JanOne Inc.
Q3 2013 Earnings Call Transcript

Published: 6 Nov 2013

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Appliance Recycling Centers of America’s Third Quarter 2013 Investor Call. During the presentation, 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, November 5, 2013. I’d now like to turn the conference over to Jack Cameron. Please go ahead sir.

[Jack Cameron:]

Thank you, Becky. I appreciate it. Good morning everyone and thanks for joining us. Welcome to the Appliance Recycling Centers of America third quarter 2013 conference call. I am Jack Cameron, President and CEO of ARCA. With me today are members of our senior management team Jeff Cammerrer, our Chief Financial Officer; Brad Bremer, President of ApplianceSmart; and Mark Eisenschenk, who has joined us this past summer as Chief Operating Officer and also as President of ARCA Recycling. This morning we will expand upon yesterday’s press release, which can be found on our website under the Investor Relations section and our website is arcainc.com. On today’s agenda today, Jeff will read our forward-looking statements and review our third quarter financial results. Then Brad will give us an update on our retail appliance business and Mark will provide an overview of our utility recycling programs. Finally, I will discuss the company and the industry developments and then we will open up the call for questions. So to start out, we will start out with Jeff. And Jeff, go ahead.

[Jeff 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 any forward-looking statements. Please refer to the cautionary statements in our SEC filings to better understand the risk that may impact our business. We are pleased to report that the company generated a consolidated profit of $1.1 million or $0.20 per diluted share for the quarter. The third quarter profit was spurred by growth in our appliance replacement revenues, improved profit margins at AAP and lower ApplianceSmart expenses. During the third quarter, we negotiated and executed the fourth amendment of our credit agreement with PNC Bank. The amendment allows us to borrow under LIBOR rates effective November 1, previously not available until January 31, 2014. The ability to borrow under LIBOR rates lowers our interest rate by 300 basis points and will save approximately $40,000 over the next three months. The amendment also deferred and lowered the mandatory loan payments from AAP providing additional liquidity for AAP to invest in capital equipment to improve its client efficiencies. Through the third quarter, we are in compliance with all of our bank covenants and we are extremely gratified by PNC’s continued support of the business. In our Recycling segment, revenues of $16.2 million were up $5.1 million compared to the third quarter 2012. The revenue growth was primarily the result of a 200% increase in appliance replacement volumes due to a customer accelerating a portion of its 2014 budget into 2013. Overall, clients’ replacement revenues increased by $5.2 million and $3.8 million of this was related to this customer’s budget acceleration. The growth in appliance replacement revenues was partially offset by a $400,000 decline in recycling-only programs. Mark will talk more about the results generated by our recycling business later in the call. Revenues at AAP, which are reported on the income statement as by-product revenues were $3 million, a 20% improvement compared to the third quarter of 2012. And that increase was primarily due to a 14% increase in recyclable appliances. Our recycling business, including AAP, generated an operating profit of $2.2 million, up $2 million from the third quarter of last year. Within that increase, AAP improved its operating profit by $600,000 related mainly to the reduction and the acquisition costs of recyclable appliances. Jack will talk more about AAP’s results later in the quarter. ApplianceSmart revenues of $17.3 million, which includes $300,000 of byproduct revenues declined by 2% compared to the third quarter of 2012. The decline in revenues was caused by the $1.2 million impact of store closures operating during the third quarter of last year, which was offset by a 5% increase in same store sales and the impact of new store sales. ApplianceSmart generated an operating loss of $200,000, an $800,000 improvement compared to the third quarter of 2012 due primarily to lower store operating and advertising expenses. Brad will talk more about ApplianceSmart results later in the call. During the third quarter, we generated $1.1 million in cash from operations. We ended the third quarter with a cash balance of $2.1 million and $6.8 million in excess borrowings available under the line of credit. I will now turn the call over to Brad to talk about ApplianceSmart.

[Brad Bremer:]

Thanks Jeff. ApplianceSmart posted consistent sales throughout the third quarter week-after-week. Business was much more predictable during this recent quarter than it was during the third quarter of 2012 when we saw some real highs and lows. Last year sales started declining in July and didn’t bottom out until the end of 2012. Our sales tracked with industry’s trend then, this recent quarter we also tracked with industry trends again and we saw same store sales rise 5%. We believe customer confidence is gradually improving leading to more stability in sales. We are also seeing some of the pent-up demand turn into sales from consumers needing replacement appliances or deciding to remodel with new ones. Some of the sales growth also results from increased housing market activity with people starting to move around a little more doing – due to lower interest rates. We are beginning to see more movement and appliance change outs as the housing situation continues to improve nationwide. To recognize one market today, I would like say that Georgia locations especially are continuing to improve their performance. We have right sized the presence in the market to four stores and we are building more consumer awareness of our product selection and value proposition. Our Atlanta stores are becoming more established benefiting from repeat business and word of mouth referrals. Looking ahead to overall fourth quarter sales briefly, I will point out so far that we have not seen a noticeable falloff from the government shutdown in October. Our business has continued at a steady pace. From profitability standpoint, our gross margin improvement was greater operational efficiencies, especially compared to the third quarter of 2012. We continue to make the operational adjustments necessary to sustain further improvements including the right sizing our stores to better fit our new business model. Jeff mentioned our lower advertising costs. In 2012 we have spent extra advertising dollars during the third quarter chasing customers that as it turned out we are just not buying. We weren’t alone in this effort. Many other retailers did the same thing. The steadier pace of sales this year has enabled us to keep our advertising cost more in line with historical averages. Looking at the industry overall the modest sales uptick has boosted the availability of out-of-cart and product, some of this is being driven by the increased activity in multifamily housing. As lot of these supply trends continue we will see a positive impact in our margins going forward. With a better product mix in our stores between new and out-of-cart and product trends take time to trickle down, we have got to get the product into our systems, ship it out for our stores start selling it. For our competitors we expect Home Depot to continue grabbing market share from other national chains and big box stores driven in part by their broadened product offerings. Their growth boosts the supply of out-of-cart and product in the pipeline which will aid in our business. We look forward to keeping you up-to-date on our progress during the remainder of 2013. And I would now like to turn the call over to Mark.

[Mark Eisenschenk:]

Thanks very much Brad and Jeff. As Jack said this morning, I joined the company this summer as ARCA’s Chief Operating Officer. I am also President of our company’s recycling subsidiary, ARCA Recycling Incorporated. I am happy to be on this morning’s call. Regarding ARCA’s recycling business, our total revenues for the third quarter of 2013 were $11.8 million, that’s an increase of $4.8 million above the same period in 2012. As you may know ARCA’s recycling business is comprised of two basic elements. First as appliance recycling revenue, which is generated by collecting old appliances from customers of utility companies that sponsor energy efficiency programs and then we will recycle those old appliances, recovering their refrigerants, copper, aluminum, steel and so on. Our second business element is appliance replacement program revenue, which is generated from selling and installing new energy efficient appliances and recycling the old ones under utility company sponsored programs, typically provided for lower income or multifamily residence. We often refer to this appliance replacement program as a change out program. The first element of ARCA’s recycling business our appliance recycling revenues increased 9% to $3.7 million in the third quarter of 2013. This was primarily due to lower volumes and price compression with certain contracts. The total number of units recycled declined 1% and the average per unit pricing declined $7 compared with the same quarter of last year. The largest factor in the decline was changes made in two large recycling programs with less advertising and promotion supporting them. In both these particular markets, overall electrical consumption has remained flat or fallen due in part to weakened economies. So there is less incentive for the utilities to aggressively reduce electrical consumption. When the economies in these markets improve, we expect utilities to once again increase their support of energy efficiency programs associated with appliance recycling. The second element of our ARCA’s recycling business, our appliance replacement program revenues increased by $5.2 million to $8 million in the third quarter of 2013. Primary contributing factors included higher volumes and the mix of appliance replacements. Overall we are seeing a shift towards appliance replacement programs. We believe this shift will continue and the shift is particularly favorable for ARCA, because we are uniquely qualified to facilitate appliance replacement programs with our turnkey solution, namely our wholesale access to new appliances, our national recycling capabilities and our established supporting infrastructure. We have got a proven solution that works. I would also like to add that the appliance industry as a whole appears to be moving in this way as well. The Association of Home Appliance Manufacturers or AHAM is behind healthy replacement initiatives starting next year that promotes change outs of older, less efficient appliances. According to AHAM, a new energy star refrigerator uses just half of the energy of a 15-year-old model. Overall what we believe the long-term trends are favorable, there will likely be ups and downs in activity and revenue levels for ARCA. Future revenues from appliance replacement programs are not certain it’s just the nature of the business. And with the large clients we have cited in our press release, the one who accelerated 2014 program funding into 2013, we should know by year-end or so what level of funding will be available for 2014. On another note and this was mentioned in our press release, in order to improve our service and responsiveness to customers participating in utility company sponsored programs we began consolidating our call center and our customer service functions in Minnesota, a process that should be completed by December 1. By outsourcing these functions, we are able to offer better, faster service and greater flexibility. We frequently see call levels drop when utility companies run ads and other promotions and in particular appliance change out programs require a higher degree of management than strict recycling programs. And all said, there are no guarantees, we never take tomorrow or next year for granted. We work hard every day to prove the value of our programs to our customers. And since arriving here I have certainly noticed a high level of dedication and commitments from everyone in the business. I am very pleased and I am honored to be part of this fine organization. That concludes my summary of recycling activity. Next, Jack will finish our presentation with a look at other developments in our company and in our industry.

[Jack Cameron:]

Thanks, Mark and Brad and Jeff for your comments. And I’d like to recap I don’t want to repeat everything that was said. There was lot of information given out, but I do want to go over some things. And Mark, we are very happy to have you on the team and thank you for your presentation and Brad just the same. Before I go into some details, I just want to mention that as you know 2012 was a tough year and we started making the adjustments that Brad alluded to it in sales we saw it in the utility business and the turndown in efforts by some utility companies. And we started making the adjustments across the board from operating expenses to renegotiating contracts to rightsizing the stores and we are very pleased with the progress. And I think it started to show up in the beginning of the year in the first quarter, continued in the second and now in the third quarter. Very confident about our management team and the current organizational structure that we have. Very pleased with the progress that we are making. And as you can surmise from the different comments made by everybody, the inner workings or the inner relations of our businesses between the access the product to ApplianceSmart with utility programs, increased out-of-cart merchandise because of some situations with the market share of Home Depot and then also the fact that a lot of the early housing starts last year were multi-family. And they tend to generate more out-of-cart merchandise. And now we are seeing a more residential rebounded with housing. So we are seeing all of it come together for us and providing more product and this also works in favor of AAP appliance – ARCA Advanced Processing, our joint venture in Philadelphia, because as you know the supply of appliances are generated from the Home Depot chain in the 12 states in the Northeast. So you can see how this all kind of works together. So our cost reductions are very improved as I mentioned. We are on track to continue to move forward. Our staffing is in great shape. We are ramping up where necessary. And as Mark mentioned, the call center is giving us some real flexibility and promoting our programs with the different utilities. Having the ability to expand rapidly is a very important issue when utilities consider who they are going to contract with. Brad mentioned in some of his presentations about rightsizing the stores. As you know, we did closed three stores last year and we have right-sized the Georgia market. We are also seeing better out-of-cart merchandise in those stores. We have a much better balance of inventory than we had in 2012. And as mentioned before, we are really in the replacement market and we have the ability to mix and match out-of-cart and with new merchandise and the ability of the multi-housing family and rental business being up. We are seeing a lot of business in that market as well. And so we are continuing to look at stores and rightsizing them and judging what works and doesn’t work. And I think Brad has done an outstanding job in putting that all altogether. AAP or ARCA Advanced Processing in Philadelphia has made great strides this year in developing better tools to manage the labor. This was a business that it gets down to the trailer management. When you are receiving as many trailers full of appliances that we do on a daily basis, the labor per ton is important. We have seen great improvement on that. We have added some new technologies and accounting procedures and using the computers to help manage the business and that’s all coming along and then we are making investments in that as well as making investments in other capital equipment such as trailers and conveyors and that type of thing. And so we are continuing to see improvement there. The volume increase we have got in the quarter, the profitability for AAP was $331,000 compared to a $300,000 loss last year, so that’s a $600,000 swing. A lot of that’s due to some of the negotiations on acquisition and also increased volumes. And as I mentioned a lot of that comes out of the GE home delivery system that is – that provide delivery for the Home Depot stores. As Brad mentioned some of the market share that they are gaining is because they have added new product to the floor and that’s increasing their market share, which in turn increases the number of units that we received. We are also expecting a big boost in product this fourth quarter because of Black Friday and my understanding is some of the promotion from the major retailers is starting around November 7 and will continue and we expect to be very busy all the way through the end of the year in recycling appliances at AAP. So we look forward to a good fourth quarter there. One of the developments that we have all been talking about for the last year or two is the carbon offset market. And I am happy to announce that we are finally getting the carbon offsets through the new California Cap-and-Trade system as a matter of fact we are partnered with Derek Six from ECC. We received the first ODS offset credits that were issued in California. So that system is now up and running. You have heard me talk about the lawsuits and with delays and so forth for the last couple of years, so that’s finally over with and we are now in the process of receiving the credits. As a matter of fact we did receive about $0.5 million with the carbon offset credit money. But it came in October, so we will show up in our fourth quarter, it's not in our third quarter and that was mentioned in the press release as well. So that's a milestone and we’re looking forward to – as a result of that we have more burns and we have more credits coming. And we are continuing to collect CFCs and we will continue to do that. For this year though we do expect about another $200,000 a combination between ARCA and AAP of carbon offset credit money this year and then we do expect some of the other burns, there are two or three of those that those moneys will flow into next year. And we anticipate that they will be hopefully early next year and with the progress that’s been made in California we expect that it would be earlier rather than later. And so we are going to continue to follow that. Some of the other things that’s going to add some liquidity to the market is that the Québec has joined with the California market. And also we are seeing a stable pricing in the carbon on the allowances in California as well. So there hasn’t been much change there. So we are very, very confident that this is going to continue to provide revenues for us and very pleased that it’s finally getting done. So in conclusion not to recap too many things that we have gone over is that there was the upside I think for ARCA this year is that I think the economy not this year, but going forward is that we are starting to see what everybody is indicating as a housing trend up for the next 5 to 10 years. We are seeing gasoline prices decrease that’s going to affect us in several areas. One I think it’s going to put more money into pockets of people to buy appliances and other items. At the same time it lowers our operating cost because we spend a lot of money on fuel. And also I can’t over emphasize the fact that our relationship with our bankers is fantastic and we are moving forward as Jeff mentioned we can never forget about our bank. And so the synergies between all of our business service and the economy and everything and I guess in summary I would like to say that we expect the economy over the next four or five years to continue to improve. I think it’s going to raise the tide of every business. And I think we will benefit from that in appliance sales. We will benefit in scrap prices, we will benefit in more utility programs and we are seeing those trends, and we see no reason to be discouraged at all. As a matter of fact we are very optimistic and I might say cautiously because you never know. But anyway it kind of wraps up my remarks and I would like to open up to question. So Becky if you can go ahead and open up for questions, I would appreciate it. Thank you very much.

[Operator:]

(Operator Instructions) And we appear to have no questions at this time sir.

[Jack Cameron:]

There are no questions, okay. Well, thank you very much. We appreciate your participation. If there are any questions that develop later, we are always available to answer them. And as you know I take all calls and whatever I could do to answer any questions you have or Jeff or Mark or Brad. So I guess it’s the last call for questions. If there are no questions at all, I guess we will say thank you very much for joining us.

[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.