Earnings Transcript for ALJJ - Q4 Fiscal Year 2018

Operator: Good day, ladies and gentlemen and welcome to the ALJ Regional Holdings Year End Investor Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to Brian Hartman, Chief Financial Officer. You may begin.

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 am the CFO for ALJ. Before we begin, I would 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 17, 2018. 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 the Federal Securities laws. Such statements include information regarding our expectations, goals and intentions regarding the future, including but not limited to statements about our financial projections and 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 statements. Factors that could 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 conference call. We will provide a financial update for the fiscal quarter and full year ended September 30, 2018 and we will provide high-level guidance for fiscal 2019. ALJ recognized consolidated revenue of $90.1 million for the 3 months ended September 30, 2018, an increase of $3.7 million or 4.3% compared to $86.3 million for the 3 months ended September 30, 2017 due to the acquisition of the printing components business by Phoenix, which accounted for $4.5 million of the total net revenue increase. Excluding the impact of such acquisitions, total net revenue decreased $0.8 million or less than 1.0% due to lower volumes in granite and cabinet sales at Carpets. ALJ recognized net income of $1.2 million and diluted earnings per share of $0.03 for the 3 months ended September 30, 2018 compared to net income of $13.8 million and diluted earnings per share of $0.37 for the 3 months ended September 30, 2017. Increased revenue was offset by restructuring expenses to combine manufacturing facilities at Phoenix and higher startup costs of certain contracts at Faneuil. Additionally, net income for the 3 months ended September 30, 2017 reflects a non-recurring benefit from income taxes due to the reduction of deferred tax valuation allowance of $12.1 million in fiscal 2017. For the 3 months ended September 30, 2018, there were no such non-recurring deferred income tax adjustments. Excluding deferred tax benefit from income taxes for fiscal 2017, ALJ recognized net income of $1.7 million and diluted earnings per share of $0.04 for the 3 months ended September 30, 2017 versus net income of $1.2 million and diluted earnings per share of $0.03 for the 3 months ended September 30, 2018. ALJ recognized adjusted EBITDA of $9.3 million for the 3 months ended September 30, 2018, an increase of $1.5 million or 18.5% compared to $7.9 million for the 3 months ended September 30, 2017. The increase was driven by the printing components business acquisition by Phoenix, partially offset by planned volume reduction in packaging at Phoenix. For the year ended September 30, 2018, ALJ recognized consolidated revenue of $369.8 million, an increase of $43.1 million or 13.2% compared to $326.7 million for the year ended September 30, 2017 due to the acquisition of the CMO Business by Faneuil and the printing components business by Phoenix, which together accounted for $37.6 million of the total revenue increase. Excluding the impact of acquisitions, total net revenue increased $5.4 million or 1.7% mainly due to an increase of $8.0 million at Faneuil partially offset by lower volume in granite and cabinet sales at Carpets and planned volume reductions in packaging at Phoenix. ALJ recognized a net loss of $7.3 million and diluted loss per share of $0.19 for the year ended September 30, 2018 compared to net income of $15.7 million and diluted earnings per share of $0.43 for this year ended September 30, 2017. Increase in net revenue was offset by restructuring expenses to combine manufacturing facilities at Phoenix, a non-cash litigation loss at Faneuil, higher startup costs of certain contracts at Faneuil, and higher selling and general and administrative costs due to increased depreciation and amortization expenses related to acquisitions. Additionally, net loss for the year ended September 30, 2018 reflects an increased provision for income taxes to reflect a one-time, non-cash deferred income tax expense as a result of the Tax Cuts and Jobs Act of 2017. Net income for the year ended September 30, 2017 reflects a non-recurring benefit from income taxes due to the reduction of deferred tax valuation allowance. Excluding the one-time impact of deferred income taxes, ALJ recognized a net loss of $3.2 million and a diluted loss per share of $0.09 for the year ended September 30, 2018, and net income of $3.6 million and diluted earnings per share of $0.10 for the year ended September 30, 2017. ALJ recognized adjusted EBITDA of $33.1 million for the year ended September 30, 2018, an increase of $2.1 million or 6.8% compared to $31.0 million for the year ended September 30, 2017. Increased adjusted EBITDA was driven by the printing components business acquisition by Phoenix, partially offset by higher labor material and customer service costs at Carpets, and planned volume reductions in packaging at Phoenix. With regard to debt and covenants, at September 30, 2018, total debt was $101.0 million and consisted of $85.0 million of term loans, $7.3 million of capital leases, and $8.7 million outstanding on our line of credit. All amounts are exclusive of any deferred financing costs. Cash on hand at September 30, 2018 was $2.0 million. At September 30, 2018, we had $14.4 million of borrowing capacity on our line of credit. At September 30, 2018, we were in compliance with all debt covenants. On November 30, 2018, we filed an 8-K, which provided specific details related to amendment number four to our term loan agreement. Key provisions in amendment number four were to extend the maturity date from August 2020 to November 2023 and reduce the fixed charge covenant from 1.25 times to 1.05 times for the next four quarters. Then the fixed charge covenant increases to 1.10 times and remains at this level for the remainder of the agreement. Capital expenditures totaled $8.6 million for the fiscal year ended September 30, 2018. The majority was to support Faneuil’s new customer contracts and the build-out of 3 new call centers. Cash interest paid totaled $9.3 million for the fiscal year ended September 30, 2018 versus $8.7 million for fiscal 2017. The increase in cash paid for interest was due to the higher weighted average outstanding balance on our revolver facility during fiscal 2018 compared to fiscal ‘17 and higher average interest rates during fiscal 2018. Cash taxes totaled $1.0 million for the fiscal year ended September 30, 2018 versus $0.7 million for fiscal ‘17. We continue to use existing net operating losses to offset federal taxable income. For fiscal 2019, we are forecasting a range of $34 million to $38 million of adjusted EBITDA compared to $33.1 million for fiscal 2018. The improvement reflects increased customer contract awards at Faneuil, improved productivity at Phoenix, and cost saving measures implemented at Carpets. For fiscal 2019, we are forecasting cash capital expenditures to be in the range of $13 million to $15 million, primarily related to the build-out of 3 call centers for Faneuil, 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. We would like to thank everyone for attending the investor conference call and look forward to providing our next update. Thank you.

Operator: Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.