Q
QEP Co Inc
OTC:QEPC
QEP Co Inc
OTC:QEPC
Price:
28.11 USD
0.04%
Market Closed
Updated:
May 16, 2024
Section:
Earnings Call Analysis
Summary
Q2-2024
Q2-2024
Divestitures Lead to Stronger Balance Sheet
After recent strategic divestitures, the company anticipates a substantial reduction in general and administrative costs and a near elimination of a $2.6 million yearly interest expense. These divestments have shed low or no-margin businesses, enhancing gross margins and reducing complexity and headcount, but specific numbers remain confidential. The UK and wood operations, with revenues between $35-50 million each, are now sold off, focusing the company more tightly on profitable segments.
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Good morning ladies and gentleman, and thank you for holding. Welcome to Q.E.P.'s Financial Results Conference Call for the Second Quarter and First Six Months of Fiscal Year 2024. [Operator Instructions] My name is Mike, and I will be your conference coordinator today. As a reminder, please note that 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.
Thank you, Mike. 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 second quarter and first six months of fiscal year of 2024, which was issued in a press release on Monday, October 16. If you have not had a chance to review the press release and our 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; President and CEO of the Americas, Leonard Gould; Chief Financial Officer, Enos Brown; and Chief Legal and Administrative Officer, Adam Morgan. On today's call, Lewis [indiscernible] recent developments as well as the highlights of second quarter and first six months of fiscal 2024. We will then give you an opportunity to ask questions. Before we begin, we would like to remind you that some of the comments today will include forward-looking statements within the meaning of the 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 these risk factors 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?
Let me thank you, and thank all of our investors for joining us this morning for the conference call. It's appreciated. This quarter, and in fact, the first 6 months have been transformational for us as we have made a lot of changes in Q.E.P. as we work on a strategic plan for the future. In this regard, I'm going to change the way we normally do our conference call and will be a launch question-and-answer session at the end. But I am going to turn this over to Leonard, who will give you some of the more specific details. I do want to say that the leadership team led by Leonard has done a magnificent job, and I want to just to mention the few folks that are listening Mike, Herbert, Adam ,Enos thank you very much for the dedication and a tremendous amount of time put into this and our Board of Directors to help us work through these unusual and complex events that happen. So I'm going to turn this over to Leonard to give you much more juice in detail, then we'll come back to the questions, and then we'll have some closing comments. So Leonard, go ahead.
For Q.E.P., it's really -- it's about focus. Everybody knows how difficult the macroeconomic environment is out there. So for us, it's about doing what we do best, better and more often. Q.E.P. has a wonderful knack for the way that we represent our brands at our customers. And for us, that is something that we need to do, frankly, more and better of earnings was. There were complexities in the flooring business that, frankly, where the juice was not worth the squeeze. That's our opinion inside. There are some sandboxes where your brand can be #1 or #2 in every category that you're in. And then there are some where you face much larger, much more well-heeled competition. So for us, by removing that complexity in our business, it does everything that everyone on this call is hoping that it's going to do. We have a strategic plan, and our hand is on the rudder as we head down towards this path. And while these first 6 months have been transformational, I would say that we are in the process of achieving our goals. As it relates to the United Kingdom and the business with Paul Boyce, our partner who's on the phone here, for us, it's about -- it's the same thing. It's about acting, being global but acting local and removing friction to add speed and that adds power in this business. So Q.E.P. is looking forward to these challenging environments because challenging environments are what provides opportunities. And frankly, that's something we look forward to taking advantage of. So I'll turn this back to Lewis.
Okay. Let's open this for questions. Mike, please have people in the queue ring in and we'll try to satisfy everybody.
[Operator Instructions] And our first question comes from Jamie Wilen with Wilen Management.
Love what's happening with the company. A couple of questions. As you are -- as you've sold off the U.K., is there some long-term arrangement there? Obviously, they need the Q.E.P. product line. Do we get a royalty stream in addition moving forward by being able -- for being able to supply them all our blister pack products?
We have a confidentiality agreement with Paul and the U.K. We're working together as a group. But many of the questions you asked are covered under confidentiality. We're working together, and we have shared services, but they made a purchase of the brands and their own stuff. It's not exactly the same product in both places.
As you're restructuring the company, our inventories have gone down a ton in this quarter. What would your objective be for how much we would hold an inventory at year-end and if you could tell us, currently, subsequent to the end of the quarter, what the balance sheet looks like as you've gotten the proceeds from the sales of these various enterprises and paid down debt.
So I will say at the end of the quarter, the inventory balance was about $58 million, the transactions which have taken place with respect to the flooring business and also with respect to the U.K., reduced the inventory by an additional $20 million and that essentially represents the normal operating levels of inventory for the remaining businesses at this point in time.
Okay. And I assume you've used all the funds to pay off your revolver?
Essentially pay off the revolver and also increase cash balances on hand, Jamie.
Perfect. A question moving forward. The adhesives plant that we've been working on, could you tell us about the progress on it at this point? And when it is completed, can you talk about the efficiencies you hope to achieve and the opportunities that it may present for you?
Jamie, this is Len. The adhesive plant takes a long time to build simply because there are so many stage gates of governmental inspections and approvals as you go along. When you combine that with the ridiculously long lead time that some of the bits and pieces of this have, it makes for a long project. So we are probably the better part of a year into this project, but the reality is we probably have the better part of a year to go. In terms of what our expectations are at completion, I mean, frankly, it's an awful lot bigger than just dollars and cents. I mean this is going to give us tremendous beyond just people or dollar efficiencies, this gives us new technology capabilities. This gives us capacity advantages, and it allows us to buy instead of buy a tote or a truckload now we can buy train or so it changes this business dramatically. That said, we have a half built facility that is starting to contribute, but we're not there yet. I hope that's a solid enough answer for you.
What other product lines that you're currently not servicing, may you have the capability to do so when the plant is operating efficiently?
Sorry no warning -- no warning bells for the other guys, Jamie?
Okay. But there are some. Okay. And then lastly and I'll hop back into the queue. Could you talk about freight rates of where they are today? And I assume all that gets to flow through to you and your customers?
Yes. I mean freight rates have normalized to pre-pandemic levels. And we are in discussions with our customers in terms of what the appropriate adjustments are.
[Operator Instructions] Our next question comes from Gary Winston, private investor.
Congratulations on all these transactions that you've been involved in. Had lots of questions about the transactions. First, can you speak to the tax consequences arising there from?
Well, the tax consequences are that this is going to be normal taxable income for us. We are in the process of completing both the tax computations and the book computations in terms of gains and losses. So it's a little premature at this point, Gary, just to give you an indication as to what the implications are, but more to come on both of those.
I understand. And can you speak to earnings per share gains because of these transactions?
Response is pretty much the same there again. We're working through all of the details in terms of the ultimate gains and losses on all of these transactions, recognizing these transactions are subject to some working capital adjustments and also some contingency considerations.
And then do you have an idea of what the book value and the cash balance in the company is currently?
So at the end of the quarter, the cash balance was approximately $13 million. The transactions relating to the Harris Flooring Group and the U.K. transaction collectively have generated an additional $20 million of cash post the end of the quarter, which has been used to pay down debt and further increase cash balances.
And does the company have short-term plans for the cash? I mean what kind of cash requirements will be required for the new factory in Tennessee?
We -- a lot of this will depend on our Board of Directors meeting, which is coming up. We do have obligations with the bank to reduce some of our debt, which will be addressed very shortly and the balance of the money will be used for opportunities generally, which we'll discuss with our Board on December 8, when we have our annual meeting.
And just to sort of follow on Lewis' comment. I mean I think the investors will appreciate the fact that this is going to give us optionality, both in terms of how we refocus and reinvest this capital going forward to improve the return for the shareholders?
Can you speak to -- I know you have a new customer that was a previous customer and you're back with that customer after 3 years, and I understand that we're doing very well with our main customer, and then we have another customer that we're gaining with. Can you speak to some of the current inside the business in terms of how things are progressing?
Gary, this is Len again. No, actually, we are not going to be commenting on customer relationships.
Okay. I'll step out with Jamie back in.
[Operator Instructions] Our next question comes from Jamie Wilen.
A couple of income statement items. As I look at the first 6 months of the year, our general administrative expenses have gone up by $1 million a quarter versus the previous year. How would you -- is that something now that we have divested a few operations that we're going to be able to impact that in a greatly positive manner moving forward? Or does a lot of that still stick with us after the divestitures.
With the divestitures, you're going to see a reasonably significant reduction in the overall G&A.
Good. And obviously, as I look at interest expense, we've been paying $1 million a quarter, and I assume that should evaporate and maybe we get interest income on the other side as opposed to having to pay $1 million a quarter.
Absolutely, Jamie. I mean our interest run rate is about $2.6 million a year. That will, at the end of these transactions all but disappear. And that's an extra $2.6 million that is going to resound to the benefit of the company and the shareholders. So yes, that's part of the strategy.
Wonderful. This obviously gives you a lot of options. Could you discuss a little bit about your acquisition strategy moving forward as opposed to and contrast it with what has occurred over the past 10 years?
We need to have under our belt a few quarters as we go forward with our plan to, I guess, become much more efficient than we were in the past. And I can tell you that we're working on that all the time. It's too soon to talk about acquisitions when we're in the middle of finishing up, moving operations around, et cetera, et cetera, but things will become a lot clearer after our December 8 Board meeting.
And moving forward, it looks like you have divested your low-margin or no-margin businesses and retained a business that you had control over and was the nucleus of Q.E.P. getting started, which was the tool business. Could you talk about the gross margins of where they are in the business or where you would look Q.E.P. gross margins to be as you move forward?
Overall, when we look at it, it's a dangerous thing for us to quote the margins because that will become problematic for us when we deal with a variety of our customers. I can tell you that we're working on the gross margin issue every day. Our supply chain is resilient. It's been refocused in different parts of Asia. And we're looking wherever possible to pick up pennies and nickels et cetera. But our gross margin without these other businesses pulling us down will increase.
Can you give an approximate of what the -- I think we had very minimal gross margins at Harris Wood and Natural Age. Can you talk about what those margins were now that we no longer own those businesses, may help us be able to look at the future when we get rid of that test.
We have confidentiality agreements with everybody that we've sold. So we have to ask them if we can make any comments on the businesses. But generally, they were low margins or no margins in each of the businesses. And that will accrue back to us after we finish with all the work we're doing regarding the taxes, the reconfiguration, the termination of the folks, our employee count has gone down significantly. But we're talking about divestitures that just happened in the last month. So we're up -- we're working through all of the numbers right now with the help of our accounting firm, our advisers, et cetera. I wish I could give you exact numbers, but I can't, we are prohibited from doing that right now.
Well, big congratulations on the restructuring program, what you have moving forward with the balance sheet that you have and the business that you have, it should be exciting times ahead.
Our next question comes from Jake Patterson with Talanta Investment Group.
I don't know if I missed this or not, but I was wondering if you guys had any call out you could give on the revenue impact from these divestments you made?
Sure. And that we could give you. That's not a problem.
Certainly. And this is -- much of this information is available through our segment disclosures, but the U.K. operation was approximately a $35 million to $40 million operation at the sales level and the wood operation was between $40 million and $50 million in terms of total revenue.
[Operator Instructions] Our next question comes from David Cohen with Minerva Advisors.
One more question with regard to the portfolio reshuffling of the businesses. Should we assume at this point that, that process is pretty much complete on the divestiture side? Or is there yet another shoe to drop?
Well, we're looking, David, first of all, we're looking at everything as we go forward. And we're looking at the numbers very carefully with the guidance from our Board. We're evaluating our businesses that we have right now and just unable to comment on those things until we finish up our analysis. But everything is on the table.
[Operator Instructions] At this time, I'm currently showing no questions in the queue.
On behalf of our Board and everyone else, I want to say -- can you hold on 1 second. My alarm just went off on the house 1 minute. Okay. Thank you very much for your patience. One of my cats set the alarm off again in the house. The police have been there 2 times today. So it's been interesting. But I do want to thank you for the support. It's been a very long time. We've been in business almost 50 years with ups and downs, but I think we're clear now. I'm very proud of the leadership team that we have right now and we're going to continue to go forward. We'll have a lot of options available to us because of the cash we have on hand with no debt. But we do appreciate all your support, everybody works very hard, and we look forward to the future. We have a Board meeting coming up on December 8, which is our annual meeting also. We urge people to attend or ask any questions as we go forward. The proxy statement will be mailed this Friday, and so everybody should have that very shortly. But beyond that, we want to thank you for your support from all of the years, and we appreciate it. So God bless America, we'll speak to you at the next quarter.
This concludes our program for today. You may all disconnect.