Q

QEP Co Inc
OTC:QEPC

Watchlist Manager
QEP Co Inc
OTC:QEPC
Watchlist
Price: 34 USD -1.22% Market Closed
Market Cap: 111.9m USD
Have any thoughts about
QEP Co Inc?
Write Note

Earnings Call Transcript

Earnings Call Transcript
2018-Q3

from 0
Operator

Good day, ladies and gentlemen, and welcome to today's Q.E.P. Co. Fiscal 2018 Third Quarter Investor Call. As a reminder, today's conference is being recorded.

At this time, I'd like to turn the floor over to Stanley Berger. Please go ahead.

S
Stan Berger
executive

Thank you, Greg. On behalf of the management of Q.E.P., Inc., we are extremely pleased to have you participate on our call, and thank you for joining us to discuss the company's fiscal 2018 third quarter financial results.

Before I introduce management, I would like to remind everyone that some of the information provided during the course of this conference call may consist of forward-looking statements that involve risks and uncertainties, including but not limited to those regarding sales and sales growth, pricing pressures, future market position and profitability, opportunities and benefits associated with potential and completed acquisitions, integration of acquisitions, cost and product mix changes, success of marketing endeavors, capital availability and current -- currency fluctuations.

The company assumes no obligation to update any forward-looking statements or information. It is important to remember that actual results and circumstances could differ materially from the company's expectations.

The company's news release announcing the fiscal 2018 third quarter financial results was issued on Wednesday, January 10. If you do not have a copy, it is posted along with the fiscal 2017 consolidated financial statement on the Investor Relations section of the company's website at www.qepcorporate.com. Alternatively, please call Paula Siegel at (561) 994-5550, and she will e-mail or mail you a copy.

Hosting the call today are Lewis Gould, Q.E.P.'s Chairman; and Mark Walter, Q.E.P.'s Senior Vice President and Chief Financial Officer.

At this time, I will turn the call over to Lewis Gould. Lewis?

L
Lewis Gould
executive

Well, Stanley, thank you very much. First of all, let me welcome and wish everyone a happy and a healthy new year. Your support in the past has been very appreciated, and we look forward to doing the same thing.

Today, I'm going to give you a lot of information. This has been quite an incredible quarter, because as you read the press release, this is probably the longest we made, and I want to give you some explanations. And hopefully, that will answer a lot of the questions certainly as we go forward.

But generally, I'm extremely pleased with the way things look. I think we're on the right track. We've got solid legs going forward. And I'll try to explain some of the things that happened and give you some insight into the workings of the company at the same time. This is quite unusual for us. Usually, it's a question-and-answer, you get it, but I'm going to try reversing at this time.

First of all, I'm pleased that finally for Gary and our other shareholders -- obviously, you're aware we're paying a $1.00 share dividend. The record date is later this week. And this is directly related to the sale of our real estate. This is a special dividend. And any dividends in the future, we'll have to look at very carefully, depending on our capital needs, et cetera. But as a general rule, we would hope that things will continue to get better as we go forward.

Here are some of the things going on right now at Q.E.P., which will better explain where we are. Number one, I want to tell you that we have great plans in the next year for the growth of the company. On a personal level, I'd like to see the company grow by maybe $100 million in sales on the top line this year, and a lot of that is based on our ability to get the capital that's needed to make the acquisitions that we want, our own expansion and our own customer base as we look at it.

I can tell you that we're heavily involved in the process of moving our operations in the west of Phoenix, Arizona to a new location. We sold the property that we had in Adelanto, California, in the high desert, and that was quite profitable. We closed -- I'm sorry, we're closing our operation in Ontario, California, moving both of those into the Phoenix location. Probably, we'll become live more like May, June of this year when we finished the negotiations, et cetera. We're probably almost there right now, but it's going to take a little bit of extra time for the machinery to be delivered.

In Phoenix, we're going to be entering a new prime business for us. We make right now adhesives, and our plan right now is we outsource certain adhesives. And we'll be making those now on an internal basis, something -- a new business for us called the cartridge and construction business, which will help us out tremendously. That will mean that there'll be some organic growth going along with the acquisition growth that we look at.

This past quarter and this year, we've had a tremendous amount of support from our Australian subsidiary. The year-to-year comparisons may be difficult. We were in the carpet installation business some time ago. The exact match, I believe now is done, right? Year to year?

M
Mark Walter
executive

Still has a little bit on the fourth quarter.

L
Lewis Gould
executive

A little bit to go, but we're quite pleased with the growth that we've had there. It seemed the -- almost a double-digit growth. We're also, in Australia, looking at the possibility of acquisitions and other market opportunities that present itself there. We actually have, which I can't go into detail, several LOIs out right now that will increase our activity in Australia and the United States.

If you read the press release very carefully, you'll see there's an impairment charge of about $1.4 million. That was directly related to our Faus business and the sale of the real estate that we had in county -- Calhoun, Georgia. That's going to be reversed in our December numbers where we'll going to pick up a gain of about $6.2 million on our property. So that activity that happened in the third quarter makes it a little bit more difficult to understand.

Also in that quarter, the company, because of its acquisitions and divestitures, et cetera, worked with an outside M&A firm. And on both of those, we've incurred charges of perhaps a little bit less than $1 million on a total basis. We're looking at that right now, and this will help us in the future as we decide on the right path to where we're going. Right now, if you looked at the American dollar, the American dollar is getting weaker, and this is going to help us as we go forward.

Actual changes, which you are aware of, probably will add on next year about $0.30 a share, roughly about $1.3 million, $1.4 million that will help towards the bottom line. Things that, on our balance sheet and the income statement, that should be reflected starting in the first quarter of next year, you'll see some differences. I'm very pleased to say that our balance sheet and shareholder equity has -- and book value, has increased dramatically, and on net debt has dropped dramatically. If we took our cash minus the debt, we might be plus or minus $1 million either way. So the balance sheet is absolutely bulletproof. That will help us.

The effective tax rate, it's going to be extremely confusing. If you have questions, I'll direct that to Mark because the -- our effective tax rate, on the changes in the territorial tax system, et cetera, since we have foreign operations, is going to be a little bit difficult to understand.

I do want to tell you that in 2 weeks, there'll be a show called SURFACES in Las Vegas, which is our premier show. We're going to celebrate 80 years of ROBERTS' growth, and ROBERTS is one of our premier companies. And we'll have a special party for our customers, et cetera, and you'll see some announcements in that area.

Our major customers are all growing. We've had some favorable results from several of our major customers regarding line reviews, which will be effective in the next 60 to 90 days. We know that we've won these. We're just waiting for the official notification, et cetera. And I think, as we go forward, that will make a difference in the dollar sales on our earnings.

Our Internet growth has been tremendous last year. It's about 15%. Jamie told me a few minutes ago, we're looking at 30% this year on our growth.

A couple of things that are on a personal and growth level. We want to grow the company quite a bit this year because we have the capital and have good partners on the banking side that have offered us a lot of money if we want to continue doing this, and I think that's probably the path that we want to walk through right now. We're probably going to add several high-level management positions in the company as we go forward in the next 2 months, but we'll keep everybody informed.

Generally, I'm pleased the way things look. The outlook looks very rosy. We've got a lot of things on the fire that are very complicated for large companies, but for smaller companies, even more difficult. But we always raise firemen, and I think we're going to succeed in just about everything we're doing. We have some solid things that we're working on that we'll announce next quarter, and I think it will make the shareholders and stakeholders quite happy.

I do want to say that none of this would happen without the benefit of the people in this room. I just want to mention them briefly. Mark, our CFO and Treasurer, has done a yeoman's job. Enos Brown has been on 60 conference calls, I think that's what he just told me. He said at least 59 of them, at least one of them has been pleasant in any case. And as we go forward, Herbert Maertl has been our operations guy, and I think he's logged million miles or something in the first 6 months of his year, and it works out. There's no one like Herbert, so that's a good sign without a doubt. Larry Levine, our lawyer, has been battling lawsuits, doing trademarks, acquisitions and LOIs, all internally, doing this on a lot. Jamie Clingan, Jamie has handled all of the marketing, all of the crap work -- I'm not Donald Trump, but all of the difficult work that we do in defining our strategic moves on distribution, our wood business, et cetera. And of course, Leonard, who's now been in his 26th year of learning and has achieved where we want him to be right now, so getting ready for the next step to do that.

So I think, at this point, we've got a great Board of Directors. Some of the directors on the line right now, David Kreilein and Marty Cooperman, who have been a real inspiration, helping us in board meetings and questioning the things that we do and giving encouragement on the way things work.

So generally, upbeat, positive, more to come. Good things on the horizon. There are, of course, always pimples on the things that go forward. Our wood business needs a little bit of work. We're looking at the possibility of selling off some noncore assets and taking in even more cash, but that's a work in process as we go forward.

But generally, I think we're at the right place and the right time. The stock market has rewarded us. And boy, I want you to know we're here working for you every day, and we watch the price of the stock and we want to make sure that everybody's happy.

So with that, let me open this up for questioning and see if we can answer some of the comments. Please go ahead.

Operator

[Operator Instructions] It looks like our first question comes from [ Jamie Weiland ] with [ Weiland Management ].

U
Unknown Analyst

Lew, lots of exciting things at QEP. First, if you could summarize the -- what we net out after real estate after the end of next quarter. Obviously, those 2 sales have closed. How much we sold, taxes we paid, gains, where that left us with mortgages on those properties, just all that?

M
Mark Walter
executive

Jamie, it's Mark. So total proceeds on the sales, about $15 million. That includes selling equipment as well. Tax bill on those is being finalized, but it's about $1 million. The tax basis of Calhoun, I'll tell you, was very high, so there's very little gain on Calhoun because the taxes being paid are really, really [ deep ] in Adelanto. Net cash to the company from the sale, I think, we've disclosed in the press release, is about $5.5 million. Some deferred cash, that's about $1.5 million.

L
Lewis Gould
executive

And the mortgage that we extinguished?

M
Mark Walter
executive

And the mortgages we extinguished, the mortgages were a little more than $6 million between the 2 properties.

U
Unknown Analyst

When you say there's going to be a $6.2 million gain on the Faus property and there was a nice gain on California property, how do we only pay $1 million in taxes? It looks like there's $9 million, $10 million of gain?

M
Mark Walter
executive

That's just a listed gain, but that's really cash flow.

U
Unknown Analyst

Okay. But on -- for book value, our book value is going to pop up by that, are you going to record that in the income statement or no?

M
Mark Walter
executive

You wind up with a gain on the income statement in Q4 with the sale of the properties, and you've got a loss that's reported in Q3 related to the equipment, which we had to write -- which we had to write down to [ accept ] realizable value when we put it up for sale. So you've got a loss this quarter on the equipment and you've got a gain on the [ profit on the ] real estate next quarter.

U
Unknown Analyst

Okay. Amongst the comments that you made, Lew, you were talking about...

M
Mark Walter
executive

It's not big, but the cash flow to the company was significant.

U
Unknown Analyst

Got you. And we do appreciate the dividend. I think it's a great return for shareholders. We do appreciate that. Lew, in your commentary, you mentioned a couple of things. You said, "I think we got a shot at getting $100 million more in sales this year." And you also mentioned we've incurred investment banking fees, possibly in the third quarter -- or in the previous quarter, amount of $1 million. Can you kind of shed a little bit more light on all that?

L
Lewis Gould
executive

Yes. On the investment banking fees, a lot of this was related to a variety of things. In the fees, you'll find things that whether it's -- could be some real estate commissions. We had an opportunity to buy a company in China. We spent $100,000 on that, just approximately. The Board of Directors authorized some of these strategic alternatives that we looked at in the form of acquisitions and divestitures, et cetera. Between the legal, the costs incurred in that, the package was about $1 million total. I shouldn't say in the quarter, but for year-to-date, it was that amount. It may be a variety of things that were also in there. We opened a company in Germany at the same time, was expensive; the company in Germany probably cost us about another $80,000 roughly. And that will become effective -- the goods for the German company will finally be arriving in February, and we'll be up and running there, too. So it's a combination of things. So all of that together and -- I would say right now, looking back at those, a lot of that was onetime activity. So it shouldn't be reoccurring in the future, except if we get real lucky. And I think you'd like that if that happened. Regarding the $100 million in sales, this is our unofficial budget. Our regular budget will be worked on. We're working on it diligently right now. We don't know what sales will be, but it'll be probably our standard organic growth as we go forward. The other $100 million happens to be on my wish list of acquisitions -- some organic growth, some marketing agreements, a variety of things that we're starting to enter into right now. We have no assurance whatsoever that we'll be successful in any of the endeavors. However, this is the beginning of utilizing the capital properly because we have the capital, we have the ability to borrow even more capital. And a lot of the businesses that we're in, the paradigm is changing. For example, our Internet business is growing very rapidly. Our wood business, we have opportunities there to grow tremendously, but not in the same format that we're doing. And I believe that as we get into Phoenix and realizing the new types of businesses, one-stop shop, et cetera, that will be there, there'll be differences made. But that's going to be the stretch this year to make that happen. We've got a lot of younger people, and they -- and I think that they have the ability to make it happen.

U
Unknown Analyst

Good. When you mentioned that the wood products, you could go in a different format, are you talking different products or different places to sell your product?

L
Lewis Gould
executive

Probably, both. We've looked very, very carefully at a variety of things. And it's not just one thing, but we're looking at the company in total, very frankly, and looking to see if we can't reformat some of the things we do because we sell wood through distribution, we sell through mass merchants, sell a little bit on the Internet, et cetera. But I don't think we're getting, at this point, enough bang for the buck. And there are some available opportunities in the marketplace that we're going to take advantage of. So we're prime, which is very good. And we want a mix that being prime with other types of flooring or other types of imports to give us a much larger footprint in this business.

U
Unknown Analyst

Okay. And just 2 more, then I'll pop out and let someone else in. On the Imperial Industries business, I think that you have, you would often mention, "Gee, if we got a hurricane, that would be really good for business." How has that impacted your business there?

L
Lewis Gould
executive

Well, we -- first thing, I was right. We did get the hurricane. And the business is going to be better. There's still -- in Puerto Rico, they got to get power first. And in Miami, our distributor business for the [ powders and loose ] it's good. There's been a bump in the Imperial business, and the Imperial business is split. They make swimming pool coatings, and they also make roof coatings. And the business is good on the Imperial side. It is not [ met ], but we want it to happen. It will be up this year probably on a growth basis a couple of million bucks, but I'd like to see more. We're working on that now.

U
Unknown Analyst

And then the Faus business, you are now going to have it manufactured for you by someone else. I assume Faus not having the critical mass was losing money for you, and I also assume if you have someone else make it for you, you'll be making a profit. What -- can you talk about what that swing could be in the Faus business now that you've restructured it?

L
Lewis Gould
executive

We only have the rights for Faus business in North America, and it has a very valuable franchise name. We actually are very close to the Faus company in Spain. They're good people. We work with them very closely. They're the manufacturer of the product right now. So for us in the whole world, it's seamless. At the time we switched, the euro has gotten so inexpensive. It made a difference. We're going to take that Faus business, which is still alive, and we still ship it, nothing has changed. But we're going to be utilizing that name for new products as we go forward in the wood and perhaps the laminated area very shortly. This is a work in process, and I know it's been a very confusing quarter, but it'll become clearer what our decision will be very shortly. But right now, we buy it and we sell it. A lot of deals we had associated with manufacturing, et cetera, are gone. So it's a good franchise and they're good people. It'll be on display in a very limited amount in Las Vegas.

Operator

[Operator Instructions] And we'll move back to [ Jamie Weiland ].

U
Unknown Analyst

Lew, why is Australia so good for you guys? What's happened that it is so strong when you take out that carpet business that sales were even up, even overcoming that loss from revenue and obviously, profits are strong there as well?

L
Lewis Gould
executive

In Australia, I think, without insulting the Australians, they're probably a different format, and maybe they're marketing relationships are different than we have in the United States. In the United States, they are much more formal and they're informal in Australia. We have a beautiful customer in Australia and also in England called Bunnings. And Bunnings has given us the opportunity to grow in a lot of areas that we're not in and can't get in, in the United States. On personal safety products, for example, in Australia, we sell safety tape, pylons, masks, gloves, et cetera, in their stores. We're also an extremely large supplier of laminated flooring to that 280-store chain in Australia, and that we've continued to grow. Our other business, what we call the AFS distributor business, has also been a strong -- remember the seasons are opposite. In our winter, it's their summer, so they seem to be doing much better. And that business is -- the housing business in Australia is coming back. The Australian dollar has hit just about $0.80. So as we do the translation, it's better. And this is probably beginning now. We've achieved critical mass. What we have to do is we have to fine-tune it. It's nice having a much better top line, but we're now working on the bottom line in that side also. But good things are happening there. And I believe that this is the beginning in that part of the world because [indiscernible] done right there. And our relationships with our customers are absolutely solid gold.

U
Unknown Analyst

Lew, also with the line reviews that are coming up, do you see more risk versus reward in those areas? Or what's the opportunity and what's the negative that you see out there?

L
Lewis Gould
executive

In one of our customers, in the Midwest, we just won a line review on a variety of our laminate cutters and some others. We have line reviews coming in wooden laminate very shortly. We have nothing to lose in those areas. With our major customers, we've won a line review -- it's very difficult for me to be specific, because of the folks that are on the phone and the confidentiality that we have with them. But we've won a significant line review, and the shipments will occur probably within 90 days, roughly. And we have 2 brand new tests going on for our major customer, [ the sawmiller ]...

U
Unknown Executive

Under laminate-related and core tools related.

L
Lewis Gould
executive

And we have those going on, and we have not much to lose because it's all brand new for us. But we have reason to believe that after all these years, we'll be successful in acquiring new business there. There are no line reviews that I'm aware of that there's any peril right now. So if we look forward, our big show this year in Las Vegas, Jamie has 2 booths there. We have a ROBERTS' booth, which will be a large booth of our distributor items. And then we have a smaller wood booth, and that's usually a dealmaking. And we write business at that also. So a lot more, we'll be pleased to give you that information on the next conference call. But I also think we're going to be very successful as we go forward. I didn't see any negatives on it, to answer the question.

U
Unknown Analyst

Okay, sure. And lastly, in the U.K., you had had some new accounts that you were opening up. You've obviously made a number of acquisitions over the past couple of years. Could you talk about your business over there?

L
Lewis Gould
executive

The U.K. probably, last year, without the effect of currency, was the most successful operation that we've have in the company. The U.K. itself is suffering from Brexit. In fact our Managing Director, Paul, was on the call, has a very bad flu, and he told me it was only 6 degrees in Birmingham. And I told Paul this morning that we have a problem, 2 of our air-conditioning broke here. So he's not talking to me. However, Europe has been very challenging because, first of all, the pound has been really taking a beating. When the pound takes a beating, we're impacted because you can't get immediately -- immediate price increases. So it falls to customers and in some cases, we'll go on a direct basis to protect their profitability. On the second case is the fact that we had to absorb some of the costs. We're still profitable in England. The growth in England is going to be restricted till they decide probably what's going to happen eventually to England. I think over the long period of time, it'll come back strong. Our business in England is robust. We have the best customers after all. We have Bunnings, B&Q, Topps Tiles, et cetera. So we have the best of the best. And in Continental Europe, I told you that we opened a company in Germany. We have high hopes for that company because the people running the company had their own business some time ago and sold all the German majors and we have promises, et cetera, that when the stock arrives, things will happen. And if you take a look at the euro, the euro now has gotten up to EUR 1.22 to the dollar. That means that our prime subsidiary, which took the beating of a lifetime this past year, will now start looking better than it did before. So our thoughts are that in Continental Europe, we'll maybe look at one, maybe, economic unit, which is okay, but the results were not pleasing there. And that had pulled down some of the results that we had at our combined operations in Europe. But no one's losing any money. We're profitable. The weak dollar is going to help us. We suffered for a few years to headwinds, and now probably the opposite will happen. And certainly, our interest rates, even though the interest rate has gone up, because we paid off a lot of debt, our -- the interest costs of the company have gone down significantly.

Operator

[Operator Instructions] It looks like we have nothing further from the audience at this point. Mr. Gould, I'll turn the floor back to you, sir.

L
Lewis Gould
executive

Thank you very much. As a closing statement, any of you guys or girls want to say anything? Okay. Well, Mark, anything? Well, first of all, thank you for the support. We appreciate it. We appreciate very much the fact that everybody has been with us a very long time. We consider this a very exciting economic times going ahead. I think the business environment that we feel is positive. This is going to be a much better year for us going forward, because a lot of the complexities that we had was on the real estate, and the M&A activity was very difficult for us. But this is just the beginning. I think we're going to really do well next year. And without the support of the banks and our shareholders and certainly our associates, it would've been much worse.

So let me say, going forward, thank you. The company thanks you, thanks all of our people for working heavy overtime and carrying emotions with them. It's very appreciated. And we look forward to speaking to you, certainly, again next quarter. And God bless America, and thank you.

All Transcripts

Back to Top