JanOne Inc.
Q1 2013 Earnings Call Transcript

Published: 7 May 2013

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Appliance Recycling Centers of America First Quarter Investor Call. During the presentations all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded Tuesday, May, 7, 2013. I would now like to turn the conference over to Jack Cameron President and CEO. Please go ahead.

[Edward R. (Jack) Cameron:]

Thank you, operator and good morning everyone and welcome to Appliance Recycling Centers first quarter 2013 conference call. As mentioned my name is Jack Cameron; I am President and CEO. Also on the call today will be Jeff Cammerrer our Chief Financial Officer and Brad Bremer President of ApplianceSmart. I’d like to thank you for taking the time today they are listening the call. I hope you had the opportunity to review the earnings release which we distributed yesterday afternoon. And it also can be found on our website under www.arcainc.com, actually I forgot an extra w in there or not, it’s under the Investor Relations section. On the agenda today, Jeff will go through the forward-looking statement, and then review our first quarter financial results. Brad will then talk about an update on the ApplianceSmart business. Finally, I will come back and talk about some of initiatives and recent developments that impacted our business and closing remarks. And then we will open the call up to questions, so to start it off Jeff why don’t you go ahead.

[Jeffrey A. Cammerrer:]

Thank you, Jack. Our comments may contain certain forward-looking statements regarding possible events including expectations and are not considered guarantees of future performance. Future results may differ materially and you should not attribute undue certainty to our forward-looking statements, please refer to the cautionary statements in our SEC filings to understand the risk that may impact our business. I will keep my comments brief today, both Brad and Jack will be discuss various financial results. And I will be available at the end of the call for any financial performance questions. As you know we extended our credit agreement through January 2016 and reset the financial covenants that created the events of the fall 2012. We are now in compliance with all the financial covenants under our amended credit agreement. Through the first quarter we are outpacing our accumulated EBITDA covenant by over $2 million, building a nice cushion going into the second and third quarters, which are more aggressive under our operating plan. We reported a consolidated net income for the first time since 2011 with a profit of a $184,000 or $0.03 per diluted share. The first quarter profit was deferred by the success of our Appliance replacement programs within our Recycling segment and sequential improvement in sales and gross margin and Appliance margin. Our Recycling segment revenues of $12.1 million were up $2.7 million compared to the first quarter of 2012. The increase was the result of 119% increase in appliance replacement volumes that drove an increase of $3.8 million in revenues. Overall utility program volumes declined by 4% compared to the first quarter of 2012. For the last 12 months we experienced decline in volumes in our recycling only programs offset by growth in the replacement business. The strength of our replacement programs drove an $800,000 increase in our recycling segment income compared to the first quarter last year. Retail segment revenues of $18.3 million which includes $200,000 of by-product revenues declined by 9% compared to the first quarter of 2012. However, we experience improving gross margins and appliance margin, as we slowly shift our sales mix back to out-of-carton product that generate higher margins. Brad will address the reasons behind this shift in his remarks, but as a result, first quarter gross margin improved by 60 basis points compared to the first quarter of last year. Appliance market generated an operating profit of $400,000 before corporate overhead and an overall operating loss of $200,000 during the first quarter. At the corporate level we implemented several cost reduction strategies in the first quarter including the reduction of 19 positions that will generate an annualized savings of approximately $800,000. The impact was offset in the first quarter by recording one time restructuring charges, we are continuing to develop an implement cost reduction strategies including rightsizing the businesses and setting down unprofitable operations. As of March 30, our cash balance was $3.9 million and only had $3.8 million in borrowings available under our line of credit. During the first quarter, we lowered our appliance inventories which generated approximately $3 million in operating cash and was offset by paying down the balance on our revolving line of credit by approximately the same amount. I will now turn the call over to Brad.

[Bradley S. Bremer:]

Thank you, Jeff. In the first quarter of 2013, ApplianceSmart focused on streamline activeness. First quarter which is generally slower was impacted by the federal governments 2012 tax delay which in turn delayed the refund process and associated consumer spending, this trend effect the sales through President’s day weekend. Same-store sales declined 7% compared to the same period for 2012. Total retail revenues decreased 9% to $18.1 million compared to the same period of 2012, this result was primarily due to an anticipated same-store sales decrease and a strategic decision to close two Georgia locations in late 2012. In addition, marketing efforts and traffic for our Rogers, Minnesota location were scaled down to minimize the April store closing that was result of a decision that renewed the building lease. Explain the sequential March decrease in electronics and Appliance store sale The National Retail Federation blamed colder-than-normal weather and the payroll tax hike. In addition to the factors previously mentioned the traditional Easter holiday weekend shifted in the first quarter. The tight housing market has had an impact on appliance purchases relative to relocation, in March 2013, The National Retail Association of retailers reported that the housing inventories declined by 17% compared with its prior year levels. Our first quarter last year saw usually high sales levels that spike in February and March before leveling off the remainder of the year. In the first quarter of 2013 we did not see that same spike, however, we are way ahead of our internal year-to-date sales projections illustrated our commitments tightened operations will continue to provide the same affordable appliance offerings to our valued customers. We’re expecting more consistent sales levels in the first half of this year which gradual improvements led by the housing market. On a sequential basis our retail operations showed quarterly improvement including per-store sales and gross margins. The shortage of housing and the gradual improvement in economy is spurring more construction particularly in multi-housing. New housing rose in March 2013 at the fastest seasonally adjusted annual rate in nearly five years. While we watch housing trends, we keep an even closer eye on the retail competitors in our industry. Locally, six Best Buy stores in the Twin City have rolled up specific kitchen and vast store within the store concepts, like they did with finally the home theatre. In part, Best Buy is trying to shrink its retail footprint by having different manufactures take over some square footage in their stores. Nationally, Home Depot and Menard across the country are adding Roper and [First-share] brand appliances. We expect this change to have a slight impact on our sales as consumer shopping pattern adjust to these new options. As the Home Depot and Menards expand their marketing efforts to support the new manufacturing offering the appliance marketplace will be stimulated in a positive manner, create additional opportunities at ApplianceSmart due to our established customer base and competitive pricing as well as our services. As I noted in past calls greater retail appliance activity means more out of carton appliance inventory that could sold at our stores which is one of our key differentiators. We’ll remain committed to delivering consumers a value oriented product offering that reflects the latest trends coupled with unrivaled consumer service. And I’ll turn the call over to Jack.

[Edward R. (Jack) Cameron:]

Thanks Brad, and Jeff, thank you. I’d like to go through some of the recent highlights and a little bit more color to the information that, if it’s in the press release and it’s that what Jeff and Brad spoke about. First, I like read our strong partnership with PNC. Jeff mentioned that we resigned our new credit agreement in this March, and we appreciate the support we’re continuing to get from PNC in regard to our business and as everybody knows being on solid footing with your bank of course is extremely important to achieving our future plans and we feel real good about the situation as it stands right now. Good news in the first quarter we returned to profitability. This was led strongly by the utility business, as Jeff mentioned the replacement programs decline about 120%. This boosted our recycling revenues 21% sequentially and 58% year-over-year. Our recycling revenues as you may recall are composed of appliance recycling fees for recycling and appliance replacement program revenues that is the putting in new appliances and taking out the old ones, because of the success of our utility partners that they’ve seen in replacement program in single family homes that the utilities are starting to look at other opportunities. And now, we’re interested in rolling out similar programs in multi housing not necessarily low-income housing but independent apartment owners who up until recently may not really been that interested in energy efficiencies are allowing people to come into to do a study. And, one of the things happening with this Change-Out program the utilities are getting in the door and allowing them to look at other opportunities such as heating and cooling, water conservation, or lighting. Targeting multi-family and homes in particular can deliver a lot savings as you can imagine in the concentrated area if you have 200 or 300 unit apartment complex where we replace after refrigerators at the same time they go in and do the lighting in the parking lot and work on the windows and doors and ceiling thing and so it’s become a very attractive option for our utility customers and we’re stating to see more interest in that. As I explained, we’re kind of uniquely positioned to do this because of the opportunities that we have or the relationships that we have with our manufacturers in our retail operation which provides us great pricing, so just speaking of the retail part of it, Brad addressed the retail business, so I’m not going to repeat all the information that Brad has talked about, but I would like to touch a little bit on the housing, because it’s kind of interesting. Beginning in 2008 the housing starts fell below 1 million annually for the first time since World War II and we’ve had five consecutive years of housing starts below 1 million and we’re seeing some encouraging signs lately anyway on the national seen with some areas being, some pockets and some areas of the country are doing well and some areas are not, there are some weak areas, Minneapolis, metropolitan area for example has been relatively strong. And as Brad said the U.S. housing starts rose in March 2013 at a faster seasonally adjusted annual rate of nearly five years, almost 50% higher than in March 2012, and it appears that we finally are on the upswing and gradually the housing will recover and we think that’s comprising led by the multi-housing both in the retail and also I think it’s going to be helpful in our utility programs in both of those areas. Turning to recycling our by-product revenue excluding AAP and Philadelphia declined to $1.5 million compared to $1.7 million in the first quarter of 2012. The decrease was direct result of a 4% decline in overall recycling volumes that Jeff mentioned earlier and a 14% decrease in scrap metal prices compared with the first quarter of 2012. Scarp metal prices are expected to remain volatile in the short-term; long-term it’s a difficult thing to project and was a major factor. For AAP joint venture, the scrap metal pricing was the strongest factor impacting the results, the volume has been relatively simmer year-over-year, in other words, the number of units coming into the places were about the same, but scrap metal prices are down. One of the elements that we can control though is labor, and we’ve dramatically reduced our cost in the labor area, this has been accomplished by better leveraging information systems to influence management decision on a real time basis, for example if the day’s work is done, our employees go home early or if we have a heavy load coming in, we call in reinforcements to handle the surge in demand, and given the ups and down in retail, we do see a swing of seasonality, there is a lot more product, uncertain holidays because of the retail sales going up which generates more units coming into our center. So we are able to do that, we do manage the center in Philadelphia, the strong management efforts are put in managing the trailers, the inbound trailers and killing them up based on weights and is able to manage our labor in a more effective manner. Revenues for AAP joint venture, report and by product revenue declined 5% to $2.6 million and AAP’s gross margin declined to $35.4 million to compared to $43.5 million in the same period in 2012. AAP’s operating loss for the first quarter was 54,000 compared with operating income of 65,000 during the same quarter of 2012. The decline in gross margin operating income was primarily result of as I mentioned lower scrap prices and higher deprecation. Our recycling efforts as you know, we create scarp metal that goes into the electric arc furnaces, but also as you know we collect CFCs which CFCs are ozone-depleting substances, which burn can create carbon offset creates which we do today and we’re storing and burning the CFCs that we’re collecting to create offsets. And so we’re continuing to do that I’ll talk a little more about that matter of fact, I’d like to do is switch over to I recently attended the annual climate action reserve conference in California this is the second year that I’ve been there and I come away again and impressed with that what’s going on in California the conference attracts people from all over the worlds are interested in the progressing California and also the progress around the world in the cap and trade and containing the emissions of CO2. There also California officials and I listened to quite a few of them speak a very and justifiably very proud of how their allowance market has varied after the two auctions that they’ve had, that they’ve really committed to this program to be successful they’re really putting a lot effort into it and they’ve really fought it through very well it’s becoming a very functional local market and I think it looks to be that it’s going to stand and test the time. I know there is going to be some [bucks] in the road and recently some critics that have tried to create, equate the setbacks in Europe’s carbon market to the potential problems in California. The California has taken strives to avoid the same issues that dared the European market. The European market hasn’t failed it’s still working, the problem is that there is an over supply of allowances and so the prices are being adjusted to the supply and demand forces in Europe, the initial allowance policy was too generous, so there is an oversupply each European country decided on their own cap and hedge by picking a rather high cap lowering the industrial output during the recessionary things also reduce the emissions, so too many it’s cheaper for the industry to buy allowance than it is to put a scrubber on smokestack, so one side says that the market is working, other side says it’s not, it’s a success and so the debate goes on, but the real problem is that the there are existing oversupply of allowances are based on initial mistakes, and there has been some articles talking about back loading and taking some of those allowances off the market, so it run the price up and contribute. But right now that problem does not exist in California, they have learned those lessons and like the Europeans have learned the lesson as well, but California has been watching that along with everybody around the world as a matter of fact. And so, everybody is taking that into account and setting their standards. While there are some [Wall Street] that’s pending in California they are not aimed at dismantling the market, they are aimed that the suits are actually more about a quality allowance distribution which is the problem that was causing in Europe and equalizing the effects across industry, different industries. The carbon markets are underway around the world, and everybody has learned a lot lessons of the over supply problem in Europe. And then also that is now developing some linkages and they are talking about linking different markets to create more market for offsets and allowances, this includes and you might have read that Governor Jerry Brown recently signed a paperwork to allow California to link their system into Quebec in the 2014. Also there was lot of representation there from China, and China is seeing observing all the stuff that’s going on and they are very heavy emitter of CO2 and so, China is launching a program for cap and trade in seven manufacturing cities, some of those you really can’t breath in. Ahead of the national program they are expecting to launch in 2020. At the meeting there was a you might want to write this down that Dr. Richard Muller, he is a professor of physics at the University of California, Berkeley, has done a major study and what they found over the last 250 years that the world climate change, the temperature has gone up, and the only thing that tracks exactly that same pattern is the accumulation of CO2, which was manmade, so there is a lot of scientific information that’s out there, there is also lot of misinformation out there and they pointed out all the mistakes that were made in out [go as book], but the fact is that the we aren’t taking that really tracks the global warming is the accumulation of CO2 in the atmosphere, you may want to Google that guy and take a look at that its really quite compelling and very positive towards the people that are primarily in the cap and trade situation. As we’ve previously announced and we’ve talked about it in the past about the equation of carbon offsets, as you know we create carbon offsets by destroying the CFCs, that we take out of refrigerators and we’ve continued to do that, we expect to drive revenues this year, the start of the CFC’s that we planned on destroying this year, of about a 1 million, we also have CFCs that we destroyed in 2012 that we are waiting to get paid for and that’s problem between ARCA and AAP is close to a 1 million as well. So we are continuing to look at generating offsets revenues through the destruction of CFCs that were accumulating. Right now these projects we are filing these projects in California and they are going through the proper protocol. They get registered, they get verified and then the certificates are issued and then we can sell the certificates and we are in the latter stage of that on some of the other credits that we destroyed in 2012, it’s a matter of fact to our partner ECC Environmental Credit Corp was our partner filed this, one that first to file the programs in California, so we feel pretty good about being first and getting we’re hearing good things about when those credits are going to be issued. There has been a recent press release that matter of fact yesterday I think that the Air Resource Board in California is saying that some of these credits the first ones will be issued in spring, which I’d like to tell them they are still under spring right now, we should hurry up. Clearly, we expect those to come in this year for sure. It’s kind of interesting the allowance auctions that they have for the cap and trade and as you know that the cap and trade legislation California one in effect of January of this year. They had their auction in November of last year and the allowances, sold for about $10, but since the favorable decision on the lawsuit on offsets in January and February the allowance prices have gone to $14 or $15 and offsets are using to sell typically between 10% and 20% below the allowances and the reason for that is that allowances are bought from the state and offsets can be bought to use against the emissions but only up 8% of the emissions of any company, so they have a limited value, however, they are expecting a really shortage in offsets. And so, we’re expecting the price of offsets to remain strong. We’re currently moving all of our CFC inventories into a situation where we can destroy them. And as you know the accounting rules are that we cannot book the revenue until we get the cash and so, we’re sitting on a lot of inventory and a lot of potential credits and potential revenue that we can’t book, anyway that’s the way the accounting works. Anyway, that concludes my remarks and if anybody has any questions at this point in time, I’d like to go ahead operator and open up for questions.

[Operator:]

Thank you. (Operator Instructions). And the first question is from the line of (inaudible). Please go ahead.

[Unidentified Analyst:]

Hey, Jack.

[Unidentified Company Representative:]

Hey, [Jerry]

[Unidentified Analyst:]

Now what was the name of that Doctor that you we’re talking about I wanted to Google him, but I didn’t get that name.

[Unidentified Company Representative:]

It’s Dr. Richard, and his last name is spelled Muller.

[Unidentified Analyst:]

Okay.

[Unidentified Company Representative:]

Muller, he is Professor of Physics, at University California, Begley. He is noted a very famous scientist.

[Unidentified Analyst:]

Okay. And then, you talked about potential from the sale of carbon oxide credit of about $1 million from the credit that you generate this year and then almost a $1 million from credits generated last year. Did you recognize any revenues of this sort and 2012?

[Unidentified Company Representative:]

No, while we did there is one burn that we sold approximately just I give you a round numbers approximately 60,000 credits that we did burnt that we sold at $9.50credit they paid us $3.50 upfront and we got an other $3 when they get registered in California and an other $3 when the get certified in California. So, we were waiting on most that money, but I think we did book about 180,000 last year, 150,000 was it just, yeah. So, we did book basically one-third of that sale, but we still have remaining on that sale over 300,000 and we were expecting that actually in the first quarter this year, but the paperwork in California just gotten delayed and they’re now saying it will be Spring or the second quarter. And so, we should get half of that in the second quarter and then rest of it comes on verification, and we’re not sure when that will be but we’re pretty confident it will be before the year is over.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

(Operator Instructions) And our next question is from the line of [Clarence Scholas] with [ARCA]. Please go ahead.

[Unidentified Analyst:]

Hi, good morning Clarence here, individual Investor. I’m wondering if you can tell me a little bit more about those carbon credits from last year that haven’t been fulfilled in terms of the revenue. Do you have something sitting on the balance sheet in either accounts receivable or other assets where those are on your balance sheet and what are valuing them at?

[Unidentified Company Representative:]

No, Jeff can speak to that, but no, they’re not on our balance sheet. We’re not allowed to book that. There is no accounting process to take credit for that, and we have a huge inventory either have burned it or sitting on it or about to burn it and its not booked in any way, shape or form. The only time we can take any credit for revenue on this is when we actually get the cash.

[Unidentified Analyst:]

So, the credits that you generated, but haven’t sold don’t sit on your balance sheet at all?

[Unidentified Company Representative:]

That’s correct.

[Unidentified Company Representative:]

Jeff is the CFO, believe me I’ve been arguing this point for a long time but I haven’t won yet.

[Unidentified Company Representative:]

Right now, because of cost that we incurred to develop these credits are pretty minor. The only thing that we could put on the balance sheet is cost associated with it, and we can’t put the market value on the balance sheet so if it only costs us $1 to generate the credits and we sell them for $9 we can’t put that differential on the balance sheet.

[Unidentified Analyst:]

That’s because the market value is so uncertain?

[Unidentified Company Representative:]

Yes.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

(Operator Instructions). There are no other questions at the moment sir.

[Edward R. (Jack) Cameron:]

Okay, well thank you very much if there are no further questions that will conclude the call today. And thanks very much for listening we’re continuing to hope that the economy and the housing continues on an upswing meanwhile we are encouraged by the momentum we have going right now, and we’re focusing, we’re really focusing on those elements that we can’t control. I think, all of our operations people are doing that and I really appreciate that from the support that we have from the entire company. And we appreciate the support from the listeners today, thank you very much and if you are in the Twin City area or if you like to fly-in we have our Annual Meeting on Thursday, this week Thursday, May 9 at 3

[Operator:]

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.