Q4 2019 Earnings Call
Good day, and welcome to the Quest resource holding Corp. fourth quarter.
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Today's conference is being recorded.
I would like to turn the conference over to Dave Mossberg Investor Relations. Please go ahead Sir.
Oh. Thank you operator, thank you everyone for joining us on the call.
Before we begin I'd like to remind everyone. At this conference call may contain predictions estimates and other forward looking statements regarding future events on future performance of course, you should the words like anticipate project estimates expects intend believe and other similar expressions are identified are intended to identify goes forward looking statements.
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10, major health crisis, and such the Carlos.
Which can cause disruption sessions government imposed travel restrictions supply chain disruptions and extend extended shutdown of businesses, which are discussed in greater detail plus filings with the securities and exchange dimensions, including limits.
Hold on form 10-K for the year ended December 31st 2019.
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Certain non-GAAP financial measures.
Well, we discussed during the call.
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Unless it is always so should we assume that any financial skus in this call will be on an ONTAP basis.
Full reconciliation of non-GAAP to GAAP financial measures are included in todays earnings release on I'll turn the call workshops, President and Chief Executive Officer.
Thank you, Dave and welcome everyone on the call to discuss fourth quarter and 29, Chief financial results. Joining me today, as Lori lights, and more senior Vice President and Chief financial officers.
We delivered another year of solid improvement in profitability during 20 that team.
Now I would note that this is the most popular here in terms of EBITDA in the history as a company.
Posted record this office.
42% growth in adjusted EBITDA.
Oh strong cash flow generation and excluding onetime costs, we have positive net income.
These improvements are a direct resolved and solid execution and the strategic plan that we estimated a couple of years ago.
And it's working well and we expect will continue to drive improvements in the future financial performance.
Before we got to the results for 20, Nike then GR strategies in more detail.
I want to address Carlyle partners.
The destruction caused by this fives.
Yes.
Let's go out to all the people families affected by this.
This is obviously a dynamic situation in light of recent developments independently and its impact both on the human and economic scale.
We are dealing with uncharted waters.
It's likely that our near term financial performance will be negatively impact.
We are concerned about the potential disruption to supply chains in consumer spending.
Is likely to temporarily impact on customer activity across all end markets.
As a baby service provider most of our service services or volume base.
Which means that near term potential disruptions and customer activity.
Could lead to lower volumes and weakness in near term revenue performance.
In addition, disruptions caused by the outbreak it kept where they make it difficult for build upon which the timely service our accounts.
Well the positive side I'll also note that our services, our recurring spend not an optional space.
Correct customers may have less volumes of waste, but they will start waste streams demeanor services.
Importantly, regardless of the macro environment, we believe that our customer prospects will continue to look for ways to save money answered to vote was from their landfills.
Those are key attributes of our value proposition and we believe were lost opportunities to continue expand our business with new and existing clients.
With that said, we believe our business model is able to withstand temporary disruptions in the market.
We have customers and multiple industries across United States.
We have block they see that were 3500, given relationships and are able to switch out vendors if necessary.
We haven't after like business with a relatively variable cost structure.
We're able to adapt quickly to changes in the marketplace.
And we have contingency plans in place it clearly the ability for employees to function remotely.
And as necessary, we want them at this point to safeguard the health it say keep our employees and to ensure our capabilities to service our customers.
In summary, we have a business model that can adjust for disruption we have a team that is ready to make changes as necessary.
Now, let's turn the call over the Lloyd will review the financials.
Thank you ready and good afternoon, everyone.
Fourth quarter revenue was 23 million.
Decrease of 9.1% compared with fourth quarter last year.
For fiscal 2019 revenue was 99 million.
Decrease of 4.7% year over year.
The decrease in both periods was primarily due to our transition away from while our value added services.
And as discussed in prior calls.
The slowdown protection occurred as one of our largest industrial customers, reducing volumes and associated revenue.
Have a low margin waste stream.
Moving down the income statement.
Fourth quarter gross profit increased 5.5% year over year to 4.7 million.
For fiscal 2019 gross profit was 18.7 million.
11.1% growth year over year.
Gross margin was 20.3 process during the fourth quarter and 18.9% for the fiscal 2019.
Once we more than two and a half percentage points a year over year improvement during both periods.
The improvement in gross profit dollars less margin.
Were primarily due to the net effect of increased added value services changing the service mix and lower cost of certain slow contracted services.
Our gross margin has been about targeted range for the last several quarters.
Standards. We have said previously we expect gross margin will vary from quarter to quarter, depending on our revenue mix and other factors.
Fourth quarter operating expenses increased 264000, you're over here to 4.5 million.
The increase was primarily related to increased stock based compensation of 127000.
Then labor and related expenses at 56000.
For fiscal 2019.
Operating expenses decreased 773000.
Or 3.9%.
18.1 million.
The decrease in operating expenses during 2019.
Primarily related to lower depreciation and amortization of 1.4 billion.
Lower bad debt expense of 1 million.
Which was partially offset by increases going labor related expenses of 624000.
Transaction costs of 248000 related to the April 20, Nike equity offering by our selling shareholders.
Stock based compensation of 292000.
And increased advertisers against Tradeshow expenses of 121000.
The decrease in depreciation and amortization was related to certain intangible assets that were fully amortized as of July 28 key.
The decrease in bad debt expense related to the charts, we kick in the third quarter 28 key.
To write off for seed receivables from is tough summer <unk> and <unk> bankruptcy.
Going forward, we expect operating expenses to grow at about half the rate our gross profit dollar growth rate.
Interest expense during the fourth quarter in fiscal year was relatively unchanged versus the prior year comparisons.
Net income per basic and diluted share was breakeven for the fourth quarter 2019.
Compared with net income per share of a penny for the fourth quarter 2018.
Year to date net loss per share improved from a loss of 16 cents last year to breakeven this year.
Our adjusted EBITDA for the fourth quarter increased 10.2% to 850000.
Year to date, adjusted EBITDA increased 42.4% to 3.3 billion.
Turning to the balance sheet, our cash balance was 3.4 million there and every year and increased 1.3 million compared to the beginning of the year.
We had 4.7 million drawn on our $20 million credit facility as of December 31st 29 King.
This was down 754000 from the beginning of the year.
[noise]. So at this time I'll turn call back to rally.
I'll discuss our initiatives.
Thank you Laurie Poland, taking minutes review the transformation of a business that explain why I believe.
Well position to become major player is helping accepted optimizer waste streams devote more wells from landfills and ultimately into their sustainability.
First we are targeting the right business several years ago much of our revenues derived from several non value added services, which put us in a position of competing on a one dimensional basis twice.
Although it's generating revenue it wasn't good business in terms of marginal return some of this all sustainable.
Instead, we now compete based on a national scale broad scope of service offerings data reporting antelope analytic capabilities.
And excellent customer service.
These attributes are very valuable to our customers think opinion based on these factors allows us to create stronger customer relationships.
Second we significantly diversified our end markets, where well end market mix.
Several years ago, almost lost proceeds the almost all revenue came from two end market.
Retail and automotive.
Today, we have three major markets retail automotive and industrial.
And restaurants is quickly becoming a significant.
The transformation of our business is evident in the improved financial performance.
It's 26, two shots revenue base I got 45%.
When they business it didn't make sense for us and adding business second sustainable produce attractive margin and matures.
During that same time period improved gross profit dollars at a compound annual rate of 15%.
We've had three years ago improvements and adjusted EBITDA and were producing operating and net income profitability.
I'll also note that we've substantially change ownership days and our corporate governance in April 20, Nike and about 40% of our shareholder base Chase cadence should.
Sure several Watson by three investors your mail owned by the new doesn't.
We believe this will have a long term positive application far liquidity under evaluation.
And this past year, we also adopted shareholder friendly policies that illustrate how board and management are committed to aligning the shareholder interest.
These policies include stock ownership guidelines and the derivative trading policy.
One area that we're not satisfied because the pace at which were adding new business.
We've achieved considerable access by expanding relationships with many of our existing customers and we've added several new customers, but just not as many as we would have helped.
Our focus on the right customers is working it's just the speed of adding new business is not what we wanted to be.
To address this late in 2019, we made changes ourselves structure and redoubling, our focus on new customer acquisition.
We have the latest shifted it came with deep domain experience in our targeted end markets.
Clearly revenue gross margin and EBITDA growth authorities for us.
We're not making changes to our go to Mark strategy.
And this is we haven't place are working and generate improved financial performance, while providing a path to accelerate the pace of new customer growth.
While we're on this topic I wanted to take a match review our growth initiatives.
First sustainability trend should help drive the market for services.
Target customers, which are large fortune 1000 companies with multi location footprints.
Our increasingly reaction to the mass from customers investors employees and communities to put in place sustainability programs that diverse waste divert waste from landfills.
Quest is well positioned to benefit and in some cases take a leadership role in affecting the secular growth trends.
Second there's a lot of room to grow within our existing customer base.
We will continue to grow with our existing passers by adding locations as well as selling additional services.
Third we expect growth to come from developing new service offerings that help customers address issues.
We have a reputation of being innovative problem solver, creating new services not only to help create loyalty with our existing customers.
It provides us opportunities for growth with a differentiated service offering for other current and prospective customers.
Regarding new customer acquisition, our team is building a strong pipeline based on relationships, we're getting a better understand the sales cycle.
How these opportunities moves to the pipeline, particularly in new and workers.
The 2020 were exploring opportunities for growth through M&A. We have recently added a dedicated resource to lead our corporate development efforts.
While the timing of strategic acquisitions, if any.
Difficult to determine I can tell you that we will take a disciplined approach focused on opportunities that can expand customer relationships in existing vertical markets as well as that business in new end markets with new vendor networks.
Before I open the call to questions I have a few comments to make about our outlook.
From a financial standpoint, it is too early to tell what the effect of the krona virus will be on her business.
Therefore, we're not giving specifics on 2020 expectations.
That said earlier were an asset light business with a relatively variable cost structure.
So we're able to adapt quickly to changes in the market it withstand temporary disruptions.
We will continue to monitor situation are ready to react accordingly.
Barring any long term effect from the virus, we believe our efforts that positions us well for future growth.
And with the operating leverage inherent in our business model, we expect operating profit to growing even faster pace.
I look forward to keeping you updated our progress.
We now like the operator provide instructions on how listeners can kill for questions.
Thank you if you would like to ask your question. Please signaling by pressing star and then one on your telephone keypad.
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Again that is star and then going to ask a question.
We can know take our first question from Jerry Sweeney of Roth Capital. Please go ahead your line is.
Hey, good afternoon.
Good afternoon.
Hi, Joe Hunter.
Right well 129.
Obviously, great and then two I just want to say thanks for the upfront.
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What's going on in the World.
Appreciate it just sort of <unk>.
Right.
Out of the game just give us.
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Your thoughts.
People just.
Skipping over itself.
Yeah, I will touch on that but I forget, let's stay with the core business for a minute here you talked a little bit about.
Sales restructuring go to market strategy.
Two questions on that front.
What have you changed and also maybe what.
Sort of.
I think are discover it has been <unk>.
Impediment to growth for or sign.
Well that.
The first question that we talked in Q4, Jerry I mean, excuse me to execute through about new leadership that we brought in or would that.
As it is that a disappointing the processes and in essence, a change in how we go to market.
So I would say new leadership and adjustments it typically come the new leadership is what we're seeing and we're expecting that to get things out of that.
The second piece, what's been the impediment.
You know.
Hi, I really Jerry I guess, that's a tough and because I have absolutely total confidence in the.
And the value of our offering and its evidenced by our relationships that have existing customers our ability to raise gross profit you can't raise gross profit if you're not bringing a value sustainably we've been able to do that so I really think maybe it's just a continuing a bang on doors, maybe the sales cycle is in many cases a bit.
Along the way thought it would be as we go after is more complex waste streams as opposed to just.
Pure commodity price sale awfully well, so I'm sure. It's a number of the above and there's continued to be I believe there's if theres a paradigm shift that's happening.
Relative to working with a a different company like classic goes across all these different ways to some platforms. It's just different than what people have done in past. So maybe it takes a little longer adjustment, but all those are gas is Jerry I mean, we're getting a lot of positive feedback on the on existing pipeline and the folks that were talking too.
And we're encouraged by that and feel good about future in that regard.
Got it and then just.
Question on the pipeline.
Is there anyway, you could qualitatively or quantitatively you know, what's the pipeline looks like today versus you know either 369 months ago just.
Are there more opportunities I'm just curious it just so we can get a little bit of.
[noise] vision or thoughts on that.
No I don't know that there are more opportunities Terabit I I will tell you that theres I think there's better ones.
And I believed that the activity within those one of things you want to dispose of a pipeline as you look at.
Aging, we always take of aging I kind of accounts receivable that if you look at a pipeline from Asia perspective, as well and he he then you're seeing a movement.
More consistent movie you feel better about how that pipeline is active so I think the better way to classify the pipeline isn't the size of it but the activity within it.
Actually.
The movement over that's how I would describe that you're.
Okay. That's fair that's actually that's helpful and I'm not sure good point and then.
Obviously, you sign Buffalo Wild wings last year.
I think and as well as another restaurant group I think the restaurant group of starting I believe in the fourth quarter.
With that fully impact it fully onboard it in the fourth quarter, how do we kinda, we'd look at that and just any color I'd probably marginally.
Sorry, I didn't jump or Marshall impact your input costs, because they didn't start till December or watch was in December.
Second group.
Obviously, we're fully we're fully implemented now moving forward, but for Q4 impact is minimal.
Got it and then one last question I'll jump back on you know obviously, okay. We talked about thrown in the beginning or did you know.
And lots of variable costs, what would be sort of.
Like a scaled down type of cost structure across I I'm not sure. If you can necessarily answer that question.
But if let's say activity slowed 40% for a full quarter.
ER or to do Youve any idea what how quickly you could scale down your cost structure and would that be mostly either.
Commissions or how would we how would you address situation like that.
But it's a great question, it's obviously something we've been working.
It's one of the benefits I think I mentioned during the call been theater asset light business model itself, because we have variable costs.
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We have.
Were very about table to flex is what I would say up and down the space. If they can do it much more quickly if we had to deal with idle assets sitting around you know based on that'd be a much more challenging situation.
So I would say will cause she is doing quite well too we're going to certain degree adjust to that to the movements in the marketplace.
Okay got it.
Thank you again I really appreciate it and.
I'll talk to them.
Thank you Jerry I appreciate it okay. Thanks.
Thank you.
We can know take our next question from mass factor of Winfield capital. Please go ahead. Your line is open.
Yeah, Hi, Greg Good afternoon, and it's nice to see hitting the.
Targets, just you set out to go for it.
Particularly in the margins.
My question revolves around.
The you articulated waste streams that you has expanded the business isn't too.
To mitigate it depends on a couple of segment. So I'm wondering if you see any or see any others that with your expanded sales capability and go after and it relates also to your comment about the complexity of waste streams, particularly the increase well electronic waste difficulties.
Dealing with that.
I have anything that you could comment on with respect.
In a general sense that can for sure in X. I mean in general sense, we continue to.
What kind of waste streams that are that our customers feel as a pain point for them.
There is an obvious reasons for that well if there's a real pinpoint.
It creates a situation where we can generate a profitable solution.
And so it's less about waste streams and more about the type of customer in the west disease. So for example, a complex industrial off the Kt exists for us out there to extend our industrial space not very crowded finished its a comparatively.
So we're a and industrial involves a lot of different waste streams that has to churn complexity in that regard.
And he likes to something that are there to match and is that something thats out there as a possibility that something that we don't have an offering point as of yet.
Definitely a pain point, along with other things I'll just give me just some examples illustrate it for example.
In foodservice business.
That has a pain point, yeah, yeah, having those claims it services associated.
We'll pay pointed to a restaurant operator, and we've recently come to market, where the where the solution in that category, that's complimentary to what we're doing.
In our primary like Street, so I guess its expansion of segments, we sell cave.
And also waste streams that those folks view of pain points based solutions.
Well, that's [laughter] that that that's really the point of what you're doing the when you find the pain point and you can solve it you can get to kind of business. You're asked a question about in the press release, you mentioned since you talked about.
Industrial one of your large industrial.
Customers and then a low margin waste stream.
ER.
And you just mentioned that there's some opportunities in industrial or the waste for use are coming more complicated or other more complicated industrial customers that you think get with your new sales effort.
I think we could definitely get new customers for the sales effort I want to specifically address backstop that.
The watching what's true that's not indicative of the segment at all it's actually indicative of one yeah. One situation that happens to have a lot of revenue.
A corresponding with smaller percentage gross profit.
But the segment ended up itself.
It is really a great opportunity for us for profitable growth and we do have for example expanded capability in our sales force now in industrial segment that we didnt have a female spot.
Well those real thank you for clarifying that goes.
That was my my question and a with respect to the low margin waste stream luxuries spindles, Todd thinking about how you can build set up a little bit.
You've got a good job with your margins. So when we use it to you and thank you very much.
Thank you back so I've got a great tend to designate job finding ways to optimize margins on this.
Thank you we'll take our next question from George I mean off of Ehmke HAGE management. Please go ahead.
Thank you.
And who we enjoy.
Thank you for good year well.
Oh, that's your question about it I don't know how easy.
It's about the durability or rather.
If you look at your customers.
Program.
What kind of good considerably.
And in twin.
So George your questions relating to the durability of our revenue and our ability to retain customers correct.
So for example.
Hi, good customers or programs.
Normally or would that visibility that you huh.
What percentage do what number are.
You bet.
When.
Well.
A little bit a difficulty hearing you, but one of the things I wanted to talk about as far as durability and ready to chime in is this a majority of our services or a recurring services and many of them. Our services that are not optional. They are are related to waste streams that must be disposed of in our approach.
<unk> weights and therefore as far as is the re occurring in the expectation or that recurring revenue. It's a it's very high among our customers. We've had good history I'm not only continuing our relationships with successful there's been expanding with those customers as evidenced by our risk.
Hopes that we chat this past year do you want to add anything to that right. Yeah, I would just say that.
Almost all of that spend is required us to the city's span themselves, they're doing a better solution, which we believe we do.
Hey, good excellent customer service I have a tendency to not mentioned that forget to mention that in this call, but one of the key attributes of the excellent customer service with <unk> keep getting told that we have.
Okay, we will hear any very well, Georgia. The if that address your question you asked something about a percentage I couldn't catch.
Okay, I'm, sorry, I think that money, but thank you for the answer.
Okay. Thank you George.
Thank you.
There are no further questions on the telephone Q.
On the call Black Friday. Additionally, our closing remark.
Yeah, I, just so again I want to thank everybody wants to support a quest to for the interest today.
And it's a challenging time and where we Ah we feel we're up to the challenge and ready to adapt and do whatever this.
Very questionable changing market blazes I'm. So I've got a good tend to do that so with that I'll I. Thank everybody again and see you next time.
Yes.
Ladies and gentlemen, this concludes todays conference call. Thank you for your participation you may now disconnect.
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