Q1 2020 Earnings Call
Ladies and gentlemen.
Sandbar your PR Gx Global Inc. first quarter 2020 earnings conference call began in about two minutes.
Thanks for your patience completion.
[music].
Ladies and gentlemen, thank you for standing by welcome to <unk> Global Inc. first quarter 2020 earnings conference call. At this time all participants are in listen only mode. After the speaker presentation they'll be a question answer session asking question during the session you'll need to press star one on your telephone please be advised that today's conference is being.
We recorded if you require any further assistance. Please press star Zero I would now like turn the conference over to your speaker today Kurt Abkemeier.
Oh. Please go ahead Sir.
Thank you Josh and good afternoon, so all of those on coal.
Just note at the outset that certain statements in this conference call maybe considered forward looking statements under the Safe Harbor provisions.
The private Securities Litigation Reform Act.
These statements, including statements relating to management's views with respect to future events and financial performance that are based on management's current expectations and beliefs and are subject to risks uncertainties and other factors, which could cause actual results to differ materially from historical experience orphan.
Actual results expressed or implied by such forward looking statements.
For additional information on these factors please refer to PR Gx global.
Filings with the Securities and Exchange Commission, including but not limited to its reports on forms 10-K inside of Q.
PR Gtx undertakes no duty to update or revise any forward looking statements, whether there's lots of new information future events or otherwise.
This presentation also contains references to certain non-GAAP financial measures such as EBIT EBITDA and adjusted EBITDA metrics that we use internally to measure of operating performance.
Reconciliations between these non-GAAP measures and net income or loss. The most directly comparable GAAP measure is available under the Investor Relations portion of our web site at PR Gx dotcom.
We'll now turn the call overdraft.
Thank you could.
We had another very good quarter, marking our highest first quarter adjusted EBITDA in seven years.
This continues the momentum we saw in the fourth quarter of last year, which was our strongest in over 10 years.
Expensed rationalization actions taken in 2019, along with additional reductions made this quarter have enabled us to significantly improve our adjusted EBITDA performance, which along with reduced levels of Capex spending are driving our ability to generate free cash flow.
Of course in the forefront every companies focus right now is the impact with cobot 19.
Fortunately over 75% of our revenue comes from clients, providing essential goods and services sectors grocers pharmacies ecommerce retailers consumer package goods manufacturers and distributors and telecommunications providers.
To date these sectors demonstrated economic resilience during the global pandemic limiting our future revenue risk exposure.
Thus far during depend dimmick period, our recovery audit and contract compliance services are generally performing at normal levels of productivity or even higher indicating that the large majority of our clients place high value in our ability to generate working capital and identified source to pay process.
Engineers during these challenging times.
Based on strong results in the first quarter.
The make up and strength of our client base and the robust audit operations productivity. During this crisis so far.
We remain confident in our improved efficiency and profitability and Twentytwenty and reiterate our expectation of delivering 2020, adjusted EBITDA within a range of $20 or excuse me 28 $30 million as well as significant improvement in three cash flow.
No I would be remiss.
If I did mention how proud I am of our employees around the world.
<unk> response to the told at 19 pandemic as we shifted to a work from home environment to virtually all of our personnel around the world.
We made the moved in mid March in a highly compressed time period and never missed a beat.
I'm very proud of the great job our people have done maintaining productivity in dealing with all of the distractions that accompanied the shift to working from home and maintaining safe and healthy social distancing.
Now I'd like to go for close to go over the strong results for the quarter before I go into more detail about what we believed to be significant stability and the revenue from our clients, which is especially important to understand in this unsettled and then <unk> environment Kurt.
Thank you Ron.
As Rob noted, we had a great quarter second strong one in a row stable core revenue results strong adjusted EBITDA performance measured Capex, all of which are coming together to deliver improved cash flow generation.
Let me jump in to a little bit more of the details.
Consolidated revenue for the first quarter of 2020 was 36.8 million a decrease of 5.1% from the first quarter 2019 on a reported basis and a decrease of 3.3% on a constant dollar basis adjusted for changes in foreign currency exchange rates.
While revenue was down 2.0 million on an as reported basis year over year I would note that the recurring revenue from the core recovery audit business is more stable than may appear from the consolidated as reported results.
The two in decline year over year about 840000 was due to a decline adjacent services, which was the result of a decision on our part to pull back from doing on profitable advisory projects.
About 680000, the decline was due to the weakening of the currencies, our international operations, which leaves the balance of about 440000. This the true constant dollar change in our recovery audit business, which is a decrease of 1.2%.
As for some color on quarterly revenue performance in the service lines in regions recovery audit Americas decreased 4.2% your three year on an as reported basis and 3.3% on a constant dollar basis. The retail part of the business was effectively flat year over year, while the commercial side.
It was the primary contributor to the decline.
Commercial as well as contract compliance part of the business can be lumpy from time to time this quarter had lumps in both areas no particular trends by regions or customer types. No. Just some lumps as I mentioned, but to take away is that we're experiencing continued stability overall.
[noise] recovery audit Europe Asia Pacific increased 8.3% on a reported basis increased by 4.8% on a constant dollar basis.
As I, just noted currency swings during the quarter as well as during the last year created a headwind for international operations on an as reported basis.
The retail part of the business was effectively flat on a constant dollar basis, that's slightly down on an as reported basis, while the commercial part of the business was up nicely on a constant dollar basis as well as on an as reported basis, but I would characterize this part of the business is happening lumps like in the Americas.
Overall, our ERP regions performance remained stable just like in the Americas.
As for adjacent services revenue was down about 840000 or is year over year. This decline was primarily due to the de emphasis on the advisory project based part of our business, which was not producing the profitability we desired.
Revenue from the more recurring revenue base analytics and solutions part of our business grew year over year, and we're optimistic that we can scale, but in a profitable measured fashion as we ramp up our next generation technology platform.
As for adjusted EBITDA.
Adjusted EBITDA for the first quarter of 2020 was 3.5 million compared to 1.7 million in the first quarter of 20 lighting and the adjusted EBITDA margin was 9.4% of revenue in the first quarter of 2020 versus 4.5% in the first quarter 2019, an increase of almost 500.
EPS year over year, our best year over year expansion over two years.
This improvement in adjusted EBITDA was achieved despite modest reduction in revenue and is due largely to an increased focus on it improved efficiency and profitability that we began ramping in the second quarter of 2019.
This is the second straight quarter of strong performance in which the benefits of our efficiency initiatives have become more apparent in our results.
As Rob noted this is our best first quarter adjusted EBITDA in seven years, which is a follow up to our fourth quarter results.
It will be the best adjusted EBITDA in a decade. The team here has done a tremendous job and driving these efficiencies and improving the productivity.
As for net loss net loss from continuing operations for the first quarter of 2020 was 3.9 billion an improvement from a loss of 4.2 million last year and was largely driven by the same factors impacting revenue adjusted EBITDA performance as well some negative impacts due to.
Foreign currency changes during the quarter.
Moving onto the balance sheet, we ended the quarter with 25.2 million in cash and cash equivalents.
$5 million and debt and 35.6 million net accounts receivable.
In this environment, we made a conscious decision to maintain a higher cash balance out of an abundance of caution I.
I will note that our net debt balance at the ended the quarter defined as our borrowings less cash balances was 19.7 million down from a peak 24.8 million at the end of Q3 last year and our lowest level since the first quarter of 2019.
As for our accounts receivable the net balance outstanding improved from the fourth quarter of 29 team, which is typical for first quarter versus the worst fourth quarter comparison due to the seasonality of our business and the typical collection cycle, but is also significantly improved compared to the first quarter of 2019.
And the days sales outstanding reflect that improvement as well.
Lastly, I would note that our cash balances increased by $10.3 million during the quarter.
Million of which was due to increased borrowings and the other 2.3 million was due to cash generation during the quarter.
Turning to capital expenditures they were <unk> point 5 million for the first quarter 2020.
Turning to 3.3 million in Q4 of 19, and 4.4 million in the first quarter of 29 team.
In this environment, we thought it was more prudent to moderate capital spend for the year and to continue to focus on the rollout and adoption of our new audit Foundation.
And platform, which we believe will be important in achieving further efficiency gains.
As a result, we expect capex for 2020 to be down significantly from 2019 and believe we can bring it under 10 million given the current environment.
Turning to adjusted EBITDA guidance for 2020, we are reaffirming our guidance range for adjusted EBITDA of 28 to 30 million.
This guidance is based on our current assessment of the business environment in a co bid 19 world and our current expectation of and modestly lower revenue levels for 2020 compared to 29.
As you've heard from US more recently, we've increased our focus on free cash flow generation, which we believe to be that much more important this environment.
The combination of expected 2020, adjusted EBITDA to age 30 million less the combination of the following capex guidance of about 10 million interest expense come taxes of a few million and transformation related expenses of a few million should enable us to generate recurring.
Operating cash flow in the mid teens during May 20.
Shaving this would be a significant improvement.
Compared to our average performance over the last six years more than doubling that level.
We believe this is the primary value driver in our business and we intend to maintain are keen focus on free cash flow generation going forward.
With that I'll turn it back over to Ron.
Okay. Thank you Kurt.
As Curt just detailed we were pleased with our first quarter performance and we believe that we're in a strong position to deliver significantly improved adjusted EBITDA and free cash flow for the business in 2020 and beyond.
While Kurt went into detail on our improving cost structure and cash flow characteristics of the business I'd like to go into more detail on the topline I'd like to focus my comments on two particular facets of our business first it was a high quality of our revenue.
This environment more than I think most realize.
The second is the reason why we feel we're well positioned to succeed in this environment and while it why potential clients should be attracted to our services.
Let me dive into the first topic the high quality instability of a revenue.
In this current environment.
As I stated earlier over 75% of our revenue comes from clients that provide essential goods and services and are generally positively impacted by our work from home environment and the need to stay healthy.
The largest segment of this client group or companies working in grocery drug store large format retailers drug stores and E Commerce retail.
We also serve a number of companies that manufacture and distribute consumer package goods food products and pharmaceuticals that supply the retail industry.
We have relatively few clients operating in industries in impacted most negatively by the Togut 19 pandemic and thus have limited exposure to downside revenue wrist from these hard hit industries.
Some topic never to why we feel we're well positioned to succeed in this current environment and why potential clients should be attracted to our services.
We're operating in unprecedented times systems and operations are stressed supply chains are out of whack.
More complexity is affecting processes, when people and systems or at least prepared to handle it.
And much as influx way more than normal.
All of this creates errors and discrepancies, which have a life blood for PR Gx as mistakes made today are the Genesis of claims our clients rely on us to generate ultimately, resulting in cash recovery for our clients and revenue from PR Gx.
During this crisis more than ever creating working capital is of Paramount importance to every company. That's what we do for our clients and that's what we can do for our perspective clients and our experience in source to pay allows us to do that quickly and effectively.
So what makes PR gx services compelling to our clients.
One we find cash and incremental working capital to clients in many cases lots of it.
Cash is king in this environment and we're the ones who find that cash as you know our revenues are generally tied to the cash and working capital that we find for our clients to we can generate working capital relatively quickly.
Merely by identifying recovering and fixing leakage in source to pay processes and transactions. We can generally help our clients get their hands on this cash faster by introducing us into the recovery in prevention process earlier, and we keep pressing our clients to outsource their internal audit processes to us.
And are working with some of our larger clients you accelerate their audit programs to generate more working capital much sooner.
Number three we generally provider services with a contingency fee model.
No risk to them.
Of course, while we want to migrate to a more predictable subscription pace revenue model.
In this environment, our contingency fee model makes it much easier for clients and potential clients to do business with us.
In this environment Cfos and companies are cutting as many expenses as they can but we are actually a contra expense for our clients with a very positive ROI and that's a huge distinction for us.
And this model, we can and with the model, we have we are needed more than ever by our clients and the potential clients.
So what does this environment mean for us.
Well in the near term, we're auditing client spend from periods proceeding that coagulant coated 19 crisis and thus the levels of spending and types of errors are generally normal relative to past experience.
Now at the beginning of the pandemic, we were concerned that are auditors and our clients might be distracted with moving operations to work from home environment and might lose focus on generating supporting Andr are proving our claims.
Overall claims productivity is at or above prior year levels and client engagement is possible.
Happy to say that we're operating largely in a business as usual environment with the exception of everyone working from home.
Now a small number of clients have delayed audit activity in relation to since its suppliers from categories, but today, we have not experienced a full stop with any existing client.
We're seeing a modest slowdown and the time it takes to ramp up new audit relationships, but we see this as potential revenue delay rather than permanently lost revenue.
We have adjusting our sales and marketing plans for 2020 in response to working into pandemic environment and are monitoring key performance indicators for new business activity.
We had a good Q1 in terms of bookings and I've been impressed with the level of activities. Our teams are generating including the willingness new prospects to engage thus far in depend Imec world.
Now looking ahead, we will begin auditing our client spend from the coated 19 pandemic period, starting in second half of this year and then to 2021, but based on our current spin tracking we do not see a significant risk claims in revenue decline.
We've been tracking weekly retail sales results by category and country, which is a strong indicator of retail and related supply chain spend activities, which we will be auditing and a few months when our clients released their spend data for a recovery and contract audits.
As we all know these industries are seeing substantial increases in sales volume compared to last year, and while promotional funding activities, which drives a substantial amount of our retail recovery audit revenues have been impacted just in certain categories due to spikes in consumer spending we.
We're seeing promotional funding patterns returning to normal while sales volumes continue to show year over year increases.
Burger with supply chains being disrupted due to this unexpected increase in demand retailers manufacturers and distributors are finding new sources of supply and expediting replenishment orders, which could cause increase billing and disbursement errors downstream.
The us based on makeup of our client base the increase volume in retail spending activity and the disruption in the associated supply chains, we expect continuing client demand for our services and have confidence in our ability to generate revenues inline with our current expectation.
The slight decline compared to 2019 as crude described in his comments.
Finally, because of the belt tightening and improved productivity results over the past year and proactive scenario planning in response to the coping 19 pandemic. We believe we're well positioned to respond to a reasonable level of negative revenue pressure and still deliver on our target.
Dr 2020.
Of course, our confidence in our ability to generate revenues and meet adjusted EBITDA targets are based on current and expected pandemic environment and to human behavior. We would have to reassess if we see a major change in restrictions or other macroeconomic factors.
So overall, we feel we are in a solid position to weather. This pandemic storm and continue to drive meaningful value for our clients. We have a great list of clients with so many of them, providing the essential goods and services, we all need during this challenging time.
And this helps provide stability to our revenue.
And we've made significant improvements in our efficiency and the expense side of our business such that we expect to continue delivering adjusted EBITDA results and generating free cash flow significantly improved over prior years.
Given our healthy cash balance existing credit facility and the ability of our business to generate free cash flow. We believe we have the resources necessary to continue to operate our business effectively invest in our technology infrastructure and platforms for the future and further strengthen.
Our position in the source to pay market.
You have my full commitment that we will continue to operate our business with a keen eye on long term sustainability as we work through this global pandemic environment.
With that I'll turn it over the Josh for the Q, a part of the call.
Thank you I'll remind you are tasked.
As a reminder to ask your question you will need to press star one on your telephone.
Try your question press the pound Keith please stand by that we've compiled Kuni roster. Our first question comes from.
Alex Paris with Barrington Research you May proceed with your question.
Good afternoon, guys Alex.
Thank you very much for Ah.
A strong earnings report I have to note that you're one of the very few up my coverage.
Huh.
We are able to.
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Alex your we can barely hear yet.
Okay.
Hello, I wish I might not quite as much better.
Yeah, that's much better.
So.
I just have a couple of a follow up questions and I think a lot of these things were covered but just to dive into it a little deeper.
Given your comments in your first quarter performance. It looks like claims productivity is is strong you know there's a couple of components to.
Claims productivity, it's identifying those claims and presenting those claims and then converting those claims shop.
Along that path.
Claims pipeline I suppose shot a how about some additional color there are things are operating as expected.
You know that there's both the pro and the kind of put and take claims conversion you know with customer cooperation being high on that list so right.
Sure Great.
Other than Oh, that's a that's a great observation question that that.
When when all this you know the cold 19 pandemic started that's what we were primarily concerned about was the no well we may get our people position and productive were clients tend to be focused on supporting our claims and working with their suppliers to get claims approved and and.
And Fortunately, we've had very little and impact on our normal productivity in fact were up a little bit we're tracking it very closely every week in terms of the number of statements that we're receiving we're looking at the number of claims generated number of claims being approved and.
And we're we're running well so we feel good at this point you know we're almost at the end of April that we're performing where we need to be performing clients are cooperating suppliers or are cooperating or accounts receivable is in a good good spot to spend a favorable compared to last call.
Orders Curt mentioned so.
We feel good and no claims so obviously recognize that we provide a very important service during this time it there.
You know supporting us all the way so far so good.
Great and then you talked a little bit about existing clients and I think you touched on a new potential clients, what the new business development efforts looked like in this environment. It's your phone ringing Oh, you're if your new business development team out there persuading new retailers.
And as such as China.
Yeah, Great Great question, we are.
First of all we rely on typically rely on going to industry shows and conferences to.
You know meet new clients and and so a lot of that is of course put on hold so we've had to revert a lot of our activities to up to other campaigns webinars and and other no direct outreach campaigns and we've been very pleased with the level of activity that we're seeing and the response.
Yes, two it we have oh, great relationship with a.
Channel partner that we.
Recently did a.
Invited us to do a joint Webinars on drive them.
Working capital during the Cobot 19 period, we had seven brand new companies joined that Webinars that would all be no great prospects to have so we're.
People are interested in and what we have to say and are being responsive to it and then we're also have no clients our existing clients talking to us about new areas that we could get involved with and new areas to look at so you know where we're feeling pretty good obviously a lot more to be told down the road, but.
No our Q1 bookings, which obviously only a short period of that what's called the 19 impacted but our bookings were up.
We're where we are above plan actually and then up you know and our pipeline of opportunities that we're pursuing now where we feel good about where we are and.
We expect to hit our plan for Q2 as well.
Great.
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Then I guess, a similar question I'm, just trying to measure risk in this environment I.
I think it's very reassuring to hear that 75% of your revenues comes from financing industries that are providing essential products and services what about the other 25%. You know you have any airlines do you have any hospitality you know hotel chain you know the area traded REIT, perhaps most oil and gas.
Yes. It you know and then the associated question bankruptcy risk among those customers.
Right.
Well first of all of that 25% covers a number of industries, but only a fairly small portion of those would be considered no at or.
Maybe not at risk score at least you know a under pressure industries, we do very little with airlines are hospitality.
So those are not really factors for us, we do have oil and gas clients and.
And so far.
We've had we continue to do work for most of those.
Clients during this period, but obviously there there were going to be a under pressure to reduce some of their spending and because they no cut back on some of their operations.
And there will be bankruptcy risk now when we did our plan at the beginning of the year. You know, we think that the team did a great job of identifying potential <unk> bankruptcy risk no. This was pre co that 19, but we do have that reflected in our plan. Some some level of bankruptcy a lot of the company said.
You know there that would be under pressure that you see out there that that might be bankruptcy risk I think we're in pretty good shape, but you know.
You know depending on how long this goes in the amount of negative pressure you know it. It was obviously could put more negative pressure, but you know what we see right now with the spread of clients. We have across all of our client base, we feel like we're pretty pretty secure.
With the.
The.
Yes, a little bit less that as we said to the 2019 revenue levels.
Gotcha. Okay. Thanks, It's reassuring and then I guess my last question for Kurt just to clarify it got distracted there for a second but.
You know you reaffirmed the 28 $30 million and adjusted EBITDA for the year on modestly on a assumption of modest bleed lower revenue and then you talked about free cash flow and kind of broke it down I think on the last quarter Conference call. You didn't say that you thought you could do free cash flow 10 million Oh.
What's your thoughts with regard to the absolute level of free cash flow. This year based on what you know now in.
Couple of assumptions.
Sure. We think we can do a few million better than that our capex expenditure assumption before was higher around 13 million. So now it 10 million, we would be picking up roughly 3 million more so the stack the adjusted EBITDA of around 28.
30 million.
Capex guidance of around 10 million interest expense net income taxes, if a few million transformation related expenses of the few million that should get us to somewhere kind of in that mid teens kind of range for recurring operating cash flow.
Okay, Great and I agree cash is king in this environment. So.
That's a good place to have your focus Ah, thanks, very much and I'll get back in the Kipp.
Thanks, Alex Thank you.
Thank you and as a reminder to ask the question Your earnings Press Star One of your telephone. Our next question comes from that comes with B. Riley FBR. You May proceed the new question.
Hi, good at Yeah. Good afternoon.
For taking my question, but I like that stuff a lot of the question that that at top of mind, but I mean, Ron just when you think about this business that we were to go into some sort of recessionary type of environment because of this disruption from Cowen 19 out of this business model tend to hold up for when we go into two or more of a recessionary.
And then.
And you know, we we we've looked back over time.
The 2008 period 2001.
And you know the good news is that we haven't seen.
A significant negative reaction you know the the good news for us and our business model is because were you would typically auditing behind the current period transaction. So were three to six to maybe nine months behind.
Yeah, we see it coming.
And yeah, we can get out in front of what we can watch the volumes of retail we can watch.
The revenues over clients and what they're doing and that's going to be a direct reflection on the spend and and we also have a pretty responses in flexible environment that we can.
Flex to increases and decreases in demand.
A lot of are a significant portion of our costs in our or.
It will cost are around commissions that are directly related to claims generation. So you know, it's it does respond well up and down to periods and then the other thing I'd say as you know during recessionary times people, we're gonna be focused on.
<unk> costs and being more efficient and eliminating errors and that's where we shot. So I think you know we're a good place to go for companies in that in that period and they can spend more time focused on.
During their their operations in line and minimizing any any leakage so up.
Nothing you can count on that.
Got it that's helpful and today, it's also bring.
That's exactly it's also worth noting the same rationale that Ron provided for.
Over 75% of our revenue is related to essential goods and services. The seems really true with kind of her the recessionary argument that we tend to.
Audit the promotional activity.
Sure.
The non discretionary kinds of items food pharmaceutical things like that so that there's a lot of defensiveness there even in a recessionary period, and we tend not to do audit for a lot of kind of discretionary goods.
Got it kinda that's helpful and with you that reducing your your planned capital expenditures for the year.
How should I think about investments in technology and kind of the expected progress that you're wanting to see with both the Epiphany and pinakothek platforms, there out of that by 20.
Yeah, Great Great question.
So you know pick any is our data infrastructure platform that we began to bringing into production and converting data in 2019 as you recall. So we know we're fully operational on a pick any today.
And we're in the process are really integrating more of our business operations. So the heavy lifting their of building. It is behind US we still have no additional work to do to continually improve.
That that platform, but but you know that was a big piece of it to have underway because that's the first piece that we build everything around the Panoptix platform, which it was our our standard audit you know global standard audit <unk> platform is a much of that of the components.
Builds in 2019, we actually are just now rolling that starting to roll that out into clients. So you know a big focus for us is moving that into our clients operations and.
That's going to help us with our operating efficiency, we're going to be able to do standardize audits across the world using you know some very powerful tools that that not only will.
You know improve our efficiency, but you know drive more effectiveness in our audits and again much of that is built there's more work to be done, which we will continue to a two you know to build on but you know we're we're rolling it out and so I think you know for this year as we look ahead and being conserved.
The them and with our our cash we're going to slow down some pieces of it but the yoga blocking and tackling and the and the pieces that are very fundamental most important are being rolled out or are rolled out and up and so we know we don't feel like we're going to lose a lot of momentum no towards the back.
This year going into 21 will up we'll continue to to roll out the platform and and build from there.
That's helpful and just final question for me with.
You expected to generate north of $10 million in free cash flow. This year and can you rank. Your expected uses of cash whether it'd be through debt pay down now investing into the business or potentially repurchasing shares.
Port why don't you.
Take that one.
Sure.
Yeah in this environment our primary.
Our priority here is really just cash until we get more clarity on how this pandemic really kind of shakes out.
So that's that's the priority for the foreseeable future. We're laser focused on just generating as much of it as possible.
And I think we'll entertain another priority is once we kind of get you just more clarity on on the pandemic.
Got it that's helpful. Okay, well, thanks again for taking my questions and best of luck here in Q2.
Thanks, Jack Great. Thank you that.
Thank you and as a reminder to ask a question you'll need to press star one on your telephone please stand by that we composite kuni roster.
Yeah.
And I'm not showing any further questions at this time I would now like to end the call over to Ron Stewart for any further remarks.
Great. Thanks, Josh and I want to thank all of you for joining our call today and we greatly appreciate your attention and your support.
And we look forward to being back with you to talk about Q2 and a couple of months ahead. So thanks very much in every one stay safe input and stays healthy. Thanks.
Thank you ladies and gentlemen, this concludes todays conference call. Thank you for participation you may now disconnect.
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