ALJ Regional Holdings Inc (ALJJ) 2019 Q4 法說會逐字稿

Good afternoon and welcome to the ALJ Regional Holdings, Inc., Fiscal Fourth Quarter and Full Year 2019 Earnings Conference Call. (Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Brian Hartman, Chief Financial Officer. Please go ahead.

Welcome, and thank you for participating in today's teleconference and for being investors in ALJ Regional Holdings. My name is Brian Hartman, and I'm the CFO for ALJ. With me is Jess Ravich, our CEO and Chairman. Before we begin, I ask everyone listening to this investor conference call to review the risk factors presented in our latest Form 10-K that was filed with the SEC on December 23, 2019.

With respect to forward-looking statements, it is important to note that today's investor call as well as our earnings release and related communications contain forward-looking statements within the meaning of federal securities laws. Such statements include information regarding our expectations, goals, our intentions regarding the future, including, but not limited to, statements about our financial projections, business growth, the impact of acquisition, cost-cutting measures, integration measures and other statements, including words, will and expect and similar expressions.

You should not place undue reliance on these statements as they involve certain risks and uncertainties, and actual results or performance may differ materially from those discussed in any such statement.

Factors that can cause actual results to differ materially are discussed in our Form 10-K filed with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements made during this investor call.

We will provide a financial update for the fiscal quarter and full year ended September 30, 2019, and then we'll provide high-level guidance for fiscal 2020.

ALJ recognized revenue of $89 million for the 3 months ended September 30, 2019, a decrease of $1.1 million or 1.2% compared to $90.1 million for the 3 months ended September 30, 2018. The decrease was primarily driven by planned lower sales volume at Carpets and lower volumes in components and packaging at Phoenix, offset somewhat by contracts at Faneuil.

ALJ recognized a net loss of $9.9 million and loss per share of $0.24 for the 3 months ended September 30, 2019, compared to net income of $1.2 million and diluted earnings per share of $0.03 for the 3 months ended September 30, 2018. The majority of the loss was due to a noncash deferred tax expense of $5.9 million and a noncash write-off of intangible assets of $0.7 million related to one of Faneuil's contracts. In addition, Faneuil had 3 contracts that generated significant losses in the quarter, and Phoenix had lower overall volumes and unfavorable product mix impacting profitability.

ALJ recognized adjusted EBITDA of $5.2 million for the 3 months ended September 30, 2019, a decrease of $4.2 million or 44.5% compared to $9.3 million for the 3 months ended September 30, 2018. The decrease was driven by contracts that generated losses at Faneuil, the wind down of existing customer contracts, compliance costs related to the implementation of new revenue recognition accounting standard and higher overall benefit costs at Faneuil.

At Phoenix, profitability was impacted by lower overall volumes and unfavorable product mix. For the year ended September 30, 2019, ALJ recognized consolidated revenue of $355 million, a decrease of $14.8 million or 4% compared to $369.8 million for the year ended September 30, 2018, due to lower planned volumes at Carpets, lower volume in components and packaging at Phoenix, offset somewhat by increases at Faneuil due to new customer contracts.

ALJ recognized a net loss of $16 million and loss per share of $0.41 for the year ended September 30, 2019, compared to a net loss of $7.3 million and loss per share of $0.19 for the year ended September 30, 2018. As mentioned earlier, a significant portion of the increased loss related to noncash charge for deferred tax expense in the fiscal year ended September 30, 2019, as well as lower profitability at Faneuil for certain contracts that generated losses, lower volumes and unfavorable product mix at Phoenix, offset somewhat by higher earnings at Carpets due to cost reduction initiatives and process improvement.

ALJ recognized adjusted EBITDA of $27.7 million for the year ended September 30, 2019, a decrease of $5.4 million or 16.3% compared to $33.1 million for the year ended September 30, 2018. Decreased adjusted EBITDA was driven by the same items mentioned a few moments ago.

With regard to debt and covenants, at September 30, 2019, total debt was $99.2 million and consisted of $81.1 million of term loans, $9.8 million outstanding on our line of credit, $5.2 million of capital leases and $3.1 million related to an equipment financing arrangement. All amounts are exclusive of any deferred financing cost. Cash on hand at September 30, 2019, was $4.5 million. At September 30, 2019, we had $12.1 million of borrowing capacity on our line of credit. At September 30, 2019, we are in compliance with all debt covenants. On December 23, we filed an 8-K, which provided specific details related to Amendment 6 to our term loan agreement. The provisions in Amendment 6 were to adjust the leverage and fixed charge ratios over the next several quarters to provide additional cushion to allow for our turnaround to take hold. The amendment was also provided for the conversion of $4.1 million of the lender's existing term loan into a new term loan participation with our CEO. The total of term loans outstanding remained unchanged after this transaction.

Capital expenditures totaled $18.3 million for the fiscal year ended September 30, 2019. The majority was to support Faneuil's build-out of 3 new call centers.

Cash interest totaled $9.8 million for the fiscal year ended September 30, 2019, versus $9.3 million for fiscal 2018. The increase in cash paid for interest was due to higher weighted average outstanding borrowings on our revolver working capital facility during fiscal 2019 compared to fiscal 2018.

Cash taxes paid totaled $0.9 million for fiscal year ended September 30, 2019, versus $1 million for fiscal 2018. We continue to use existing net operating losses to offset federal taxable income.

For fiscal 2020, we are forecasting a range of $28 million to $31 million of adjusted EBITDA compared to $27.7 million for fiscal 2019. The improvement reflects integration of previously awarded customer contracts at Faneuil, most of which occurred during fiscal Q1 of 2020 and increased incentives related to training and hiring programs from our call center in New Mexico.

For fiscal 2020, we are forecasting cash capital expenditures to be in the range of $5 million to $6 million, cash interest to be in the range of $9 million to $11 million and cash taxes to be in the range of $1 million to $1.5 million and cash restructuring costs related to efficiency initiatives in the range of $1 million. We will now open the call for questions. Thank you.

(Operator Instructions) Our first question is from [Eric Moore], a private investor.

I was just wondering if you can talk a little bit more about the kind of the footfalls from the Faneuil side of things and how they relate specifically to the, call it, $18 million we spent building out new call centers?

On the $18 million of new call centers, 2 or 3 new ones put in, there was an incremental 1,200-plus seats added from the existing call centers that we left. And then that volume of seats has been filled, so we built it -- we've sourced new contracts, added the seats, got new customers from it. So we feel good that we've made the right choice. The incremental $18.5 million itself will pay off over time, but it brought us customers like Humana, Enterprise and a few other large, reputable -- large customers that we didn't have before that are more marquee nameplate in a sense.

With regard to some of the Faneuil quarterly issues that we had this time, we did have one contract that we talked about previously that we're in wind down with them, and we'll be ending that in the end of March and early April, where we provided them notice of termination.

That one had a significant loss in the quarter. We've also concluded that there were 2 other contracts that we've talked about in the past as well, one related to the Vertex acquisition, that was a loss. Since the Vertex acquisition, we've actually restructured that, and we're in the final process of getting the contract signed for that to where that will go from a loss to an income item, which would be great in turning things around. And then we're also in -- with the third contract, we're in discussions here to change the actual pricing of the contract. So we're trying to go back to basics and look at each of the contracts, make sure that we have the right pricing, the right KPIs in place and the right structure to take what's been holding us back for some time and now to sort of shed that -- those losses and turn those into profitable contracts or exit them at the right time.

And so it sounds like none of the -- I mean, we're restructuring 3 contracts, losing 1. So it sounds like the $18 million, it's not as if we just spent that and we haven't filled up the -- that we don't have a bunch of excess capacity, I guess, is the right way to say it?

No, we've been great in filling. I mean, the ones in Wichita is fully sold out, one in Orlando fully sold out and the one in Sacramento, California is almost all sold out. And during the peak season, it's just about there. We had a press release recently about a facility in Albuquerque, New Mexico, that was more we call a plug-and-play, where basically it was an existing call center already. So it had 750 seats ready to go with (inaudible). So much cheaper to set up. We brought some servers over, turned the lights on and you go. That call center comes with several million dollars worth of job training incentive programs from the state and the city. So we're taking a different tactic to where this is a plug-and-play facility that comes along with incentives that will drop right to the bottom line for us as we continue to train and ramp personnel up there.

Got you. And given the -- I'd love to hear you guys just talk generally about the human capital at Faneuil, given that I know one of them, the one we inherited from an acquisition, but -- and 2 contracts are newly entered ones that we had some big losses on. Do you think we have the right people in place at Faneuil to kind of execute on the business?

Eric, this is Jess. So the answer is, we do think we have the right people. We're always looking to promote within and bring in from outside talent, but we're going back -- as we grew from a $50 million company at Faneuil to over $200 million in revenue, we needed to go back to basic principles, which is empowering the project managers and their teams to, one, have accountability and, two, be aligned with the shareholders, so that they're not just looking at gross revenue, they're looking at what is the profit, how -- what could be the implementation issues, what could be the KPI penalty issues. We put that in place starting in the last quarter and earnest this quarter where every contract is being -- every new contract goes through the same vetting process, which we have our minimum EBITDA thresholds. But this business should be a business that you can count on. If you have so many seats, each seat generates so much in revenue and each seat generates so much in EBITDA. And to the extent that it doesn't, we are going to need to either replace personnel, hopefully, that's not the issue, or make sure the contracts are appropriate. The nice thing is the newer contracts, the ones that Brian mentioned, Humana, TxDOT, MassHealth, ones that are rolling out and implementing in the first and second quarter of 2020 have all gone through that vetting process.

Great. And sorry, last question for me. Just on -- in terms of the guidance, how would you -- how have you guys been thinking about that in terms of conservative, aggressive and right down the middle?

Obviously, the guidance is a range. We know that we have not forecasted well. So I think everybody's a little gun-shy about what you always go get. I'd rather forecast light and overperform than have another year where we miss the forecast. But that is the range that we are publicly telling people. And at the halfway point, when the implementations -- LA metro goes live next week, the large -- the transportation contract goes live in the third quarter, we have 2 healthcare contracts going live in the second quarter, we'll update it after those implementations.

(Operator Instructions) Your next question is from Jay Leonard with Oppenheimer & Company.

First things first, congratulations that Carpets N' More is no longer a drag. Brian worked hard on that and John. Where do I start? Well, let's start with the easy one director search for new independent. What's the status? Where are we? What's going on?

The nom/gov committee is looking at that. It's not the highest priority. It is a priority. But first, we wanted to get Faneuil straightened now. And it's an all hands on deck with regard to working with Anna and the team on that aspect. The nom/gov committee has looked at a number of -- we are in compliance, obviously, with independent versus inside directors.

We're looking for someone who can be additive on the M&A side. We don't look for someone who could -- because we don't know 5 years from now, whether we will be in the call center business, the book business or new businesses, but we are -- as we talked about over the summer, we are looking to make acquisitions. And so that's the priority of the skill set. Along with those acquisitions would come new independent directors. So there's a little bit of do we do one and then fill it or do we fill it and then do one, but we're discussing that, Jay.

Right. I mean, you can definitely add more than 1. I mean...

We can.

The one thing that definitely will help with NASDAQ and everything, add 2 if you can.

It's 100 -- $70,000 to $80,000 a person. And we are looking at every -- I mean we're pushing down on people to turn the lights out and then adding more independent directors that don't have the skill sets we want doesn't really...

No, I get that. But there is a certain element of additional -- it just looks much better to get that an another slot [build-out]. But I'll leave that for a second. Let's get back to Anna and really where our problems have lied. I believe that it's kind of like Faneuil is with a larger version of what happened with Carpets N' More. And yes, it looks like you're getting things turn. But when I look at -- I'll just -- take me through this because I don't get it. The new initiative sounds great. You've got these marquee things that you've seen, Humana as an example. It would seem to me that we should not be looking for new companies to have contracts with. We should be building upon the good contracts that we have and just adding capacity within those. Am I being too simplistic on that? Or does that not make sense?

So some of the clients can grow. Some of the clients are at capacity. And I don't think it's one or the other, Jay. We have -- we brought over a sales force, a number of people from conduit and other places. And to the extent we tell them, look, we're not taking on any new contracts, don't go out and try and prospect for good health exchanges or good corporate or good transportation clients, we're going to lose them, right, because the more we do, I think, we're just to build from internal and do organic growth. Our organic growth alone with a number of these clients is tremendous. So look -- we look at -- and we are going to play more defense in terms of taking on new clients because of implementation. But it's really -- we've grown tremendously. We've had some issues on the financial side, but client service has not fallen down. Our reputation is still stellar.

And one of the things we worry about in growing is do we get ahead of our skis, how many implementations can we do in a quarter. So that's more of a regulator on new clients than it is -- what you were talking about is, why don't we just focus on the old. What we've decided, as you can see from what Brian talked about, CapEx is going to be 1/3 of what it was last year. And my guess is that is going to be the run rate going forward, as we do more plug-and-play and are more selective on where we go to. We wanted to build, and we did build 3 marquee call centers that helps us win business. But going forward, it's going to be more along the lines of either in the client on location, like it was in Texas or plug-and-play in a jurisdiction that has skilled labor, good wages for us to be able to pay that are also good for the employees and where available incentives both -- from both the state and the city.

Okay. Because when I look at the EBITDA, it was -- 2017, we were $13.1 million; 2018, $13.1 million; 2019, we're down to $8.8 million. And it sounds like from what you said, earlier to the first question, that you are looking at not just top line for the sales force, yet, Anna's deals never changed, and it's $7.5 million and then she gets paid on top of that, where is the profitability matrix that gets attached to the EBITDA. It's like -- revenue for revenue sake is not that good.

It's a question of -- to me, she has a contract that you could say it's rich or it's not rich, it's good or is that -- but it's aligned. She gets paid as we make more money. She gets paid more. And it has gone up based upon the money we spend on the call centers. It has gone up based upon the Vertex acquisition. As we spend money, she gets charged the capital charge.

So she is making significantly less as is appropriate because our numbers are worth. If we get the numbers back up into the mid-teens, she will make more. But as the largest shareholder, I want to pay her more if we get the -- I mean, I think this business, at the end of the day, should be between an 8% and a 10% EBITDA business, fully loaded. And so you could do the numbers, we're going to do over $200 million of EBITDA -- of revenue next year. I want her incentivized and I want her paid if we hit those margins.

Listen, I'd like her to get as rich as can be. It's just that I get worried that some of the contracts, the 3 that basically buried us last year, were predicated on just top line and giving away the house...

Well, she doesn't get paid on -- get paid on EBITDA. Anna certainly has no incentive to take on a contract that doesn't make money. She is paid on EBITDA.

Okay, good. So then, as long as -- are we looking at it -- so she gets -- fine. So then now that you're vetting all the contracts, is there an escalator on -- as we all know, wages are going up. And that's got to be your biggest component for cost.

Yes.

I mean, the one thing I got to see, do we have proper escalators that as those wages go up, we get an escalator to protect the company and the contract instead of having one of the powerful contracts that really hurts us because we are so thin on our margins versus the debt coverage. I mean, it's like I know you're doing it. I just want to make sure that we really are focused on that.

So we can't go and change contracts are -- that are in writing that we don't have any levers to pull. So the contracts, clearly, new contracts, we look at that, we determine, if it's a long contract, what are these, what are the COLA increases for wages. If it's a short contract, we might be able to live with a fixed wage pay because we'll take that risk for a 2- or 3-year contract because I don't think wages are going up.

For the older contracts that were long, that we don't have the ability to have an escalator, we've started negotiating with them early to do extensions and rather than getting the full wage increases in the out years, started earlier. So we are very cognizant of this, more so because of inflation, there is no inflation, but just at -- sometimes it's because of minimum wage going up in certain states, but more often, it's Amazon coming in and hiring a whole bunch of people at $15 an hour, everybody wants to get jump to $15 even if the minimum wage in the state were $12.

So it's an economic aspect of where we are in the cycle that wages are starting to go up and you -- with 6,000 employees, $1 an hour more is a big number.

Yes, I know. It's what -- that's -- I've said that to Brian when I spoke with them. The thing that would keep me up at night is the democrats come in that somehow win and God only knows what the minimum wage is going to be. That's not a political statement, that's just, like, who knows what the minimum wage would be on a federal level, if that happens. I don't -- I doubt it, but you never know. So I just -- those are the things that get me worried is because we're so close on our ratio that it gets me nervous, which by the way, leads me into, are we going to -- I don't know if you can talk about it, but are we going to be looking at perhaps changing our primary lender to somebody who might be a little bit more, let's just say, easier to deal with going forward on the agenda.

Well, okay. Let's start with, Cerberus is not hard to deal with. I mean they've been a good lender to us. They've loaned us money when we wanted to make acquisitions. They loan -- they tend to...

There are terms -- Jess terms are very tough.

The interest rate is high. So I mean, we pay 8% amo. Amortization to the Board is, one, it's a good discipline at this point. We want to get below 3 turns. And we are at $99 million of debt at the end of September, as Brian said. A year from now, we'll be at $91 million because we're roughly amortizing $2 million a quarter. We hit $30 million of EBITDA, we're back to our 3x leverage. We're -- we have more options available to go and look at other things.

Yes, I just -- look, I'm not -- you're the expert when it comes to debt and everything. I just have friends that are in the industry. And when they look at our stock and have tried to get them interested in the company, they say, "you guys -- the market -- you should be able to do better in the marketplace." So I just -- I notice you have a penalty to do something there.

No, I don't think that we are going to do better in the marketplace if we have 4x debt. We're running in the mid-20s, and we have $100 million of debt.

Yes, I agree with it. We have to improve the numbers.

We need to.

There's no question.

So wait for the next 6 months to play out, amortize down according to the amortization schedules and then we should have more options.

All right. So it's more of an end of year type of thing, which is what I would have thought anyway. Just on a purely -- I watch the stock, and I know you don't really watch the stock as much as I watch the stock. There's been a lot of selling pressure. And we can't -- anybody who knows the company has been around, nobody could figure out where the selling's come from. I mean the only guesses we have, and it's not anywhere reportable, is that whatever those guys that were at Vertex that took stock, still have stock for sale or Cove because it's -- I mean I have friends that have taken out blocks of stock and they just refresh.

And I know it's not you, I know it's not me and I know it's not any other big shareholders. So we can't figure it out. So maybe you guys got to look at the noble list and try to get a handle on this and maybe figure out where it is, so once and for all, if we can get cleaned up because comes 6 months from now, you're going to want to look to do deals, I know you, Jess. You need the stock above $1. You need the stock in the $3 -- I mean, I don't know what you think fair value is. But I think book went down to, I don't know even know that's tangible book, went down to around $2. And this is just ridiculous where it's trying to get. Your thoughts?

I don't disagree, Jay. But I mean, I don't know where the stock is coming from. And Brian, I don't know...

No, I don't know either.

Well, I'm going to -- something -- you guys have the noble list. There should be a way to kind of figure out if there is -- if it's Vertex, I don't know if you're still in touch with them. But I mean, these guys are refreshing 50,000 shares that have quickly spun a lot of money. But for this stock, if someone is going to...

There is a decent amount of volume, Jay.

Yes. I mean, look, I mean, they got stumbled whatever they had out there today. But it's very -- it's confusing. It's weird. I mean it's like -- it's not like you guys have any news coming out that would have an insider selling. Somebody is -- and it's not tax selling anymore. We would have thought...

I know, at the end of December dried up.

Yes, I fully expect at the end of December, we would have been dried up, and we would be languishing, waiting on good news from you guys starting when you have a catalyst. But this guy has been refreshing at 50,000 shares at a click the last few days going into tonight's conference, which makes 0 sense by the way.

I don't know who it is. I mean, obviously, I'm not thrilled that the stock is down in the low 1s. But on the other hand, every time it trades, somebody new comes in, and there will be a better holding.

I acknowledge that. But at the same time, it would be much better for everybody getting people interested. It's very hard to get people interested in the dollar stock. It's just -- I'm just saying. I mean -- and the company doesn't warrant -- I hope it doesn't warrant where it's trading at. What is the actual book value to getting rid of all the intangibles? It was $1.97 on Bloomberg. Do you guys have a number for that?

I mean the equity value on the balance sheet, $83 million at the end of September. So divided by 42 million outstanding shares, it's approximately...

Oh, $2.

All right. So -- and Bloomberg is accurate. So we're trading way below book. And it looks like you guys are putting in the corrections. You've got some really bad contract behind us. The other 2, you're sort of negotiating out. And we have new stuff coming online and no big CapEx. Why in the world this company be slamming the stock going into that, makes no sense. That's what I don't get it. Very confusing. Let's see if I have any other questions. The printing business. I know from your competitors the fourth quarter stock. Any color going forward?

Calendar fourth quarter stock?

Yes, calendar fourth quarter stock.

Yes, it was super soft. It is an interesting business at this time. It's like playing 3-dimensional chess. You have Quad announcing that they are getting out of the book business. Quad and LSC announcing their mergers off. LSC getting out of the magazine business. CBS and Viacom merging and then what happens to Simon & Schuster. So there's a lot of moving parts.

I mean the good news is there's not a lot of capacity. We -- the numbers have borne out where a thesis was, which is trade and books are not going away. [El High] is not going away. Obviously, college has pretty much gone the way of professors just having virtual book, telling you to read certain chapters at a certain thing.

And we're -- we don't compete in that digital world. But the number of actual books being published has been flat to up since the advent of the e-book a decade plus ago.

The biggest unknown to us is does education move more to a workbook model as they have for math and do they do it for English and others, which means that we produce a lot more covers for a lot lower price every year versus covers every 4 or 5 years at higher prices. There's -- they went that route. They're now -- there's reason why we're so slow in ed is the 3 big, Florida, Texas and California, have not sort of figured out which way they're going on their education book, but they will have to before, obviously, the school year starts.

Got you.

But in general, Marc and the team do a great job watching costs. We think that there's opportunities in this shakeup between Quad and LSC as they are trying to rightsize their own workforce. And we have excess capacity in certain of our facilities, so we'll see where it shakes out.

And he's been great. I mean, it's been a steady and a tough business as anybody. But essentially, that's where we get all our EBITDA from anyway.

I mean -- and it's one of the things that we had a discussion about, which is Phoenix cash converts a whole bunch of money. Their CapEx is fairly minimal, and they generate a lot of EBITDA. And that's part of the reason why Brian and I and the managed team at Faneuil have, one, started to look at each contract more line by line. But also, as we grow, we're roughly 6,000 employees, we could be significantly more next year, but we're not going to be doing it with CapEx dollars. It'll either be in the client's location or plug-and-plays or some of our contracts were going to exit because they weren't profitable in replacing those seats with profitable seats. So we will be very cognizant of cash conversion next year.

Got you. Carpets N' More. Is that still a fit for us? Or what's to any plans? I mean now that Brian fixed it, what do we got?

It is -- it's not a fit for us only because it's too small. We would never buy a business in 2019, 2020, that is doing $1 million to $2 million of EBITDA. And therefore, if we wouldn't buy one, we shouldn't keep one. So it's not a fit. We have to figure out the right price and the right exit, but it doesn't do the shareholders any real value to continue to own a business unless we're in that $10 million-plus range of EBITDA.

Okay. So it's work in progress. At least it's not draining us anymore. That's good. I mean the only thing I could pull back on is I can't believe that somebody is selling these blocks of stocks and we can't figure it out. You guys got to look at the noble list or at least reach out, have somebody reach out, figure out what it is because once it gets cleaned up, it'll change the complexion around a lot of things.

Brian, will you do that?

I'll take a look.

The next question is from Tom Koch with Trancoso Partners.

I got a question, what are the opportunities in printing with what's going on with LSC and Quad. So Quad, I guess they didn't announce it, but there was some news in the press about them selling or potentially selling their book business which is a lot...

So, they did announce...

Oh, they did, okay.

Yes, it is public.

So what are you hearing on that? Is there -- do they compete at all on covers with you? I don't remember.

No, but they do some covers in areas like rack books that we don't do. The stuff you see at the airport, the rack book. So it's really -- we don't do much work with -- we do -- some of the publishers publish both with Quad and away from Quad. And we do some of their work. Depending where those publishers end up, we may be able to pick up some more work, but the world's pretty divided between us and Coral at the moment on the component side.

It's okay. Okay, so I was -- yes. And then with LSC, with what's going, I assume they're going to continue to shed assets as well, potentially to pay down debt. I'm just wondering kind of big picture, are there any interesting businesses there for you to go after if they are for sale?

Again, they are a really good client of ours. We do a lot of things with them. We bought the Moore-Langen plant from them. And they -- it was a good sale for them and a good purchase for us, where we took over some business and they rightsized their workforce. But I mean they're really good client, and we're working with them to try and do what makes sense for both of us.

Okay. Has there been any material change in market share between you and Coral over the last 12 months?

No. I mean, we have our clients. They have Penguin and others, but Penguin is a monster. They're owned by the same people that own Penguin Random.

Right. So -- and do you anticipate as you look out on this year any major changes with your accounts or market share?

With accounts, no. With market share, obviously, it depends who has hot books and who doesn't. Like we -- it's like a fantasy football thing, right?

Yes. Yes. Yes.

We -- if our quarterback is doing better, we're going to get higher market share. Not market share with that particular publisher, but that particular publisher may have a higher market share than they did prior year.

Right. Okay. But your contracts with the -- with your customers are kind of the same as they've been?

Yes. I mean, they're all -- you could see in the contract backlog, they're all multiyear. And so we don't see any big shifts, like we're not going to pick up Random -- Penguin Random House business, we're not going to lose our long-term clients business, we don't expect, but how they play and their market share, that could shift around.

Okay. All right. And then I had a question on Faneuil. So when you kind of look at the progression of contracts coming off, which my understanding tend to be generally higher margin contracts toward the end of their lives versus new contracts coming on, which tend to be much lower margin beginning of their lives, how do you see this progressing kind of through the year? I mean, I would -- if I'm correct on that, that means the first couple quarters are going to be a lot tougher than the back quarters. However, seasonally, your first December and March quarters tend to be seasonally stronger quarters. So how does that balance out through the year?

(inaudible) benefit of changing. For transportation, they're actually stronger over the summer. So -- but HPE is definitely stronger during open enrollment, which is the fourth calendar quarter and the first calendar quarter.

I don't think you're right in that the contracts are more profitable at the end. I think that you're -- because of the way the contracts are written, I think that you're right that they seem that way and they're accounted for that way because of rev rec and how we take expenses in early on in a contract versus how we take revenue in as we're training and ramping.

Ramping, especially with the new rev rec rule, has really played havoc with a business like ours that grew dramatically and had a lot of implementation over the last 6 months and over the next 6 months. But the contracts -- during the term of the contract, we pencil it out and we work with them to have -- we try to have at least consistent margins. But the implementation phase, Tom, is what you're talking about, that does reduce the profitability of a contract. To give you an example, a number of our contracts provide that we do not get repaid for training until people graduate from a training class. And that may not happen in the same quarter that all the expenses, we still have to pay people every week they show up while they're training, but because there's no guarantee they'll graduate and no guarantee that we'll get paid, we don't book any revenue against that.

Brian will probably spend weeks with you on the phone about rev rec.

Like we're coming experts at it, but...

Okay. So -- but how should we think about kind of the margin, obviously, the margin at Faneuil has been negatively affected for several quarters now. And given the latest credit agreement amendments, it calls for a lot more leniency on your leverage ratio in December. It starts to tighten up a little again in March and June and towards the back end of the year. So...

I think it's all the way back to normal in either June or September.

So you've got this new business. I guess there's 2 parts to it.

So what is existing business? I'm trying to get a sense for how much turnover is there in this. So if there isn't a lot of turnover, and you keep existing contracts, those are humming along, those are -- should be making full margin, you're making the improvements to the new ones that have suffered...

Tom, the 3 that we called out were large negative contracts, not just low margins but actually negative EBITDA contracts. So that gives the blend. The majority of our contracts by number hit our margin analysis that we're looking for. And the new contracts have embedded to do that as well.

Okay. So sorry, maybe you said this and I didn't catch it, but was there -- did you actually talk about the time that those 3 money-losing contracts? Are they behind us? Is that what you said?

One is, we gave early notice, and it's gone in April. So it will affect the quarter we're in and it did affect December. The other 2, we are in the either the red zone or close to the red zone of getting extensions and amendments to put them in line with new contracts. They both had about a year left to go. Clients like the service, want to extend with us, and we need to -- and we have discussed with them what market is and what we need to get. And so rather than starting the contract later, we're starting it early but extending.

But that will continue to be a drag, it was in the December quarter and will continue in this quarter until that's finalized?

One of them, I imagine, will be about half this quarter and one will be a little more than half. One will probably be the full quarter.

Okay. So in summary, those 3 will definitely all hit December and will be most of this quarter. And then hopefully...

Than were in the September quarter, yes.

Yes. So then from then on out, it's hopefully back to kind of like what you said 8% type of EBITDA margin?

I would -- I think this business should run higher than that. But that's a fine number for you.

Okay. Awesome. Hopefully, we're there this summer.

I mean, you'll -- you should be able to see it progressing. It's not turning on a dime, you should see certain things happening in this quarter that will lead you to believe that by the summer we'll be back on track and down to our 3x leverage, which is where the Board really wants to get to.

This concludes our question-and-answer session. I would like to turn the conference back over to Brian Hartman for any closing remarks.

Great. Thanks. We'd like to thank everyone for attending the investor conference call today and look forward to providing our next update. Thanks, again.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.