Earnings Transcript for ALJJ - Q4 Fiscal Year 2019

Operator: Good afternoon. And welcome to the ALJ Regional Holdings Incorporated Fiscal Fourth Quarter and Full Year 2019 Earnings Conference Call. All participants will be in listen-only mode. [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 am 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 23rd, 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, 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 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 three months ended September 30th, 2019, a decrease of $1.1 million or 1.2% compared to $90.1 million for the three months ended September 30, 2019. The decrease was primarily driven by planned lower sales volumes at Carpets and lower volumes in components and packaging at Phoenix, largely offset by new contracts at Faneuil. ALJ recognized a net loss of $9.9 million and loss per share of $0.24 for the three months ended September 30, 2019, compared to net income of $1.2 million and earnings per share of $0.03 for the three months ended September 30, 2018. The majority of the loss was due to non-cash deferred tax expense of $5.9 million and a non-cash write-off of intangible assets of $0.7 million related to one of Faneuil's contract. In addition, Faneuil had three contracts that generated significant losses in the quarter and Phoenix had lower overall and unfavorable product mix impacted profitability. ALJ recognized adjusted EBITDA of $5.2 million for the three months ended September 30, 2019, a decrease of $4.2 million, or 44.5%, compared to $9.3 million for the three months ended September30, 2018. The decrease was driven contracts that generated losses at Faneuil, a wind-down of existing customer contracts, compliance costs related to the implementation of the new revenue recognition accounting standard, and higher overall benefits 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 net loss of $7.3 million and loss per share of $0.19 for the year ended September 30, 2018. As mentioned earlier above, a significant portion of the increased loss related to a non-cash charge for deferred tax expand in the fiscal year ended September 30, 2019, as well as lower profitability of Faneuil for certain contracts that generated losses, lower volumes and unfavorable product mix at Phoenix, offset somewhat by higher earnings at Carpet 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. Decrease adjusted EBITDA were driven by the same items mentioned a few moments ago. With regard to debt and covenant at September 30, 2019, total debt was $99.2 million and consisted of $81.1 million of term loan; $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 23rd, 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 lenders existing term loan into 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, a majority was to support Faneuil's build-out of three new call centers. Cash interest totaled $9.8 million for the fiscal year ended September 30, 2019 verse $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 total zero $0.9 million for the fiscal year ended September 30, 2019 verse $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, an increase incentive 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: [Operator Instructions] Our first question is from Eric Moore, a Private Investor. Please go ahead.

Unidentified Analyst: Hey, how's it going Brian? Hey, I was just wondering if you talked a little bit more about the kind of the footfalls on the Faneuil side of things. And how they relate specifically to the call it $18 million we spent building out new call centers.

BrianHartman: On the $18 million of new call centers, two or three new ones put in, there's 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 what we built it, we've sourced new contracts, added the seats. Got new customers from it, so we feel good that we 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 Fanueil quarterly issues that we had this time, we did have one contract that we talked about previously that were and 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 had concluded that there were two 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 are in the final process of getting the contract signed for that to where that will go from a loss to an income item, which we 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 that sort of shed that those losses and turn those into profitable contracts or exit them at the right time.

UnidentifiedAnalyst: It sounds like none of the -- I mean we're restructuring three contracts losing one, so it sounds like the $18 million it's not as if we just spent that and we haven't filled up the --with-- we don't have a bunch of excess capacity. Is the right way to say it?

BrianHartman: No. We've been great in filling, we know there once Wichita fully sold out, or in Orlando fully sold out and the one in Sacramento California is almost all sold out and during the peak season just about there. We had a press release recently about a facility in Albuquerque, New Mexico that was more we call a plug-in play where basically was an existing call center already. And so it had 750 seats ready to go with desk in them, so much cheaper to set up. We brought some servers over, turn the lights on and you go with that call center comes with several million dollars worth of job training and center 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.

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

JessRavich: Hey, Eric. This is Jess. So the answer is we do think we have the right people. We're always looking to promote within and you'll 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 go to one have accountability and to 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 to 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, at the extent it doesn't, we are going to you 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 the 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.

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

JessRavich: Obviously, the guidance is arranged. We know that we have not forecasted well. So I think everybody is a little gun-shy about what you always go get. I'd rather forecast light and over perform then have another year where we missed the forecast. But this 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 two healthcare contracts going live in the second quarter. We'll update it after that implementation.

Operator: The next question is from Jay Leonard with Oppenheimer & Company. Please go ahead.

JayLeonard: Hey guys. First things first. Congratulations with corporates and more is no longer a drag. I know Brian worked hard on that and John. Where do I start? Well, probably the easy one. Director search for new independent. What's the status? Where are we? What's going on?

JessRavich: The NAM gov committee is looking at that. It's not the highest priority. It is a priority but first we wanted to get Fanueil straightened out. And it's been all hands on deck with regard to working with Anna and the team on that aspect. The NAM 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 five years from now whether we'll 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 acquisition. And so that the priority of the skillsets 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.

JayLeonard: Right. I mean you can definitely add more what I mean --

JessRavich: You can.

JayLeonard: One thing that definitely will help with NASDAQ and everything add to. I know if you can.

JessRavich: It's $170, 000 to $180, 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--

JayLeonard: No. I get that there is an element of additional, it just looks much better I get that, another spot build it. I'll leave that for a second. Let's get back to Anna and really where our problems have lied at least in it's kind of like Faneuil is to say larger version of what happened with Carpets and more. And, yes, it looks like you're getting things turned but when I look at, and just take me through this. Because I don't get it. The new initiative sounds great. You've got these marquee things when you see Humana as an example. It would seem to me that we should not be looking for new company contracts with. We should be building upon the good contract that we have. And just adding capacity within those. Am I being too simplistic on that or does that not make sense?

JessRavich: So some of the clients can grow. Some of the clients are at capacity. And I don't think it's one of the other, Jay. We have a -- we brought over a salesforce, 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. You're going to lose them, right, because all we do that we just build from internal and do organic growth. Our organic growth alone with a number of these clients is tremendous. So what we look at in and we are going to play more defenses 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. Your reputation is still stellar and one of the things we worry about is growing is you do we get ahead of our scheme. How many implementations can we do in a quarter? So that's more of a regulator on new clients than it is so than it is what you were talking about is why don't we just focus on the old. Look, we've decided as you can see from what Brian talked about CapEx is going to be a third 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 three marquee call centers that help us win business. But going forward is going to be more along the lines of either in the client own location like it was in Texas or in a plug-and-play in a jurisdiction that has skilled labor, good wages so for us to be able to pay that are also good for the employees. And we're available instead of supposed from both the state and the city.

JayLeonard: Okay because when I look at the EBITDA was, 2017 EBITDA was 10.1, 2018, 13.1, 2019, were down 8.8 and it sounds like from what you said earlier to the first question that you are looking at not just top line for the salesforce yet Anna's deals never changed, it's $7.5 million and then she gets paid on top of that. Where is the profitability metrics that gets attached to the EBITDA just like revenue for revenue sake is not that but --

JessRavich: It it's a question of to me she has a contract, you could say at redshirt, it's not rich, it's good or fit but it's a line. She gets paid as we feel, 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 a capital charge. So she is making significantly less as is appropriate because our numbers are work. 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 10% EBITDA business fully loaded. And so you can do the numbers. we're going to do over $200 million of EBITDA of revenue next year. So I want her incentivized and I want her paid if we hit those margins.

JayLeonard: Listen, I'd like her to get as rich as can be, it's just that I get worried that some of the contract, the three that basically buried us last year were predicated on just offline and giving away the house.

JessRavich: But she doesn't get paid, it's paid on EBITDA. Anna certainly has no incentive to take on a contract that doesn't make money.

JayLeonard: Okay, good. So then as long as --

JessRavich: If she has been on [Indiscernible]

JayLeonard: When you are looking at it, so she gets fine. So then now that you're vetting all the contract, is there an escalator on because we all know wages are going up. And that's got to be your biggest component for cost.

JessRavich: Yes.

JayLeonard: I mean it's one thing that [Indiscernible] do we have proper escalators that have those wages go up? We get an escalator to protect the company in 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 you really are focused on that.

JessRavich: So we can't go and change contracts are -- that are in writings 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 is the call it increases for wages? If it's a short contract, we might be able to live with a fixed wage paid because it will take that risk for a two or three-year contract because I don't think wages are going up. For the older contract that were long that we don't have the ability to have escalator. We've started negotiating with them early to do extension and rather than getting the full wage increases in the out-years started earlier. So, Jay, we are very cognizant of this more so because of inflation. There is no inflation but just at some times it's because of this is 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 jumped 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 a $1 an hour more is a big number.

JayLeonard: Yes. I know, it's what that, I've said that to Brian when I spoke with him. The thing that would keep me up at night is the Democrats come in next somehow win and god only knows what the minimum wage is going to be. That's not a political statement. That's just say that 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 a ratio that 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.

JessRavich: Well, let's start with -- services 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 loans -- they think --

JayLeonard: There are terms of -- definitely terms of very top with that.

JessRavich: But the interest rate is high.

JayLeonard: Yes.

JessRavich: So I mean we pay a 8% amo, amortization to the board is one it's good discipline at this point we want to get below three turn in the --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 where in fact are 3x leveraged. Where we have more options available do go and look at other things.

JayLeonard: Yes. I just, look, I am not, and you are the expert when it comes to debt and everything. I just have friends that are in the industry and when they look at our stuff that I've tried to get them interested in the company. They say you guys, the market you should be able to do better in the market place. So I just-- I know you still have tendency to something now.

JessRavich: So I don't think that we are going to do better in the marketplace if we have four times debt. We're running in the mid 20s and we have $100 million of debt.

JayLeonard: I agree with. We have to improve.

JessRavich: We need to--

JayLeonard: There is no question.

JessRavich: Wait, prefer the next six months to play out, amortize down according to the amortization schedule. And then we should have more options.

JayLeonard: All right. So it's an -- more of an end of year type of thing which is what I would have thought anyway. Just out of 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 is coming from. I mean the only guesses we have and it's not anywhere reportable is that whatever those guys you know that we're at Vertex that took stock still have stocks for sale over cove because it's --I mean I have friends that have taken out blocks of stock and they just refresh. I know it's not you. I know it's not me. And I know it's not to be any other big shareholders though. We can't figure it out. So maybe you guys got to look at the noble list and probably get a handle on this. And maybe figure out where it is. So once and for all can get cleaned up because come six months from now you're going to want to look to do deal. I know you, Jess. You need to stock above a dog, you need to stock into three. I mean I don't know what you think fair value is but I think book went down to, I don't know, that's tangible book went on sale around two bucks. And this is just ridiculous where it straight again. I am just a lot.

JessRavich: I don't disagree, Jay, but I mean it-- I don't know where the stocks coming from and Brian, I don't know.

BrianHartman: No, I don't know either.

JayLeonard: Well on to something you guys have the noble list. Should be a way to kind of figure out if there's-- if it's Vertex. I don't know if you're still in touch with them, but I mean these guys at least refreshing 50,000 shares that certainly ton a lot of money but for this stock if somebody spending --

JessRavich: This amount of volume.

JayLeonard: Yes. I mean, look, I mean I've lost some of whatever they had out there today, but it's very -- it's confusing, it's weird. What I mean it's like --it's not like you guys have any news coming out that would have an insider selling. Somebody is -- it's not packed selling anymore. We would have thought

JessRavich: I know in the end of the December.

JayLeonard: That the coves draw it up. I fully expect at the end of the summer we would be dried up and we would be languishing waiting on good news from you guys starting when you have a paddle it. But this has been refreshing at 50,000 shares at a clip the last few days going into tonight's conference, which makes the zeros that by the way.

JessRavich: I don't know who it is. Yes, I mean obviously I'm not thrilled that the stock is down in the low one. But on the other hand every time it trades somebody new comes in. And there'll be a better hold.

JayLeonard: 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. I just --

JessRavich: I hear you.

JayLeonard: 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 for getting rid of all the intangible? It stays at $1.97 on Bloomberg. You guys have a number for that.

BrianHartman: 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 --

JayLeonard: $2, all right, so the Bloomberg is accurate. So we're trading way below book and it looks like you guys are putting in the corrections. You've got the really bad contract behind us. The other two you're sort of negotiating out. And we have new stuff coming online and no big cat backs. Why in the world would company be slamming the stock? So answer that makes no sense. That's it but I don't get it, very confusing. Let's see if I have any other questions. The printing-- the printing business. I know from your competitors that the fourth quarter stock when we're going forward.

JessRavich: Calendar fourth quarter stock?

JayLeonard: Yes. Calendar fourth quarter.

JessRavich: That was super soft. It is an interesting business at this time. It's like playing three-dimensional chess. You have Quad announcing that they're getting out of the book business. Quad and LSE announcing their mergers off. LSE getting out of the magazine business. CBS and Viacom merging and then what happens to Simon & Schuster. So there's a lot of moving part. I mean the good news is there's not a lot of capacity. We, the numbers but have borne out where a thesis was which is trade and books are not going away. AL high is not going away obviously college has pretty much gone the way of your professors just having virtual book. Kind of he 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 at decades 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 four or five years at higher prices. There's -- they went that route. They are now --the reason why I was so slow in ad is the three 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 start so.

JayLeonard: Got you.

JessRavich: But in general marking the team do a great job watching cost, we think that there's opportunities in this shake up between Quad and LSE as they are trying to right-size their own workforce. And we have excess capacity in certain of our facilities. So we'll see where it shakes out.

JayLeonard: And, yes, he's been great. I mean he's been a steady and a top business as anybody. I think personally that's where we get a lower EBITDA from anyway. Like they --

JessRavich: 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 even EBITDA and that's part of the reason why Brian and I and the management 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 dollar. It'll either be in the client location or plug-in plays or you know some of our contracts we're going to exit because they weren't profitable and replacing those deeds with profitable deed. So we will-- they'll be very cognizant of cash conversion next year.

JayLeonard: Okay, Carpet this year. Carpets and more, is that still a fit for us or put to any plans? I mean now that Brian fixed it, what do we got?

JessRavich: 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.

JayLeonard: Okay. Well, work in progress at least it's not draining us anymore that are good. I mean the only thing I could pull, I pull back on it I can't believe somebody is selling these blocks of stock 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. Just once it gets cleaned up it will change the complexion around a lot of things.

JessRavich: Brian, will you do that?

BrianHartman: I'll take a look.

JessRavich: Thanks, Jay.

Operator: The next question is from [Tom Koch with Transco Partners]. Please go ahead.

UnidentifiedAnalyst: Yes. Hey, Jess. Hey, Brian. I got a question. What are the opportunities in printing with what's going on with LSE 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 --

JessRavich: They did announce.

UnidentifiedAnalyst: So they did, okay.

JessRavich: Yes, public.

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

JessRavich: No but they do some covers in areas like rack books that we don't do. The stuff you see at the airport the other rack book. So it's really -- we don't do much work with -- we do -- some of the publishers published 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 Quad at the moment.

UnidentifiedAnalyst: Okay.

JessRavich: Yes, we are not like own inside.

UnidentifiedAnalyst: Okay. So, yes, and then with LSE 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 a big picture. Are there any interesting businesses there for you to go after if they are for sale?

JessRavich: They're a really good client of ours. We do a lot of things with them. We bought the more land plan 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 right-size their workforce. But, yes, I mean they're real good client and we're working with them to try and do what make sense for both of us.

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

JessRavich: No. I mean we have our clients; they have Penguin and others but Penguin is a mantra. They are owned by the same people that Penguin ran.

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

JessRavich: I -- with accounts, no, with market share, obviously it depends who has hot books and who doesn't. Even like we-- like a fantasy football thing right. If our quarterback doing better we're going to get higher market share, not market share with that particular publisher, but that particular publisher they have a higher market share than they did prior year.

UnidentifiedAnalyst: Right, okay. But your contracts with your customers are kind of the same as they had been?

JessRavich: Yes. I mean they're all -- you can see them in the contract backlog. They're all multi-year and so we don't see any big shifts like we're not going to pick up random Penguin Random House business. We're going to -- not going to lose their long-term clients business. We don't expect. But how they play and their market share that could shift around.

UnidentifiedAnalyst: Okay, all right. And then the 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 -- 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 for the year?

JessRavich: [Multiple Speakers] benefit exchange. For transportation they're actually stronger over the summer. So but HP is definitely stronger during open enrollment which is the fourth calendar quarter in the first calendar quarter. If -- 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 the 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 six months and over the next six months. But the contract filled during the term of the contract, we pencil it out and we work with them to have -- we try to have at least consistent margin. But the implementation phase time 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 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.

UnidentifiedAnalyst: Okay.

JessRavich: Brian will probably spend weeks with you on the phone about that.

BrianHartman: So like we're becoming experts on it but --

UnidentifiedAnalyst: 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 what we get in March and June and toward the back end of the year.

BrianHartman: So all the way back to normal in either June or September.

UnidentifiedAnalyst: So you've got this new business ,I guess, there's two parts 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 -- or should be making full margin, you are making the improvements to the new ones that have suffered --

JessRavich: The time the three that we called out were large negative contracts not just low margins, but actually negative EBITDA contracts.

UnidentifiedAnalyst: Okay.

JessRavich: So that boost the blend, the majority of our contracts by number hit our margin analysis that we're looking for. And the new contracts have been vetted to do that as well.

UnidentifiedAnalyst: 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 three money losing contracts are they behind us, is that what you said?

JessRavich: One is we gave early notice then it's gone in April. So it will affect the quarter we're in. And it did affect December. The other two, 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 contract. They both had about a year left to go clients like the service want to extend with us. And we need to just because we'd 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 extensive.

UnidentifiedAnalyst: But that will continue to be a drag. It was in the December quarter and we'll continue in this quarter until that that's finalized?

JessRavich: One of them I imagine will be about half this quarter and one will be a little more than half. We want to probably the full quarter.

UnidentifiedAnalyst: Okay. So in summary those three will definitely all hit December and will be most of this quarter and then hopefully --

JessRavich: They are more in the September quarter, yes.

UnidentifiedAnalyst: So then from then on out it's hopefully back to kind of like where you said 8% type of EBITDA margin?

JessRavich: I would, I think this business should run higher than that, but that's a fine number for you.

UnidentifiedAnalyst: Okay. Awesome, hopefully we're there this summer.

JessRavich: Hope we will. 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. End of Q&A

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

Brian Hartman: 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.

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