Q2 2021 Quest Resource Holding Corp Earnings Call
Yeah.
[music].
Please standby.
Good day and welcome to the Quest resource holding second quarter 2021 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to David Mossberg Investor Relations. Please go ahead Sir.
Thank you, Jeff and thank you everyone for joining us on this 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 and future performance of quest.
Use of 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 quest current expectations estimates projections beliefs, and assumptions and involve certain significant risks and uncertainties actual events or results could differ materially from those discussed in the 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 our SEC filings for additional risks and uncertainties.
Because forward looking statements are presented as of the date made and we disclaim any duty to update such statements unless required to do so by law. In addition in 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 the data and information are based on quests estimates.
Independent publications government publications and reports by market research firms and other sources. Although quest believes these sources are reliable and the data and other information are accurate. We caution that quest has not independently verified the reliability of the sources or the accuracy of the information.
Certain non-GAAP financial measures will.
It 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 to investors understanding and assessment of the Companys ongoing core operations and prospects for the future.
Unless it is otherwise stated it should be assumed that any financials.
<unk> discussed in this call will be on a non-GAAP basis.
Full reconciliations of non-GAAP to GAAP financial measures are included in today's earnings release with all that said I'll turn the call over to Ray Hatch, President and Chief Executive Officer.
Yes.
Thank you, Dave and thanks, everyone for your interest in <unk>, we had great momentum coming into the year and that momentum continued during the second quarter and thus far into the third.
The second quarter's financial performance was exceptional across all metrics.
Topline growth was 68% relative to last year, which was due to a combination of organic growth post pandemic recovery and M&A.
Organic revenue growth, which excludes M&A was more than 50% year over year.
I will point out the strong organic growth performance was not just related to post hayne different recovery.
To provide another reference point, if we compare second quarter of 2021 to the second quarter of 2019 revenue increased over 30% organically compared to that period.
This is organic growth, excluding the acquisitive growth in the comparison.
Gross profit dollars grew by more than 55% year over year and grew 6% sequentially.
The key attributes of our value proposition are clearly resonating with clients and prospects.
In turn they are rewarding us with new business and expanding their scope of services.
M&A was also a significant contributor to year over year growth with the acquisition of Green remedies continuing to perform as expected.
We also closed on a similar acquisition on June 30th, which we expect will contribute to future growth, adding more than $500000 to our annual EBITDA run rate.
During the second quarter, we also showed strong improvement in profitability.
EBITDA increased by 120% to $2.5 million.
For perspective, EBITDA grew at more than twice the rate of gross profit dollars, which illustrates the earnings leverage and the scalability of our platform.
Before I go into review of market trends and strategic initiatives I'm going to turn the call over to Laurie Latham, our chief financial officer to overview of the financials.
Thank you Ray and good afternoon to everyone.
Second quarter revenue was $36.9 million, an increase of 68% compared to the second quarter last year.
Keep in mind that comparisons are against the peak of the pandemic last year.
As Ray mentioned, we showed solid organic growth year over year from both new and existing clients.
As well as the incremental contribution from the acquisition of Green remedies.
Which we completed during the fourth quarter of last year.
As we discussed.
Last quarter, the heightened activity levels at our industrial clients locations in the first quarter of 2021.
Continued during the second quarter, when compared to the Covid related constraints last year.
Additional drivers for the increase were split between the incremental contribution from the Green remedies acquisition and growth of new and existing clients.
Sequentially revenue increased.
6% from the first quarter, primarily from the initial onboarding activity with several new client wins and from the addition of new multifamily housing clients.
Also I'll point out that the acquisition, we announced in June was completed on June 30th and therefore was not a contributor to second quarter results.
The second quarter gross profit was $6.8 million.
An increase of 56% when compared with the second quarter last year, an increase of 6% sequentially from the first quarter of this year.
Gross margin for the second quarter was 18, 5% of revenue, which was 140 basis points lower than last year.
But within our targeted range.
The year over year decrease in gross margin was related to the service mix, which will fluctuate from quarter to quarter.
SG&A expenses were $5.1 million during the second quarter and.
An increase of $1.1 million compared to the same period last year.
More than half of the year over year increase was related to the rebound in our business from last year. When we took significant cost cutting initiatives related to COVID-19.
As you might expect with the recovery of business activity, we have increased labor costs marketing trade show travel and other costs related to SG&A.
The remaining portion of the increase was related to costs associated with project.
Project consultants.
As well as the timing difference in the accrual for stock based compensation compared to last year.
Overall SG&A costs grew at 27% year over year, which is less than half of the rate of revenue and gross profit dollar growth for the second quarter.
We anticipate that SG&A will increase primarily as we add to the national account sales staff and other personnel to support growth.
We also plan to increase investment in technology that is expected to enhance operations.
And add scalability to our platform.
During the second quarter interest expense increased to 550000 from 87000 last year.
The increase is primarily related to debt financing for the green remedies acquisition.
Net income attributable to common stockholders was four cents per basic share or <unk> <unk> per diluted share for the second quarter compared to EPS of eight per basic and diluted share for the same period last year.
As a reminder, last year's second quarter included $1.3 million or about <unk> <unk> per share and other income related to the benefits from PPP funds.
Adjusted EBITDA increased to 120% year over year for the second quarter to $2.5 million.
Looking at the cash flow and balance sheet.
We generated $1.2 million in operating cash flow during the second quarter and $5.2 million for the first half of 2021.
The increase in cash flow was due to the combination of strong net income performance as well as positive working capital changes.
About half of the operating cash flow was added to our cash balance which was $10 million at the end of the quarter.
Up from $7.5 million at the beginning of the year.
In addition, we utilized approximately $2.3 million in cash to finance the acquisition that closed on June 30th.
At the end of the quarter debt levels were relatively unchanged at $18 million.
This $18.5 million at the end of 2020.
So at this time ill turn the call back to Ray.
Thank you Lori before I get into a review of our strategies I want to give an update on several of the trends that are positively affecting our business.
First we continue to see post pandemic recovery than all of our end markets. The industrial end markets stood out again, this quarter and exceeded our expectation both from existing clients and the earlier than expected on boarding of a major new client in June.
All of our other end markets showed modest sequential improvement, which we expect will continue throughout the balance of the year.
The second trend that is positively affecting our business is sustainability and sustainability reporting.
I believe we are at a tipping point, where clients are feeling pressure from multiple stakeholders to divert more waste from the landfill.
Everyone. On this call is aware of the growing demand for public companies to report sustainability metrics.
Our capabilities in this area, where a clear differentiating factor in why we were chosen for the recent wins, we discussed last quarter with a publicly traded company in the industrial end market.
This client had previously hired an outside consultant who is ultimately unable to satisfy their needs. We created a data portal for this client with the ability to provide a uniform and audible dataset across multiple waste streams for use in sustainability and operational reporting.
We have begun on boarding this client recently and they have given us positive feedback on the visibility that they did not have before.
Sustainability is not just important for investors. It's also important for all stakeholders. We've recently created a video for our clients in the automotive service market to show their customers their employees and other stakeholders.
The video highlights in several ways in which quest is able to help our client recycle or otherwise divert waste from the landfill.
I would encourage you to look at the video on our website or on our social media as it is a great example of how we help customers become more sustainable with multiple waste streams.
I won't go into all the details but in summary, we help this client recycled $27 million.
Sounds of waste from multiple waste streams last year that volume prevented 38000 metric tons of Cotwo emissions.
We'll take all the trees in Central Park 46 years to do the same.
I would also note that sustainability achievements, we help this client make are not unique.
These types of improvements are widespread amongst our client base.
The final trend I'd like to discuss is how the major vertically integrated waste providers are implementing price increases and how the increasing price of landfill costs are making recycling and our services and increasingly increasingly viable solution financially.
Let me give you a bit of background.
In some cases the cost of recycling is greater than disposing of waste to landfill, which has historically been a hurdle for adoption of our services. However, when you take into account the commodity value and some of the waste streams that can significantly offset costs.
Not only do our services help clients maximize the value received from commodities. We also help our clients optimize the efficiency of waste collection, and we have scale that gives us greater buying power with vendors.
I would also point out that one of our largest profit centers for most one of the largest profit centers for most vertically integrated waste sites waste providers is our landfill operations. Since we don't have a landfill operations, we're financially aligned to help our clients achieve the most sustainable and cost efficient method to divert more waste from landfills.
Using these levers we can often help clients save money by recycling waste streams and diverting waste from landfill.
With increasing prices and increasing pressure to be more sustainable clients are more willing to have discussions about improving their sustainability, which is lowering the hurdle for the adoption of our services.
Moving on to a review of our strategic growth initiatives.
Our multi year effort in building, our sales and client service capabilities is showing an ongoing positive results.
Our organic growth increased an annual a double digit pace compared to 2019 and of equal importance the pace of securing and onboarding new clients is accelerating.
This success is a reflection of our clients believe in our ability to add value to the processes and we appreciate their trust.
Based on the recent success of our go to market strategy. We are actively increasing the size of our client facing staff responsible for producing gross profit.
This includes both hunters and farmers and our sales force.
Client solutions team members as well as vendor management personnel.
Overall, even with this incremental investment we continue to expect 50% of incremental gross profit dollars to flow through to EBITDA.
Let me explain how adding our vendor management to our vendor management team adds to our gross profit growth by lowering our cost of service basically we help our vendors add new business.
That they would not have been able to keep compete for individually.
This incremental business helps them optimize loads and pickup routes essentially increasing their utilization and making them more efficient.
The more we help our vendors add revenue and improve profitability of the more value, we add for them, which translates into better service for our clients and better economics for all parties involved.
In addition to creating greater efficiencies our vendor management team has also tasked with finding new service providers and adding new types of service <unk>.
This drives greater client satisfaction and expands our service offering.
To drive gross profit dollar growth, we're also increasing the size of our client services team.
These folks are tasked with servicing our existing clients as well as adding more locations and service lines to them.
There are plenty of opportunities to continue to grow with our existing client base, which has and should continue to provide us with a stable source of growth going forward.
The key is to continue to provide exceptional service and our team has a great track record in this regard.
We're also adding to the number of National account reps recently hired and we've recently hired an experienced professional to focus on the grocery end market and our newly developed organic waste program, we call per organics.
As we discussed in our last earnings call grocery chains are increasingly implementing sustainability goals.
And facing increasing regulation regarding food waste.
<unk> ability to recycle both non packaged in packaged food in a cost effective manner is a significant and key differentiator for us we.
We have our first client in place and are actively educating the market about this program and building a pipeline, we think theres significant opportunity to expand the service and expect it to help us garner new client wins, along with expanding relationships with existing clients.
Next I'll address our M&A strategy.
As I mentioned earlier, we closed on a small acquisition in June 30th, which we expect will add more than 500000 toward EBITDA run rate.
This company is in the multifamily housing market as a nice complement to the acquisition of Green remedies last year.
In addition to this acquisition we have been very active during the first half of the year evaluating several acquisition client candidates. We expect M&A will continue to be an important part of our growth going forward.
Regarding new business wins in the second quarter.
Of note was an expansion with an existing client the expansion is adding seven figures to annual revenue and will increase the size of their footprint.
I would also note that we had a strong we had strong organic growth with new clients in the multifamily housing end market during the second quarter.
Regarding our outlook.
Our end markets are strong and they continue to recover.
We continue to view inflation is net neutral to our business as our contracts have mechanisms in place to adjust.
Pressure to improve sustainability and increasing cost of landfills are lowering the bar for adoption of our recycling services.
The contribution from new client wins, we will continue to provide incremental growth as we onboard these programs throughout the balance of the year.
We have seen increased movement and opportunities through our pipeline and the pace of organic growth is picking up.
As such we continue to have success, adding new clients and our expanding business with existing clients.
We are investing investing in personnel to further grow gross profit dollars.
We expect acquisitions to continue to be a significant contributor to our growth.
Based on all of these factors in the business that we have in hand, we are optimistic we will continue to deliver strong growth in gross profit for the balance of the year and we are well positioned to deliver robust organic growth for next year.
We expect EBITDA profitability will continue to outpace topline growth.
As we benefit from greater scale and operating leverage inherent in our business.
I look forward to keeping you updated on our progress.
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Star one for questions Andrew.
And our first question will come from Gerry Sweeney with Roth capital.
Hey, good afternoon, Ray and Laura Thanks for taking my call.
Hi, Jerry Hi, I apologize I joined a little bit late so.
Okay.
Hopefully my my questions makes sense, but meaning it's not covered earlier.
Obviously, you're making a little bit more of a push into the sales aspect.
Historically this has been a little bit of a challenge I think you went through some iterations.
Do you feel as though you have everything in place to start incrementally adding.
The sales in.
The sales force.
Yes, everything is a big word Jerry.
We definitely feel like we've got the right sorry, yes.
We definitely feel like we've made a lot of progress in the area and I think youre seeing the results in new account acquisition, but we continue to look to complement that effort.
So everything no but were definitely move in the right direction and we're excited about where we're headed.
Got you that's fair I mean, we are seeing a nice pick up.
And then how much.
Has increased.
I guess the disposal costs at landfills, how much has that changed over maybe the last two to three years.
How much is that bar load I know, that's sort of a qualitative commentary you made but I'm just curious if you could expand on that a little bit.
Just for Edification I guess.
Yeah, it's hard to put a percentage on it because there is obviously several players in that space, but I don't think a quarter has gone by Jerry in the last couple of years, if not more that there hasnt been price increases going into place and sometimes a regional sometimes there are actually they're all regional but theyre consistently going forward I've, yet to see an announcement about landfill cost.
Actions.
I don't know that I will.
It's been a cumulative effect Gerry and I think it has gained a lot of momentum over the past year.
And continue to increase so just.
Right there that tells us that our prices are not so I think that obviously refers to lower bar, we mentioned, but it's been pretty consistent.
Got you.
Then one more question that I think you'd mentioned you've reduced.
Yeah.
Our emissions by 38000 tons of C. O. Two are you getting more requests for.
Our card data from companies because what we're seeing with a lot of ESG related companies with some investors are saying show me how much you're reducing.
Yes carbon footprint for emissions by Im just curious if youre starting to see this request from your clients for more detail. So they can pass along.
What we've been able to do for example, what we measure of courses that we measure is the actual materials being diverted and how they're handled and from that from those volume measurements. There are formulas that create those measures.
I was talking about in that earlier piece was really just one client.
And that one client was we gave them a marketing tool to use internally for themselves about their sustainability and thats why we reflected in things like.
Trees in Central Park and stuff like that.
And so yes, there's that request specifically was how can they portray themselves.
In a sustainable way that they operate how can they communicate that more effectively to their customers and thats, where that tool came from but yes, jarrod, we get asked quite a bit about obviously quite a bit in reporting about the materials and the volume of materials that are diverted from their from their locations and from that we can create those calculations are those illustrations we talked about.
I cant imagine at some point that that becomes a an increasing selling tool for you just for companies trying to position themselves from an ESG standpoint.
Some of the moves they've made it.
Is that a fair.
Characterization.
Yes, I think it's very fair Jerry in.
It's even more than just ESG reporting like in this example, I gave you it was.
It's a very environmentally responsible company that wanted to find the best way to illustrate that to their customers to help as opposed to just ESG reporting, but yes, it's becoming more and more prevalent I think we mentioned one of the key reasons, we were able to get that industrial win.
We started that we mentioned last quarter, when we started doing business this quarter.
Is.
Is because of the visibility that our reporting gifts all of that ESG reporting and all those that it's all about visibility.
Can't create that reporting unless you actually see the data and we collect the data and reported back.
Readable fashion and.
Again, I think I mentioned, they had a consultant before that really wasn't able to effectively do that and with us they've been able to do that that's a big piece in getting that business frankly, I believe got it got it I appreciate it that's it for me and I apologize I got on late so thank you.
No problem good to talk to Jerry Thank you.
Thank you. Our next question will come from George Melas with N K H.
<unk>.
Hi, Ray Hi, Lori Congrats on another really good quarter.
Well, thank you Gary.
Yeah Congrats.
Im very excited to see the organic growth rate.
And can you tell us a little bit more about it.
Yes.
Easier way to sort of look at the growth and see how much is coming from Greg maybe how much is coming from existing clients and maybe how much is coming from new clients.
Well George I can tell you none of it came from green remedies, because organic growth and our measurements specifically excludes acquisitions.
So.
And.
Okay.
Yes. It did we've had some organic growth with green remedies holiday I'm, sorry, with green related but the acquisition portion.
That bump that was totally excluded out of the numbers. We gave you the acquisition wasn't with the growth we had and they did have growth.
Major players have 3% to 5%.
The increases announced in our sequential comparison.
6% sequential and that was all organic with no acquisition knowledge as far as breaking it out existing clients and new clients.
Yeah.
It really.
We've had new client growth for the first time really significantly in quite a while and it's it's really helpful quite a bit of it is.
Okay.
And.
Do you get it.
<unk>.
Based on what you were seeing in Jerry's question seems like you have quite some momentum in new client acquisition.
Help us understand what explains that what you've done right to be able to achieve that and are you expecting that to continue.
Yes, well I think what we've done right.
As we have the right people, telling the right message to the right customer I mean, I know that sounds trite, but it's not as easy as it sounds.
These clients that we have in our new account acquisition they've been we've been working with these folks for a long long time, it's been a long cycle and it's coming together now.
I think all the things we mentioned earlier George.
Tailwind that we have relative to.
Increasing cost visibility to sustainable practices.
And our ability to execute against their needs.
Finally, starting to pay I guess is the best easiest way to put it but I am very proud.
Of the work that's been done by our internal operations team and our external sales team to.
Identify the needs and to satisfy those needs.
Okay.
Then when you look into your pipeline your deal pipeline do you see sort of.
You can see you.
See sort of growth continuing in terms of signing up new clients. I mean, you have several people in late stages in Europe.
New sales pipeline.
Yes, yes, we do George.
These folks are the ones that we've got right now were set in late stages for a while as we went through the process and we've got some in there now so I.
I definitely expect continued.
New account additions as you move forward and I think another thing to emphasize is that even though new accounts that have come on they are the size of accounts that keep growing every month or so.
So.
The size and the complexity, which we talked about a lot.
Is there with a lot of these new clients summer, we're seeing a full uh huh.
Results of those are going to be continuing throughout the year and then when we see some of these new accounts that we're just bringing on.
When we annualize that next year that will be another big contributor to next year's organic growth also.
So it's it's it's once you land that those nice big accounts. They just continue to drive our growth.
For several months as we rollout and continue to optimize them.
Okay.
Does that help George.
And he actually did just at least a question and answer queue.
Okay.
And once again, if you would like to signal with questions. Please press star one on your Touchtone telephone again that is star.
One if you would like to ask questions.
And our next question will come from Greg Kit with Pinnacle Fund.
Hi, Ray and Lori congratulations on the great quarter. Thank you for your hard work.
Thank you Greg I appreciate it.
I was really encouraged to hear that you are continuing to benefit from this economic reflation, but you are also you also had an opportunity to grow even if economic growth slows as you expand the number of waste streams that you're managing for your existing customers and continue to add new <unk>.
Customers as you look at the opportunity with your existing customers do you think there could be an opportunity to add.
$50 million of revenue over the next five years or is there a way to think about what that opportunity is with your existing relationships.
That's probably a pretty hard to quantify Greg at this point in time.
Our existing clients have been responsible for the majority of our moves north and gross profit dollars over the last several years.
I expect that pace to continue.
Kind of what we've been doing the last couple of years, where these guys are and look at the GP dollar growth and now you can add in.
These new accounts in the ramping that Lori just referred to on top.
Yes.
Thank you very much.
I was wondering if you can help me understand when when do you think we could start to see results from.
Some hires on the client services team and National sales Slash new account focused reps.
Well I think we're already seeing some results from the national excuse me the client client solutions services team because they are managing some of this onboarding and helping expand.
Some of the growth that we have going on right now the organic growth you've seen in.
And Youll consider that Youll continue to see that in organic growth.
That's how you'll see the result, so I think we're seeing it today.
The expanded sales force is already our pipeline has got some great stuff from them in there, Greg and we should be seeing.
Some new stuff with them quite shortly hopefully get those executed and we have already started to implement it.
Expansions in the client excuse me in the vendor relations side that we mentioned last quarter and Thats, helping us a lot in supporting these.
These new customers and Onboarding with better services from client services and expanded service lines as well.
One one more for me.
If I may.
I think one of the reasons that it sounds like Youre, winning new customers is because you have a solution and youre solving a need that the customer needs. It is not just hey, we can.
It's not just a bake off based on price you are providing services that are helping meet the customers' need and you're providing all the data and reporting for that customer.
Maybe you could help me understand is is that accurate and what do you think is resonating so much with customers that youre, winning large new customers at a rate that I don't think you've won the Matt in the past couple of years.
No youre absolutely right the rate, we are bringing on new business right now I couldnt be.
We're pleased with the change from the past couple of years in the past couple of years, our GP dollar growth was.
We're entirely focused on existing client base and driving efficiencies improved cost of service and Thats, where you are seeing that there is new clients coming on board I really do believe.
Some of the tailwind we've been talking about for a long time, whether it's.
Whether it's the ability to divert from landfill and track that ability to divert from landfill.
I think I think in many cases to simple solutions they've been offered before are undeserving there currently.
I really think as an overarching view.
Greg.
We can bring a whole myriad of solutions.
To these larger clients and these ones were talking about these are fairly significant new clients.
And our diversity, both in geographic and the variety of services and the fact of the matter is every company out there.
They're struggling away, whether it's with labor whatever the strange economic time. So if we can create a situation where they have one less thing to worry about I think it makes us much more attractive.
And I think all of those things have gone into <unk>.
And probably more of that I didn't describe have gone into this recent change and I'm happy to see it and I expect it to continue.
Thank you and one last comment and maybe just to clarify my understanding even with some of these investments that you're planning to make to prepare the company to scale and serve some of these larger customers you still expect 50% of incremental gross profit dollars to fall through to EBITDA. So if you added.
$5 million of gross profit that could be $2.5 million of EBITDA approximately is that right.
Yeah, that's the formula.
And we feel really good about it.
Business model and its yielding it today it has consistently and we expect it to get.
You too.
Awesome. Thank you so much we're so excited.
And we can't wait to see what you do over the next couple of years.
Thank you Greg we appreciate all of you. Thank you.
Thank you and that does conclude the question and answer session. I will now turn the conference back over to you for any additional or closing remarks.
Thank you operator, I just want to again, thank everybody for their continued interest in quest and following us I don't want to take this moment to thank the <unk> team.
Yet another consecutive hardworking productive quarter.
These folks have been working very hard and we appreciate that.
And it's starting to show really in the results and so thanks to everybody.
I'll have operator.
Yeah.
Well, thank you and that does conclude today's conference. We do thank you for your participation have an excellent day.
Right.