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Earnings Transcript for ALJJ - Q4 Fiscal Year 2017

Executives: Brian Hartman - CFO
Analysts:
Operator: Good day ladies and gentlemen and welcome to the ALJ Regional Holdings Conference Call. [Operator Instructions]. I would now like to introduce your host for today's program Brian Hartman, CFO for ALJ. Please go ahead.
Brian Hartman: 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 on the call Jess Ravich, our Executive Chairman. Before we begin I would ask that everyone listening to this investor conference call review the risk factors presented in our latest Form 10-K that was filed with the SEC on December 19, 2017. With respect to forward looking statement it is important to note that today's investor conference call and 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 in gold or intentions regarding the future including but not limited to statements with our financial projections and business growth the impact of acquisitions, cost cutting measures, integration measures and other statements including the words will and expect in similar expression. 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 Form 10-K filed with the Securities 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 full year ended September 30, 2017 and then we will provide high level guidance for fiscal 2018. After the conclusion of prepared remarks we will open the call to question. ALJ recognized consolidated revenue of 86.3 million for the three months ended September 30, 2017, an increase of 13.9 million or 19.2% compared to 72.4 million for the three months ended September 30, 2016 due to an increase in business activity in the Faneuil and carpet segments as well the acquisitions of Color Optics by Phoenix and the CMO business by Faneuil which together accounted for 9.3 million on the total increase in revenue. Excluding the impact of acquisitions total revenue increase 4.6 million or 6.4% with carpets increasing 2.8 million or 19.2% due to higher volumes from home builders and Faneuil increasing at 3.1 million or 9.5% related to new customer awards offset somewhat by lower revenue at Phoenix due to increased volume for juvenile books. ALJ recognize net income of 13.8 million and earnings per share of $0.37 on a diluted basis for the three months ended September 30, 2017 compared to net income of 8.8 million and diluted EPS of $0.24 for the three months ended September 30, 2016. Increased revenue was offset by higher cost due to startup cost of certain contracts increased depreciation and amortization expense of 800,000 and acquisition related expense of 300,000. There was a significant positive benefit from income taxes due to the reduction and the differed tax valuation allowance of 12.1 million in fiscal 2017 versus 3.9 million in fiscal '16. Excluding such benefit from taxes ALJ recognize net income of 1.7 million and diluted EPS of $0.04 for the three months ended September 30, 2017 compared to net income of 4.9 million and diluted EPS of $0.14 for the three months ended September 30, 2016. ALJ recognize adjusted EBITDA a non-GAAP measure of 7.9 million for the three months ended September 30, 2017 a decrease of 300,000 or 4.1% compared to 8.2 million for the three months ended September 30, 2016. Decreased adjusted EBITDA was primarily due to lower overall volumes and continues [indiscernible] expenses related to the transition of the packaging business at Phoenix offset somewhat by improved performance at [indiscernible]. For the year ended September 30, 2017 ALJ recognized consolidated revenue of 326.7 million an increase of 58.3 million or 21.7% compared to 268.4 million for the year ended September 30, 2016 due to an increase in the business activity in each of our segments as well as the acquisitions of Color Optics by Phoenix and the CMO business by Faneuil which together accounted for 27.2 million of the total revenue increase. Excluding the impact of acquisitions, total revenue increased 31.2 million or 11.8% with carpets increasing 19.1 million or 37.8% due to higher volumes from home builders and Faneuil increasing 13.8 million or 10.5% related to contract renewals and new contract awards offset by lower revenue at Phoenix due to decreased volume from juvenile books and educational components. ALJ recognize net income of 15.7 million and diluted EPS of $0.43 for the year ended September 30, 2017 compared to net income of 10.9 million and diluted EPS of $0.30 for the year ended September 30, 2016. Increased revenue is offset by higher cost due to startup cost of certain contracts and increased depreciation and amortization of 3.4 million primarily related to acquisitions. There was a significant positive effect from a benefit from income taxes due to the reduction of the deferred tax valuation of 12.1 million in fiscal '17 versus 3.9 million in fiscal '16. Excluding such benefit from income taxes ALJ recognize net income of 3.6 million and diluted EPS of $0.10 per the year ended September 30, 2017 compared to net income of 7 million and diluted EPS of $0.19 for the year ended September 30, 2016. ALJ recorded adjusted EBITDA of 31 million for the year ended September 30, 2017 an increase of 2.2 million or 7.7% compared to 28.8 million for the year ended September 30, 2016. Increased adjusted EBITDA was primarily due to the acquisition of the CMO business contract renewals and new contract awards at Faneuil and improved performance at carpet offset somewhat by lower volumes primarily at one educational customer and the impact of securing longer data contracts with customers at Phoenix. With regards to debt and covenants at September 30, 2017 total debt was a 103.8 million and consisted of 91 million of term loan, 7.3 million of capital leases and 5.5 million outstanding on our line of credit. All amounts are exclusive of any deferred financing cost. Cash on hand at September 30 was 5.6 million. At September 30, 2017 we had 14.1 million of borrowing capacity on our line of credit. Net debt defined as total debt less cash with 98.1 million at September 30, a decrease of 3.3 million compared with net debt at September 30, 2016. Improved cash earnings and working capital offset higher capital expenditures and acquisitions made in fiscal 2017. At September 30, 2017 we were in compliance with all debt covenants. Capital expenditures totalled 9.3 million for the fiscal year ended September 30, 2017 versus 3.6 million for fiscal 2016 an increase of 5.7 million. A majority of this increase was to support Faneuil's new customer contract including the CMO business acquired contract and Phoenix's purchase of production equipment. Cash interest paid totalled 8.7 million for fiscal year ended September 30, 2017 versus 8.1 million for fiscal 2016. The increase in cash paid for interest was due to higher weighted average outstanding balances on our term loan and revolver working capital facility during fiscal 2017 compared to 2016 as a result of business acquisitions and higher average interest rates during fiscal 2017. Cash tax is total 0.7 million of the fiscal year ended September 30, 2017 versus 0.6 million for fiscal 2016 basically flat year-over-year. We continue to use existing net operating losses to offset federal taxable income. With the corporate federal statutory income tax rates decreasing from 35% to 21% we expect this to impact the value of our existing net operating losses as well as reduce our deferred tax assets and related valuation allowance. We will continue to research the recently enacted tax changes to impact our financial statement, current thoughts are that any significant change would result in a non-cash charge due to provision for income taxes or deferred taxes in the income statement. We estimate that our cash paid for taxes in fiscal 2018 will approximate $1 million to $1.5 million which mainly relate to state and local taxes. For fiscal 2018 we are forecasting a range of 36 million to 39 million of adjusted EBITDA compared to 31 million for fiscal 2017. The improvement is based on the final integration Color Optics acquisition and relocation of the production facility from [indiscernible] New Jersey to our existing Hagerstown, Maryland facility. Also the full year impact of Faneuil's Vertex acquisition which closed in May of 2017 and Phoenix's Moore-Langen acquisition which closed in October 2017. Also increased customer contract awards at Faneuil and cost saving measures at carpet. For fiscal 2018 we are forecasting cash capital expenditures to be in the range of 79 million, cash interest to be in the range of 8 million to 10 million, cash taxes to be in the range of 1 million to 1.5 million. This concludes the financial update portion of ALJ's investor call. Operator please open the call to questions.
Operator:
Brian Hartman: Sure. Thank you. We would like to thank everyone for attending today's investor conference call and look forward to providing our next update in New York during the summer. Have a good day. Thank you.
Operator: Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.