Q3 2020 Quest Resource Holding Corp Earnings Call
I worry about.
Yes.
And welcome.
Just resource holding corporation third quarter 2020 earnings call.
This conference is being recorded.
This time I would like to turn the conference over to David.
Investor Relations. Please go ahead Sir.
Well I think a great and thank you everyone for joining us on the call today before and again I'd like to remind everyone that this conference call may contain predictions estimates and other forward looking statements regarding future events or future performance of quest.
Use words like anticipate project estimate expect intend believe and other similar expressions are intended to identify those forward looking statements.
Such forward looking statements are based on quest current expectations estimates and projections beliefs and assumptions and involve significant risks and uncertainties and.
Actual events or of course.
Results could differ materially from those discussed some forward looking statements as a result of various factors, which are discussed in greater detail and quest filings with the Securities and Exchange Commission.
You are cautioned not to place undue reliance on such statements and to consult RCC filings for additional risks and uncertainties quest forward looking statements are presented as of the day made and we disclaim any duty to update such statements unless required by law and to do so.
In addition, and this call. We may include industry and market data and other statistical information as well as quest observations and views about industry conditions and developments the data and information are based on quest estimates and they've got a publication government publications.
And reports by market research firms and other resources.
And other sources, although quest bleed those sources are reliable and the data and other information are accurate, we caution that quest has not independently verified the reliability of sources or the accuracy and information.
Certain non-GAAP financial measures will be discussed during this call. This and this non-GAAP measures are used by management to make strategic decisions forecast future results and evaluate the companys current performance and.
<unk> believes.
Presentation of these non-GAAP financial measures is useful for investors understanding and assessment of the company's ongoing core operations and prospects for future.
Unless it is otherwise stated it should be assumed that any financials discussed and this call will be and non-GAAP basis.
Full reconciliations of non-GAAP to GAAP financial measures are included in today's earnings.
That's it and I'll turn the call over to say, how its president and Chief Executive Officer.
Thank you, Dave and thanks, everyone for your interest in quest.
We hope the chenier satellites are healthy and safe and we appreciate that you've given cost taken the time zone.
As discussed our third quarter results.
To start off I'm happy to reported our business. It's an extremely solid footing that said, we recognize the uncertainty and the current environment and for me and ready to act and they have had of any short term softness and our business.
During the third quarter gross profit dollars improved sequentially from the second quarter.
Year over year gross profit dollars decreased by less than 5% as a weakness and some of our end markets almost entirely offset by strength and the others.
We benefited from a flexible cost structure.
And did a good job controlling costs, which led to a 15% year over year growth and EBITDA.
We also had our first acquisition and that's part of our broader M&A strategy.
This provides a beachhead and and new and market that has significant growth potential.
Hi, I'm also encouraged that we began to see some movement in our sales pipeline.
Seven and a half months since the beginning of the pen debt, our customers' apparently more settled and have free and reserved evaluation of how quest can help them drive operational and financial efficiencies.
Importantly, we have not net to step when it comes to providing excellent service to our customers.
Most all of our staff is still working from home and continues to do a great job, providing uninterrupted service and.
It has not been easy and I want to thank our folks for all their efforts to manage through this uncertainty.
And I'm trying to call over the long life, and our Chief Financial Officer to review the financials, and then I'll be back to review trends, we see and our major end markets and discuss some of our strategic initiatives Laurie.
Thank you Ray and good afternoon to everyone on the call.
Third quarter revenue was 23.7 million.
Relatively flat compared with 23.9 million in the third quarter last year.
The decrease was primarily due to lower levels of services COVID-19 related shutdowns or reduced operations and some of our customers.
Net impact was mostly offset by increased services from Butler, continuing and new customer base.
Gross profit was 4.6 million and decreased to 4.5 per cent when compared to third quarter last year, and an increase of 4.2% sequentially from the second quarter of 2020.
Gross margin for the third quarter was 19.2%.
Which was 70 basis point decline compared with last year.
Still well above our targeted level.
The year over year decrease was primarily related to the mix and services that we perform.
<unk> expenses were 4.3 million during the third quarter compared to 4.2 million during the same period last year.
Included in the F G and H third quarter was 355000 and professional fees related to M&A activity.
Excluding these fees and she and expenses would have decreased about 7% year over year.
Most of that decline was related to reduced labor and travel expenses.
And the near term, while certain SG and expenses such as travel will continue to remain low.
We expect MSG and <unk> costs will increase from Q3 levels due to business.
Operating.
I will also note that we expect corporate development expenses and the fourth quarter will remain at elevated levels related to the closing of the green remedies transaction.
During the third quarter, depreciation and amortization decreased year over year by approximately 180000.
This was primarily primarily related to a fully amortization of one of our intangible assets at the end of the second quarter.
Oh and want to point out a couple of items on our piano.
Regarding other income we recorded a 168000 expenses for extinguishment of debt, which.
Which was related to switching our working capital line of credit to a new bank.
We elected to secure the new agreement now because our existing credit facility and set to mature early 2021.
And we were able to capture better terms.
Also in the other income line, we recorded a 150000 related to the use of proceeds received under the Paycheck protection program during the third quarter.
Net loss attributable to Tom and stockholders per basic and diluted share.
Was two cents for the third quarter, 2012, and compared with breakeven for the third quarter of 2019.
Included within the net loss per share for the third quarter is a non cash deemed dividend adjustment of 205000.
For a one cents loss per share this.
This adjustment was related to a triggering repricing of warrants when we completed the equity offering and August which was done primarily to provide additional capital to execute our M&A strategy.
As Ray mentioned adjusted EBITDA increased 15% for the third quarter to 989000 compared to 860000 during the same period last year.
I would note that adjusted EBITDA excludes the 355000 and professional fees related to M&A activities.
As well as the gain from a P. P. P loans that I described earlier.
Moving onto the review the balance sheet and cash flow.
We ended the quarter with 6.4 million and cash which is up from the 3.4 million at the beginning of the year.
The increase in cash is primarily related to the equity offering we completed during the third quarter, raising approximately $3 million up that proceeds.
Operating cash flow year to date was 845000.
We maintained strong working capital discipline and continue to carefully monitor the status of our accounts receivable.
Dsos remain within and all range and through our efforts, we've been able to keep receivables and order.
Subsequent to the end of the quarter.
We completed the acquisition and bring remedies operations and assets.
For total consideration of 16.2 million with approximately two thirds of the consideration to be paid in cash and closing.
And the remaining third was delivered through a combination of common stock and a subordinated so and that.
And additional 4% to 14% of consideration maybe paid through an earnout tied to future performance over the next three years.
During the trailing 12 month period and bring in June Green remedies is estimated to have produced net income of 2.5 million.
And adjusted EBITDA of 2.8 million.
The transaction is expected to be accretive on a free cash flow per share basis.
We expect to have pro forma financial statements are available within the 75 days required and.
And we'll be able to speak to this in more detail our index call.
Overall, we feel confident that the cash on our balance sheet.
Availability on our working capital line and the combined earnings power for Green remedies, and quest will have ample liquidity to fund operations and service debt.
At this time I'll call back I'll turn the call back to Ray.
Thank you Laurie.
Today I'd like to cover several key points by prepared remarks.
First I'll give some details and what we're seeing and our major end markets second.
Second I'll discuss how new business opportunities have begun to move to our pipeline and again.
And finally, I will cover M&A activities and describe the opportunity we have for growth and the multifamily housing market with the acquisition agreeing remedies.
So first I'll review, what we're seeing and our end markets, where and frequent contact for their customers and monitoring and markets across geographies.
In order to be prepared to adjust and their debt of changes to our customers business.
Keep in mind and what I'm about to describe is what we're seeing in terms of market activity levels, which does does correlate but not always on a one to one basis with our financial performance.
We're fortunate that were mostly service businesses and mostly service businesses that are considered essential.
And have remained operational through the period.
We also have a diversified end market mix strength, and some markets offsets the weakness and others.
The gross and market has stayed stable throughout this entire period and in some cases experienced modest growth year over year.
We're continuing to work with our grocery customers defer more waste from landfills and grow the program and so we have and place.
And the automotive market demand for automotive repair and maintenance services.
Has improved since April.
And is still down year over year and number of passenger miles driven and can be used as a proxy to the overall economic activity and the segment of.
According to U.S. Department of transportation passenger miles driven and were down about 14% on average during the third quarter.
Passenger miles were down 18% and began a quarter and it remains down approximately 10% to 12% for the last couple of months.
For reference this is a significant recovery relative to the 50 per cent decrease.
During the low that the pandemic and April.
Activity levels on the industrial market I've also recovered sequentially from the second quarter, but are still down year over year.
Pandemics had less net effect on and customer demand that did shift order deliveries due to temporary closures related to virus and.
Supply chain issues are.
Customers and not working because backlogs and activity levels and pick back up.
Of all of our end markets as you might expect restaurants, and saying the largest impact from the pandemic well.
Well this is one of our fastest growth areas prior to the cover and Nike and.
I want to I want to emphasize our restaurant business is still a smallest and market and our overall mix.
Well first of all a full service restaurant customers have been significantly impacted clicks.
Quick service customers have done well in terms of volumes.
Overall this end market has recovered sequentially from the second quarter, but it's still significantly lower year over year.
I want to talk about new customers and the velocity of our sales pipeline.
During the early stages of the pandemic, there was little or no movement, and our pipeline as many prospects slowed or even stop devaluation new projects.
Their cancer was diverted to focus on protecting the health and safety of their employees.
And adapting their operations to market changes caused by the pandemic.
With more time under their belts prospects have made these changes and are now seeing greater movement in our pipeline.
In fact, given that many companies are facing reduced revenue and profitability relay. This pandemic, we think there will be even greater willingness to evaluate programs like ours that can drive operational and financial efficiencies.
Last quarter, we spoke a seven figure wherever the specialty retailer that we began servicing in July. We recently have smaller went on the restaurant business with a new original quick service restaurant group.
We're also making progress for the new and National Automotive service customer and we've recently kicked off a pilot project with this prospect that.
That has previously been delayed it depends and Eric.
Next I want to cover recent M&A activity.
Last month, we announced the acquisition of Green remedies.
This is one of the candidates we discussed on our last call that and made it to the life stage.
We're very excited about the acquisition, it's a great fit with our M&A criteria. It will add significant EBITDA contribution and will be nicely accretive to earnings.
Particularly excited degree and remedies will give us a beachhead and large base of customers and the end market for multifamily housing.
Its founder is joining the quest team and will lead our efforts to expand the market and nationally.
We and remedies generated approximately 2.8 million and EBITDA during the trailing 12 months ended June this year compare.
Competing so successfully against much larger players by providing outstanding service. This is directly in line with our strategies.
Utilizing our national footprint and service capabilities. We believe we can take their success recently and leverage that on a national level significantly expanding the size of our business.
We expect the integration of Green remedies will be fairly seamless as we have significant overlap and our vendor network growth.
Green remedies customer service and finance will transition to our platform much and the same way we bring on a new accounts.
I also want to comment on the other acquisition candidates and we mentioned last quarter.
It's important that we take a disciplined approach to M&A.
And after we complete and due diligence on the other candidate we discovered it did not fit our strict criteria.
Overall, we continue to expect M&A to be an important part of our growth and.
And we're actually building out our pipeline and pursuing other opportunities.
Our industry is highly fragmented with 18000 local and regional players, which provides plenty of opportunity for growth through consolidation.
In summary, I want to point out that we've been able to show and improvement in adjusted EBITDA.
And generate positive cash flow, there and one of the most challenging economic periods and our lifetimes.
While there is still a lot of uncertainty regarding covered and nobody is in a position to make forecasts for encouraged that our end markets are showing stability, we're winning new business and opportunities have resumed movement in our pipeline.
All are waiting for more certainty and a broader recovery will continue to work diligently to close new business and actively pursue M&A.
I look forward to keeping you updated on the progress but.
And we now like the operator provide instruction on how listeners and queue up for questions operator.
Thank you if you'd like to ask a question on todays call. Please press star one on your telephone keypad.
And if you're listening to phasing and speakerphone. Please pick up your handset before pressing the corresponding digits. Once again. Please press star one at this time, if you have a question.
Well take our first question from Gerry Sweeney with Roth Capital. Please go ahead.
Hey, good afternoon, and Lori and Greg Thanks for taking my call.
Hi, Jerry Heli high.
I wanted to start maybe a little bit on the corporate side and right.
Recognize that may or may not want to answer this question and in its entirety, but I'm kind of put it out there and how.
How much visibility or communication do you have what your client flow.
And what their view of the next several months is in regards to the Covis.
And then the second part of the question is.
As you look at staffing internally quest are you prepared to handle and either moving up and down as that.
And so that your customers vision dictate.
Okay, Jerry I appreciate that and I'll answer your second question first.
I think what I'll do is I'll just refer directly to the way quest was able to handle the a significant challenge of March and April early and the pandemic. Yeah. We assessed we evaluated we assess we executed and a company managed quite well to it and all I would say is that we would expect to do.
To manage to any future situation and the same effective way.
Bell and second part on the visibility to our customers and the and the co and the Covance situation is quite challenging we have first of all we do have a constant communication with those customers.
Our client services team is and contact regularly and the management group is doing business reviews and have a steady you know.
Hi, and bigger picture conversations with them and there's a lot of optimism, but the fact is.
Got to see what happens I mean day, they don't know whats going on either they don't know what the future holds.
[music].
As with all happened last time I was very very pleased with the outset of the pandemic and an indication that our team had with the customers and our ability to react to whatever their situations. You know became a day coming up here with us quite well and we executed well and involved a lot of service changes up and down.
And it's just communication shoes, so the visibility is or excuse me. The communication is great visibility. So five years just based on as you can imagine it's difficult for them to know and many cases.
And I appreciate it I know, it's not necessarily an easy question and answer switching gears to the automotive.
Client that you're working with.
With a pilot project is there any way you can give us a little bit of.
There's two things one the cash.
Actual size of the contract or how large that customer is and then.
The progression potential progression from a pilot program to something that's more permanent what would that entail.
Well the client I can tell you the size the opportunity is significant and its a.
Should we say that's and so the average deal size is our average deal size is half made and stuff and figures and this one definitely is about a.
Seven figure number I would pick up from an opportunity perspective, the acceleration to the pilot.
I'm not sure exactly what the time frame, that's what we anticipate it being successful and it will be and it'll be and coupon in Q2, as we see impact on that hopefully.
But it is a significant opportunity and it and we're happy because it challenges.
A lot of our business and different types of our business.
Got it and if you.
The pilot go and.
He performed on Q1 and Q2.
Yeah, I think as far as when she wants.
Got it and.
Yeah, I'm not really sure you asked a question about the timing between the pilot and and and roll out and I'm not really sure that thats still probably up to the customer on that one.
Well, that's what I meant was you know it.
And maybe a different way asking and would be what kind of metrics, we could be looking for and in terms of maybe the cost I'll kick in from a pilot to to the next steps you know what you know.
That may be a better way of asking the question I apologize yeah sure.
There's a and.
This is a customer of this like himself first solutions to problems that has a day and they're looking for it on a consolidated basis looking for cost savings and they're looking for and.
Our mill efficiency relative to that so I think there's a number of score cards on and Gerry and we have a high confidence level and our ability to perform on that.
Got it.
I'll jump back in line and I don't want to.
Dominate.
I'll jump back in line for question. Thanks.
Okay. Thank you.
And we'll go ahead and take our next question from a net Dal with H.C. Wainwright.
Hi, sorry, I've already is thank you for taking my questions.
You know with respect to sort of the three and remedy.
Hi, sorry, I would just stick to the Greens and legal acquisition.
And.
<unk> 0.5, and then when you all are looking at.
In terms of net income contribution from this acquisition.
Does this the factory and revenue growth coming from low side or does it just represent.
That business is you know as it stands today.
So two definitely and net earnings for that was the last trailing 12 months as it stands today.
Okay, and Virginia's through June, yes, and no. It doesn't include the future.
Okay and the management.
Hi, guys.
Okay, and then in terms of channel initiatives, you and maybe putting in place to drive growth in this business can you give us some.
Just some color on you know what some of those initiatives could be.
And driving growth on the multifamily through with a green Red This acquisition so she loves it and yes, okay sure Yep.
That's a great question because it.
First the description of grain remedies is.
There are a regional player.
And and a 100% exclusive to the multifamily segment.
And then.
They have done a great job doing that and they pick up and itself ran up again, that's run up against a size constraints, meaning and our ability to handle the kind of growth. They have some and infrastructure standpoint. So there's a number of things that this debt that makes sense for us to grow the business one.
Just from a technology platform that we already happened and built in we're able to fold that in and and exponentially creates capacity or.
For growth in that respect just strictly from a onboard and customer perspective, secondly, geographically.
We as you know are not a regional player where national player and we have and network and and every market and the country. So the limitations that they had via and network or.
I don't we don't have that limitation. So we can we can sell we can take fake and go and sell nationally the program. There so successful with regionally and be supported better and national level.
And then the last thing I would mention as I've written remedies offered a singular service profile, a high service profile, but around one way strength.
And we offer a numerous times you know Ah different alternative for waste that's created by their customers and the customers have wanted the ability to possibly and different types of recycling program is weak and up sell into that and we're very encouraged by that as well. So that's really three pieces summit that we still are going to be pretty much.
Close to immediate as far as our ability to impact of growth.
So turning to the Ministry and.
And you you've talked a little bit about sort of you know.
And potential hurdles or challenges coming from.
And if you're starting to see.
Being put in place.
I'm, assuming we got much better per bed this day.
If there is low BBB et cetera, I mean, how low the position can manage working capital needs et cetera.
Just trying to get us and so.
Oh, what steps and maybe take into just good but he is in place that will allow you to maybe right through.
The next few months flows are going to uncertainty there and all of this.
[noise], so a minute and and you're aware were in good taste and weekend.
And they have a very good position, our a b L and we have blacks and not only in our history and any line, but as you know 100% of our cost of sales is flexible too. So so we have many levers we can look and we have maintained low traveling.
Since Weve maintained all those types of.
Controls on expenses already and continue to do that from a cold and so we have the ability to to.
To feel very comfortable that we can whether through some bumps and we still continue to have those from kind of it.
Yeah, and even without the TPP and we're thankful for that that ticket and able to us it made it easier, but our business is almost entirely variable. It's already mentioned and we we have various necessary both on the cost of goods and <unk> and our need to serve.
So I think we're probably I believe we're probably just as well if not better.
Than anybody to to a waiver to that and also want to mention again.
And I take a real important aspect of quest versus maybe some other companies is the diversity of the end markets that we serve.
[laughter] no matter what happens on on these types of things that you know if theres no way, it's going to I mean, we go everywhere from heavy manufacturing to grocer to food manufacturing to automotive I mean, we're all over the place and so since we have that diversity of end market segments and has a tendency to delude you know some of these.
Hammer type impacts that come from.
Non controllables like that so when you add our variable cost structure and the diversity of the client base and we serve I think we're really well positioned regardless of what happens.
And still there ahead.
Oh.
Okay and then please go ahead.
Basic and that's operator.
Yes, and Oh.
Okay.
He's not responding well go ahead and take our next question and George Melas Swiss and T.H. management. Please go ahead.
Thank you.
Okay domain <unk>, thanks for taking my call.
Great. Good you talked a little bit could you I think you mentioned a few weighted.
Good morning, and she talked about and you know acute and so.
Could you maybe cash do I used to Duane.
And also can help us understand the pipeline and maybe how has the composition of the bottom line involved or.
And what stage.
So the prospects on the pipeline and telephone.
They both in the last 36 months.
Hey, George the first part of your question and I don't think I picked it up where you asked me, what you're asking about QSR restaurants, and characterization and what you do Doug you mentioned that you had a few loans and maybe could you characterize the loans all your comments and then you get about them.
Yeah.
We we've got to win and the and the quick service restaurant, a franchisee group, which we're really excited about potentially as a growth, which we believe day, all well QSR did well to the SEC, but are we mentioned the a specialty retailer.
Well, the specialty retailer or debt that we brought on which has got a lot of locations were onboard and currently and then also we we mentioned the pilot with the.
Automotive service company, that's got a lot of locations throughout the U.S. its got a ton of potential.
For us as well those are those are three of them George and we're talking about bookings per wins.
Okay, Great and moving he was wondering about.
Well yeah.
Okay, and George I I was kinda I didn't finish century and all your questions, though on the pipeline and the you had asked about dish and things that happened and one yet and we're confident they will.
First I want to reiterate or you're.
There seems to be a much more of a receptiveness now and maybe people are getting used to this thing I don't really know to.
Or at least take a virtual meetings and have conversations around and I'm going to speculate here I believe that it makes sense to me that with some of the recent positive news and the light at the end of the tunnel regardless of the situation people are facing a day to day. They realize if this is going to come out and they want to be a strong shape tomorrow.
When the vaccine job and place and Weve returns and wonderful normalcy environment, we are very low.
So that means audiences are easier to get and maybe some incentive around.
Considering some of our offerings. So first of all I would say, it's nice to see.
Conversation and starting back up that had been and quite stale for a number of months I think that's the first indicator on the pipeline.
No and beyond that.
It's really really all over the place again restaurants part of it we have a lot and automotive opportunities and there's a lot of people wanting to be engaged and more and I understand in the the tracking and the ability to to.
Moving programs like food waste and the source. So they didnt have them before food waste type of diversion programs. So I I guess, it's pretty and it's pretty broad on the pipeline opportunities as well I think the best thing to say about it is it's moving and the reason is moving is because people and more open to having conversations are a bit and active about find a way.
Please consider new programs like ours.
Okay, Great and then maybe just one quick and I don't know day as much data, but is there anything that you have done that its quest.
And then to do approach sales somewhat differently.
And.
In terms of you enjoy low cost issues.
[noise], Yeah actually we've done we've done quite a bit we've if we lose some of the cost systems around we've changed our marketing programs.
Actually have that we've made in addition, there that's.
Really got a very cohesive joint marketing and sales activity, which involves a lot of lead generation outreach.
Outreach programs.
So I and and we're learning how to be more effective more virtually George and which I think a lot of companies probably are and we're utilizing a lot of the tools that maybe we've had access to that didn't really use a lot before a social media type of lead generation activities. So I guess I'd say, we stepped a little more and more modern.
Age and and I think it's generating more activity and opportunities for us.
Okay, great. Thank you very much.
Thank you George Thank you.
And that concludes today's question and answer session and today's conference call. We do appreciate your participation you may now disconnect your phone line.
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