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QEP Co Inc
OTC:QEPC

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Earnings Call Transcript

Earnings Call Transcript
2020-Q3

from 0
Operator

Good morning, ladies and gentlemen, and thank you for holding. Welcome to Q.E.P.'s Third Quarter 2020 Financial Results Conference Call. [Operator Instructions] My name is Olivia, 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.

S
Stanley Berger
executive

Thank you, Olivia. Good morning, and thank you for joining today's conference call to listen to our discussion of Q.E.P.'s third quarter financial operating results which were issued in a press release on Monday, January 13. If you have not had a chance to review the press release and our financial statements, they are available on the Q.E.P. and OTC markets websites. I'm joined today by Q.E.P.'s Chairman and CEO, Lewis Gould; and its President; Leonard Gould, President and Chief Integration Officer. On today's call, Lewis will review recent developments as well as the highlights of the third quarter and fiscal 2020. He will then give you an opportunity to ask questions.

Before we begin, we would like to remind you that certain statements made in this conference call may be forward-looking statements within the meaning of the federal securities laws. These statements can be identified by words such as expects, plans, projects, will, may, anticipate, believe, should, intends, estimates and other words of similar meaning. Any forward-looking statements 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, statements regarding economic conditions, sales growth, price increases, profit improvements, product development and marketing, operating expenses, cost savings, acquisitions, integration, operational strategy relationships, cash flow, debt and current exchange rates.

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

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

L
Lewis Gould
executive

Let me thank you, and thank you for all the participants to our shareholder meeting. I'm very pleased to give you a review of last quarter. I do want to tell you, we've returned to EBITDA profitability. We made ourselves a little bit less than $1 million. It's been a big change from the buyout that we made with Kraus, and I'll give you more details on that in just a moment. I do want to tell you that our SGA continues to decline. We've made a lot of changes in senior management as we go forward. And we've also added a new management, we'll discuss in a second. We've also identified some of the changes that we have to make as we go forward. But I'm very pleased to say we did, for the 9 months, just about $300 million. And this quarter looks promising, and I think that the year probably will end up, on a net basis, over $400 million on a gross basis, probably considerably more than that because we give rebates, discounts and allowances to our customers. So we continue to grow.

I can tell you in the year-to-date, we've paid the bank back $6 million, our inventory has declined by $12 million. It continues to go down as we go forward. So I want to give you now some detail and some insight into the numbers, so you'll know where we're headed. But first, I'd like to tell you, I've been an active buyer in Q.E.P. stock. Almost every day, I have purchased shares. I personally, from my own personal belief, think this is a good opportunity to become a shareholder.

So here we go with some of the changes that we have made. Some of these are minutia, some of these are going to change quite a bit of what we do, but I'll give you some of the information right now.

Number one, I mentioned briefly that our management and our senior management has changed. We've added on new people. We've added on a General Manager who'll be on our flooring side of the business, a senior officer who will make an announcement very shortly. We have changed the management at Kraus. We've changed some of the management at Q.E.P. We're absorbing a lot of that overhead right now. We have leased 40% of our warehouse in Tolleson, which is in Arizona, for the space that we weren't using when we sold off the Halex division.

We have a CFO search that continues right now. Although Enos and Joe have done a super job, we think that the next addition to the team will make a difference, and we're looking forward to finding the right person. We actually have hired a search firm that's been working on this, and we've gone through an awful lot of people. We're getting closer and closer to the right person. At the end of this month, we have a show called Surfaces in Las Vegas, where we're going to unveil our new line of products, including ceramic tile, our long- and wide-type flooring, which is starting to take traction, it's on several websites right now. And we will introduce our new leadership team at that time.

Leonard, as Chief Integration Officer, has his 90-day plan in stock in -- I'm sorry, in place, and Leonard will have a brief summary of that very shortly. We did get a bit of minor relief on the tariffs, most of the items, the tools and the basic items that we have, unfortunately, we didn't get any relief on, but we got a little relief on one type of flooring called SPC and the tariff went away, but it was a little bit. It wasn't meaningful. We still hope that Phase 2 will happen, and it will help us.

In summary, what we're doing worldwide. In Europe, Paul Boyce, who happens to be on the call, has been promoted. He's going to be on our Board at Q.E.P. And in addition to that, Paul has taken over the responsibility for managing our Australian operations. And Paul has done a marvelous job in Europe. We have reformatted his whole management team, extremely profitable, sales are up, profits are up on that side of the world, and we continue to grow.

In Australia, we all wish the best to the folks that are impacted by the fires. They're terrible. But we're rolling out, and we've won -- I mentioned on the last conference call that we won a lot of new business in Australia in flooring. I believe in the next 45 days, there will be another $6 million in new flooring business that will be generated through there.

So I do want to tell you some highlights of what we're doing now in the United States. We have started rolling out the long and wide wood. The first indication is that we have something that will have some growing power. It's too soon to tell you it's an absolute winner, but initially, it looks like people want it, it looks quite good. And a major home center, thanks to Leonard's efforts, we're rolling out a new line of tools that have a margin protection in it from the tariffs. And I think that will make a difference as we go forward. We've also received, just generally, increases in the sales price of our adhesive line, that is an 8-figure number. As we go forward, that will be reflected in the next quarter. And I'm pleased to say we've opened up another very large home center. We've got some initial orders from them, which we're shipping.

Now I know that Kraus is an issue for us, and that's kept us from sleeping a great deal, but I believe that we have turned the corner and identified a lot of the areas that need work. I told you that on the last conference call, the integration plan is going forward. Leonard will speak very briefly on that. But we've identified almost, for sure, all the $3 million in savings, but that isn't going to happen for another 60 days. But we know that, that will happen. We have a new leadership team there and a new marketing team. And we're -- we've identified the weaknesses that we have. We're looking forward to the show that we have in Las Vegas, which will introduce the new product lines in LTV wood, SPC and ceramic tile. And I just want to turn this over briefly to Leonard for a few words.

L
Leonard Gould
executive

Good morning. A quick update on the integration. All is moving forward as we introduce speed back into our [indiscernible] Surfaces. It is an extremely important event for us. It's our customer-facing introduction of the Harris Flooring Group. It's going to be an exciting time with tremendous amount of new product.

In the background, we are working on systems, we're working on footprint, we are working on getting the right inventory to our customers so that we can simplify their lives and show them how we're different from the other guys. At the end of the day, we are plugging Kraus into the Q.E.P. engine, and we are going to take advantage of our global scale.

Harris Flooring Group is the combination of our recent acquisitions, Naturally Aged Floors, Kraus and our legacy core business of Harris Wood. We will be taking the best of the best from our product portfolio, from our sales team, our marketing team and our go-to market so that we could bring, again, scale to our customer base and really simplify their lives.

L
Lewis Gould
executive

Leonard, thank you very much. I can tell you, go forward, I'm encouraged for the first time in a long time, we're starting to see the recovery in the flooring industry, concerned about recessionary trends that are happening in Canada, just generally. But we're looking very carefully at a lot of the items are doing in great detail. And I think that the next quarter, you'll see the reflection of all the efforts. It's been a really tough turnaround, but I think we're just about where we want to be at this point in time. December had 2 holidays that affected us at the wrong time in the middle of the week, but we were -- didn't lose money in December. And January has the makings of what we feel is going to be a pretty darn good month as we go forward.

We're also on the M&A front. I mean we're always looking. We're not doing anything right now, we have to earn our way there with our banks. The company is stable, orders continue to be good. They're all quality, our receivables quality, we didn't see any difficulty on the receivable side. Our inventory continues to decline, and we're looking at that because that's a source of funds for us, obviously. So we're doing the right thing. And we've gotten support from our banks, our vendors, et cetera. And we're in the midst of our audit. As we're February 28 year-end, the preliminary audit has started. And so far, nothing has come to bite us.

We're also looking at the possibility, we own a lot of real estate, and we're looking at mortgaging some of the properties to get some additional liquidity into our business. And we've also looked at the sale leaseback opportunities that are available. But I think the mortgage side looks more promising to us, and we're pursuing that right now.

We have a property in Atlanta, where we have a gentleman that owes a little bit less than $3 million. We have a large note from him, which we've rolled over year to year. We have a property in Dalton, Georgia that we bought, right? It's probably worth $1 million more than we paid for it, and we have a surprising property in Apple Creek, Ohio that has very significant value, maybe -- who knows, maybe it's sitting on an oil well without joking. So we're looking at all of these things. But where we stand right now, we're stable. There is a new management team. We've taken tremendous hits with changing of the management. We have done a lot of work on the integration. That's been our focus. Almost day and night, I have to congratulate the team, Leonard, Enos, Joe and Rodrigo and the folks that are here knocking themselves out every day. None of this happened by itself.

So we look forward to our normal 20% growth on the top line. Now we have to address the bottom line, which we're going to do as we've always done. But this time, we really have -- it happened in a shorter period of time.

So let me open this up for questions. And please feel free.

Operator

[Operator Instructions] We will now go to our first question coming from [ Rick Hicks ], a shareholder.

U
Unknown Shareholder

Well, Mr. Gould, congratulations. It's comforting to know that you've been buying stock. What has been the activity in the stock by other members of senior management and the directors?

L
Lewis Gould
executive

You're correct, [ Richard ]. First of all, good morning, and thank you for sticking with us. Incidentally, [ Richard ] is making sure I'm healthy. I'm just a few years younger than [ Richard ], and he sends me vitamins to make sure that I work 24 hours a day. I am. I have spoken to directors, I've urged them to buy stock. I also have spoken to our senior managers about buying stock. And we're -- we constantly ask, and we're looking at the possibility of some compensation that might be stock-based as we go forward. But it's a good question. And now that you've asked as a shareholder, at our Board meeting that's coming up, I'll ask them on an individual basis, what they're doing. I continue to buy stock. I think it's a good investment for myself, and we're working hard to make it even a better investment, but thank you so much.

Operator

Next, we will go to Jamie Wilen of Wilen Management.

J
James Wilen
analyst

Lew, could you talk about the SG&A reductions you have, a, planned and b, what were some nonrecurring things that you've probably incurred a lot of severance pay and one-off charges within the past year? And I'll start there and come back.

L
Lewis Gould
executive

Okay. On the SG&A side, domestically, about 1% of our sales so far have lowered on the SGA. We have planned, for the next 90 days, another $3.5 million in cost reductions on the SG&A side, primarily due to termination, salaries and a closing of a facility. And because we have to give a 60-day notice, I'm not allowed to -- without notifying people in other countries. I have to be careful, but I can't give you that number. I can also tell you that in the last quarter, we have absorbed an enormous amount of severance. I don't want to qualify it because Grant Thornton is in the middle of the order right now. But it's a significant amount of severance.

On the additional SG&A, we have done everything from looking at a vendor of toilet paper, we have looked at our postage, we have looked at our lease lines on the computer stuff, we have looked at almost every bill that goes out of the place we have done work on. We've worked on the inventory. We have a gentleman that works for the company now, who'll be at the Surfaces show, who does nothing more than sells closeout or dead inventory, et cetera. We took significant charges in selling off inventory that was dead that we sold below cost. And we have written off, in addition to that, some of the inventory that wasn't moving that was the right thing to do. But we've taken, in the last quarter, an awful lot of charges. But we do know, going forward, that number should be pretty good, $3 million to $3.5 million in the next 90 days, Jamie.

J
James Wilen
analyst

Right. With Kraus, you incur expenses for a lot of product displays. Could you talk about -- and I think they're all expensed as opposed to capitalized. Could you talk about -- and I assume that, that would be a onetime expense. Could you talk about how much that was and have you had any impact from doing that?

L
Lewis Gould
executive

When we originally bought the Kraus operation, it was combined with a company that made, I guess, broadloom, and they sold the broadloom off and we bought the hard surface business. They were owned by a hedge fund that didn't put a nickel into any of the displays or new product when we purchased them. And they have, roughly, we believe, about 15,000 to 16,000 dealers throughout the United States and Canada. So what had happened, the displays look empty. Some people need new displays, and we brought out, in addition to that, a new line of LTV, luxury vinyl tile; and SPC, the stone version of that, and a rigid tile through our subsidiary in California called Naturally Aged Flooring. So the results have been that we don't see the immediate result because what happens is when you ship a display to a customer, you have to go there, set the display up and then he has to get the sale and the orders from you.

So typically, we've been averaging. I stopped, I'd put a Band-Aid on my wrist before I tell you this. We have been averaging $400,000 to $600,000 a month in samples that we have given our customers. Now when do we expect to get the return? I expect it yesterday. The recovery on the samples is nil. The recovery on the displays is from 10% to 30%, say, for the sake of argument. Now to give you an idea, in December, 2 weeks ago, we sent out $200,000 worth of racks and new samples for our new line of HPC, and the results will start coming in 60 days. So we have actually, I call them an investment. It's not really throwing the money in the garbage because people get the display.

We've also rolled out, obviously, on the long and wide, an awful lot of displays and samples to our dealer friends. So we're now looking at probably continuing of this, my guess is, for the next month or 2, and then it should take it down significantly as the new product lines get into the dealers. But the results have been -- but sales have been relatively flat at Kraus, and this is a bad time of the year for them, typically, and it starts picking up in January. At the Surfaces show, we'll be at the show, we generally write couple of million dollars extra typically. And we're looking forward to the next quarter with different management to make this work along with the trimming of the SG&A. So we've been there. Our major customers will see price increases from us. We haven't fully gotten back all the tariff money, but we've gotten back some of it, and we're on the right track. Anybody that ships 1,000 orders a day at 99% complete, that's a pretty good thing. So I want to assure you that if we could work 25 hours a day, we do it, but 24 is the limit for us.

J
James Wilen
analyst

Lew, on the long and wide, are you putting that out through all the Kraus and Naturally Aged Flooring dealers?

L
Lewis Gould
executive

Absolutely, it's going out. It's also if you go on a website of a lot of famous home centers, you'll start seeing it there right now. And you'll start also seeing for the first time some ceramic tile products on the website, too. I think we'll be a very complete supplier. This has been a transition year for us, but we have probably given away in samples and displays as a rough figure about $3 million to $5 million in the past year. And we look at it as an investment rather than expense. It's going to come back to us. We're very aggressive now, and we're coming out of the ballpark running strong. All of our vendors are happy. We pay our bills on time, et cetera. And we're ready for combat now.

J
James Wilen
analyst

Okay. But the $3 million to $5 million you're expensing in this fiscal year, and I assume the program is pretty much done, so you will not have that expense next year or will it continue on?

L
Lewis Gould
executive

What we'll do is we'll look at it this way. We'll take a percentage of our sales going forward. We'd like the percentage of our sales to be about 3%. So we're going to monitor it as we go forward. So as the sales increase, we'll look at it on a month-to-month basis as we go forward. But the big chunks of it probably we've eaten already. Because I think everybody who wants a new rack has gotten one from us already. Anybody who needs to do sample, it's a good sign because when they get a sample of a product, they could generally give it to a customer or it's on display. And Leonard has modernized the samples. We put pictures on them and some other things that will help. But I believe that the flooring is recovering. And we're going to do another $100 million in the next quarter. So I think this is the right time. And the Board of Directors is looking to a way to reward our new management team, and we should have something available to discuss in the next quarter. We've also -- I do want to compliment our Board of Directors incidentally that they are getting to be a very good looking into our numbers, and they've been a real creative health and we have an active Board. It's just not a Board of Directors that we name. We're very pleased to see the input from all of them. So we might have to give them some money and some shares if something God forbid.

J
James Wilen
analyst

And once back to Harris Wood. Was Harris Wood and the long and wide you've just started to carry that at Kraus and new age, started to make a push for that or they've always carried that?

L
Lewis Gould
executive

No, they always have the -- the long and wide is a new product that we invented about a year ago. There's only 2 people in the United States that are making, us and someone else. And it's very difficult to make. But Kraus is starting to get -- what we have do is we have to make it, imagine how many racks we have to go through and how many pieces of samples you have to cut up. I mean we have a sample department in every -- almost every division. Probably no pieces, the wooden pieces, the vinyl pieces of this. And the postage and freight is enormous, but everybody is getting it. So this is the first 60 days that we started to see now returns on the long and wide. And we're pleased to see the way it's growing.

J
James Wilen
analyst

Okay. And last question, I'll go back into the queue. When you look at the income statement, the one glaring item are shipping expenses, which have gone up dramatically and stayed up. What is that a result of?

L
Lewis Gould
executive

It's 2 results. Number one, when we send a sample to our customers, we pay the freight or rack. And we've had extraordinary cost in that rack, maybe, believe it or not, 16-feet wide and 4-feet high, and we're throwing -- we're investing several hundred dollars in that. That's just typically. We've also balanced this quarter our inventories in the various warehouses. So we have a quicker delivery to our customers. We picked up several hundred thousand dollars in internal freight for the first time. Also, the containers from overseas. Now the container folks are squeezing everybody. We had an annual contract, which we just renewed. We had great savings in the prior year. But we're starting to pay a little bit more for the container operations right now. And generally, trucking has gone up overall. We're aware of that, but a significant portion of that turns out to be the sample costs, and we're monitoring that very carefully who's getting the samples, et cetera. So you can imagine. But if by any chance, at the end of this month, here in Las Vegas at the Surfaces Show, get your ticket, you'll actually see what we're doing. We're very impressed with the new Harris rollout. We're coming out of the booth running.

Operator

And Mr. Wilen, with no further questions in queue, did you have additional questions before we move on?

J
James Wilen
analyst

Sure. I wonder if you could tell us about the state of the cartridge line in Phoenix and how operationally -- when will that begin to achieve your objective for cost savings.

L
Lewis Gould
executive

We're now about 2/3 to the stuff that we manufacture. So you need about 12 periods of operation, 12 3- or 4-hour shifts to come even. We're about now 9. We've improved it by almost 40% as we go forward. So we're almost there right now. Also, the overhead that we charge on that plant because of the rental, we've been able to relook at the cost on it. So we're just about there, Jamie. It shouldn't be much longer. I think that we just about have it. For us, it was a new endeavor, and it's paid for already, the whole line is paid for. We're just about there right now.

J
James Wilen
analyst

And lastly, in Australia, the shipments of the new flooring lines, that has started? Or is about to begin? I assume if you could tell us the timing on that. And just what the impact of the environmental difficulties they're having or they have had on your business?

L
Lewis Gould
executive

Well, first of all, we shipped $1 million of the new stuff last month. This month, they're scheduled in the next 45 days, $6 million additional on the brand-new items in addition to what we did. Also, if you recall, we made an acquisition last year of a company called PR Floors. They paid for most of the acquisition out of their own cash flow. What we understand from the fires, we're in major cities, we're not on the fringes. The fire has come close to one of our units, which was about 2 miles away. But my understanding is that we're okay. We don't know what that will do to the economy. So my guess is that, that government will probably start dumping a lot of money to the economy to stimulate it, to bring back things, which is only good for us because we're associated with building, construction, et cetera. And we've also rolled out 2 new programs in Australia that -- we have a partnership with another major European company that we just started with the first of this month. We're going to look at that to see how far it goes. We've enhanced the management with Paul Boyce running that in our international operations. And we're looking forward to tremendous growth there. The total amount of new business and the flooring for the purchased orders that we have total about AUD 22 million. So that's supposed to roll out all of this in the next 10 months. And what that will mean also there'll be reorders on top of that. So this is in addition to our regular business. We're looking forward to about $60 million or $70 million in Australia this coming year. And I think we have the right people in place now.

J
James Wilen
analyst

Fantastic. And then lastly, you mentioned that you've started to sell a new home center. Would you be able to discuss who that is? Or is that true?

L
Lewis Gould
executive

If I did discuss it, we'd have a minus of one other home center. So very difficult, but it's in one of the top 10 that we have orders for.

Operator

I am showing no further questions at this time. And we'll now turn the call back to Lewis Gould for closing comments.

L
Lewis Gould
executive

First of all, thank -- I want to thank everybody, our employees, our Board, our outside vendors. All the people who have done an awful lot of work, nothing happens by itself. This year will be our 41st year in business this August, and the first year in business, we did $38,000. So we've come a long way, and we're looking forward to that $0.5 billion mark very shortly.

We have a good Board, great management team, hardworking folks, and what's not on our balance sheet are the best customers in the whole world. When I look at this, we're worldwide. The second-largest home center country in the world is Germany, we now have a location in Germany. We're selling into China some of our adhesives. We're doing all of the right stuff, if you will, and we're coming out with brand-new packaging for our new line that will be available in Las Vegas. We have a new line of long and wide wood. We have a new sister company in Peru and a sister company in Spain. We're moving ahead on all fronts. And hopefully, we'll be able to only work 23 hours a day as we go forward. But if you do call Q.E.P., you'll find that we're open somewhere in the world all the time. We never close the phone, and since we still have the personal touch and that's been the structure of the management that we want to keep this. We're closer to our CFO search very, very shortly. And I do want to tell you some amazing statistics. We've been with our bank for almost 39 years. We've been with the same auditing company for 38 years, and we're proud to say that we're consistent in our approach. Can we do better? We can always do better. Can we move faster? Probably, yes. But we're deliberate and we want to make sure that we preserve the values that we've had in the past.

So hang on, we're going to move very fast. We encourage everybody to look forward to what we do in Las Vegas. That will be our coming out, if you year -- if you will, after a year of hardship. So again, thank you very much. We look forward to the next conference call.

Our year-end, as you know, is February 28 last year. We had a conference call at the end of April. We have a Board meeting scheduled. So approximately, about that time, we'll have another conference call. Certainly, our management is available for any comments from the shareholders, and we look forward to growing with everybody. Thank you very much.

Operator

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

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