ALJ Regional Holdings Inc (ALJJ) 2020 Q3 法說會逐字稿

Good afternoon, and welcome to the ALJ Regional Holdings, Inc. Fiscal Third Quarter 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 of ALJ. With me is Jess Ravich, our CEO and Chairman.

Before we begin, I would like to ask everyone listening to this investor conference call to review the risk factors presented in our latest Form 10-Q that was filed with the Securities and Exchange Commission, or SEC, on August 12, 2020, and our 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 conference 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, intentions regarding the future, but not limited to, statements about our financial projections, business growth, the impact of acquisitions, cost-cutting measures, integration measures and other statements, including the 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 could cause actual results to differ materially are discussed in our forms 10-Q and 10-K filed with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements made during this investor conference call.

We will provide a financial update for the fiscal quarter and year-to-date ended June 30, 2020, and will provide high-level guidance for the fiscal full year 2020.

ALJ recognized consolidated revenue of $95.4 million for the 3 months ended June 30, 2020, an increase of $11.1 million or 13.2% compared to $84.2 million for the 3 months ended June 30, 2019. The increase was driven by implementation activities and the start of new contracts at Faneuil, offset by lower component sales primarily related to education at Phoenix and lower volumes at Carpets. ALJ recognized a net loss of $2.7 million and loss per share of $0.06 for the 3 months ended June 30, 2020, compared to a net loss of $7.2 million and loss per share of $0.19 for the 3 months ended June 30, 2019. $3.4 million of the improvement in net loss was due to a decrease in the provision for taxes as well as an increase in margins for implementation activities and the start of new contracts at Faneuil.

ALJ recognized adjusted EBITDA of $7.2 million for the 3 months ended June 30, 2020, an increase of $2 million or 38.5% compared to $5.2 million for the 3 months ended June 30, 2019. The increase was a result of implementation activities and the start of new contracts at Faneuil, offset by lower component sales primarily related to education at Phoenix and lower volumes at Carpets.

For the fiscal year-to-date ended June 30, 2020, ALJ recognized consolidated revenue of $281.8 million, an increase of $15.8 million or 6% compared to $266 million for the comparable prior year period. The increase was driven by implementation activities and the start of new contracts at Faneuil, offset by lower component sales related to education at Phoenix and lower volumes at Carpets. ALJ recognized a net loss of $68.7 million and loss per share of $1.63 for the fiscal year-to-date ended June 30, 2020, compared to a net loss of $6.1 million and loss per share of $0.16 for the comparable prior year period.

Net loss for the fiscal year-to-date ended June 30, 2020, reflected a $59 million noncash, nonrecurring impairment of goodwill. Excluding such impairment of goodwill, ALJ recognized a net loss of $9.7 million and loss per share of $0.23 for the fiscal year-to-date ended June 30, 2020. Most of the decrease was due to inefficiencies related to the start of new contracts and operational challenges related to the expansion of certain ongoing contracts at Faneuil and lower volumes for both Phoenix and Carpets, offset somewhat by a $5.2 million change in income taxes primarily related to deferred taxes.

In the current year, ALJ had a $1 million benefit from income taxes versus a $4.2 million provision for income taxes in the prior year comparable period. ALJ recognized adjusted EBITDA of $15.2 million for the fiscal year-to-date ended June 30, 2020, a decrease of $7.3 million or 32.4% and compared to $22.5 million for the comparable prior year period. The decrease was the result of operational inefficiencies from the start-up of new contracts, increased medical and workers' compensation claims and higher rent expense for new call centers at Faneuil, lower component sales primarily related to education at Phoenix and lower volumes at Carpets.

With regards to debt and covenants at June 30, 2020, total debt was $106.2 million and consisted of $80.2 million of term loans, $15.8 million outstanding on our line of credit, $6.1 million of capital leases and $4.1 million related to equipment financing arrangements. All amounts are exclusive of any deferred financing costs.

Cash on hand at June 30, 2020, was $7.4 million. At June 30, 2020, we had $14.8 million of borrowing capacity in our line of credit and our compliance of all debt covenants.

Cash capital expenditures totaled $5.2 million for the fiscal year-to-date ended June 30, 2020. Cash interest paid totaled $7 million for the fiscal year-to-date ended June 30, 2020, versus $7.4 million for the comparable prior year period. The decrease in cash paid for interest was mainly due to lower average interest rates on our term-loan debt. Cash taxes paid totaled $800,000 for the fiscal year-to-date ended June 30, 2020, which is consistent with prior year. We continue to use existing net operating losses to offset federal taxable income.

For the full fiscal year 2020, we are forecasting a range of $20.5 million to $22 million of adjusted EBITDA compared to $27.7 million for fiscal 2019. For the full fiscal year 2020, we are forecasting cash capital expenditures to be in the range of $7 million to $8 million, cash interest to be in the range of $9 million to $10 million, 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 $2 million.

We are currently working on our fiscal 2021 budget and are not at a point to provide specific details, but we believe that our fiscal 2021 EBITDA will be higher than fiscal 2020.

We will now open the call for questions.

(Operator Instructions) Our first question today will come from Jay Leonard with Oppenheimer.

Just wanted to be the first. I didn't really have that many questions, but it's always good to be the first. Let's see, the New Mexico, the J-Tip arrangement, how is that working out?

Jay, it's Jess. Joining me on the call -- Brian and me on the call today are also Anna and Marc from Faneuil and Phoenix. I'll sort of act as a quarterback and direct the calls unless you want to hear from me. But Anna, if you're around -- if you're able to -- you want to discuss the J-Tip program and how it's going?

Yes. So Jay, the J-Tip program is obviously a great incentive brought to New Mexico. We had a bit of a bump in the -- starting in mid-March because of COVID on that incentive. As you probably know, we moved everybody home in New Mexico. So...

Sorry, Jess?

You there?

You faded out there, Anna.

I'm sorry. Can you hear me...

I heard you moved people home, and then it went dead.

Sorry. Yes. So we moved people home, and so we didn't add a lot of new employees to New Mexico during the heart of the pandemic, April and May. We certainly intend to continue to add more staff in New Mexico and continue to benefit from that incentive.

So that's ramping -- so that -- in other words, that's ramping up now?

Yes.

Okay. And is that mostly people working from home or at a location?

It's a mix.

A mix. Okay. So that's good. I mean, it's -- we're in the growth market, I guess, with the unemployment contracts that we have.

But a lot of the unemployment contracts, Jay, either explicitly or implicitly want the workers to be in their state to help with the unemployment in their state as logical as that is.

So while we -- for a lot of reasons, New Mexico is a good market for us to fill up. We don't always have the flexibility to -- as we grow, to put representatives in New Mexico.

Okay. So with the existing -- do we still have any problem contracts that we still have to address? Or did we finally get rid of those? And for the second part of the question, are we expecting anything better out of some of the contracts we already had signed? Are they becoming more profitable with what's going on in the marketplace? Two-part. One question.

Yes and yes and yes. So we're always going to have contracts that go in and out of hitting our projected margins to being above it or below it, depending upon how they're being operated at the time and other events outside our control.

The biggest contract that we had, one, finalized in March, and so that's over; the other ones, we are both working operationally as well as with the client to make changes to how either the requirements of the contract are or in pricing and feel comfortable that they are either all profitable or moving to profitability as we head into fiscal '21.

Got you. Right. Are any of the contracts working substantially better than you expected?

Well, I mean, the very thin silver lining of the crisis is that unemployment is way up and the need for our services is in high demand in the states that we have contracts for.

So they continue to add additional representatives or ask for us to add additional representatives. So they are outperforming what we thought they would be.

Got you. Yes. That's good. Okay. There's not really much to ask about. I have a daughter who goes to school and not going to school. So I know the deal with the books. So that's...

On the educational side. But on the other side -- and Marc's on the call, he can talk to you about it. The regular book and component side has been very strong. Education, it's anyone's guess when that's going to come back to normality.

And Marc, could you talk a little bit about the other side? So -- because I wasn't aware that it was that much stronger than -- I've kind of got caught up in the whole education aspect.

Yes. I mean, the experience we had was when COVID really hit, it disrupted the publishers' businesses, things softened up quite a bit in April and May, started picking up as we came into June, got very strong as we exited June, and July and August have been incredibly busy.

It's a combination of, obviously, more people being home and having interest in reading, but just some huge titles coming up out of the political arena, out of the race-concerned arena. It's just been a very, very strong trade market.

Our children's book business also has been very strong. So look, it's been a real different year for us. Trade has worked its way through successfully from the COVID challenges, and school challenges will continue into 2021 and until both at the high school level, elementary level and colleges, things start to shake out.

And Marc, correct me if I'm wrong, with just to level set it, Jay, education is about 15%. Is that ballpark right, Marc, or correct me?

It's probably in that ZIP code now. We'd obviously like to see it back close to 20%, but it's certainly not the more significant part of the business than it has been in the past.

That's why it's been important for us to be growing our share on the other side of the business.

Okay. And from your competition standpoint, did they fare through this as well as you guys did? Because I know you run a tight ship. Has there been flow out from the competition, which may be an indirect benefit for you?

I'm not sure it will be indirect benefit from us. I mean, one of the large players in the market is exiting the business, so that's in transition. So we'll see how that ultimately shakes out.

But the book market, in general, has done well. If you're not producing books and you're in printing, it's been an incredibly difficult year, but the book market has held up very, very well.

Great. Okay. That's cool. I'll let somebody else ask a question. If I think of something else -- other than one point. We are going to have a call in late December after your numbers come out, I take it, or January?

January. Yes.

(Operator Instructions) Seeing no further questions, this will conclude the question-and-answer session. I'd like to turn the conference back over to Brian Hartman for any closing remarks.

Thank you. We'd like to thank everyone for attending the investor conference call today. We'll also be presenting at the LD Micro Conference on Thursday, September 3, and we'll be posting all the details, including the presentation on our website. So we look forward to you listening in on that.

Again, thank you for attending today's call, and I look forward to providing our next update to you.

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