ALJ Regional Holdings, Inc. (ALJJ) Q4 2020 Results Earnings Conference Call January 13, 2021 4:30 PM ET
Company Participants
Brian Hartman - Chief Financial Officer
Jess Ravich - Chairman and CEO
Conference Call Participants
Operator
Good day. And welcome to the ALJ Regional Holdings Fiscal Fourth Quarter Investor Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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’m the CFO of ALJ. With me is Jess Ravich, our CEO and 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 December 18, 2020.
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, 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 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 statement.
Factors that could cause actual results to differ materially are discussed in our Form 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 our historical and projected financial performance and believes it may assist investors in assessing our ongoing operations.
Presentation of this additional information is not meant to be considered an isolation or a substitute for or superior to measures of financial performance prepare 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 U.S. Securities and Exchange Commission on December 18, 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-to-date ended September 30, 2020 and then we’ll provide a high level guidance for the full fiscal year 2021.
ALJ recognized consolidated revenue of $107.3 million for the three months ended September 30, 2020, an increase of $18.3 million or 20.6%, compared to $89 million for the three months ended September 30, 2019. The increase was driven by state unemployment contracts and new contract implementation activities at Faneuil, increased component sales primarily related to trade at Phoenix, offset somewhat by lower volumes at Carpets.
ALJ recognized net income of $1.1 million and fully diluted earnings per share of $0.02 for the three months ended September 30, 2020, compared to a net loss of $9.9 million and fully diluted loss per share of $0.24 for the three months ended September 30, 2019.
$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 at Faneuil and improved volumes in trade components at Phoenix.
ALJ recognized adjusted EBITDA of $8.8 million for the three months ended September 30, 2020, an increase of $3.6 million or 69%, compared to $5.2 million for the three months ended September 30, 2019. The increase was a result of new state unemployment contracts, implementation activities and the start of new contracts at Faneuil, increased component sales primarily related to trade at Phoenix, offset by lower volumes at Carpets.
For the fiscal year-to-date ended September 30, 2020, ALJ recognized consolidated revenue of $389.1 million, an increase of $34.2 million or 9.6%, compared to $355 million for the comparable prior year period. The increase was driven by implementation activities in the start of new contracts at Faneuil, offset by lower component sales related to education at Phoenix and lower volumes at Carpets.
ALJ recognized a loss of $67.7 million and fully diluted loss per share of $1.60 for the fiscal year to-date ended September 30th, compared to a net loss of $16 million and a fully diluted loss per share $0.41 for the comparable prior year period.
Net loss for fiscal year-to-date ended September 30, 2020, reflects a $59 million non-cash non-recurring impairment of goodwill. Excluding such impairment of goodwill, ALJ recognized a loss of $8.6 million and fully diluted loss per share of $0.20 for the fiscal year-to-date ended September 30, 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 ongoing contracts at Faneuil and lower volumes at both Phoenix and Carpets; offset somewhat by a $12 million change in income tax is primarily related to deferred taxes. In the current year, ALJ had $2 million benefit from income taxes versus $10 million provision for income taxes in the prior comparable period.
ALJ recognized adjusted EBITDA of $24 million for the fiscal year-to-date ended September 30, 2020, a decrease of $3.7 million or 13.4%, compared to $27.7 million for the comparable prior year period. The decrease was a result of lower component sales primarily related to education at Phoenix, lower volumes of Carpets, offset somewhat by new state unemployment contracts and the completion of certain new contract implementations at Faneuil.
With regard to debt and covenants at September 30, 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, $5.3 million of capital leases and $3.6 million related to equipment financing arrangements. All amounts are exclusive of any deferred financing costs.
Cash on hand at September 30, 2020, was $6.1 million. At September 30, 2020, we had $14.6 million of borrowing capacity on our line of credit and we’re in compliance with all debt covenants.
Cash capital expenditures totaled $9.5 million for the fiscal year-to-date ended September 30, 2020, versus $18.3 million for the comparative prior year period. Cash interest totaled $9.1 million for the fiscal year-to-date ended September 30, 2020 versus $9.8 million for the comparative prior year period. The decrease in cash [indiscernible] interest is mainly due to lower average interest rates on our term loan debt.
Cash taxes paid totaled $0.9 million for the fiscal year-to-date ended September 30, 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 31, 2020, we anticipate that adjusted EBITDA will be in the range of $5 million to $6 million versus $3.4 million for the prior year comparable quarter. Included in fiscal Q1 2021 adjusted EBITDA result is an anticipated loss of approximately $5 million from a new contract at Faneuil. We had planned to implement this contract in two physical call center locations, but due to COVID-19, we needed to transition to an all at-home workforce prior to our go-live date.
It is important to note that based on our forecasted fiscal Q1 2021 adjusted EBITDA of $5 million to $6 million as mentioned previously, if the COVID related loss 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 at Faneuil in fiscal Q1 2021, we are anticipating adjusted EBITDA to be higher than fiscal 2020, which was $24 million.
For the full fiscal year 2021, we are forecasting cash capital expenditures to be in the range of $5 million to $7 million, cash interest to be in the range of $9 million to $10 million, term loan amortization of $8.2 million, capital lease and equipment financing payments of $5 million to $6 million, cash taxes to be in the range of $1 million to $1.5 million and cash restructurings related to efficiency initiatives in the range of a $0.5 million to $1 million.
We’ll now open the call for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Eric Moore [ph], Private Investor. Please go ahead.
Unidentified Analyst
Hi, guys. How are you?
Jess Ravich
Good.
Brian Hartman
How are you, Eric?
Unidentified Analyst
Good. I’m doing well. Thanks. Good. Nice way to cap off the year for September. So congrats. Just wanted to on that last comment on the $5 million loss for Faneuil, what has -- what’s the right way to think about that? It seems like we’ve had a number of contract related implementation issues over the years at Faneuil. So how would you characterize this one versus what you’ve seen in the past?
Jess Ravich
I’ll start Brian and then if you want you can take it. So this is - when we start new contracts, you are correct, implementation on large contracts, we often starts down in a whole and then come back and this contract is new and there’s issues involved with each one that are unique to that and then they’ve turned into long-term profitable contracts for the most part.
The -- this one is really one time, because we had spent a year prepping, building out two call centers, training people for physical in brick-and-mortar call centers. And then at the very in March, we were notified for a -- the time was in June go-live and eventually became a July go-live, timeframe to move everybody at home.
So it required hiring lots more people. The attrition rate was much higher at that time due to COVID. And this contract is a -- this is a fixed price contract. It’s one of the contracts that is not based upon hours, but based upon members and the members is irrelevant, whether you have a person working or 1,000 people working, on your expense line the revenue is the same.
So, we along with the client 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 open enrollment came and it was very expensive. It’s all labor.
And the contract itself is a good contract. The clients are really good clients. It’s a long-term contract. And it will be - it’s being resolved currently. It’ll obviously dissipate after open enrollment, because the numbers go down in terms of the amount of calls and therefore the employments 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 and not overstaffed to be on the safe side.
Unidentified Analyst
So it’s more of a transition to like an outsourced call center model that was the issue rather than something kind of inherent in the contract?
Jess Ravich
It wasn’t inherent in the contract. I mean, we transitioned 5,000, 6,000 people to at-home. So, I mean, we have that all over the place. In the last year, it has benefits, it has cost. There’s a cost. You have to give everybody a computer versus in a workplace, you could share computers and the like.
This one, though, had all new agents and that’s the big difference. Everything was transitioned. You know your agents and you have a better feel for what their attrition will be like, what their absenteeism will be like, without having new agents in a call center and being able to physically be with them for months or years we had to err on the side of having way too many people.
Unidentified Analyst
Yeah. Yeah.
Jess Ravich
So the whole -- the -- I don’t -- it was COVID related. It is one-time. It is different than the other movements we made successfully for the most part on all our other contracts to being at home. One of the things that is a result of this is, if you’ve noticed, our capital expenditures were in the 18 range, then they were in the 9 range and then this year they’re going to be in the 5 to 7 range. Is that -- going forward we will -- I can’t 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’ll be a much larger cash conversion model.
Unidentified Analyst
And do you think about it going the other way of getting rid of those call centers or…
Jess Ravich
We [indiscernible].
Unidentified Analyst
Yeah.
Jess Ravich
I mean, we’ve closed, Brian, two -- did we get out of two leases since…
Unidentified Analyst
Yeah.
Jess Ravich
COVID started.
Brian Hartman
Yeah.
Jess Ravich
Yeah. And as again, as they roll off, we’re not going to continue them.
Unidentified Analyst
Okay.
Jess Ravich
So that’ll be a positive effect on EBITDA. But it also be a very positive effect on cash flow, because we won’t need to build them.
Unidentified Analyst
Yeah. Yeah. And so, as you guys look at the year ahead, what do you -- what are the kind of key objectives for you guys? I see you -- you’ve had a couple of choppy years in the last couple of years. It seems like Faneuil starting to hit its stride with larger business. How are you guys looking at the year ahead and just making sure that your business is performing as you expect it to?
Jess Ravich
I am being a very disciplined on taking on new business, making sure that we have enough senior management and not go over our skis, because as you noted, we’ve 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. And the thing that could put that on the rails is we stretch 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 we’re being very circumspect on not getting our 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.
Unidentified Analyst
Got it. And do you think there’s a way to avoid some of these -- the issues with new contracts startups or is this just inherent in the call center model?
Jess Ravich
No. They’re definitely, I mean, some of this is our own footfalls. We were trying to implement a very large transportation contract, a large -- two large healthcare contracts, dealing with COVID, moving people home. We are a large enough company right now with 9,000 employees. But we didn’t have enough people to really monitor all those implementations and move at home.
So, there’s no reason why we should be in a ditch, as opposed to I’m level ground in year one. Year one is never going to be as profitable as the out years, as we fine tune the staffing and everything else. But we have made the choice that we were going to take on a lot of business and we therefore had a lot of issues. But there was business that we wanted to take on. They were logos we thought were important. They were long-term relationships.
But going forward, I would -- there’s -- going forward, if that happens again, it is, probably, all on us. It’s not a COVID related. It’s not -- we can’t come back next year and say we took out too many different contracts again. We did that to grow from $150 million to $300 million run rate or whatever the numbers are, because they were important large contracts to take on. We’re not going to double the size of the company.
Unidentified Analyst
Yeah. Yeah.
Jess Ravich
There’ll be more moderate…
Unidentified Analyst
What about from -- go ahead. Sorry.
Jess Ravich
There’ll be more moderated growth. I mean, it’ll still be large growth, because the RFPs that are out are large, but it’ll be ones that we can take on, because we have the bandwidth back on the implementation.
Unidentified Analyst
And what about 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 Cerberus. I think you’ve had to put up a kind of a stand behind facility, I think you’ve actually joined into the Cerberus facility in a subordinated position. Have you guys thought about just refinancing broadly with all of the activity going on in the market?
Jess Ravich
The answer to that is, yes, we have and I think that’s all we could talk about at the moment.
Unidentified Analyst
Okay.
Jess Ravich
We’re always looking at -- everything we have 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, given the public nature of everything, even if we were doing something, I couldn’t talk about.
Unidentified Analyst
Okay. Fair enough. And I think the last kind of couple of questions I had was just around Carpets. I think this has probably been one of those situations where the -- maybe the least important business in the enterprise and probably soaking up a great deal of you guys’ time over the last couple of years. Do you feel like you’ve got the right kind of team there leading that, with everything going on in the construction industry right now and then last year as well you thought they could have capitalized in some way shape or form on what was going on?
Jess Ravich
We’re, obviously, no, but obviously, but we’re very disappointed in the results out of Carpets and are looking at all the possible remedies to that. That’s probably all I can talk about.
Unidentified Analyst
Okay. Well, that’s it for me, guys. I appreciate you taking the time to answer some questions.
Jess Ravich
Thanks, Eric.
Operator
[Operator Instructions] And gentlemen, I’m seeing no further questions at this time. Would you like to proceed to closing remarks?
Brian Hartman
Yes, please. We do like to thank everyone for attending the investor conference call today and look forward to providing our next update. Thank you.
Operator
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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