Q1 2021 Quest Resource Holding Corp Earnings Call
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Right.
Good day, everyone and welcome to the Quest Resource holding Corporation first quarter 2021 earnings call. Today's call is being recorded at this time I would like to turn the conference over to Dave Mossberg Investor Relations Representative. Please go ahead Sir.
Thank you Christie and thank you everyone for joining us on the call before we begin I would like to remind everyone that this conference call may contain predictions estimates and other forward looking statements regarding future events or future performance of requests.
The use of the 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 projections beliefs, and assumptions and involve significant risks and uncertainties actual events. Our quest results could differ materially from those discussed and forward looking statements. As a result of various factors, which are discussed in greater detail with quest filings with the Securities and Exchange Commission.
You are cautioned not to place undue reliance on such statements and to consultant and took the full of our SEC filings for additional risks and uncertainties.
Quest forward looking statements are presented as the date made and we disclaim any duty to update such statements unless required to do so by law. In addition, and this call. We may include industry and market data and other statistical information as well as quests observations and views about industry conditions and developments.
And that the data and information are based on Quest estimates independent publications government publications and reports by market research firms and other sources.
Although the quest believes these sources are reliable and data and other information are accurate we caution the quest has not independently verified the reliability of the sources or the accuracy of the information.
Certain non-GAAP financial measures will be discussed during this call. These non-GAAP measures are used by management to make strategic decisions forecast future results and evaluate the companys current performance.
Management believes the presentation of these non-GAAP financial measures is useful for investors' understanding and assessment of the.
The company's ongoing core operations and prospects for the future.
Unless it is otherwise stated should be assumed that any financials discussed in this call will be on a non-GAAP based on GAAP basis full reconciliations of non-GAAP to GAAP financial measures are included in today's earnings release and with all of that said I'll now turn the call over to Ray Hatch, President and Chief Executive Officer.
Thank you Dave Thanks to everyone for your interest and quest, we're off to a great start in 2021 after what's been an incredibly challenging year.
During the first quarter, we had top line growth nearly 40% with organic growth representing more than half of that.
This performance Rep of reflects gains across our growth initiatives of supporting a assisting customers driving organic growth and adding customers through acquisitions, plus a surge and demand did it kind of a recovery of certain end markets.
We also raised the new records in terms of gross profit dollars and adjusted EBITDA.
Gross profit was a record $6 4 million, representing 42% growth year over year.
Adjusted EBITDA was also a record at $2 6 million, which is almost five times greater than the first quarter of last year.
The success evidenced in the quarter as a result of the actions we took during the downturn as well as the work we've done to position the company for both topline and bottom line growth over the last several years.
I want to recognize and thank our team for their hard work and the perseverance over the many professional challenges and personal hardships of the past year.
Before I go into the review of the trends and our major end markets and strategic initiatives and I'll now turn the call over to Laurie Latham, Our Chief Financial Officer to review the financials and Laurie.
Thank you Ray and good afternoon to everyone on the call.
The first quarter revenue was $35 1 million, an increase of 38, 6% compared to the first quarter last year.
Growth came from both new and existing customers and we were able to more than offset weakness and some markets the strength and others.
About a third of the increase was related to the Green remedies acquisition.
Which we completed during the fourth quarter of last year.
I would also point out that we benefited from a significant ramp up and activity with our industrial and market.
And as we discussed and the press release activity levels and waste volumes grew significantly at these locations.
As they looked to makeup for COVID-19 related constraints last year.
These activity levels were ahead of our expectations and we believe are likely to subside as the production backlogs are reduced.
During the first quarter gross profit was $6 $4 million and increase of 41, 8% when compared with the first quarter last year.
The gross margin for the first quarter was 18, 3% of revenue.
Which was 40 basis points ahead of last year and is in line with our targeted levels.
SG&A expenses were $4 3 million during the first quarter, a decrease of 147000 compared to the same period last year the.
The decrease was primarily related to lower travel and advertising stock based compensation and trade show expenses.
And the near term, while certain SG&A expenses, such as travel will continue to remain low we.
We expect SG&A costs will increase throughout the year data business recovery.
In addition, we plan on adding national accounts salespeople and other personnel to support growth.
As well as vendor relationship managers.
We also plan to increase investment and technology this year.
We'll further improve operations and and scalability to our platform.
Overall, we expect operating expenses will grow at approximately half the rate of gross profit dollars during the balance of the year.
During the first quarter interest expense increased to 561000 from 84000 last year.
The increase is primarily related to debt financing for the green remedies acquisition.
Net income attributable to common stockholders per basic and diluted share was <unk> <unk> for the first quarter compared to a loss of <unk> <unk> per share for the same period last year.
As Ray mentioned adjusted EBITDA increased 390% year over year for the first quarter to $2 6 million, which was a quarterly record.
Moving on to the review of our cash flow and balance sheet we.
We had very strong cash flow generation during the quarter with the operating cash flow of $4 million.
The strong cash flow was due to a combination of strong net income performance as well as positive working capital changes.
We ended the quarter with $10 8 million and cash which is up from $7 5 million at the beginning of the year.
At the end of the quarter, we had $17 7 million of notes payable versus $18 5 million and at the end of 2020.
Total notes payable consists of the following and.
And of 11 $5 million term note. The principal of that note comes due in 2025.
$2 6 million in the form of a five year seller note, which is payable and quarterly installments.
And the remaining $3 6 million as our revolving line of credit.
From a liquidity perspective, we are very confident that with the cash on our balance sheet availability on our capital lines and strong cash flow generation.
We have ample liquidity to support our M&A program of fund our operations and service debt.
So at this time I'll turn the call back to Ray.
Thank you Laurie we had an exceptionally strong start to the year with a solid growth and record EBITDA.
This performance represents the tangible results from the key strategies, we implemented to reposition the company over the last several years as.
And as well as the actions we took during the downturn so that we could rebound quickly as the economy begins to recover.
Our key strategies resulted in the expansion of gross margin by more than 10 percentage points over the last five years.
The improvement in gross margin has also been stable and sustainable.
The first quarter of 2021, Mark the 12th consecutive quarter consecutive quarter of gross margin within or above our targeted range.
Our key strategy has also broadened the scope of our services and diversified our end markets.
Having a more diversified end market mix was very beneficial during the pandemic.
The strength in some markets such as retail grocery and was able to offset weakness and others such as full service restaurants.
Another key strategy with the introduction of a disciplined corporate development of effort with a dedicated internal team.
We successfully completed our first acquisition last year and have built the pipeline of potential targets.
And the goal is to find strong businesses with value added services that can be layered over our existing national service platform.
Which is capable of operating at a much larger scale without having to make substantial incremental investment.
This means we have significant operating leverage and our business, which is evident by the relative growth and profitability during the first quarter.
In addition to the key strategies that we have committed over the last several years.
During the downturn, we took specific actions, which enabled us to recover quickly as the economy recovered.
The actions, we took included prioritizing service customer service and customer relationships developing new innovative services enhancing our marketing efforts and developing new ways to gain efficiency without compromising service levels.
We've been investing and a number of long term growth initiatives all of which we maintained through the downturn some of which we're starting to see tangible results from.
Over the last couple of years, we've been working with our customers to address the issue of organic ways.
We've launched an innovative new program called <unk>. This.
And this program cannot cost effectively divert as much as the 100% of organic waste away from landfills organic.
Organic provides a singles collection process from multiple waste streams, including floral cardboard and packaged food as well as packaged food.
Along with the packaging on.
Again, and materials are 100% diverted from landfills recycled and repurpose to create compost or biofuel of animal food Pete as grocery chains are increasingly implementing sustainability goals.
And facing increasing regulation regarding food waste.
<unk> ability to provide recycled packaged food and a cost effective manner is significant and key differentiator for us.
We recently began introducing the service to our customers and prospects and have garnered our first win with the Midwest grocery chain.
And there's significant opportunity to expand the service and expect it to help us garner new customer wins, along with expanding relationships with existing customers.
During the downturn, we work with our customers prioritizing their service needs and how can then to adjust to react sudden changes in demand.
It is straightforward and treat your customers right and they will remember and reward you.
And for example, during the downturn many customers who are generating lower volumes of ways. Our reports the closed locations.
We've found ways to flex the service level. So they were not paying for services they didn't need.
And other cases, where customers had increased volumes, we were able to help them manage the customer levels more efficiently and stay within budget constraints.
And we did the right thing during the downturn and as a result created stronger customer relationships and turn these customers are rewarding us with more business.
Over the last few years, we've been we've made we igniting organic growth of <unk>.
We've continued to enhance our go to market capabilities.
We've added the new marketing VP added to the sales team and and develop new brand platform that is helping us to market the company and more effectively.
This effort also included enhancing our outreach programs through social media.
Finally during the downturn, we continued to focus on ways to gain operating efficiency without compromising service.
The facing of.
Quest platform.
We expect profitability will continue to outpace topline growth as we benefit from greater scale.
And the operating leverage inherent in our business model.
We have withstood many challenges presented by the pandemic and of coming out. The other side is the stronger company able to drive further increases and profitability returns and the shareholder value.
I look forward to keeping you updated on our progress.
We'd now like the operator to provide instruction on how listeners can queue up for questions.
And at this time, if you'd like to ask a question. Please press star followed by the number one on your telephone keypad, if youre, calling from the speaker phone. Please make sure you're on mute assumption is often share your signal can reach our equipment.
Again I wanted to ask a question.
We'll go first to Amit Dayal from H C. Wainwright Your line is open.
Thank you.
Lori congrats on the strong start of the year.
Thank you, Matt and thanks.
This is.
With respect for the revenue mix for the quarter was primarily from the industrial segment you saw a lot of strength.
And with others potentially going to catch up of other segments catching up maybe in the coming quarters.
In terms of per.
Our centers, maybe and what some of the mix was industrial and versus other segments for the quarter.
Yeah.
I'll start on that Lori can follow up if I missed something but now we usually they will speak about.
Percentages on how it breaks out but your assumption is correct that the industrial segment.
I had an exceptional performance for us.
And we believe a big part of it has to do of pent up demand during the during.
During the pandemic. So there was a lot of growth there, but there was growth and other segments as well as we laid out and.
I believe theyre going to continue to recover and improve and grow the other segments as well through the balance of the year, but there was there was growth and most all of the segments minus foodservice.
Yes, I think we mentioned in the and the call here and the prepared statement that the organic growth I E. Excluding green remedies with the little over was over half of the of the growth and that would include the industrial so.
And green remedies, and there, which was the big chunk and the industrial.
Recovery was of search for us a little unexpected, but it was a nice surge and showed recovery there plus of growth.
And then we've talked about adding the three other new customers for <unk>.
Our substantial but they were just starting to contribute to to our overall organic growth.
Understood.
Let me add one other thing we do have some other end markets and I think automotive is one we've talked about in the past that still recovering so we do as we progress through this year.
We anticipate seeing some additional recovery from that and market.
Okay, and with respect to breeding remedies Laurie.
And do you still believe you could see additional contribution of growth from green the remedies or.
Do do those revenue sort of stabilize at least for the near term before.
Maybe picking up again and the future.
Okay.
Well from the perspective of just the M&A growth is contributing growth because we acquired it.
So that was.
If you look quarter over quarter, it will be contributing to growth from that perspective.
As I operating group <unk>.
And we expect it to grow also during the year.
Yes, absolutely.
One of the reasons for the acquired Green remedies is sort of consistent growth profile.
<unk> had over the years and it is continuing and we expect to continue.
It's a growth factor not just obviously because of the other acquisition and and of itself. The quest platform actually enables us to grow faster than it did before the downturn.
Thank you.
And.
The gross margins going forward.
I know you were emphasizing the growth profit dollars there in terms of gross margins or even for the gross profit dollars. The how should we think about drivers for margins or profit.
The gross level with this new.
Some of the revenue mix that you have.
So are you asking if the gross profit margin profile would change based on this revenue mix.
Yes.
Yes.
I guess I guess, let me answer your question and I think and then tell me if I am answering it and help me.
Our gross margins and again Youre right gross profit dollars is what we manage to the gross profit percent to me really is just the.
The mathematical equation and we are keep growing gross profit dollars.
But theres a consistent performance between the profile with the business that were bringing on.
The current margin of our gross profit profile, we have today.
So I wouldn't anticipate huge changes there by any stretch.
But.
And I think as we add industrials and nice big part of our business and Thats, obviously, it's got a lot of profit opportunities too.
But am I answering your question on it and the sense that I don't see massive.
Changes from a gross profit standpoint.
And I get a good it on and follow up with you and on that.
Okay. Okay, yes. It is.
And it's always going to vary when we have a big change in revenue mix, which we have had this quarter.
We are going to see some movement.
It doesn't mean that Directionally, we arent seeing still gross profit dollars growth.
So I think thats, what we want to clarify.
So just one last one for me do you think the how the year has started for you.
<unk> could be probably the strongest quarter or do you think you have an opportunity all of the remainder of the year to maybe you have.
A stronger quarter than what you saw on the first quarter.
Yes.
Obviously, we believe there is a chance to have that I mean, this first quarter had a surge within this back like Lori mentioned and herpes, but that doesn't mean that we can't have it come from other channels as well as we move down there, we're adding new quality customers for rolling out more locations with existing customers.
And these type of unexpected total searches like that can happen again, we just want to be wanted to be clear that this is obviously the strongest quarter, we've ever had as the company.
We expect to at some point to pass that to I, just don't know how of necessarily be and Q2.
Understood.
Great. Thank you guys congrats on that.
Thanks, Amit I appreciate it.
And again if your other question. Please press star followed by the number one on your telephone Keypad next we'll go to Greg Kit from Pinnacle Fund your line is open.
Hi, Ray and Laurie. Thank you for just an incredible quarter.
Yeah. Thanks, Craig.
We're very happy about.
Failure.
So I think on the Q3 earnings call you talked about a national auto service customer and pilot is that.
The potentially $10 million revenue.
Contributor or is it fully scales.
No it's actually the.
The new as the new industrial client.
Debt.
It's quite large as far as the number of locations and their volume and thats going to be of scale, that's going to be rolling out throughout the next several quarters to hit hopefully that annualized number we laid out.
But it's not in the automotive sector.
Okay, great and as.
Is there and update on is that pilot concluded and.
Did that customer and make a decision or not as of yet.
The pilot is not concluded.
And some penetration and then at the revenue showed up some of the beginnings of the revenue showed up in Q1.
The slide many of these things Greg It takes a while and roll through all of them, but no. Its not concluded there is a lot of upside left from that opportunity.
Okay great.
So exciting having.
<unk> share company for so many years to start to see several of <unk>.
Seven figure plus customers new customers all being added onto your platform at the same time I'm, just so excited that youre starting to see that.
Gaming revenue growth not just because of reflation, but because you can fine tune the message to be able to win new cash customers is there anything that you can point to where you can say you know what now is different because we're able to win new customers and better than we had in the past.
Yes.
The one specific thing it would be difficult Greg, but there are several of things I think we've.
I will tell you I know that we've gotten better and delivering our message because we're not a simple cell because.
It's not something that our business model and when we ran the table isn't suffering of these folks have had before and I think we're getting much better at it.
Consolidated our measures I think on.
Managed Mitch and and the call that we've kind of changed or added a lot to our marketing direction as well of the tools, we're using how we're messaging our brand to these companies. So first I think.
We are better able to explain quest, maybe than we were in years past and.
And second our execution continues to improve.
We have a lot of very happy customers through the execution and Thats very helpful helpful and helping you gain new ones as well.
Thank you and.
The second thing that.
And the popped out at me, where the the incremental margin and.
Heard I think if I heard you correctly, we should expect to Opex opex dollars to grow of half of the rate of gross profit dollars did I hear that correctly.
<unk> grew one gross profit dollars by $1 million should we expect opex to grow of $500000, Yes, that's true.
That's directionally correct and Thats right.
Okay great.
So.
And Mike that Youre, making smart investments to position the company and to grow from a stronger platform, while still showing positive incremental margins of positive operating leverage and so.
Last question was you also had that great on.
Free cash flow quarter, working capital benefit this quarter as well should we think about it.
Is it fair to think that you could still have 50 ish percent of EBITDA converting to free cash flow.
Over the course of the year.
Well, we have some other investments and things were going to be doing throughout the.
The year so.
Well I think we're going to continue to generate good cash flow.
And im not sure its exactly that ratio, let me pick the best that Greg.
But we did have an exceptional cash flow quarter and it really benefited by almost half of that cash flow was the benefit of.
Yes.
Working capital changes versus operational contributions from just the P&L, but the two together, we're very powerful and we wound up of $4 million and.
The cash generated.
Thank you and so just as I'm thinking through this opportunity last point.
And you're adding new customers or existing customers are growing.
And because of economic reflation, but youre also growing service lines with them.
They've grown and confidence with you and.
And so growing with new and existing customers and you have positive incremental margins from gross profit dollars and generating positive cash and I think it's just a really exciting opportunity and I wish that I earned more so thank you very much for.
Thank you for your hard work and and I can't wait to see the rest of the year.
Thank you Greg we appreciate that you really do.
And next we'll go to George Melas with MGH management. Your line is open.
Thank you.
Just wanted to extend the Greg Thanks, and just wanted to thank you guys for and the whole team for the hard work.
And the amazing results.
Thank you George we'll pass that on to everybody. Thanks for that.
Yes, yes.
And we'll be the Greg and George Congratulations there.
Yep.
On the sales I mean this.
This is the quarter, where sales have been tremendous and amazing.
The conversion from gross profit EBITDA.
And I think you said that you were actually making additionally investments in sales and marketing, adding some national accounts salespeople and also I think some account managers can you can you talk a little bit about the transformation of the sales force.
Do you see happening in 2021.
Yes, Im happy to George Thanks, and.
And internally, what we're calling them as the broad sense as growth investments and <unk>.
Both of us more than just salespeople, although that's a big part of it.
So we're investing and.
Salespeople growth for new account revenue, we're investing on the client services side to help us continue to manage and penetrate and improve our position with the existing clients and we're investing and.
And.
We're also investing in Corp, Dev as well to help us continue to do a great job there.
So there is a lot of all of <unk>.
And vendor relations and Im sorry vendor relations as well, which is really.
And our world Thats sourcing procurement, Georgia, and these guys and it's not only getting better pricing by negotiating with more folks since the telephone us expand our service lines because.
And anytime you expand your services, you've got to develop and broaden your network with which to accomplish that and have and talented team on.
Client service of our excuse me of vendor relations for sourcing enables us to do that better so thats truly of growth piece as well.
On the sales force side.
And we'll continue and we are continuing to.
The focus people on the individual market segments.
Whether it would be industrial whether it be automotive and that type of thing where they speak the language and focus on it. So we're expanding on the same thing we've just as I mentioned.
I guess it was greg's question I think we're a lot better and messaging and I am given the marketing group credit for that as well and the tools for our sales force.
More targeted George reach out I mean, we're utilizing a lot of great tools that are available today with this technology to help our salespeople would be more targeted and their efforts. So they have higher close ratios.
But we're going to keep marching down that same step and just path and just do it better than we've done and in the past.
Okay great.
And I have no questions thinks is so good.
Thanks very much.
Thank you George we appreciate your support.
Yes.
And at this time I will turn it back to Ray hatch for closing remarks.
Thank you very much.
As Lori said this is true.
This is of great quarter, I want to take the opportunity to thank my team.
It's a challenging raw when you're working from home, mostly and trying to communicate and take care of your customers and they've done a fantastic job as evidenced by this quarter.
The whole team has executed very well and I'm appreciative of that.
Secondly, I just wanted to.
Comment on the growth and the changes and the evolution of this company I have watched it for five years now and.
And just continuing to impress as the change and adapt and expand and grow. So we're looking forward to a great year here at quest and thanks for everybody and all of your support out there.
And that does conclude our call for today. Thank you for your participation you may now disconnect.
Yeah.
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Okay.