Ironclad's (ICPW) CEO Jeff Cordes on Q1 2016 Results - Earnings Call Transcript

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Ironclad Performance Wear Corporation (ICPW) Q1 2016 Earnings Conference Call May 13, 2016 4:30 PM ET

Executives

Jeff Cordes - CEO

William Aisenberg - CFO

Analysts

Operator

Good afternoon, and thank you for participating in today's conference call to discuss Ironclad Performance Wear’s financial results for the first quarter ended March 31, 2016.

Following remarks by the Company’s management team, the call will be opened for your questions.

I would like to remind everyone that this call will be available for replay through June 12, 2016, starting after 7:30 p.m. Eastern Time today. A Webcast replay will also be available via the link provided in the earnings release, as well as available on the Company's Website at www.ironclad.com.

The following presentation by Ironclad’s management contains “forward-looking statements” that include information relating to future events, and future financial and operating performance. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the time at, or by which that performance or those results will be achieved. Forward-looking statements are based on information available at the time they are made and/or management’s good faith belief as of the time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements made today. For a description of the risks associated with these statements, you are encouraged to read the Forward-Looking Statements information contained in the Company’s press release issued today.

Now, I would like to turn the call over to the CEO of Ironclad Performance Wear, Mr. Jeff Cordes. Sir, please proceed.

Jeff Cordes

Good afternoon. I’m Jeff Cordes, the CEO of Ironclad Performance Wear, and I want to welcome everyone to Ironclad’s first quarter 2016 financial results conference call.

Joining me on this call is Bill Aisenberg, our Chief Financial Officer.

During this call, we will review the financial results for the quarter ended March 31, 2016, which has now been publicly released. Bill Aisenberg will provide details on the financial results for the quarter; followed by myself where I will provide my insights into the “State of the Company.” We will conclude this conference call by answering any questions you may have regarding these financial results and our business.

I’m now going to turn the floor over to Bill Aisenberg, who will provide the details regarding our quarterly and year-to-date financial results.

William Aisenberg

Thank you, Jeff. As reported in our press release issued earlier today, Net Sales for the first quarter ended March 31, 2016 increased 10.5% from the same year-ago quarter to $5.1 million from $4.6 million last year. As we did last quarter, to keep this simple, as we speak about the business today, we will segment the Company primarily between four areas, domestic industrial distribution, international distribution, the private label business, and finally the retail business.

Net Sales for the 1st quarter of 2016 in the domestic industrial segment increased 15.2%, or $349k from the prior year period. This increase was directly attributable to our, new for 2016, strategic partnership with Grainger. Sales to Grainger for the quarter were up more than $1mm from the same quarter in the prior year and more than offset a significant reduction in sales with ORR Safety, the former exclusive master distributor of Ironclad’s Kong branded products. During the 4th quarter of 2015, Ironclad terminated its agreement with and commenced litigation against ORR Safety.

Moving on to our international distribution segment, the 1st quarter Net Sales were up nearly 17% over same period in the prior year. This increase is primarily due to a rebound in sales to our Australian distributor and sales made to new distributors in international markets. These increases are partially offset by a decrease in sales of our co-branded program in the UK. This is the 6th straight quarter of increase in our international business.

Within the private label segment, Net Sales for the 1st quarter were down by approx. 31% from the prior year same period. This decrease was primarily due to the discontinuance of our private label program for 5.11.

Finally, our retail segment revenues for the quarter decreased by increased approx. 5% from prior year totals. The decrease is primarily due to the timing of sales across the quarters and will be made up in later quarters.

Gross Profit for the first quarter was $1.82 million as compared to $1.77 million for the corresponding period in 2015. Gross Profit as a percentage of Net Sales for the quarter was 36.1% in 2016 vs. 38.7% for the same period in 2015. The reduction in the Gross Profit percentage is primarily due to two factors. First, the mix of goods sold, which for the quarter was skewed to slightly lower margin goods. Second, in order to meet Grainger’s roll-out plan, we incurred significant costs in expediting and handling product.

Operating Expenses for the first quarter increased by $293,000 to $2.14 million as compared to $1.85 million for the corresponding period in 2015. As a percentage of Net Sales, Operating Expenses represented 42.5% for the three months ended March 31, 2016, compared to 40.5% of Net Sales for the same period in 2015.

The increase in operating expenses for the 1st quarter were primarily due to legal costs incurred in the our litigation with ORR Safety and planned investment in wages, benefits and travel to support the new business growth of Grainger.

Loss from Operations increased by approx. $239,000, to a loss of $323,000 in the first quarter of 2016, from a loss of $84,000 in the first quarter of 2015. Loss from operations, as a percentage of Net Sales, increased to 6.4% in the first quarter of 2016 from 1.8% in the first quarter of 2015.

Pre-Tax loss increased $260,000 to $359,000 in the first quarter of 2016 from pre-tax loss of $99,000 in the first quarter of 2015.

Ironclad utilized $2,573,045 of cash flow from operations in the first quarter of 2016 as compared to providing $333,929 of cash flow in the first quarter of 2015. The Company’s Accounts Receivables average days-outstanding increased to 125 days from 63 days last year due to a heavier concentration of sales at quarter end, but still within our expected parameters based on customer dating terms. Our owned inventory at March 31, 2016 was up $2,620,523 from the end of last year, due to the inventory build for the Grainger and Vibram programs, and our deposits on inventory were down $62,996, for a net increase in our investment in inventories of $2,557,527.

I will now turn the call over to Jeff Cordes, our CEO, who will discuss the State of the Company.

Jeff Cordes

Thanks Bill, the first quarter of 2016 is a simple story. Ironclad recorded strong revenue growth across both our industrial and international businesses. That benefit was offset by higher legal expenses incurred in our litigation with ORR Safety.

We are pleased to report a 10% increase in revenues.

It continues to be a very difficult environment across most industrial markets.

Without a doubt, the worst hit market is oil and gas, an industry that represents 30% plus of Ironclad’s business today. Based on industry reports, drilling activity across North America is off by more than 80% from a year ago. USA operational rig counts are down from 1900 to less than 370 today. That’s a big decline and it is impacting far more than just oil and gas. Four other public companies servicing this same PPE market have recently announced revenue declines on average of more than 10% for their most recent quarters. Given this environment we were very pleased to record the revenue increases achieved this quarter. For these same reasons we continue to focus on revenue growth coming from multiple business segments. On the industrial side, clearly the largest driver for us today is Grainger. However, our sales team is expanding the number of distributors and placements. In fact, net of ORR and Grainger, in Q1, this group of all other industrial accounts increased nearly 10% over the prior year, and represented 40% of the industrial volume. On the international side, the increase this quarter was due in part to the business with our Australia distributor, Performance On Hand, returning to more normalized levels. It also grew through an expanding network of global industrial distributors. More about this in a moment.

As Bill pointed out, within the quarter, we incurred added expenses to service Grainger’s initial stock programs. These costs reduced our first quarter gross margin %’s by a few percent.

Operationally, we aggressively planned for Grainger’s business. To that end, we added several sales team members to drive the transition of Grainger customers to Ironclad products. These same team members will continue to open other Grainger customers.

However, the major impact to first quarter SG&A was legal fees and nearly all were related to the ORR litigation. While it is highly frustrating to incur these non-recurring expenses, and ORR has done its best to create added expenses for Ironclad, we continue to be confident in our position and course of actions.

Looking forward at the year, we are excited about our direction. We are growing despite a very difficult market condition. Every day we are stressing to our team to stay focused on the objectives and their focus is paying off. We have sales team members that are beginning to fill success with new customers to expand their product placement. Within the industrial segment let’s begin with Grainger, we are beginning to see the real impact of Grainger on our numbers. In Q1 Grainger more than offset the decline in revenues from ORR Safety. Grainger’s business is not heavily focused on oil and gas thereby helping us to diversify and reduce segment risk.

Grainger is fully working through the customer transitions in the USA. They began transitions in Canada this quarter as well. But once that the Grainger is began transition this quarter to more Ironclad products. As we continue to transition we see many other opportunities for expansion. There are many Grainger customers who don’t have [indiscernible] programs or their programs are under growth in some way. Another significant opportunity is the Grainger contract business. We are beginning to work into this area as well.

Moving past Grainger we have discussed in previous calls there are number of other key investment contributors they are working diligently to gain position with. We’ve made some significant progress this quarter with several of these leading distribution. As we have no desire to provide insight to our competition, we will skip the names of these companies, but suffice to say we’re beginning to see an increase in orders and prices.

Within the international segment the first thing to point out again is our [indiscernible] of performance in hand are back online and delivering new business. We are very excited with their success and the impact it has on our Company’s growth. In the first quarter we continue to build our international distributor network, while we do have placements overseas the reality is we’re behind several of our competitors today in a number of key markets. We are actively at work changing this situation with hands on efforts at a far higher level of interaction with our distributors. We're already seeing expanded report from overseas and our [indiscernible] team to cover these towns later this year. Within the retail segment we saw declines of about 5% this quarter primarily the result of no winter business. That being said the balance of the year is shaping up very well. Mike Fowler who drives the retail business for us has done a great job of setting the foundation of this, driving placements.

This quarter we picked up two new 2016 placements one of the biggest DIY channel player. We just finished client reviews with two of the main USA hardware store groups. As a result we were awarded expanded planograms with both merchants. One we're now the branded performance club and have our own planogram. These planograms will begin rollout during the fall of this year. Our expectation is more production more doors.

Ironclad's online catalogue [ph] business has also expanded. As an example our business with Amazon in the first quarter was up more than100% and continues it’s rise this quarter. We believe this channel has a very significant growth potential going forward. After this point we've worked with a handful of catalogue and online companies. This past week we added a new manager, who had brought us 30 million online business from a major consumer goods company. We now expect to add to the group of customers in this category as we leverage his knowledge and expertise.

Finally, there is a private label segment, as it has been reported we are up 31% this quarter in this segment. But those do not tell you that we made 53% more gross margin dollars this year on that 31% lower revenue total as compared to a year ago. The answer is you may recall is that there are two parts of our private label after calling everything out. We got 5-11 [ph] at the end of 2015. And 5-11 was a very low market business.

As you may also recall we decided last year to bring to market our own capital line of products. This product is captured under our normal sales, our channel that is doing very well. The other portion of our private label business was up this quarter and based on orders already booked, in the year ahead of 2015. We are working to expand our progress with [indiscernible], we plan to introduce our first retail [indiscernible] this year with them. We are also in discussions with some other possible private label partners today.

Operationally our major base continues to expand and improve performance. Our team's major are working on multiple funds for cost and development and speed to market. It's been a good first quarter in many respect to start 2016. Our team is very focused on working now building for the second quarter. We appreciate the support of our shareholders and we look forward to continue growth in 2016.

With that I'd like to open the floor to questions, Kelly the call is yours.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We'll go first to [indiscernible].

Unidentified Analyst

So, well first congrats on a growth quarter, you're not seeing growth from a lot of guys in this space, a 10% growth in spite of what's going on, is a solid performance. Are we seeing any reason to be optimistic in oil and gas given the rise in oil prices recently, any reason for hope?

Jeff Cordes

Ben, look I don’t know whether in a [indiscernible], but I'll say we're really excited and that is, is that what's happened is because oil and gas is down HSE, Health and Safety Engineers are taking the time to look at products, and with the new things we’re bringing to market they're really excited. And so what's happening is we have more than 30 ware trials today out there the world going on as we speak and results for those are very-very good. So we are gaining access to a lot of folks as a result of that.

So, again while it may not be this very moment, but we feel very-very good about the oil and gas in its own if I’m right. The other piece of it is, is that what's also happening is that we're finding a lot more places for Vibram than we expect. Guys doing brick building, shipyards, really heavy-heavy industries user really love this product. So again it's -- I don't have a crystal ball for oil and gas, I think obviously some of these [indiscernible] might impact us, but yeah we are so [indiscernible] buying glove. We think our market is going to go up, we've got great products, competitively priced and our team is finding home as we speak, so we're pretty excited about that.

Unidentified Analyst

Great you touched on Vibram line, my next kind of line of question is just any more color on things that are going on with Vibram and I didn’t hear you mention much about EXO.

Jeff Cordes

EXO is going everywhere, I mean it's a major part of Grainger, it's become a major part [indiscernible] on tax, it's finding a [indiscernible] a lot of different places because it's a just a glove, I mean it's a very focused glove, uses great materials, so it has durability, great price and all that goes to the engineering guys and with the marketing guys who have done a great job on the supply chain to it. We have a major placement across all of Grainger’s multiplex. On the bottom side, I'm kindly hedging my investments banks with much more because the other thing that’s coming from a violent perspective, I think probably next quarter was up more about that but suffice to say it’s just getting placements and significient placements, but were still in its infancy stage. What I live is the fact that we’ve got work retails out there and normally you get results in 30 days. But if the gloves don’t wear out it’s kind of revolving, that’s getting more time. So that's a high class problem to have. So we are working through that right now.

Unidentified Analyst

Just the next item I don’t want to monopolize too much of this, but just international looks like performance on hand is going into right direction, that's good to see, I mean international growing there you've been saying for a while that that’s one of the biggest opportunities for the whole company?

Jeff Cordes

Absolutely. It is no doubt that international having just come back from overseas what we see and it’s just that it’s a formula market, we really needed more coverage over there and the beauty is it's not just a one glove, I mean every glove in our assortments has a replace over there and as don’t care what your talking about from the Middle East to Russia there is a lot of places where we contain access and being in the middle of that now and driving it, moving our queues to support it we’re really excitedly about the opportunities in the international market.

Unidentified Analyst

Great, and last just to more on Syntel's area, looks like margins slippage from year-over-year but still higher for the overall year compared to last year which was 35.1. So as continued mid-30s we’re good on margins?

Jeff Cordes

Yes Ben, we’re very comfortable with margin. As I briefly mentioned the reason for revenue slippage was primarily the ramp up cost related to the Grainger program for various reasons something happened to it expediting product which obviously have rates much more expensive and other our ship rates and other of course around the Grainger program which would not be recovered. So we expect to see improvements in subsequent quarters.

Unidentified Analyst

Okay and then and at DSO number while it's made fall within your guidelines and that's not ideal the 125 days is that a the short-term or is that the permanent new normal for us?

Jeff Cordes

That would be short-term and again there are some new customers we brought onboard, like I said we offered some extended dating, and also the timing of sales this year and the last month or months of the quarter versus the timing of last year's quarter has an impact on it. So again you will not see at these levels going forward, it will come down.

Unidentified Analyst

Alright. And last as I apologize one more. You announced that you hired ROTH Capital and I know those guys well. Can you give any color on just anything, anything interesting that you are seeing out there or can you give any kind visibility into things we’re thinking about on a capital markets there were acquisitions or anything that you can talk a little bit about?

William Aisenberg

Ben there have been lots of interesting thing but it's a little early to talk about it and I appreciating obviously a good investor and a lot of things that could be interesting but were just a little early in the process.

Unidentified Analyst

Fair enough. Okay guys well, thank you very much for taking all the questions and keep up the good work.

Operator

[Operator Instructions] Will move next to Tony Sinkowski [ph], Private Investor.

Unidentified Analyst

I got more questions than Ben. I guess a few things ORR Safery are they still buying our product?

Jeff Cordes

They can buy our product if they still desire, yes they can.

Unidentified Analyst

Okay and I guess the next question is why would somebody buy it if the new products we have Vibram is 900% better.

Jeff Cordes

The answer is to all types folks who have different products and desires and like different brands so that would make the world interesting right. So lot of them will like different things, so we are preparing and happy to service them all and again our timelines have changed, things changed, so I'm sure they’ll be able to think down the road but for right now is just if there is someone who wants to buy those products, we are happy to provide them.

Unidentified Analyst

Okay and I know you can't talk about the issue with ORR but do we see a light at the end of the tunnel where this is going to come to an end or are these people are just going to continue to drag this out because their pocket book is bigger?

Jeff Cordes

Everything has in hand at some point. We feel very, very positive about our position and our situation and that’s why we went down this path in the first place and I wish to say it wasn’t expensive but it is. But we feel like very-very positive where we are and we’re not going to play out little bit longer and hopefully down to little a bit further and not too long and hopefully get some good news and we’ve have some positive situation. But again, it's just we have to let it play out and grin and bear it for a while but look I have absolute confidence [indiscernible].

Unidentified Analyst

As you know I’ve been along this road here with this company since May of 2006, so I’ve been hanging in there, it just seems like we’re not going anywhere ever. I don’t know what our market share is less than 1% and I just was wondering is there another philosophy we could use to increase our sales like just load up with sales people. I do know that the competition is catching up. They’re catching us in the look of the glove probably not the quality, but the normal personal doesn’t know that and combating that is a huge problem every time I go to a different DYI, I see more and more gloves that are looking exactly like ours and I just don’t know how we could compete with so many other competitors.

Jeff Cordes

To start about equipment side, on the industrial side people who make the decisions are very educated people and understand the difference between products and I can tell you what, we’ve recently had meetings with some very large oil and gas companies with their hub and safety engineers and I can assure you there is a very big difference between our products and a lot of names you’d probably throw out if you’re taking about oil and gas growth as an example, a big difference and they recognized it and we’re now very competitive can be in that position. So that’s one other retail side and as you heard but again you know in your neck of the woods very shortly you’re going to see some big do it yourself network channels carrying our products and you’re also going to find out again is that for one of the largest hardware chains in this country we’re now the global choice from a branded perspective for performance clubs.

So you may feel like they’re catching upm but I think we’re looking at the opposite, we’re giving some people a run for the money. And don’t forget the fact that we just went from 50 plus glove makers at Grainger [indiscernible] and then has to tell you something too. So again I would love to have more ramp, but I think when you look at and you’ve not spoken befire about the oil and gas industry and how bad it is, for us to record what we did when I know my competition and I won’t mention names, but I know where they are and it's not good. I think we’re hitting on a lot of cylinders and I think as things begin to recover and get better in those markets I think we’re going to be a big-big beneficiary in that.

Unidentified Analyst

The next thing, the questions are going to get a little better. WESCO, I know they had six different divisions. And I was just wondering the last time we had our conference call you said you were moving forward. So, are we still succeeding? Or is that ongoing?

Jeff Cordes

Which company was this?

Unidentified Analyst

WESCO.

Jeff Cordes

WESCO, I would say right now that the WESCO business right now is very slow, and it's not moving fast as we like which is going to make is the company has probably come on strong, it's not come on strong and there is some ways instead that are about the same as them that have come on but much better and so I think the whole [indiscernible], I am not sure if their market is down or what the situation is, but it has not come on like we hoped. And again probably frankly given how fast Grainger has come on probably that was a blunt thing because we’ve had a lot of focus on Grainger and that is the reason to grow. So, we had not missed much at time given that the situation with the fact that WESCO is little behind.

Unidentified Analyst

I wondering too if you -- could you explain the IVE product it's a patented product that I guess for about -- the reflective quality is better than other reflective qualities?

Jeff Cordes

Actually what it did that it's an optical engineered design. So what that means is that for whatever reasons I’m an engineers as you know Tony, but basically that design is not something that keen on a rig and a lot of the places that particular shape and form. And so because of that it's far more visible from a distance and because also because of the way it's designed and that product include certain florescent type things that we’re on our a rig even with the oil based mud, but that streak stands out, so the rig operator, a crane operator, all those guys can see that form and see the back of the hand and be able to know which direction it is. So it's a patent pending technology and we think so far people are very impressed with this and I think that some of the things happen to start to get placement with that product.

Unidentified Analyst

Also last time we talked about there is some testing going on at the University of Wisconsin at Milwaukee new product or whatever, or I don’t know I guess maybe functionality is that still happening?

Jeff Cordes

Yes, as we commented the testing actually we’ve been working with them for about a year now year and a half I guess and what they’re doing is there is no one in the answer to it, that has a real test that shows you when you drop a weight on a glove what the impact is to your hand and so we working with the University of Wisconsin develop an actual test method and product with plasma hand where that can be tested, you can see it drop a 500 pound weight on the hand, how much of really impact, how many net pounds impact that hand felt, and that testing is almost complete we’re going through our [indiscernible] right now and we’ve tested other peoples gloves, by the time we’re done, later this year we’ll be able to literally market our gloves with certain ratings that other people wont have the ability to do. It will give us a front seat for selling, so that’s a really big deal.

Unidentified Analyst

The follow-up question on that is I don't know how I mean we have to protect our feet and our eyes and our ears and our heads with OSHA and insurance companies, are we making any progress on that front with OSHA or insurance companies to mandate this with certain industries?

Jeff Cordes

Well insurance company sell only mandate, but we actually do it with Aion [ph] and some other folks who introduce us to companies, because it of drive your insurance cost down, OSHA has its own requirements and regulations and some of those are actually under an advisement and changes today, so that is the big animal out there, OSHA as we know, is a force to itself. So, there are requirements for protection and for duty of care for managing your employees, our co-head's, so the right [indiscernible] another thing but there are regulations out there.

Unidentified Analyst

How many employees do we have now?

Jeff Cordes

About 43.

Unidentified Analyst

Is most of that increased in sales?

Jeff Cordes

A big part of it is yes in sales, but the majority would of sales related yes.

Unidentified Analyst

So, 38-43 so that means at least three more salesman out of that size you think, correct?

Jeff Cordes

It's more than [indiscernible], but yes look I mean obviously the sales force is expanding, we've expanded on greater side, we expanded for industrial sales, we're getting more efficient in some other places but something we don't have. So, you move some bodies around from that standpoint.

Unidentified Analyst

I appreciate all your openness and you guys did a great job in this bad market and yes I just hope we could just push forward little factor that would be great, of course everybody is waiting for that, I'm going to quote one of your homies “perfection is the enemy of profitability”. So maybe we don't have to be so perfect just get more sales people out there and get the stuff out on the shelves, I don't know what you think about Mark's saying, but I've seen it work.

Jeff Cordes

But then, we are and again I know personally believe personally for me but we are on average selling working down this path, we got some great things coming, I think that Grainger continues to ramp, we got some more things we'll talk about next quarter that we've been very closed on. But we're making progress.

Operator

[Operator Instructions] And we have no further questions at this time. Jeff and then I'll turn the conference back to you for closing remarks.

Jeff Cordes

Thank you. On behalf of Ironclad’s team - we thank you for your continued support and participating in today’s call. Our next financial reporting for the quarter ending June 30, 2016 and the year-to-date period is tentatively scheduled for August 8, 2016. Please note this date in your calendars and schedules. Thank you again.

Operator

Again that does conclude today's conference. We thank you all for joining us.

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