Q4 2020 ALJ Regional Holdings Inc Earnings Call

Good day, and welcome to the L.J. regional holding fiscal fourth quarter Investor call operating.

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I like to turn the conference average, Brian Hartman, Chief Financial Officer. Please go ahead.

Welcome and thank you for participating in today's teleconference for being investors and A.O.J. Regional Holdings. My name is Brian Hartman and I am the CFO on April Jay with me is Jess Ravage Garcia on chairman.

Before we begin I would ask everyone listening to this investor call to review the risk factors presented in our latest form 10-K that was filed with the Securities and Exchange Commission on this.

For 18th 2020.

With respect to forward looking statements. It is important to note that todays Investor conference 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 expectation goals on intentions regarding the future.

Moving 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 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 debt was discussed in any such statements.

Factors that could cause actual results to differ materially our discussed on our forms 10-Q, and 10-K filed with the Securities Exchange Commission.

We assume no obligation to update any forward looking statements during this investor call.

During the course of this call. We will also reference historical non-GAAP financial measures management reviews, non-GAAP financial information in evaluating for historical and projected financial performance and believes it may assist investors in assessing our ongoing operations.

Presentation on this additional information is not meant to be considered in isolation from a substitute for or superior to measures of financial performance prepared in accordance with GAAP.

For a reconciliation of historical non-GAAP to non-GAAP financial measures. Please see our latest form 10-K that was filed with the U.S. Securities and Exchange Commission on December 18th 2020.

In addition, we will reference certain forward looking non-GAAP financial information, including fiscal year 2021 adjusted EBITDA.

We are unable to recognize reconcile this forward looking non-GAAP financial information to corresponding forward looking GAAP measures because you're unable to estimate without unreasonable effort on certain forward looking GAAP revenue expense and other income items.

We will provide a financial update for the fiscal quarter and year to date ended September Thirtyth 2020, and then will provide a high level guidance for the full fiscal year 2021.

L. G recognize consolidated revenue of 107.3 million for the three months ended September Thirtyth 2020.

An increase of 18.3 million or 20.6 per cent compared to 89 million for the three months ended September Thirtyth 2019.

The increase was driven by state unemployment contracts and new contract implementation activities. This annual increase component sales primarily related to trade at Phoenix offset somewhat by lower volumes the carpets.

LG recognized net income of 1.1 million fully diluted earnings per share of two cents for the three months ended September Thirtyth 2020, compared to a net loss of $9.9 million in fully diluted loss per share of 24 cents for the three months ended September 32019.

[noise] 6.9 million of the improvement in net loss was due to a decrease in the provision for income taxes. In addition.

Margin increased from new state unemployment contracts and implementation activities, Fanueil and improved volumes and treat components in Phoenix.

LG recognize adjusted EBITDA for 8.8 million for the three months ended September Thirtyth 2020.

An increase of $3.6 million or 69 per cent compared to 5.2 million for the three months ended September Thirtyth 2019.

The increase was a result of new state unemployment contracts implementation activities and the start of new contracts. Its annual increase component sales primarily related to treat it Phoenix offset by lower volumes of carpets.

For the fiscal year to date ended September Thirtyth 2020, and LG recognized consolidated revenue of 389.1 million, an increase of 34.2 million or 9.6 per cent compared to 355 million for the comparable prior year period.

The increase was driven by implementation activities on the started new contracts at Fanueil offset by lower component sales related to education at Phoenix and lower volumes at carpets.

Well, Jay recognize a loss of 67.7 million and fully diluted loss per share from one dollar and 60 cents for the fiscal year to date ended September thirtyth compared to a net loss of 16 million and a fully diluted loss per share of 41 cents for the comparable prior year period.

Net loss for fiscal year to date ended September Thirtyth 2020 reflects a 59 million noncash nonrecurring impairment of goodwill.

Excluding such impairment of goodwill.

LG recognized a loss of 8.6 million and fully diluted loss per share of 20 cents for the fiscal year to date ended September Thirtyth 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 on doing contracts for fanueil and lower volumes at both Phoenix and carpet offset somewhat by a 12 million dollar change in income taxes, primarily related to deferred taxes.

In the current year LG had 2 million benefit from income taxes versus a 10 million provision for income taxes in the prior comparable period.

Hey, Ajay recognize adjusted EBITDA of 24 million for the fiscal year to date ended September Thirtyth 2020, a decrease of 3.7 million for 13.4 per cent compared to 27.7 million for the comparable prior year period. The decrease was the result of lower component sales primarily related to education at Phoenix low.

For volumes that carpets offset somewhat by news the unemployment contracts and the completion of certain new contract implementations at Faneuil.

With regard to debt covenants at September Thirtyth 2020, total debt was 104.1 million and consisted of $80.7 million of term loans 14.4 million outstanding on our line of credit for 5.3 million of capital leases and 3.6 million related to equipment financing arrangement on me.

On for exclusive of any deferred financing costs cash on hand at September 32020 was 6.1 million.

At September Thirtyth 2020, we had 14.6 million of borrowing capacity on our line of credit and were in compliance with all debt covenants cash.

Cash capital expenditures totaled 9.5 million for the fiscal year to date ended September Thirtyth, 2020% 18.3 million for the comparative prior year period cash interest totaled 9.1 million for the fiscal year to date ended September Thirtyth 2020 for is 9.8 million for the comparative prior year period. The decrease in cash paid for interest is made.

Due to lower average interest rates on our term loan debt.

Cash taxes paid total zero point Ninemillion for.

For fiscal year to date ended September Thirtyth, 2020, which is consistent with the prior year, we continue to use existing net operating losses to offset federal taxable income.

For the first fiscal quarter of 2021, ending December 31st 2020, we anticipate that adjusted EBITDA will be in the range of five to 6 million versus 3.4 million for the prior year comparable quarter.

Included in fiscal Q1, 2021, adjusted EBITDA result isn't anticipated losses of approximately 5 million from a new contracted faneuil.

We had plan to implement this contract into physical call center locations, but due to COVID-19, we needed to transition to an all at home work force prior to our go live date.

It is important to note that based on our forecasted for fiscal Q1 2021, adjusted EBITDA of five to 6 million as mentioned previously.

If the Covidien related losses of 5 million did not occur the quarter would have been more than 10 million of adjusted EBITDA for the consolidated company.

For the full fiscal year 2021, including the forecasted contract loss of 5 million net faneuil in fiscal Q1 2021, we are anticipating adjusted EBITDA to be higher than fiscal 2020, which was 24 million for.

For the full fiscal year 2021, we're forecasting cash capital expenditures to be on the range of five to 7 million cash interest to be in the range of nine to 10 million term loan amortization of 8.2 million cash.

Capital lease on equipment financing payments of five to 6 million cash taxes to be on the range of one to one and a half million and cash restructurings related to efficiency initiatives in the range of a half a million to $1 million.

We will now open the call for questions.

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Once again that northern one to ask a question.

And our first question comes from Eric more private Investor. Please go ahead.

Hey, guys how are you.

Good how are you Eric.

I'm doing on things good nice nice way to cap off the year for September so congrats.

Just wanted to on that last comment on the end of the $5 million loss for for Daniel.

What.

What's the right way to think about.

What's the right way to think about that it seems like we've had a number of.

You know contract for related.

Implementation issues over the years that for annual so how would you characterize this one versus what you've seen in the past.

Oh I'll start Brian and then if you want you can take it.

So this is when do we start new contracts Youre correct implementation on large contracts, we often starts down in a hole and then you'll come back as these contract is new in there.

There's issues involved with each one that are unique to that and then they've turned into your long term profitable contract for the most for the this one is really one time, because we have spent a year wrapping up building out to call centers training people for physical in <unk>.

Brick and mortar call centers and then at the very you know in March.

We were notified free <unk>. The time was a June go live and eventually became a July go live timeframe to move everybody at home.

Oh it required a hiring lots for people you know the attrition rate was much higher at that fire during co bid.

And this contract.

Is a that's it's a fixed price contract.

Yes. It is.

One of the contracts that its not based upon hours, but based upon members.

And the members is irrelevant, whether you have a person working for a thousand people working.

On your expense line the revenue for the same so we go along with that the client you have made the decision that we were going to Overstaff. Because we just didn't know what was going to happen as we rolled this project out and it yeah.

Open enrollment game and it was very expensive, it's all labor and you know the contract itself is a good contract. The clients are really good client. It's a long term contract and it will be you know it's being resolved currently it will obviously dissipate.

For open enrollment because you have the numbers go down in terms of the amount of calls in there for the employment goes down but suffice it to say that next year it will not be a repeat.

Because it's just a totally different situation next year, we will have been at home with these agents for a year and we will have a much better feel for what the attrition is a non overstaffed too.

On the sales side.

So it's more of a transition so like an outsourced call center model that was the issue rather than you know something kind of inherent in the contract. It wasn't it hurt on the content I mean, we we transition as you know five 6000 people to at home.

You know so they give me we had that all over the place you know in the last year that has benefit. It has cost you know there's a cost you have to give everybody a computer vs. In a low workplace you could share computers on a like this one though it had all new agent.

And that's the big difference everything was transitioned sort of you know your agent.

You have a better feel for what their attrition will be like what the absenteeism will be like without having new agent for the call center and being able to physically be with them for months or years yeah.

No. We we had to err on the side of having way too many people.

Yeah.

Yeah, So there's a whole the I don't it.

It was covered related it is one time.

You know it is different than the other movements. We made successfully you know for the most part on all our other contracts being at home one of the things that you know is a is a result of this is if you've noticed you know our capital expenditures for the 18 range. So then they were in the nine range and then this year, they're going to be on the five.

For the seven range is that you'll going forward, we will I cant imagine we will be building any call centers in the near future. We have lots of empty seats in call centers and most of our clients are very comfortable with the work at home environment.

So going forward it will be a much larger cash conversion model.

Do you think about it going the other way of getting ready for those call centers are well on the leasing rollout shirt I was on her yeah.

Yeah.

We've closed Brian.

Who did we get on a two leases.

Current started yep.

Yeah, and as again as they roll off you know, we're not going to yeah.

To continue them for now.

So that will be a positive effect on EBITDA, but it also be a very positive effect on cash flow because we won't need to build.

Yeah.

Yeah.

Okay, and so you know as you guys look at the year ahead, what do you what are the kind of key objectives for you guys.

Yes, you had a couple of choppy years for last couple of years.

Yeah. It seems like for annual starting to hit its stride with larger business. How are you guys looking at the year ahead and.

And just making sure that for the business is performing as you expected it to.

Hi, being very disciplined on taking on new business make.

Making sure that we have you know a enough senior management and not go over our skis because as you noted we have grown quite a bit and are hitting our stride with the amount of business. We have just in house on these large long term contracts.

Our numbers should be great, yeah, and and the things that could you know put that on the rail is we stretched ourselves too thin and we don't perform well. So we're very there's a number of large contracts that are publicly out there for RFP that we will be competing with but were being young.

Very circumspect on not getting you on implementation team.

Deal with too many implementations at the same time.

It's a good place to be so that we're being very careful on what business. We are looking to take on.

Yeah.

And do you think there is a way to avoid some of these you know the issues with new contract startups or is this just inherent in the call Center model.

No there are definitely I mean for me.

Some of this is our on football.

So we were trying to implement a you know a very large transportation contract a large deal two large health care contracts.

Dealing with co bid moving people home.

We we are you are a large enough company right now with 9000 employees, but we didnt have a enough people to really monitor all those implementations and move at home.

So you know there's.

There's no reason why we should be in a ditch Joe as opposed to us on level ground in year, one you're was never going to be as profitable as the out years as we fine tune the staffing and everything else.

But you know we have.

Made the choice that we were going to take on a lot of business.

And we there for had a lot of issues, but there was business that we wanted to take on their logos. We thought were important there are long term relationships, but going forward I would you know there's the going forward if that happens again it is probably on all on us it's not a covert related to.

Thought we can't come back next year say, we took on too many different contracts again, we did that to grow from you on 150 to 300 million run rate or whatever you know the numbers are because they were important large contracts that take on no. We're not going to double the size of the company.

Yeah Yeah.

It will be more modern what about from.

Go ahead, sorry, it'll be more moderated growth I mean, it will still be large growth because the the rps that are out our large but you know it will be ones that we can take on because we have the bandwidth back on the implementation.

And what about from a from a capital structure perspective, I know you guys have done a lot of work over the last.

I don't know two years or so with the with service you know I think you've had to put up a.

Kind of a stand behind facility I think you've actually joined into the service facility.

Subordinated position have you guys thought about.

Just refinancing broadly with all the activity going on in the market.

That's it I guess, we have and I think that's all we can talk about at the moment.

So we're always looking at you know.

Everything we have you know is for sale every day, we're constantly looking at is there a cheaper and better way to finance the growth of the business.

So.

Yeah.

Given the public day job everything even if we were doing something like on talking about.

Yeah fair enough.

And I think the <unk> the last minute.

In a couple of questions I had was just around you know carpets I think this is probably been one of those situations where you had the.

Maybe the least important business in the in the.

Enterprise it probably soaking up a great deal of of your guys. It's time for the last couple of years do you feel like you've got the right. You know kinda team. They are leading that you know with everything going on in the construction industry right now and then last year as well.

You know they could've capitalize on some way shape or form on on what was going on.

Yeah.

We're obviously.

But obviously, but we're very disappointed in the results out of out of.

Carpet.

And are looking at all the possible.

Revenue for that.

That's probably all I can talk about.

Okay.

Well that's it for me guys I appreciate you taking the time to answer some questions. Thank there.

And once again, if youd like to ask a question. Please press Star then one.

And gentlemen, I'm seeing no further questions at this time would you like to proceed to closing remarks.

Yes. Please.

We'd like to thank everyone for attending the Investor Conference call today, and look forward to providing our next update thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.

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