Q3 2021 ALJ Regional Holdings Inc Earnings Call
Any regional holding incorporated fiscal third quarter 2021 earnings conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone.
And to withdraw your question. Please press Star then two 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 Sir.
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 as just ravitch, 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-K that was filed with the Securities Exchange Commission on December 18th 2020.
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 security laws.
Such statements, including information regarding our expectation.
Kohl's intentions regarding the future, including but not limited to statements about our financial projections.
<unk> growth the impact of acquisitions cost cutting measures integration measures in other seems 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 performance may differ materially.
From those discussed in any such statements.
Factors that could cause actual results to differ materially are discussed in our forms 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 conference call.
During the course of this call. We will also reference historical non-GAAP financial measures management reviews, non-GAAP financial information and evaluating our historical and projected financial performance and believe it may assist investors in assessing our ongoing operations.
The presentation of this additional information is not meant to be considered in isolation or as a substitute for or superior to measures of financial performance prepared in accordance with GAAP for a reconciliation of historical non-GAAP to GAAP financial measures. Please see our latest Form 10-K that was filed with the 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 reconcile this forward looking non-GAAP financial information to corresponding forward looking GAAP measures because we are unable to estimate without unreasonable efforts certain forward looking GAAP revenue expenses and other income items.
We will provide a financial update for the fiscal quarter and year ended June 32021, and then will provide high level guidance for the fiscal full year 2021.
ALJ recognized consolidated revenue of $103.5 million for the three months ended June 32021, an increase of $17.4 million or 22% compared to $86.1 million for the three months ended June 32020.
The increase was driven by the start of production of new contracts in healthcare and transportation verticals at Fanueil and improved volumes for trade components and books at Phoenix.
ALJ recognized a net loss from continuing operations of $3.5 million and loss per share from continuing operations of <unk> <unk> for the three months ended June 32021.
Compared to a net loss from continuing operations of $2.2 million and net loss per share from continuing operations of <unk> <unk> for the three months ended June 32020.
The increase in net loss is due to the write off of deferred financing costs and certain related expenses related to refinancing efforts, which are included in loss on debt extinguishment and the statement of income and loss.
ALJ recognized adjusted EBITDA of $7.8 million for the three months ended June 32021, an increase of <unk> 6 million or eight 9% compared to $7.1 million for the three months ended June 32020.
The increase was driven by higher volumes from trade components and books at Phoenix offset somewhat by the wind down of certain state unemployment contracts and continuing losses from one healthcare contract at Faneuil.
For the year to date ended June 32021, ALJ recognized consolidated revenue of $329.2 million, an increase of $76.9 million or 35% compared to $252.2 million for the comparable prior year period.
The increase was driven by the start of production for new contracts and increased volume for existing contracted Daniel and improve volumes for train components and books.
Phoenix.
ALJ recognized net loss from continuing operations of $4.6 million and a loss per share from continuing operations of 11.
For the fiscal year ended June 32021, compared to a net loss from continuing operations of $65.4 million.
And our loss per share from continuing operations of $1.55.
For the comparable prior year period.
Net loss from continuing operations for the nine months ended June 32020 reflects a $56.5 million noncash nonrecurring impairment of goodwill.
Excluding such impairment of goodwill ALJ recognized a net loss from continuing operations of $8.9 million.
And net loss per share from continuing operations of 21 for the nine months ended June 32020.
The improvement in net loss is due to higher business activity at Daniel <unk>.
ALJ recognized adjusted EBITDA from continuing operations of $23.1 million for the fiscal year to date ended June 32021, an increase of $7.9 million or 51, 9% compared to $15.2 million for the comparable prior year period.
The increase was driven by the start of new contracts and operational improvements at existing contracts with Daniel and higher volumes from trade components and books at Phoenix.
With regard to debt and covenants at June 32021.
Total debt was $102.3 million and consisted of $101 million of term loan.
No amounts were outstanding on our line of credit and $1.3 million of capital leases.
All amounts are exclusive of any deferred financing costs.
Cash on hand at June 32021 was $8.4 million.
At June 32021, we had $29.2 million of borrowing capacity on our line of credit and we are in compliance with all debt covenants.
Cash capital expenditures totaled $6.6 million for the fiscal year to date ended June 32021.
Cash interest totaled $6.9 million for the fiscal year to date ended June 32021 for $7 million for the comparable prior year period.
Cash taxes totaled zero point $1 million for the fiscal year to date ended June 32021, which is lower than prior years Europe was $8 million cash taxes, primarily related to state taxes, we continue to use existing net operating losses to offset federal taxable income.
On June 29, 2021, the company completed the refinancing of a term loan with a new provider.
<unk> amended its existing agreement with its working capital revolver provider significant benefits from this refinancing are greater financial flexibility by reducing debt amortization capital lease and equipment financing payments.
Improvement in cash flows that can be reinvested in our business.
Reset of financial covenants with cushion of 20% based on adjusted EBITDA forecast.
And extension of debt maturities to June 2025.
We have discussed in the past one contract with Daniel which had underperformed significantly as the initial ramp up occurred during the early stages of Covid. As you May remember. This program was meant to be operated from two call center locations, but due to COVID-19 had to be facilitated from an at home model from the very beginning.
In early July 2021, Daniel reached an agreement with this customer to include this contract prior to the end of this calendar year and have developed a transition plan cumulative life to date losses related to this contract approximate $8.8 million through June 32021, and will not be recur.
Right.
Daniel approximate to that going forward through the end of the transition period results for this contract will approximate breakeven.
On a consolidated basis, we are forecasting a range of 29% to $31 million of adjusted EBITDA for the full fiscal year, ending 2021 compared to $24 million for fiscal 2020.
For the full fiscal year 2021, we are forecasting cash capital expenditures to be in the range of 9% to $11 million.
Cash interest to be in the range of $9 million to $10 million.
Amortization payments of $5.1 million.
Cash payments for capital leases and equipment financing to approximate $4 million.
This excludes any impacts from the refinancing transaction.
Cash taxes to be in the range of $1 million.
Cash restructuring costs related to efficiency initiatives to be in the range of zero point $5 million.
We are currently working on our fiscal 2022 budget and are not at a point to provide specific details.
We will now open the call for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then two and at this time, we will pause momentarily to assemble our roster.
Yeah.
And the first question will come from Jay Leno with Oppenheimer. Please go ahead.
Gentlemen.
I guess I have my record going to be first again.
Hmm.
I'm not really sure where I wanted to begin but just you just from a point of reference on the proxy results.
Is that something that you guys are going to put out.
Yeah on the 8-K, when we file after the.
On Friday, when we have the vote there'll be an 8-K within four days and we will list out all the voting as it came in.
Okay, Greg Sullivan the votes are not all tallied hasn't yet.
No no the cutoff I think is Tonight.
Gotcha.
I misread it I thought that.
To be able to note today okay.
<unk>.
Getting to reading through from a focus standpoint with new contracts versus.
Building upon existing contracts.
My interpreting correctly that the emphasis for ALJ as to work on existing relationship.
Basically try to get more out of those relationship does compare to going out and taking the <unk>.
Inherent risks as is evidenced by some of these other contracts that we've had that we've had to walk away from.
Where are we with regards to that first question. Okay. So first of all you Theres Fanueil in Phoenix.
And Phoenix.
The landscape is pretty static.
Theres not a lot of additional publishers out there.
And so we are we have a stable core customers and we look to this business.
Business with them, but there's not a lot of movement in that in that marketplace with regards to Fanueil, which is I assume where youre talking about.
We are.
Our relationships with Europe.
Up ancillary business Youre doing some work for the state and they need other work they can sometimes do it under the same contract or you have relationships, but we are constantly going after new business.
We have a much more disciplined approach to to how to do that than when we took on those contracts that cost us $8.8 million.
Four or five years ago, and there was implementation two years and then we went live it was a confluence of.
Looser standards back then plus obviously COVID-19 hit and it just changes the program's dynamics completely around.
But we are not we are not just focusing on current clients we are.
So it was recently announced deal we won a large transportation contract and we are continuing to look for new builds.
Okay.
What's the status on the hybrid model that you guys migrated to during Covid.
You mean work at home.
Yes.
Still.
Yes, Vasily work at home some clients have wanted people back in but with Covid coming back. It's very fluid. My guess is that there will be a percentage whether it's before this all started we were 90, some odd percent brick and mortar.
And then at the height, where 80 plus percent work at home. My guess is that we will end up somewhere between 30% and 50% work at home, which means that our brick and mortar footprint will be reduced.
Okay, because I saw the.
<unk>.
Under the finance leases that number went down dramatically is that due to the fact that we have leases that we didn't renew or am I reading that right.
Yes.
During when we did our refinancing on June 2019, we paid off as men all of our equipment financing agreements and we paid off about 90% of our capital leases and the refi.
If you were talking to real estate leases, we are actively managing your brick and mortar that we don't need you to as they roll off.
Okay.
Leads me into the beginning of it.
The unfortunate set of events that caused all of our debt issues started with.
Bad leaf and putting the company in jeopardy prior to the pandemic.
What do you mean.
The company was when we have to do the first refi.
With your previous lenders how does.
Has that started.
Unless I'm misreading it.
Standing what happened before the pandemic that was the first time, we had to go work with them to get within the covenant is not being met.
I'm pretty sure that was the way it started and then things start to get then the pandemic hit and then every year.
Now while the other helmet came out.
Is that not correct.
Brian.
Yes, I think Jay is asking about the $18.5 million of Capex and not leases just capex capex, yes, we.
We spent $18 million building out facilities or growth.
And that growth did come some of that was unprofitable and thats on US and then obviously hindsight with work at home we would not.
Our capex spending will be vastly different going forward than it has been in the past it sounds like everyone else you have to readjust to post Covid life, we're not everyone's coming back to the office.
Right. Okay, I, just I mean, I guess the way.
The chain of events and then it was unknown about the pandemic coming to just kind of push every business into this new hybrid flash work at home.
Things going forward, which is a positive I would think for us because.
Your footprint.
Actual costs will go down at least that's what it appears.
That's accurate.
So.
Let's talk about the.
Board our current board.
And I'm trying to figure out a way to say this the nicest way I can.
The board has been around for a very very long time. There are a few members of the board that I think most shareholders are very comfortable with.
And then there are a lot of people on the board.
That they're not.
Is there this would probably be a good time.
Refresh.
What we have especially in the way of independence within the board.
Where do we stand on that I know you've added one person that's great, but the refresh is really necessary going forward any thoughts.
If not.
Under active consideration at the moment.
Okay.
Will that become of act.
We really need new blood and the board I mean.
If you need more check the balances.
Let me move onto the next thing Investor Relations.
I know that that was something that you were guidance.
We're going to entertain once the company turned the corner he got the debt refinanced at a much better.
View of the total.
Total future, but of the immediate future.
And with the numbers starting to get better where are we on that respect.
Brian you want to take that.
At the moment, we havent engaged a firm there've been some talks as we've mentioned in different than past annual shareholder meetings, we look into it but at the moment. There are no discussions that doesn't prohibit us from starting discussions with such firms.
Okay with that.
We will get back on the agenda hopefully in the.
The foreseeable future and I know that was put to the side because why have them.
Numbers market it would be good now that you've made the turn at least we hope you made the turn.
I would think that that will that become something.
To get started in the near term because if people are a little frustrated.
Stock's been 15 years I'm not moving when you look at it.
Yes, I mean, we did have we did have some of that last year with attending a conference that was webcast. It.
You get some positive feedback from that.
But again I think we can talk about this at the board level, and we'll see where things shake out.
Again, it's nothing at the moment has been actively discussed.
Okay.
On a different level in <unk>.
Yes of course.
Being the Savior.
To step in to take on.
Yes.
During the pandemic.
Has it been considered because of the dilution.
That whole debt financing that that debt could be paid back instead of in shares and cash since that wasn't really.
The company's <unk>.
Quote Paul from or the shareholders fall that we went through a pandemic.
We were at a weakened condition then the pandemic hit.
And then we're going to end up being at a very diluted stands.
Standpoint, going forward has that been something that has been considered.
Just you want me to take that.
That is the original term loan C that was issued in May of 2020, and as you know we publicly stated that the conversion of that debt was at 54 cents. It hasnt changed.
That debt picked all throughout the year and when we refined on June 29th of this year, we asked our our new term loan lender to change the terms. The only term that we change was to make it from pick which would be very dilutive at the 54 when the shares are trading north of a one dollar.
And may get cash pay so the dilution is turned off.
And now it's just the normal dilution setback.
And Jess and one additional investor made the investment at that time.
So theres no additional dilution coming it's already been in our numbers disclosed.
Since may of 2020, and now the extra tick Pes is completely capped because you paid in cash paid in cash okay.
Okay. It was aware of that I mean does it does.
Parent structure of that.
Let's just make an assumption here that as the company gets stronger and I'm sure Jeff.
Love to or if the company would love to add another leg to the tripod type of thing for another business.
Does that affect.
The ability to go use stock in the future.
Make an acquisition.
For the.
Yes, the attractiveness of the stock in the future and see what happens with the.
The Nols.
Well.
As at February at the end of March.
Yes chunk of the Nols go by by the Nols expire on June 32022, So call. It 10 to 11 months from now.
And there is nothing in the structure of the agreement that's listed on the SEC.
The actual term loan C, which is now a term loan b under the new refinancing.
There is nothing in their structure that changes that from what it was before its convertible notes.
Note holder's option.
And that could be converted into actual shares at 54.
<unk> current price.
Or we the company would have to pay it back in cash.
Okay got you.
It's something that.
If a deal did arise.
We didnt whoever was buying didn't want to come in with a diluted stat that I.
I mean that suggests discretion, obviously quick one.
I'm just worried that we finally get moving and that becomes the next hindrance.
Because it's already of the company's control, 40% by Jeff additive.
Let me just stopped.
What youre seeing what Youre, saying is accurate I think if we were to do a deal and not that theres. One in the works I don't think that that would be a hindrance I think if it would we would find a solution to it at that time.
Okay and is there anything else you guys can share on <unk> and <unk>.
Aside from improving the operations and everything on that getting the stock at a more reasonable level compared to what your current EBITDA is and what our proper multiple might be.
We've met with some.
Youll companies that hold now virtual conferences and the like one of the.
Sticking point is is that we have no float and we have no volume. So it's a little bit of a they want to go there or people that want to research it want to be able to make money trading the stock.
And as you said, it's fairly tightly control which limit.
We traded 70 million shares have a day one.
One day.
Phil.
The stock find its way out there well, but he wants to buy I.
I think that was the same shares trading over and over Jay on the on our part.
Yes.
Obviously 71 billion shares didn't trade hands, because we only have to finally coming in 30 of them are.
Lately or all restricted.
Yes.
No it was the kind of within.
With me.
Circumstances, but but again that puts us into that same.
I'm, a believer that volume will there's enough shares in the float that if we if it started to move you would see a lot more action in the stock.
Prior to this.
Thats right it will trade if they're trading.
Oh.
But again.
Had that youll make having those meetings.
Obviously, you can't do a secondary or anything to get more sockets of assist with either.
Not at this price we will.
Right.
I mean.
Can you speak to what you think would be.
A reasonable level for where the stock would.
It would be trading at if we were in a reasonable world the way the stocks as being.
Okay.
Hi, Lee.
Legally cannot.
So.
My lawyers.
But just from a reference standpoint.
Like five or six times EBITDA.
It kind of be a good benchmark.
Again.
Okay.
Yes.
We have a board of directors that own stock that is married up with the with the public.
Well have an NOL that's running out in June that we're aware of.
And we all have an interest in maximizing value at the same time, whereas zero roughly zero interest rate environment.
And five to six times EBITDA is <unk>.
16% to 20% cash on cash.
So everything has to be balanced.
Gotcha.
Anything else you can share on.
What your thoughts might be on enhancement of value for the shareholders.
I mean.
We.
We are.
No.
I really can't I mean I'm.
I'm, the largest shareholder I want to maximize value.
Don.
I don't see it coming on just daily trading our stock as always.
Sort of done nothing and then we make an announcement of either a sale or something and then it goes up and then it sort of goes into stagnate again.
I'd like to get that.
To be changed.
Without.
The stock getting to a different level and us either doing a secondary or reducing the insider holdings I don't see how the volume is going to pick up enough.
I don't know if that answers without sort of.
So basically it's more a matter of we have to just get some coverage on the stock and the stock will take care of itself and.
We do have a little bit of a timing gun to our head where we have an NOL that runs out in nine to 10 months.
Yeah, well that's well.
Function, which I wasn't going to say about the assumption would be obviously, if you could merge <unk> with another entity utilizing.
Your Nols.
Of course, if you kept the margins together that would be a very attractive thing to deal with visa.
And unclear.
Hello.
It would make sense.
We or anyone within NOL, we're going to do something they do it before the NOL runs out them rather than the day after the NOL runs out.
Thanks Zack.
Thanks, Jeff.
No that one Paul but the.
The NOL when we started this journey was 10 years away and we up sold K, Yes, and we did other things, but now it's getting closer.
Got it.
Well I'll, let that hopefully there's somebody else will add some.
Thanks, Scott Thanks, Jay.
Okay.
Again, if you have a question. Please press Star then one.
And this will conclude our question and answer session for today I would like to turn the conference back over to Brian Hartman for any closing remarks. Please go ahead Sir.
We would 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.
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