the hard-working folks at Q.E.P., generally. Whether you're in the United States or you wind up in New Zealand, we have good people all over. So we want to thank those people for joining us. So let me say, God bless America. We look forward to the next quarter, speaking to everybody, and thank you very much. Thank you, operator.

[Operator]

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