Q4 2020 Quest Resource Holding Corp Earnings Call
The.
Good day and welcome to the Quest resource holding Corporation fourth quarter and year end 2020 earnings Conference call. Today's conference is being recorded at this time I'd like to turn the conference over to Mr. David Mossberg Investor Relations Representative. Please go ahead Sir.
Thank you Cody and thank you everyone for joining us on this call before we begin 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.
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Certain non-GAAP financial measures will be discussed during this call. These non-GAAP measures are used by management to make strategic decisions forecast, our future results or the evaluate the company's current performance.
Management believes the presentation of these non-GAAP financial measures is useful for investors understanding of the assessment of the company's ongoing core operations of the prospects of the future.
Unless it is otherwise stated it should be assumed that any financials discussed on the call.
We'll be on the non-GAAP basis full reconciliation of non-GAAP to GAAP financial measures are included in today's earnings release.
Well I said I'll now turn the call of the Ray Hatch, President and Chief Executive Officer.
Thank you, Dave and thanks to everyone for your interest in Quest, we hope that you're on your families are healthy and safe and we appreciate that you've taken the kind of join us to discuss our fourth quarter and 2020 of financial results.
Let me start by saying that the performance of our team during 2020 of was exceptional and I'm very proud and humbled by the dedicated efforts to overcome many of the challenges put forth by the pandemic.
Continuing to deliver exceptional value to our customers, while ensuring the safety and also producing solid financial results.
During the fourth quarter, we continued to see improvement of financial performance.
The first meaningful growth in gross profit dollar since the beginning of the pandemic.
Year over year of gross profit dollars increased 20%, which came from the combination of organic growth and 10 weeks of contribution from our Green remedies acquisition.
These same factors will layer in over a relatively fixed cost structure lots of more than 100% increase in EBITDA for the fourth quarter.
I think the strong relative growth in EBITDA at the nice illustration of the earnings power of our platform and our ability to take on incremental business, both from organic growth and from acquisitions.
I hear it over our platform with a relatively limited increase in incremental overhead costs.
Well the audience in certain end markets are likely to continue to be of headwind in the near term the intensity of the headway on appears to be weakening.
And the positive momentum that we saw on the back half of 2020 has continued into the new year.
Not only of volume is picking up in southern markets for customers of more settled.
I presume the valuation of how quest can help them drive operational and financial efficiencies.
The answer of divert more waste from the landfill.
I'm going to turn the call over to Lori liked him, our Chief Financial Officer to review the financials and then I'll be back to review the trends that we've seen in our major end markets and of discuss some of our strategic initiatives.
Thank you Ray and good afternoon to everyone on the call of course.
The fourth quarter revenue was $27 7 million.
An increase of 25% compared the fourth quarter last year.
As we pointed out in the press release about $2 6 million or a little more than half of the increase of fourth quarter revenue was related to the green remedies acquisition.
We completed and began contributing to revenue in mid October.
The remaining half of the fourth quarter's revenue growth came organically.
In fiscal 'twenty 'twenty.
Revenue was $98 7 million, which was relatively flat year over year.
This was quite an accomplishment considering the lower level of economic activity experienced of some of our end markets.
Especially at the beginning of the pandemic.
We were able to offset weaknesses in some markets the strength and others and later in the year, we expanded the existing customers.
During the fourth quarter gross profit was $5 6 million, an increase of 19, 7% when compared with the fourth quarter last year and an increase of 22, 5% sequentially from the third quarter of 2020.
Gross margin for the fourth quarter was 22% of revenue.
Which is still above our targeted level.
For fiscal 2020 gross profit was $19 1 billion or one 8% growth year over year.
SG&A expenses were $4 5 million during the fourth quarter compared to $4 2 million during the same period last year.
The increase was primarily related to acquisition integration and corporate development costs.
For partially offset by lower travel advertising and trade show expenses.
For the fiscal year 2020, SG&A expenses increased one 9% of $17 1 million.
On the increased expenses, primarily related to corporate development M&A and stock based compensation.
Were mostly offset by decreased labor travel and professional fees and expenses.
In the near term, while certain SG&A expenses, such as travel will continue to remain low.
We expect SG&A costs will increase throughout the year.
Business recovery.
I will also note the ongoing corporate development and M&A initiatives are likely to keep operating expenses at elevated levels during 2021.
During the fourth quarter, depreciation and amortization increased 4% year over year to 346000.
Going forward, we expect depreciation and amortization will be approximately 410000 per quarter without consideration of future M&A activity.
During the fourth quarter interest expense increased to 458000 from 87000.
The increase is primarily related to debt financing part of the green remedies asset acquisition.
Net income attributable to common stockholders of per basic and diluted share what the penny for the fourth quarter of 2020.
Compared with breakeven for the fourth quarter of 2019.
Year to day net income per share improved from near breakeven last year.
It's a <unk> <unk> per share of this year.
As Ray mentioned adjusted EBITDA increased 110% year over year for the fourth quarter to $1 8 million compared to 850000 during the same period last year.
The Green remedies acquired business contributed approximately 590000, and adjusted EBITDA or a little over half of the fourth quarter increase.
For fiscal 2020, adjusted EBITDA increased 33, 6% to $4 5 million.
Moving on to a review of the cash flow and the balance sheet for fiscal 2020, we generated operating cash flow of $3 1 million.
We maintain strong working capital discipline and continue to carefully monitor the status of our accounts receivable.
Dsos remained within the normal range of our efforts, we've been able to keep receivables and the order.
We ended the year with $7 5 million of cash, which is up from $3 4 million at the beginning of 2020.
We ended the year with $18 5 million of notes payable versus $4 7 million at the end of 2019.
The increase is primarily related to the financing of green remedies.
We completed in October.
The $18 5 million consists of $11 5 million is the term note the principle of debt comes due in 2025.
$2 7 million is in the form of a five year seller note interest payable quarterly installments.
And the remaining $4 3 million is related to our working a lot of capital, which was down from $4 7 million at the end of last year.
From a liquidity perspective, we felt confident that the cash on our balance sheet a day.
Oh ability on our working capital line and strong cash flow generation, we have ample of liquidity to fund operations and service debt.
At this time I would turn the call back to Ray.
[laughter].
Thank you Lori I'm very proud of how we performed during 2020 and for the strong finish during the fourth quarter, where the work we've done in previous years to transform our business, we were well prepared to overcome the diversity of presented to us by COVID-19.
On the gross profit dollar line and the adjusted EBITDA lines, we delivered record performances in the year with the financial performance of many businesses are severely impacted.
We ended the year well prepared to deal with the adversity by increasing margin profile of our businesses and diversifying our end markets.
Over the past several years, we were able to expand our gross margin profile by more than 10 percentage points from.
8% of sales in 2016% to 19% of 2019.
During 2020 gross margin increased slightly from 2019.
Kind of remain above our targeted levels of slowly let lorie mentioned earlier.
It's important to note that on margin expansion was not related to increasing price.
In fact, we often end up saving our customers money by switching to our service offerings instead.
Instead of the margin expansion was related to add even more value to our customers.
Change on the mix of services performed.
And being more efficient.
Regarding diversifying our end market mix several years ago, almost all of our revenue kind of from two end markets retail and automotive.
The day, we have five major end markets retail slash grocery automotive industrial restaurants, and with the acquisition of Green remedies or put the end market is multifamily housing.
By having a more diversified end market mix and customer base strength in some markets such as retail grocery has been able to offset weakness in others, such as full service restaurants.
We're also fortunate and that most of our customers operate in end markets considered essential.
The remainder of at least partially operational throughout the pandemic.
Now, it's probably a good time to give a quick update on what we're seeing in our end markets.
The retail grocery and market has stayed stable throughout this entire period and in some cases it of the spirits moderate modest growth year over year.
We continue to work with our retail and grocery customers through the for the verb most more waste from the landfills.
And the graduate programs that we have in place.
In the automotive market demand for automotive repair and maintenance services has improved since the second quarter.
But it's still down year over year on the third and fourth quarters as well as the beginning of 2021 with the impact of Covid and the rest of winter storms.
Number of passenger miles driven can be used as a proxy to the overall economic activity of this market.
According to the U S Department of transportation passenger miles driven were down about 14% on average during the third quarter, 13% during the fourth quarter and down 12% during the first seven weeks of 2021.
Activity levels on the industrial market continued to recover sequentially from the third to the fourth quarter the pack.
The endemic had less of an effect on the end customer demand in this end market.
The did shift order deliveries due to temporary closures and related to pandemic and supply chain issues.
All of our end markets as you might expect restaurants of seeing the largest impact from the pandemic.
While this is one of our fastest growth areas prior to COVID-19.
I want to emphasize that our restaurant business is still our smallest end market in our overall mix Walpole.
While the full service restaurant customers have been significantly impacted quick service customers have done well in terms of volumes.
Overall, the market has recovered recovered sequentially from the third quarter.
But it's still significantly lower year over year.
Regarding our nearest the end market multifamily housing.
This business comes to us through the acquisition of Green remedies.
As we said on the press release, we completed this acquisition in mid October.
And it added about $2 6 million to fortune of revenue.
On the sound Green remedies grew in the mid teens during 2020.
Which was due to a combination of adding new locations as well as an increase in volume of waste generated from more people working from home.
Moving on to a discussion about our growth initiatives.
While we were well prepared to deal with the lower volumes in certain end markets. There were significant delays in customer decision processes, especially early during the pandemic the curtailed on our organic growth initiatives during 2020.
However, the level of uncertainty on our customers' businesses is increasingly dissipating.
And we're seeing increased movement and opportunities through our pipeline, resulting in a recent wins with existing and with existing customers during our fourth quarter.
During the fourth quarter, we had several wins with existing cash or some to expand locations some of them where they are exactly on the service we expanded lines of service with two of our manufacturing clients.
Added 500 locations two of retail clients.
We also had a seven figure win to expand our food waste program of existing clients.
Our food waste diversion programs are growing our of growing category for a number of reasons sustainability concerns for both consumers and investors.
Putting pressure on grocery and restaurant change the divert more and more waste crude ways from the landfill.
However, these low margin businesses as you might expect the incremental cost of these programs has kept the adoption of food waste programs from being totally widespread however.
However, with increases to landfill waste to landfill costs.
This way of just maybe changing most landfill operators have been of continued to implement price increases. This is good for our food waste programs because of many areas of food waste is now not only more environmentally friendly and sustainable.
But it's depending on where economically attractive as well.
Now I want to cover recent M&A activities the.
The integration of of Green remedies business is progressing as planned and is substantially complete.
The work is very similar to what we do to bring them.
On board of new customer basically moving billing vendor relationships and customer service onto ARPA.
The integration work is really focused on enabling additional capacity for growth not about cost savings.
While we've been integrating operations, we've kept our eye on the ball and I worked together to continue to provide outstanding customer service.
In addition, since the acquisition to the business has kept pace.
With its growth rate.
The remedies business gives us the beachhead with a large base of customers in the end market from multifamily housing.
Sandra joined the quest team and will lead our efforts to expand this market nationally.
With the integration substantially complete we now turn our focus to accelerating the growth of this end market.
Utilizing our national footprint in the service capabilities. We believe we can take their success recently and the leverage that on the national level significantly expanding the size of our business.
Overall, the Green remedies is of Great example of the types of M&A opportunities. We're pursuing we continue to expect M&A to be an important part of our growth and continue to evaluate and pursue other opportunities.
Our industry is highly fragmented with 18000 of local original players, which provides plenty of opportunity for growth through consolidation.
In summary, I want to point out that we've been able to show an improvement in adjusted EBITDA.
And generate positive cash flow during one of the most challenging economic periods of our lifetimes.
While there's still uncertainty regarding total of it and nobody is in a position make forecast we're encouraged that our end markets of showing stability.
We are winning new business and opportunities Jefferson moving our pipeline.
While we're waiting for more certainty in the broader recovery will continue to work diligently to expand business with our existing clients and because of their business and to actively pursue M&A.
Look forward to keeping you updated on our progress we now like the operator to provide instruction on how listeners can queue up for questions operator.
Thank you if you would like to ask a question. Please take them by pressing star one on your telephone keypad, if youre using a speakerphone. Please make sure. They give me a function of is turned out to later signal to the chart equipment.
It's again net of star one if you'd like to ask a question of.
Plus with use of mobile to allow everyone an opportunity to signal for questions.
Yeah.
Okay.
Once again Thats star one if you'd like to ask a question.
Yeah.
We will take the first question from Amit Dayal with H C Wainwright.
Thank you.
Hey, guys. Thank you for taking my question part of it.
The.
So read on it.
So the strong performance in the between the seasonally slower period and it looks like you signed up more of a question is on larger contracts on top of it.
And what should we expect in terms of.
Group. So you guys didn't bring it on you want the relative to trying to sort of doing Duane.
You know all of that what I can say is thank you for that and types of the question of what I can say is is that Q4 again as you mentioned this was really a good performance for the company.
And I can tell you that we see the momentum carrying into Q1 is work on them.
So as we look at our growth.
Again, there's there's there's a there's forecasting issues relative to the economic environment, but our confidence level is that we'll continue our growth.
You've seen on the path I think I think you'll see I think you'll see a lot of reputation the momentum carrying through the year, but I'm not really to tell you really ready to tell you. What we feel is total growth for 2021.
That's the.
That's what the stumble on.
Lorie, you mentioned potential M&A related expenses of <unk>.
Could be part of the operating cost of the ship.
Do you have targets that you are exploring whether any of them and couldn't be anymore.
Yeah, I'll take that out, but we surely are.
And Youre aware of what our credit facility. It looks like that we've targeted for M&A and we have of a whole initiatives associated with that included staffing. So we're continuing to look at targets a junior Oh, we have we're looking at them right now so there's a we feel really good about the pipeline of opportunities.
We find the right one on the right situation, we're ready to execute on it.
Do you think you could introduce moving price increases as a part of.
Your execution.
The one we're doing the me too.
You said you didn't neither of instructed all of this performance of this form of efficiency gains.
Are you moving to maybe Oh.
Something on the pricing from two customers.
You know our business is a little different than maybe some of the other folks from the waste environment. When you read the reports, which I do and I know you do as well.
We don't generate we have not generated out of the increase of continued.
Put it on the gross profit through price increases.
We developed the through synergies.
Better sourcing, our with our subcontractors and focusing on.
Waste streams debt, maybe bring a higher return so contrary to our competitors in many cases of I don't anticipate price increases I I I I anticipate increased growth increase the leverage in our cost of goods and bringing even greater value to the customers, which gives us more growth.
So we're a little different on that respect on it I mean, we we anticipate continuing to the.
To drive great gross profit, but the way we do it is true those other aspects as opposed to just pure price increases.
With respect to some of this food waste opportunity.
I'd love to restaurants or is it to reach of slash flow.
Or was it kind of it currently predominant of dominated by the retail grocer.
That's the I'll call it the lowest hanging fruit and food waste program food service operators, the slow more challenging the separate and it's it's it's happening it's going on there, but it's a it's dominated now by retail grocers.
Food waste is by organic food waste is a significant amount of tonnage for a grocer.
That's going to the landfill the day unless they can enter into a pivotal program like we have so it's the it's a very good target with a lot of headwinds force on it to continue to do all of it.
Understood.
That's all of them so much.
Thank you. Thank you.
Thank you we'll take our next question from Greg Kit with Pinnacle Fund.
Hi, Ray and Laurie on thank you for taking my question.
Hi, Greg.
And Tim Congratulations on your first first soft looking what struck me was one 8% organic growth I really thought the 'twenty 'twenty was going to be the year.
The you showed organic growth for the first time after Covid happened that you didn't think that that had a chance of happening last year and so on and so excited to get to see that now and after this transition that you've gone through over the last five years of returned to organic growth and it's pretty exciting and I think I hear you on you're saying there.
We're seeing some of that momentum continue this year I was wondering if I think on the last call you talked about of National Auto service National Auto service customer pilot and I heard could you talk about the food waste Wayne and then some expansion in terms of the number of locations.
Good day and lines of service within the customers are there other.
It is all the way to think about how you're looking at your pipeline today and how that compares to what you've seen in the past.
Yeah, Yeah, Yeah. There is a I can give you the I'll just give you a general over all of observation, Greg about the level of kind of pipelines of day versus the past and again to your point. We do have we have some sign of wins here of the work.
We're working on from that in Q1, you know they really didn't hit Q2, the force, but what's the impact in Q1. The pipeline is moving much better from left to right I call. It and I think I've mentioned that before and I think the best way to look at the pipeline instead of just the pure size of it is the movement of them and are we able to push them across the goal line.
And honestly since Covid started we're seeing.
We're seeing actually things moving across the goal line now and I anticipate personally I anticipate that accelerating as we more normalized of communications of our decision making process at the kind of thing.
At the prospect level, there's a lot more interest and I think the word we use the sense of the challenges started of dissipates a lot of these customers were having more of the conversations that we are so our pipeline has got.
A number of seven figure type of opportunities that at a debt that we feel have got possibilities and we've got a couple of debt that were there on right now and as far as expansion I mean, I'm glad you mentioned net expansion within our existing client base has been.
Tremendous thing for this company for a long time and it continues I mean, there's nothing that says more things of that your company than when your existing clients or expand in the growth with you. They don't do that will come with the vendors. They don't feel good about and so that gives me a really good sense. There. So I guess the best way to look at on a new are new.
Pipeline for the new accounts is it's moving in some of the Golar crossing the goal line and I see some more on the relative near future helpful.
And our.
It has not slowed down at all of our expansion within existing clients has continued to tick.
To grow and I can't say enough about our client services team, our tier two debt and continue to do that as well.
Thank you very much I I had one more question I was encouraged to see.
The sequential growth in EBITDA I mean, that's I'm, sorry that sequential growth in gross profit result in the sequential on year over year growth and an EBITDA of I also heard Laurie talk about you know higher levels of the Opex. If you are able to grow gross profit and in 2021 day.
Think that some of that incremental gross profit dollar contribution contributes to EBITDA as well.
Oh, I think we still have the structure in place for leverage and to accomplish exactly what you're saying so that if we have growth in our gross profit dollars will continue to seed a portion of that a considerable portion of that falls down to the EBITDA.
Okay great.
And the Oh go ahead Ray.
Sorry, I was just kind of build on what Laura said, I think Q4, and actually 2020, but Q4 is the will stay.
The statement of what we've been saying our business model on and go on gross profit and having more and more part of the bottom line I'm really happy day to see that validation really.
I'm happy as well [laughter].
So you know looking at Q4.
A little bit over $7 million EBITDA run rate quarter on annually and so if if you could just continue that trend for the upcoming year is there a way to think are there any outstanding Capex uses on for 2021 is I'm trying to get to a free cash flow of member.
Capex for the.
The cap ex for this upcoming year will be higher than we've had in the past couple of years for a couple of couple of things going on.
Gene remedies has those customer that customer base has opportunity for us to place certain surface equipment in place. So we expect to spend some money there as that grows and we do have some internal initiatives to work on them our I T platform.
From an end.
Yeah finish filling out some areas of that we'd like to they will certainly contribute to our growth and efficiency says where it's we're continuing our path.
Okay, Great that was that was it from me. Thank you both very much of your time on your hard work.
You bet, Okay. Thank you very much Greg.
Okay.
Thank you and once again Thats star one.
Oh.
Thank you we'll take our next question from the George Melas with the N case management.
Thank you.
Good afternoon Wayne moving.
Hi, George the U graduations.
Thank you. Thank you.
Yeah.
I Wonder if the question, which is very much related to the previous question sort of if you feel like you've ordered.
Maybe just getting a little bit.
It seemed like there was an improvement.
This is the execution.
You see that the pie.
The planes.
And towards.
Towards the kitchen deal can you help us understand the.
The execution of the seals.
What you guys are doing internally of what have you done.
Two.
That's publicly resulted in sort of the.
The movement in the pipeline.
Okay.
I can tell you.
First of all thanks for that observation, Georgia, and seeing things move across the go line as well.
So very comforting me as I'm sure. It is the U S in Investor day of what I've seen happening is of tremendous teamwork between our solutions team internally and the sales team.
We're targeting customers that and working with customers that are looking for specific solutions and it's nice to see the of the inside of the operations team work and so hand in hand with the sales team I love seeing that because that way were right off the beginning understanding of the customer problem developing specific solutions to that customer.
Presenting and executing on them.
In the.
In a more seamless way.
So that's happening, but you know I I got to let you know or at least mentioned again. These efforts are going on.
Before Covid I mean, what's your working through of Covid I think is it's.
Okay.
The assets moving through were seeing results I think that we would've been seeing maybe sooner.
Without that without that are extraneous situation.
But they are working well together I think the solution I know that the solutions are bringing the.
The clients or prospects to present.
It does seem to be this outstanding I think theres just some excellent work on out of the Georgia, along with a softening of the sphere environment, we've been operating in.
Great Okay.
Like you I appreciate the color. Thank you very much.
Thank you George Thank you.
Okay.
Thank you.
That does conclude today's call.
Question and answer session I'd like to turn the conference back over to management for any additional or closing remarks.
Thanks, I'll just close the real quickly by reiterating.
How much the team here appreciates the support from all of you.
And I want to reiterate how proud I am on the work. This team has done it's been a challenging time period and are the results from the efforts.
Can't say enough about the efforts of gone into creating the results that we have so I'll take this moment to thank them and also the tax you on the investment community for your support on your interest from Quest.
Yeah.
Yeah.
Thank you that does conclude today's conference. Thank you all for your participation and you may now disconnect.
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