JanOne Inc.
Q4 2013 Earnings Call Transcript

Published: 25 Feb 2014

[Operator:]

Ladies and gentlemen thank you for standing by. Welcome to the Appliance Recycling Centers of America, Inc. Fourth Quarter Investor Call. [Operator’s Instructions] I would now like to turn the conference over to Jack Cameron, President and CEO. Please go ahead, sir.

[Edward Cameron:]

Thank you, Felicity. Good morning, everyone, and thanks for joining us this morning for Appliance Recycling Centers of America’s Fourth Quarter 2013 Conference Call. I am Jack Cameron, President and CEO. With me today, there will be – on the call will be Jeff Cammerrer, our Chief Financial Officer; and Brad Bremer, President of ApplianceSmart. Mark Eisenschenk, who joined us this past summer as Chief Operating Officer and President of ARCA Recycling, is travelling and will not be with us today. This morning we’ll expand upon yesterday’s press release which can be found on our website at arcainc.com, under the Investor Relations section of the website. On today’s agenda, Jeff will read a forward-looking statement and review our fourth quarter financial results, then Brad will give an update on the retail business and I will follow-up with the utility recycling program, and finally, we’ll discuss the Company and the industry developments and then we’ll open it up for questions at that time. So, to start off I would turn the call over to Jeff.

[Jeffrey 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 of our forward-looking statements. Please refer to the cautionary statements in our SEC filings to understand risks that may impact our business. We’re pleased to report that the Company generated a consolidated profit of 1.2 million or $0.21 per diluted share for the fourth quarter. Our profit, again, was spurred by growth in appliance replacement revenues, improved operating profit at AAP and lower appliance operating expenses. During the fourth quarter we reviewed the valuation allowance against our deferred tax assets and recorded a $1.2 million favorable non-cash adjustment. We do not expect this to occur again in 2014. The favorable non-cash adjustment was partially offset by $500,000 income tax provision related to fourth quarter taxable income. In 2013, we grew consolidated revenues by 14.8 million to 129.1 million, the highest in ARCA’s history and recorded a consolidated profit of 3.3 million or $0.58 per diluted share. Because of the Company’s strong financial performance in 2013, our bank has reduced interest rates by approximately 300 basis points in February 2013 compared to the rates in March 2013. Recycling revenues of 11.8 million in the fourth quarter were up 5 million compared with the prior year. The growth was primarily due to an increase in appliance replacement volumes. Recycling only revenues were flat during the fourth quarter. Byproduct revenues are 5.3 million in the fourth quarter, were up 900,000 compared with the prior year. Fourth quarter byproduct revenues included 600,000 from the sale of carbon offsets. We expect to generate similar, if not higher, carbon offset revenues in 2014. Revenues at AAP, which are also reported on the income statement as byproduct revenues, were 3.6 million for the fourth quarter, up 700,000 compared with the prior year. The increase was due primarily to an 8.6% increase in recyclable appliances and 400,000 in carbon offset sales. Our recycling business, including AAP, generated an operating profit of 2.1 million in the fourth quarter, up 2.9 million compared with the prior year. Within that increase, AAP improved its operating profit by 1.8 million, 1.1 million of that increase was related to a goodwill impairment charge that was recorded last year and the remaining improvement was due primarily to a reduction in the acquisition cost of recyclable appliances. Jack will talk more about the results in our recycling business, including AAP, later in the call. ApplianceSmart revenues of 15.9 million in the fourth quarter were up 500,000 compared with the prior year. The increase in revenues was the result of a 7.4% increase in same store sales and partially offset by the impact of two store closures operating in the fourth quarter last year. ApplianceSmart generated an operating loss of 800,000 in the fourth quarter, an improvement of 400,000 compared with the prior year, the improvement was due primarily to lower store operating and advertising expenses. And Brad will talk more about ApplianceSmart later in the call. Overall, ARCA generated 1.7 million in cash from operations during 2013 and ended 2013 with a cash balance of 1.9 million and excess borrowings of 4 million available under our line of credit. I will now turn the call over to Jack.

[Edward Cameron:]

Thanks very much, Jeff. A couple of highlights I would like to point out is that, overall 2013 was a very good year across all of our companies. As a matter of fact, as Jeff mentioned, it was a record year in revenue, we exceeded $30 million in each quarter and our revenue are going up and we basically are trying to squeeze every penny out of every appliance that comes through the door, either coming in or going out. So, we’re working very hard to increasing our revenue and increase our efficiencies. Typically the first quarter and the fourth quarter for us, over the years, have not been our best quarters. The first quarter this year, we had a $0.03 earnings then the second quarter was $0.13, third quarter was $0.20 and the fourth quarter was $0.21 for a total of about $0.58 a share for this year. Typically, the first and the fourth quarter are not our strongest quarters, namely because of the weather usually and the winding down and the starting of the different programs because of year-end. But anyway, we just really had a good year and very pleased with it. And so, thanks, Jeff, and Brad would you like to talk about ApplianceSmart.

[Bradley Bremer:]

Sure, thanks, Jack. I’m pleased to say that ApplianceSmart’s fourth quarter sales were almost 25 million or 3% for the same period in 2012, due mainly to a 7.4% same store sales increase. The marketplace remains challenging, economic uncertainty makes consumers nervous and reluctant to buy. As with other big ticket items, appliance purchases are driven more by necessity lately. As expected, aggressive retail competition continue in the fourth quarter, led by national players Home Depot, Lowe’s and Best Buy. Home Depot, in particular, is grabbing market share and broadening supply end fly-ins. Sears and regional player hhgregg both continue to struggle. In this highly competitive environment and given the latter Thanksgiving this year, Black Friday promotions started earlier, as a result we didn’t see the typical bump in sales like we have around previous Black Fridays. During this extended promotional period, appliance retail sacrificed margins for sales. It was the heaviest promotional holiday since 2008. You can say the extended promotional period backfiring on the industry, causing prolonged price erosion and compressed margins. Industry sales were flat compared to the prior quarter. Tight retail price in our new appliances also pushes down prices we could charge for out of carton product, which is our key differentiator. After Black Friday promotions ended sales cooled significantly for the rest of the year. According to the U.S. Commerce Department, overall retail sales fell by 0.1% in December. As indicated by recent headlines, the U.S. housing market has been soft with experts blaming cold weather and some underlying market dynamics. However, residential construction spending increased 18.3% in 2013 according to the U.S. census estimate and market forecast for 2014 are encouraging. Early this month – and I’m just speaking to the National Association of Home Builders, said that consumer confidence has returned to pre-recession levels and household balance sheets are on the mend. The NAHB is forecasting housing starts to rise 24.5% from 2013 levels. Our efforts to rightsize our stores continue, we’re still exploring opportunities to reduce square footage at some of our larger stores. Weather is making the news around the country with more shopper choosing to stay home – or warm by staying at home. Weather doesn’t discriminate, of course, it impacts our competition too. However, two-thirds of our 18 store locations are concentrated in states particularly hit hard by this winter’s weather

[Edward Cameron:]

Thanks, Brad. I appreciate it. To expand a little bit on what Brad is saying, is that we did rightsize some of the stores and as you might recall from previous press releases, we did closed three stores last year, underperforming stores, and we’re continuing to look at that and we’re working with several landlords now to rightsize some of those stores. And that’s moving along very nicely. We continue to look at our cost structure, improving our competitiveness. Our role with the manufacturers has continued to be very strong. We filled a niche in the marketplace with the ability to manage large volumes out of cart merchandize. And over the last several years because of the new construction being down and housing being down, the availability of that out of cart merchandize has been limited. We’re starting to see that improve, as Brad mentioned, as the economy improves we’re also going to see an improvement in the mix of product that we have in our business which is better for the retail. Brad mentioned Home Depot sales in the four markets that we’re in, but in the Northeast because of the addition of other brands into the floor of Home Depot, it increased their market share. And in this case, it worked to our benefit because of our relationship with General Electric and Home Depot in the Northeast, that supplies product for our recycling center in Philadelphia. And in Philadelphia the AAP, ARCA Advanced Processing Joint Venture, had a much improved year for lots of reasons, one of them is the startup cost, a lot of them are behind us. We’re also finding improvements in the labor efficiencies and also some negotiation and more favorable pricing contracts. So, all-in-all the improvement there is quite rewarding and we look forward to increased volumes. And seeing from the Home Depot-GE relationship, we feel pretty good about the direction that the momentum is going. As a matter of fact, the volume was up over Black Friday as substantially. And if that were to continue the run rate there would be well over a million units. However, obviously that isn’t going to be the run rate but it does start to test the facility and the capabilities. We’ve always said that that facility can handle about 750,000 a year, but based on the activity we feel that that is – we can handle that or maybe a little more by running a second shift. So, that is working out very well. One of the things that’s happening is that the progress that we’re making there, I think, is very important to the industry. It’s showing that the large volume of appliances can be handled and recycled in a proper manner and all these proper materials to be handled properly and at the same time not suffer from on the end of the financial and for the retail and the manufacturers. Our revenues increased $17.5 million in the recycling division this past year. We were quite pleased with that. Some of that revenue came from some change in our program with the utilities which, again, emphasizes our relationship with the manufacturers through our ApplianceSmart stores. Because of the accessibility of appliances through our retail operation, we’re able to fulfill contracts with utilities and multi-housing type operations. The appliances are at a very good price and because of our capabilities in recycling and our experience in turnkey programs, it’s a very, very nice fit for us and has been doing very well. And we expect for that to happen in 2014. Some of our contracts that we’re having have been funded for this year and we’re seeing an increase in business. In the fourth quarter of last year, our recycling revenues were flat even though our total recycling revenues were up mainly because of the Change-Out Program, but we’re starting to see a shift in that as we move forward because some of the utilities that had moved away from the $50 incentive in 2012, which did effect our volume in 2012, as they move from $50 to $35, they have now moved back to $50 incentive and we’re already seeing an increase in the number of calls and – for recycling in those markets. And we expect that to continue through 2014. It did affect our volume, as I mentioned, in 2012. So, 2013 was a much better year for us in many respects. One of the new areas that we’re starting to work with is multifamily housing. Typically in the past our recycling efforts have been around single family homes but we’re starting to see an emphasis on multifamily homes. And recently the ACEEE, which is the American Council for Energy-Efficient Economy, outlined efforts by the utilities and reached more than 20 million Americans in apartments and condos. And we have a strong track record in handling multifamily programs with utilities, both, in change-out and recycling, and the utilities are expanding their efforts with the U.S. Department of Energy as they broaden their Better Homes initiative. So, we feel very confident that housing – the multifamily housing will be a new market for us. And that’s just kind of developed over the last two years basically. But in recycling effort, as you all know, we capture all the materials from the refrigerators, any contaminants, mercury, oil, CFCs. And the CFCs that we capture, we convert those into carbon offsets and we market those. As we mentioned, we market those into the California system. And the California system is continuing to gain momentum and acceptance. And as the economy improves in California, the demand for these offsets will be increase. As a matter of fact, there are some new participant – starting the 1st of next year that will require allowances and offsets in the fuel industry. So, we look forward to that market continuing to expand. As was mentioned earlier by Jeff, we did receive $700,000 ARCA and ARCA Advanced Processing last year into the income. And that was a favorable impact to our earnings by $600,000. We also have been talking about upcoming sale of carbon offsets and we expected some of these in last year, which did not come but they are coming this year. As a matter of fact, we just got word yesterday that we had completed the sale of carbon offsets and the money will be coming in today or tomorrow and that’s about $1 million to us, about 700,000 for ARCA and over 200,000 for AAP in Philadelphia, so a total of about $1 million. So, some of those – that work that we’ve done over the last couple of years is finally paying off. One of the things that we talked about in the past and has been talked about is the linkage between California and Quebec. We feel that that is going to increase the value offsets and allowances going forward and seem to be working out well. Other states are looking into it; the State of Washington could be next. But we’re currently watching that and staying on top of those issues and we feel very confident that everything is moving in the right direction. I will be attending the Climate Action Reserve conference again this year. This will be my third year. In California that conference is put on by the Climate Action Reserve and that is an update by everybody in the industry about what is going on and new developments. And so right now, based on the agenda, there are no surprises and as matter of fact there’s a lot of successes and we feel very good about it. To wrap everything up with the fourth quarter and before I do that I’d like to mention that we are going to do a question-and-answer session afterwards, and I know sometimes we’ve ended the conference call and some people were trying to call in and we didn’t have enough time to get it. So, if you plan on asking any questions you might want to either get the question prepared and get ready to call in and I will announce that when I’m done, I’d like to do a little recap here. So, just generally speaking, 2013 is a very good year for us. A lot of the things that happened in 2012 were surprises and/or we made adjustments in staffing and pricing, in contracts and in some of the issues that incentives, for example, that went away have come back and some of our funding for some of these programs we did in the fourth quarter of 2012 were active in the 2013 fourth quarter and we also expect the funding to continue in 2014. So, very optimistic about 2014, however, I have to be a little bit cautious because you never know with the economy and what’s going to happen – you know, we’ve had a few curve balls thrown at us with the weather this year. Normally the weather is not a big issue, but this year we’ve had store shutdown for two and three days, for example, in Atlanta and Eden Prairie, Minnesota. So, weather does have an effect here and also affected our Midwest operations. In the utilities, we had to pull trucks off the road but generally speaking we’re doing fine. We’re continuing to build relationships with the manufacturers and namely GE and the utilities and our relationships are doing very well and going very well. So, anyway, all-in-all we had a good year. And as I mentioned, I’d like to open it up for questions. And this concludes my remarks and we’d be happy to take any questions that you might have. So, I’d like to go ahead and open it up for questions, operator.

[Operator:]

Certainly. Thank you. [Operator’s Instructions] Our first question comes from the line of [John Agnuko] with – he’s a private investor. Please proceed with your question.

[Unidentified Analyst:]

Good morning, Jack and good quarter. I got a question here regarding offset credit pricing. Is there any – somewhere public or through California somewhere where we can get an idea as these offset credits are sold, about what the pricing looks like?

[Edward Cameron:]

Yes. There is an outfit in California that publishes allowance prices and offset prices. And the name of this off-the-top-of-my-head, I can’t give it to you. Jeff, do you remember the name of that outfit. Evolution Markets is the outfit. And they produce a daily pricing of offsets and allowances, as a matter of fact there just was an auction a couple of – well, in the last week or so in Californian offsets and the prices were fairly stable. And so, but, yeah, Evolution Markets is the name of the company. And I get an email from them every day as a matter of fact. It could be that I don’t look at the name but I do look at the pricing.

[Unidentified Analyst:]

Is the demand likely to exceed supply down the road?

[Edward Cameron:]

Yes, that’s what’s keeping the pricing up right now is anticipating that there is going to be a demand for these allowances. And we expect the demand to increase 1st of the year in 2015 because up until now the fuel industry, like, the refiners and those people, were not involved but they come under the captain trading starting the 1st of the year, next year. So, there will be a demand for offsets and allowances. And then with the addition of Quebec, that’s going to add another market. And I’ll find more out what’s coming down the road in March when I go to that conference. I’m sure there will be some conversation about expanding the program. But, yeah, we expect the demand to be there, yes. And as you know, the way that that works is the utilities – excuse me, the industry has to cut back on their emissions but also the amount of allowances are cutting back and also the requirements to meet those emissions requirements will get tougher to meet. So, they’re actually selling these options and allowances forward as well, so there’s a futures market in that too in some respect.

[Unidentified Analyst:]

Thank you.

[Edward Cameron:]

You bet. Thank you. Good question though. It’s good question.

[Operator:]

[Operator’s Instructions] Our next question comes from the line of [David Cayman] with Aegis Capital. Please proceed with your question.

[Unidentified Analyst:]

Good morning. Congratulations, guys. I’m travelling, so I apologize in advance if there’s any background noise. Three quick questions. What was adjusted EBITDA for the year? And then also, I noticed receivables were up quite a bit as of December 31st, do you expect working capital to generate a lot of cash by the end of March and have you thus far generated the cash through receivables. And then the last question is in regards to your success in Philadelphia. Is there an opportunity to replicate that potentially in Chicago or L.A.?

[Edward Cameron:]

I’ll let Jeff answer the EBITDA question and then I’ll go ahead with the other.

[Jeffrey Cammerrer:]

Adjusted EBITDA for just ARCA was $4.2 million. I don’t have the AAP adjusted EBITDA number right-off-the-top-of-my-head. So, just for ARCA it’s 4.2 million. Regarding the receivables, that’s related to the growth in our Appliance Replacement Program, charge mark for those appliances and the recycling of those appliances, which has caused AR to increase and, yes, we do expect that to come back in as cash in 2014.

[Edward Cameron:]

Yeah, the dollars are bigger on these change-out programs and so our receivables have gone up. You noticed that we ended the year with 2 million cash and about 4 million holding even though the receivables are up almost $5 million from the beginning of the year. So, as far as it replicating – I hope that answers the question. And then as far as adding additional centers, the key to us opening additional center is supply and we continue to work with our customers to increase our supply and when the volume justifies it, we will then make the capital investments and open up the centers but the key to our program is supply which is why our relationship with General Electric is so important because they control supply as they have a logistics arm that provides delivery for a major retailer, namely, Home Depot. And as we see that concept of warehousing and delivery expand we expect to see our supply continue to grow as well. So, we look forward to expanding operation and that’s our full intent to move in other parts of the country – you know, supply is the issue.

[Unidentified Analyst:]

Are there opportunities in your Philadelphia plant through strategic investments in terms of capital equipment to generate more revenue and higher incremental profitability? For example, maybe making plastic – you know, giving a higher grade plastic or potentially with some of the non-ferrous material could you give us a sense of that?

[Edward Cameron:]

Yeah, absolutely. You hit on two areas that we’re continually working on. One is the efficiency in the plant, either better conveyor systems, better heating equipment such as [inaudible] to eliminate labor. So, we’re always working on cutting our labor cost down which I’d say a key factor, the other thing we’re always working on is improving the value of the different fractions coming out of the shredders and you hit on the one that has probably [inaudible] and that’s plastic and we’re working with several people to – right now we do the sell the plastics but we think that if we invested some capital into processing equipment we could double the triple the revenue stream from the plastics revenue. Also the non-ferrous can be improved as well. So, we think that the future of the business is we’re going to continue to increase the margins by being efficient and increasing the revenue by increasing the markets we can go to with different materials. And, so, yes, we need to do that. The hurdle to get to where we were, it was quite high, and now we’re there. It’s hard to find a market for shredded materials, if you don’t have the shredded materials. And so we had to have the shredders in place first, so that we could have the materials to go to market with. And now we have people bidding on it and we have people come to [inaudible] and improve the revenue stream there, so those are two things that we’re constantly working on and we feel very good about that by the way. We think that’s a big part of our future. The consolidated income for 2013 was – excuse me, the consolidated EBITDA for 2013 was $5.7 million, to answer your other question.

[Unidentified Analyst:]

Okay. So, real quick question, I’ll jump back in the queue. What do we have in front of us in terms of carbon credits that we can recognize for 2014? You gave a number for Q1 but going for the full year, what do we have in front of us?

[Edward Cameron:]

Well, right now we have several burns-in – I don’t have – some are pending. We also are continuing to collect CFCs but what is in the bag as of right now that would be showing in the first quarter would be the $1 million that I mentioned, 700,000 of ARCA and 200-some thousand for AAP, so between the two companies about a $1 million and that will show up in the first quarter. And then the rest of the year, we – I just still not give an estimate on what the rest of the year but we expect that we’ll generate – continue to generate carbon offset money the rest of the year and it depends on what we capture. Some of this is a build-up of a couple of years ago that we – as you know we didn’t receive any credits in 2012 that we thought we were going to and even some that we are just receiving now – some in 2013 as well but – but the systems have gotten worked out to the point where California has figured out how to do all of the paperwork and the processes and so forth, so these first ones were the difficult ones in California. The time was over six weeks and sometimes even longer to convert these. We’re going to see that timeframe continue to drop and so we’re pretty optimistic about not only capturing the CFCs and converting them but also the timeframe and converting them from [inaudible]. I can’t give you a number for the rest of the year but I can tell you what we’re going to receive shortly.

[Unidentified Analyst:]

Okay. Congratulations. I’ll let someone else pose questions.

[Operator:]

Mr. Cameron, actually we have no further questions from the phone lines at this time. [Operator’s Instructions]

[Edward Cameron:]

Okay. Well, thank you very much and with the fact that there is no more questions and we appreciate you attending the conference call. And if there’s any questions that come up at a later date, feel free to call us; if we’re able to answer them, we will. And we appreciate your support and the opportunity to present our 2013 numbers. So, with that, I’ll close the conference call and 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 line.