Earnings Transcript for ALJJ - Q3 Fiscal Year 2020

Operator: Good afternoon. And welcome to the ALJ Regional Holdings Inc’s Fiscal Third Quarter Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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.

Brian Hartman: Welcome and thank you for participating in today’s teleconference and for being investors in an 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 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 statement, 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 security 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 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-Q and 10-K filed with the Securities 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 year-to-date ended June 30, 2020 and then we will provide high-level guidance for fiscal full-year of 2020. ALJ recognized consolidated revenue of 95.4 million for the three months ended June 30, 2020, an increase of 11.1 million or 13.2%, compared to 84.2 million for the three 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 of Carpets. ALJ recognized a net loss of 2.7 million and loss per share of $0.06 for the three months ended June 30, 2020, compared to a net loss of 7.2 million and loss per share of $0.19 for the three 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 three months ended June 30, 2020 an increase of $2 million or 38.5%, compared to 5.2 million for the three 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 the 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 lost 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 non-cash, non-reoccurring impairment of goodwill. Excluding such impairment of goodwill, ALJ recognized a net loss of 9.7 million in 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 at 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 one 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%, compared to 22.5 million for the comparable prior year period. The decrease was a result of operational inefficiencies for the startup of new contracts, increase in medical and workers’ compensation claims and higher rent expenses for new call centers at Faneuil, lower component sales, primarily related to education at Phoenix and lower volumes of 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 we are in 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 total seven 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 [indiscernible] 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. With a full fiscal year 2020, we are forecasting cash capital expenditures to be in the range of seven million to eight million, cash interest to be in the range of nine million to 10 million, cash taxes to be in the range of one million to 1.5 million and cash restructuring costs related to efficiency initiatives in the range of two 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: We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Jay Leonard with Oppenheimer.

Jay Leonard: Hi guys. Just wanted to be the first, I didn't really have that many questions, but it is always good to be the first. The New Mexico the JTIP arrangement. How is that working out?

Jess Ravich: Hey Jay, it is Jess. And joining me on the call is Brian and on the call today are also Anna and Marc from Faneuil and Phoenix. I will sort of act as a quarterback and direct the calls unless, you wanted to hear from me, but Anna if you are around if you are able discuss the JTIP program and how it is going?

Anna Van Buren: Yes, so hi Jay. The JTIP program is obviously a great incentive for us in New Mexico. We had a bit of a bump starting in mid-March because of COVID on that incentive, as you probably know, we moved everybody home in New Mexico. I'm 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 SaaS in New Mexico and continue to benefit from that.

Jay Leonard: So in other words, that is ramping up now?

Anna Van Buren: Yes.

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

Anna Van Buren: It is a mix.

Jay Leonard: It is a mix okay. That is good, I mean we are in the growth market I guess with the unemployment contracts that we have.

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

Jay Leonard: 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 is going on in the marketplace? Two parts.

Jess Ravich: Yes and yes. So we 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 are being operated at the time and other events outside of our control. The biggest contracts that we had one finalized in March, and so that is 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 or in pricing. And feel comfortable that there are either all profitable or moving to profitability as we head into fiscal 2021.

Jay Leonard: Got you. Alright are any of the contracts working substantially better than you expected?

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

Jay Leonard: That is good. Okay, there is 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.

Jess Ravich: On the educational side but on the other side you know and Marc is on the call, we could talk to about it. The regular book and component side has been very strong. Education, it’s anyone guess when that is going to come back to normality.

Jay Leonard: Hi Mark, could you talk little bit about the other side. So because I wasn't aware that it was that much stronger than I kind of got caught up in the whole education aspect.

Marc Reisch: 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 is combination of obviously more people being home and having an interest in reading, but just some huge titles coming up out of the political arena, out of the race concern arena. It has just been a very, very strong trade market. Our children's book business also has been very strong. So look, it has 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 as things start to shake out.

Jess Ravich: And Marc, correct me if I'm wrong, just to level set for Jay education is about 15%, is that ballpark right, Marc or correct me.

Marc Reisch: You know it is probably in that zip code now. We would obviously like to see it back close to 20%, but it is certainly not the more significant part of the business that it has been in the past, that is why it has been important for us to be growing our share on the other side of the business.

Jay Leonard: 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 fallout out from the competition, which may be an indirect benefit for you?

Marc Reisch: I’m not sure it will be indirect benefit from us, and one of the large players in the market is exiting the business, so that is in transition. So, we will see how that ultimately shakes out. But the book market in general has done well, if you are not producing books and you are in printing. It has been an incredibly difficult year. But the book market has held up very, very well.

Jay Leonard: Great. Okay. That is cool. I will 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.

Jess Ravich: January. Yes.

Jay Leonard: Okay. Thanks guys. Good work guys. Keep people working at home. Stay safe.

Jess Ravich: Thanks Jay, stay safe.

Operator: [Operator Instructions] We are seeing no further questions. This will conclude the question-and-answer session. I would like to turn the conference back over to Brian Hartman for any closing remarks.

Brian Hartman: Thank you. We would like to thank everyone for attending the investor conference call today. We will also be presenting at the LD Micro Conference on Thursday, September 3rd. We will be posting all the details, including a presentation on our website. So, we look forward to listening in on that. Again, thank you for attending today’s call. I look forward to providing our next update to you.

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