CCA Industries, Inc. (CAW) Q4 2017 Results Earnings Conference Call March 1, 2018 11:00 AM ET
Stephen Heit - Chief Financial Officer
Lance Funston - Chief Executive Officer
Lenny Dunn - Mutual Trust Company
Good morning. My name is Stephanie and I'll be your conference operator today. At this time, I'd like to welcome everyone to the CCA Industry's 2017 Fiscal Year-End Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
Steve Heit, Chief Financial Officer, please go ahead.
Good morning, everyone, and welcome to our year-end 2017 investor call. I'll start by reading our safe harbor statement.
Statements that are today that are not historical facts are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward looking statements are subject to risks and uncertainties, which would cause actual results to differ materially from estimated results. Such risks and certainties are detailed in the company's filings with the Securities and Exchange Commission. No assurance can be given that the results of any forward-looking statements will be achieved and actual results could be affected by one or more factors which could cause them to differ materially. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act.
And now that I've gotten the legal part over with, I will review with our financials and then I'll turn it over to Lance Funston, our CEO.
So for the fiscal year 2017, we posted total revenues of $19,830,098 and we had income from operations after tax of $1,831,181. That is an increase of about 55% over 2016 which had net income $1,181,210. A lot of the changes that have occurred as you can see cost of sales was slightly less due to the company's cost saving efforts in regards to our outsourced contract manufacturing, also our SG&A expenses were less due to the company's management's efforts in controlling costs.
Of note that I do want to point out on our financial statements is looking at the balance sheet, couple of things. Number one, you will see as of November 30th, 2017, that we reported under current assets differed income taxes up $2,079,988 that is going to be changing as a result of changes with GAAP that the company has do with here too and all differed tax assets will be reclassified as non-current, which means that entire $2 million number I just read to you will be put together with a non-current amount and shown as a non-current asset.
The company has made significant improvements to its working capital and we had gone from an essence negative working capital to positive working capital as of year-end, but this change will affect our balance sheet and that will decrease our current assets and increase our non-current assets. So that's one big change I wanted to point out.
Another change I wanted to point out is on the balance sheet. On the accounts payable and accrued liabilities, you can see that there was a large decrease from 2016 year-end to 2017 year-end going from 5.6 million to 3.6 million. And that was due to the payment of what we called all the legacy expenses, those are all the expenses we had from the restructuring, all of which have been paid off now, severance costs and we also had other cost that we had incurred.
Actually, the changes greater than that when you go back and look at 2015, the change from 2015 is over $5 million. That means that the company which has been generating positive cash flow to the last two years but all of its cash flow has gone towards reducing that yet [ph].
The other point I'd like to make and looking at our financials is looking forward into the first quarter of 2018. As everyone is aware, the Congress had enacted a tax cut for - that took effect in December and so our federal tax rate has now been reduced to 21%. However when that - the flip side of that is well our taxes are lower, that means that the value of our differed tax assets are lower. That creates a huge income tax expense that we will be recording in the first quarter that could likely show a first quarter was pertaining specifically to the change in the tax rate.
And the company has a significant carry forward tax loss that's part of that differed tax asset and which means that as we are burning up the differed and the net operating was on a current cash basis, the company just has to pay very minimal federal income tax. But we are going to have to record for fiscal statement purposes that decrease in the different tax asset, it's really for intents and purposes a non-cash transaction.
Our cash flow has been strong and as you could see we generated even with a decrease in accounts payable, we generated cash used in our operating activities of over $1.1 million which most of that was used to reduce the borrowing that the company had.
The last point I wanted to make is that as a subsequent event that took place after the close of the year, it took place in the first quarter, the company on February 5, signed a new credit agreement moving our credit facility to PNC Bank. That credit agreement provided us a term loan for $1.5 million and a revolving credit loan up to a maximum of $4.5 million. As of today, we do not have anything borrowed on the revolving line of credit, we only have the outstanding term loan. And at the same time which when Funston will discuss later, he exercised words that were held by an entity that he controls and that exercise of warrants had put a significant amount of cash into the company as well.
With that I will turn it over to Lance Funston.
I'm assuming you are all sitting on the edge of your chair after that exciting acquisition by Steve, I actually guessed new, what we have I guess it's time for me to say something. I'm a little bit reluctant to say anything because I have a positive impact on the investor support for the company, I guess we are tended to that but after last call, I think the stock went too late twelve month low. So apparently action say a whole lot because did have very much positive impact on the stock price, but I'm assuming you guys are all over 21, so I am just going to say, I'll give you a little bit of insight in terms of why I'm here. I guess like the sector is personal care sector had attracted me and my advisors because it seemed to me that it's the difficulty in getting products on the shelf and the big boxes, the targets had Wal-Mart's of the world have become so daunting that the spaces commanding I think very high multiples not necessarily on earnings but on net sales, because most of the companies that have high net sales have already tick it on Challenge looking that self-space for their products.
I started buying personal care products about, all entities about 15 years ago, purchasing initially proud [indiscernible] and Denorex, sell those properties a couple of years ago for about three times net revenue. And the current market is of 3X plus net revenue. Steve says I can do the math for you, but if you're all over 21, you can take the 20 million in net revenue and you could multiply it time three plus yourself and figure out whether or not my decision to exercise and do show what a million for some change in warrants, as well as my initial investment of 4 million plus in this sector is intelligent or not. You decide, it's your money and I'm not going to take you how to invest it.
The transition I think is complete, I took over the CEO responsibility a couple years ago. And I think that at this point Steve and Doug Haas have done a brilliant job of controlling costs and convincing. I guess to a certain extent, they've convinced the banks to provide really more credential credit facilities, there we have term debt and a revolver from PNC. The working capital that as you know allows me to start investing in new initiatives, as well as give us some dry powder for acquisitions.
Acquisitions make a lot of sense, but not, it's much more likely at the three times a net revenue that I'm going to decline to buy a lot even though we look at acquisitions as soon as often as they come on the market. Every time we bid, it seem as though somebody goes a little more aggressive, but I don't think that's going to help you or me realize higher share value, it will go chasing something in realistic price.
In terms of a 30,000 view without getting into details, I have noticed that two our products have been very responsive to a little bit of digital marketing test we did and that been significant. But last year, we did spend about 10% of our media budget went into digital and we discovered that two products Bikini Zone and Plus+White both had very - had substantial response in terms of the millennial market that we have not been tapping into the T.V. My daughter is 17 and 19 don't even have a T.V. Apparently for the millennial, it's a matter of advertising on Facebook, YouTube, using influencers, using Instagram and AD works and we've been testing all of these. And now this year, we're going to take a nominal 10% of our budget increase it to 50%. So in 2018, we will be 50% in traditional T.V. media which is the area I'd group in. But we will also have to 50% of our budget dedicated to digital and hopefully that will allow us to tap into this new P&L.
And I think I'd rather at just point know what you want to ask questions about if you have any, President continued to chat because we don't want to drive the stock value further. Any questions for Steve or me and Doug Haas of Presidents here too on the operations side.
[Operator Instructions] Your first question comes from Lenny Dunn with Mutual Trust. Please go ahead.
Good morning. And it looks like we finally made it. I appreciate all the hard work you've done and it has taken longer than I initially expected, but I felt that when you came on, Lance that was a sign the company was going to finally get turned around. And the previous management was unable to do it, but it's done now. We got our legacy cost behind us, we got the balance sheet cleaned up and you put on a new distribution company, I forgot the name of it but you replaced Emerson and they'll get you in more places. So it looks the future looks bright but you know clearly we have to do acquisitions and that's which you are trying to do and the Porcelana acquisition has worked well. And if we can find things like that you know clearly we have great earnings power.
The only request I have is that if you could put out EBITDA when you put out your releases, because I think this company is easier to read based on EBITDA because of the cash flows and if you could put those in the releases that would be helpful. And perhaps if you can give us some forward-looking EBITDA as many companies do that would also be helpful?
Lenny, I am finding that we do and did doing and not produced an EBITDA on our last…
I did not in the press release...
But you put it in the 10-K.
No, you can't do it in the 10-K, but we did not do it in the press release and EBITDA but it's easy enough to calculate out.
All of the prior company's Lenny, that have acquired have been private, just by first entry into public company, but I noticed that in the private world, EBITDA rules. In this personal care space, EBITDA seems to be irrelevant. And I say that only because of the values are all derived by purchase sale activity in which the acquirer usually has all the infrastructure in place. Look at that net revenue line and all just bring that into my revenue base and using that was much change in terms of the SG&A side that is they've already got that infrastructure in place. But I think to extent that that's an interest in the investment community, I think it's a good suggestion and you made it in a previous call, I did give it to Steve and I think he did, he is including in internal documents.
It was on the prior press release just not this one and EBITDA is simple enough to calculate anyone, if you look at the income statement, it clearly shows that our income before tax was $3,004,000, we had interest expense of $505,000 and we had depreciation and amortization of $84,000. So when you add all that up, it gets you to somewhere in the area of about $3,590,000 of EBITDA for last year.
I understand and I was able to figure that out, but a lot of people don't take the trouble to do that. And I did appreciate it your last release and if you could do it going forward, it would be much appreciated.
Be happy to do it, Lenny, that's a very suggestion. And any other questions?
[Operator Instructions] There are no further questions at the time.
Thanks for listening guys. We're going to wrap it.
Yes. So thank you very much for participating in the call and we look forward to talking to you with our first quarter 2018 earnings call.
Thank you. This concludes today's conference call. You may now disconnect.