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Edited Transcript of ALJJ earnings conference call or presentation 5-Jan-18 9:30pm GMT

Thomson Reuters StreetEvents

Q4 2017 ALJ Regional Holdings Inc Earnings Call

NEW YORK Jan 8, 2018 (Thomson StreetEvents) -- Edited Transcript of ALJ Regional Holdings Inc earnings conference call or presentation Friday, January 5, 2018 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian Hartman

ALJ Regional Holdings, Inc - CFO

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the ALJ Regional Holdings conference call. (Operator Instructions). As a reminder, this program may be recorded. I would now like to introduce your host for today's program, Brian Hartman, CFO for ALJ. Please go ahead.

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Brian Hartman, ALJ Regional Holdings, Inc - CFO [2]

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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 on the call is Jess Ravich, our Executive Chairman.

Before we begin, I would ask that everyone listening to this investor conference call review the risk factors presented in our latest Form 10-K that was filed with the SEC on December 19, 2017.

With respect to forward-looking statement, it is important to note that today's investor conference call and as well as our earnings release and related communications contain forward-looking statements within the meaning of Federal Securities Laws.

Such statements include information regarding our expectations and goals or intentions regarding the future, including but not limited to statements of our financial projections and business growth, the impact of acquisitions, cost-cutting measures, integration measures and other statements including the words will and expect and similar expressions.

You should not place undue reliance on these statements as they involve certain risks and uncertainties and actual results or performance may differ materially from those discussed in any such statement.

Factors that could 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 conference call.

We will provide a financial update for the fiscal quarter and full year ended September 30, 2017, and then we'll provide high-level guidance for fiscal 2018. After the conclusion of prepared remarks, we will open the call to question.

ALJ recognized consolidated revenue of $86.3 million for the three months ended September 30, 2017, an increase of $13.9 million or 19.2% compared to $72.4 million for the three months ended September 30, 2016, due to an increase in business activity in the Faneuil and Carpets segments as well the acquisitions of Color Optics by Phoenix and the CMO business by Faneuil which together accounted for $9.3 million from the total increase in revenue.

Excluding the impact of acquisitions, total revenue increased $4.6 million or 6.4% with Carpets increasing $2.8 million or 19.2% due to higher volumes from home builders and Faneuil increasing $3.1 million or 9.5% related to new customer awards offset somewhat by lower revenue at Phoenix due to increased volume for juvenile books.

ALJ recognized net income of $13.8 million and earnings per share of $0.37 on a diluted basis for the three months ended September 30, 2017, compared to net income of $8.8 million and diluted EPS of $0.24 for the three months ended September 30, 2016.

Increased revenue was offset by higher cost due to startup costs of certain contracts, increased depreciation and amortization expense of $800,000 and acquisition related expenses of $300,000.

There was a significant positive benefit from income taxes due to the reduction and the differed tax valuation allowance of $12.1 million in fiscal 2017 versus $3.9 million in fiscal '16. Excluding such benefit from taxes, ALJ recognized net income of $1.7 million and diluted EPS of $0.04 for the three months ended September 30, 2017, compared to net income of $4.9 million and diluted EPS of $0.14 for the three months ended September 30, 2016.

ALJ recognized adjusted EBITDA, a non-GAAP measure of $7.9 million for the three months ended September 30, 2017, a decrease of $300,000 or 4.1% compared to $8.2 million for the three months ended September 30, 2016.

Decreased adjusted EBITDA was primarily due to lower overall volumes and continued startup expenses related to the transition of the packaging business at Phoenix offset somewhat by improved performance in Carpets.

For the year ended September 30, 2017, ALJ recognized consolidated revenue of $326.7 million, an increase of $58.3 million or 21.7% compared to $260.4 million for the year ended September 30, 2016, due to an increase in the business activity in each of our segments as well as the acquisitions of Color Optics by Phoenix and the CMO business by Faneuil, which together accounted for $27.2 million of the total revenue increase.

Excluding the impact of acquisitions, total revenue increased $31.2 million or 11.8% with Carpets increasing $19.1 million or 37.8% due to higher volumes from home builders and Faneuil increasing $13.8 million or 10.5% related to contract renewals and new contract awards offset somewhat by lower revenue at Phoenix due to decreased volume from juvenile books and educational components.

ALJ recognized net income of $15.7 million and diluted EPS of $0.43 for the year ended September 30, 2017, compared to net income of $10.9 million and diluted EPS of $0.30 for the year ended September 30, 2016.

Increased revenue is offset by higher cost due to startup cost of certain contracts and increased depreciation and amortization of $3.4 million primarily related to acquisitions. There was a significant positive effect from a benefit from income taxes due to the reduction of the deferred tax valuation of $12.1 million in fiscal '17 versus $3.9 million in fiscal '16.

Excluding such benefit from income taxes, ALJ recognized net income of $3.6 million and diluted EPS of $0.10 for the year ended September 30, 2017, compared to net income of $7 million and diluted EPS of $0.19 for the year ended September 30, 2016.

ALJ recorded adjusted EBITDA of $31 million for the year ended September 30, 2017, an increase of $2.2 million or 7.7% compared to $28.8 million for the year ended September 30, 2016.

Increased adjusted EBITDA was primarily due to the acquisition of the CMO business, contract renewals and new contract awards at Faneuil and improved performance at Carpets, offset somewhat by lower volumes primarily at one educational customer and the impact of securing longer data contracts with customers at Phoenix.

With regards to debt and covenants at September 30, 2017, total debt was a $103.8 million and consisted of $91 million of term loan, $7.3 million of capital leases and $5.5 million outstanding on our line of credit. All amounts are exclusive of any deferred financing costs. Cash on hand at September 30 was $5.6 million.

At September 30, 2017, we had $14.1 million of borrowing capacity on our line of credit. Net debt defined as total debt less cash was $98.1 million at September 30, a decrease of $3.3 million compared with net debt at September 30, 2016. Improved cash earnings and working capital offset higher capital expenditures and acquisitions made in fiscal 2017. At September 30, 2017, we were in compliance with all debt covenants.

Capital expenditures totaled $9.3 million for the fiscal year ended September 30, 2017, versus $3.6 million for fiscal 2016, an increase of $5.7 million. A majority of this increase was to support Faneuil's new customer contracts, including the CMO business acquired contract and Phoenix's purchase of production equipment.

Cash interest paid totaled $8.7 million for fiscal year ended September 30, 2017, versus $8.1 million for fiscal 2016. The increase in cash paid for interest was due to higher weighted average outstanding balances on our term loan and revolver working capital facility during fiscal 2017 compared to 2016 as a result of business acquisitions and higher average interest rates during fiscal 2017.

Cash taxes totaled $0.7 million for the fiscal year ended September 30, 2017, versus $0.6 million for fiscal 2016, basically flat year-over-year. We continue to use existing net operating losses to offset federal taxable income.

With the corporate federal statutory income tax rates decreasing from 35% to 21%, we expect this to impact the value of our existing net operating losses as well as reduce our deferred tax assets and related valuation allowance.

We will continue to research how the recently enacted tax changes impact our financial statement. Current thoughts are that any significant change would result in a non-cash charge due to provision for income taxes or deferred taxes in the income statement.

We estimate that our cash paid for taxes in fiscal 2018 will approximate $1 million to $1.5 million which mainly relate to state and local taxes.

For fiscal 2018, we are forecasting a range of $36 million to $39 million of adjusted EBITDA compared to $31 million for fiscal 2017. The improvement is based on the final integration in the Color Optics acquisition and relocation of the production facility from Rockaway, New Jersey to our existing Hagerstown, Maryland facility.

Also, the full year impact of Faneuil's Vertex acquisition, which closed in May of 2017, and Phoenix's Moore-Langen acquisition, which closed in October 2017, also increased customer contract awards at Faneuil and cost-saving measures at Carpets.

For fiscal 2018, we are forecasting cash capital expenditures to be in the range of $79 million, cash interest to be in the range of $8 million to $10 million, and cash taxes to be in the range of $1 million to $1.5 million.

This concludes the financial update portion of ALJ's investor call. Operator, please open the call to questions.

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Operator [3]

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Certainly. (Operator Instructions). And I'm not showing any questions at this time. I'd like to hand the program back to Brian Hartman.

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Brian Hartman, ALJ Regional Holdings, Inc - CFO [4]

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Sure, thank you. We'd like to thank everyone for attending today's investor conference call and look forward to providing our next update in New York during the summer. Have a good day. Thank you.

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Operator [5]

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Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

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