Q3 2021 Quest Resource Holding Corp Earnings Call

Good day, everyone and welcome to the Quest resource holding third 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.

Thank you Christie and thank you everyone for joining us on the 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 of words like anticipate project estimate expect intend believe and other similar expressions are identified are intended to identify those forward looking statements.

Such forward looking statements are based on quests current expectations estimates projections beliefs, and assumptions and involve significant risks and uncertainties.

Actual events or quest.

Markwest results could differ materially from those discussed in the forward looking statements as a result of various factors, which are discussed in greater detail with quest <unk> 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 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. Our 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 information.

Certain non-GAAP financial measures will be discussed during the call.

These non-GAAP measures are used by management to make strategic decisions forecast future results and evaluate the company's current performance manage.

Management believes that the presentation of these non-GAAP financial measures are useful to investors.

Standing of the assessment of the company's ongoing core operations and prospects for the future.

Unless otherwise stated it should be assumed that any financials discussed on the 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 that said I'll turn the call over to Ray Hatch, President and Chief Executive Officer.

Thank you Dave Thanks to everyone for your interest in quest.

This past quarter marked our fourth consecutive quarter of double digit year over year growth in gross profit dollars.

I am proud to say that this is a result of the strong execution across all of our growth strategies and great contributions from our entire team in partnership with our terrific clients.

The third quarter's financial performance continued to be exceptional.

As we have said repeatedly on these calls we are and will continue to focus on managing the business to grow gross profit dollars, which is the key metric we use to gauge our success.

And during the third quarter, we delivered an impressive 50% growth in gross profit dollars year over year.

I will point out that this growth is not limited to the post pandemic economic recovery when.

When compared with prepayment dynamic levels in 2019 organic growth increased at a double digit pace and that organic growth came from the combination of both new and existing customers.

Our disciplined M&A strategy also contributed nicely to our growth.

Adjusted EBITDA grew at an even faster pace and was $2 5 million for the quarter, an increase of 148% year to date adjusted EBITDA $7 6 million.

We have a lot of activity in recent quarters and I'm excited to give you an update on the progress before I go into that I'm going to turn the call over to Laurie Latham, Our Chief Financial Officer to review the financials.

Ari.

Thank you Ray and good afternoon to everyone.

Third quarter revenue was 37 4 million, an increase of 58% compared to the third quarter last year gross profit dollars.

Increased 54% to $6 9 million.

As Ray said earlier gross profit dollars is a key metric we use to measure the success of our initiatives.

Organic growth represented more than half of the increase in gross profit dollars year over year with contribution from both new and existing customers.

The remaining portion of the increase in gross profit dollars came from acquisitions.

The Green remedies acquisition continues to perform in line with our expectations and we began to see contribution from the smaller acquisition. We completed at the end of June.

Gross profit dollars increased 1% sequentially from the second quarter.

As we have discussed in previous quarter, there were heightened activity levels at our industrial clients locations. During the first and second quarters of 2021, when compared to the Covid related constraints last year.

Activity levels normalized during the third quarter for the industrial segment, which was offset by the increase in contribution for new customers and acquisitions.

Gross margin for the third quarter was 18, 3% of revenue, which was 90 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.

Each will fluctuate from quarter to quarter.

SG&A expenses were $5 3 million during the third quarter, an increase of $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 recovery of business activity, we have increased labor costs marketing trade show and travel and other costs related to SG&A.

The remaining portion of the increase was related to increased M&A activity and also costs associated with some of our.

Initiatives.

Depreciation increased to 508000 versus 150000, a year ago.

The increase was primarily related to amortization from the green remedies asset acquisition.

Overall SG&A costs grew at 24% year over year, which is less than half of the rate of revenue and gross profit dollar growth for the third quarter.

We anticipate that SG&A will increase 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 our capabilities and operations and add scalability to our platform.

During the third quarter interest expense increased to 543000 from 73000 last year.

The increase is primarily related to the Q4 2020 debt financing for the Green remedies acquisition.

Net income attributable to common stockholders was <unk> <unk> per diluted share for the third quarter compared to a net loss of <unk> <unk> per diluted share for the same period last year.

Adjusted EBITDA increased 148% year over year for the third quarter to $2 5 million.

Moving on to a review of the cash flow and balance sheet.

We generated $3 4 million in operating cash flow for the nine months of 2021.

The increase in cash flow was related to our strong net income performance.

Capex was approximately half a million dollars and we utilized approximately $2 $3 million in cash to finance the acquisition that closed on June 30th.

Our cash balance was $9 1 million at the end of the quarter up from seven 5 million at the beginning of the year.

At the end of the quarter, our debt levels were relatively unchanged at $19 million versus $18 5 million at the end of 2020.

At this time I'll call the call I'll turn the call back to Ray.

Yes.

Thank you Laurie.

I will now walk you through what we're seeing in our end markets.

And our business strategies.

First let's talk about our end markets, we continued to see post pandemic recovery and all of them the.

The grocery market has continued to be stable throughout this entire period.

Retail has continued to show modest recovery, although foot traffic is still down significantly from pre pandemic levels were.

We're fortunate in that most of our retail customers, our specialty retailers that have been stable and even modest volume gains during the pandemic.

In the automotive aftermarket.

<unk> for automotive repair and maintenance services has continued to improve during the third quarter.

The number of miles driven which we use as a proxy for activity. In this end market was flat with 2019, which is consistent with the trends we've seen with our customers.

The industrial end market has also seen recovery, but activity levels are very significantly from customer to customer.

As we have commented previously we have a large industrial customer that experienced a significant increase in activity. During the first half of 2021, reflecting pent up demand and their customer base.

During the third quarter activity levels return to more normalized levels.

Since the end of the third quarter supply chain and other company specific issues that are affecting that customer in some parts of the country.

This may have a short term impact, but the impact is likely to be offset by higher volumes as these issues are resolved.

That said as a result of strength across our business. We continue to expect year over year growth in gross profit dollars in the first fourth quarter and beyond.

Regarding wins with new customers since the end of the third quarter, we had a large win with another new industrial customer will begin to onboard. This customer early next year and we would expect to be fully implemented before the end of next year.

We expect this customer win to generate annual sales in the mid seven figure range with opportunities to expand the relationship above eight figures with additional services.

This marks the second significant win in the past year with a new customer in the industrial market.

Clearly our value proposition is resonating with customers and we're gaining traction in this end market.

And this win were selected due to our ability to build out long term solution path to help them reach the goal of being qualified as a zero waste company.

Our ability to provide a uniform and auditable data set across multiple waste streams for Houston sustainability and operational reporting played a big role in our selection.

By centralizing all the waste streams with quest, we were able to improve efficiencies and maximize value from the commodities, which also played a role in our selection.

I'll also point out that new customer wins, we had discussed earlier in the year continue to ramp during the third quarter.

And are increasingly contributing to our growth.

Along with growth in other areas, we are continuing to diversify our customers and end markets steadily reducing the impact of only one any one customer on our results in the future.

Moving on to a discussion on our acquisition strategy.

Last week, we closed on a small acquisition, which we expect to add more than 400000 to our EBITDA run rate.

This company has customers in multiple end markets, including multifamily healthcare and restaurants.

Really accelerated our M&A efforts in the past several quarters and have expanded our pipeline of potential acquisitions.

As such we continue to expect acquisitions to be a meaningful part of our growth during the next few years.

Now I'll talk about how we are preparing for future growth and making investments in our platform.

Based on the recent success of our growth strategies, we are actively increasing the size of our client facing staff responsible for producing gross profit.

This includes both hunters and farmers and our Salesforce client solutions team members as well as vendor management personnel.

As the pace of our growth accelerates its even more important that we continuously improve our ability to suggest growth without skipping a beat on delivering exceptional customer service.

To this end, we created a new role and recently hired a senior VP of strategy to lead our efforts and manage new investments in technology and changes to our process that will further improve operations and scalability to our program platform.

This leader will help us to further automate our processes for Onboarding, new customers integrate gration of acquisitions as well as maximize operational efficiencies.

Regarding our outlook as I mentioned earlier, we're very pleased with the performance of our business.

And the progress, we're making executing our strategy.

We expect year over year growth to continue going forward.

Our end markets are strong or they continue to recover.

We continue to view inflation as a 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.

We've 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 in personnel technology and processes to further grow gross profit dollars without compromising customer service levels or the ability for our model to significantly produce operating leverage.

Acquisition activity is continuing and we expect it to be an ongoing contributor to our growth.

Based on all of these factors in the business. We have in hand, we are optimistic it will continue to deliver strong growth in gross profit during the fourth quarter and into next year.

We expect EBITDA profitability will continue to outpace topline growth.

As we benefit from greater scale and the operating leverage inherent in our business model.

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 operator.

Thank you if you'd like to ask a question. Please press star followed by the number one on your telephone keypad, if youre, calling from a speaker phone. Please make sure. Your mute function is off to ensure your signal can reach our equipment again star. One first we'll go to Sameer Joshi from H C. Wainwright. Your line is open.

Good afternoon, the Lodi congrats.

Congratulations on a great quarter.

Thank you for your prepared remarks, you mentioned.

New industrial large industrial customer.

Does that compare this customer compared to your peers.

In terms of gross margin the gross profit dollar contribution.

Okay.

We really don't comment on gross profit dollars per customer, but we expect this customer to be a very large contributor to us in general very.

Very much in line with the other business that we have in that space.

Okay.

Similarly, the descriptor.

Description.

Yes, yes, similar is a good description.

Okay.

And then.

You talked about.

Hiring new employees.

Expanding.

You mentioned the U.

Our senior VP.

The only thing that is driving your SG&A up a little bit sequentially. This year.

Are there other factors.

Anything that that.

That has to do with supply chain issues.

Maybe if I can.

<unk> costs.

Well one of the big factors that can affect it quarter to quarter is also the acquisition activity that we do.

That is going to be more difficult to predict quarter to quarter. Since it's really tied to those activities. So I would say that's one of the big drivers and I think we covered in our script that we were going over earlier in our comments that.

Recovery of our business as we start to market more add more salespeople. We've also have growth and we need to add some variable headcount. So those are the two I would say the two biggest buckets.

Is the acquisition and related cost to that along with the business growth side.

We have a couple of higher Samir.

Couple of hires just happened they were there they weren't reflected in third quarter.

Think what Lori was talking about was probably a much bigger contributor.

Personal services, maybe some travel and things are loosened up there weren't loosened up before.

Alright, great.

Can expect.

On the uptake in the T&D.

SG&A floats leukemia.

Sequentially.

Yes, we're looking at our activity and particularly acquisition activity and we think that that will push it up some.

Yes.

Not to nitpick, but when you mentioned the $400000 contribution.

Acquisition from last week.

Lines of multifamily healthcare then.

Got.

You mentioned gross profit dollar contribution.

The gross margins, they're also similar 18, 19% or lower.

Good.

Gross profit dollars.

It's also much as are the margin as a percentage we're just talking about the dollar so they can be contributed from that business.

Acquisition, yes.

Heavily based on the contracts there so.

There is not particularly a lot of depreciation and amortization that kind of thing. So our gross profit dollars. In this case are very similar to what we expect from an EBITDA run rate also so.

Just that.

How we are disclosing it so its about 400000 on an annual basis that we could see.

Yes.

Okay got it.

Okay.

Thanks Robyn.

Congratulations and good luck.

Future quarters.

Thank you Samir.

And again, if you have a question. Please press star followed by the number one on your telephone keypad, a pause for just a moment to give everyone a chance to signal.

And next we'll go to Bruce Wally from Wolfson Davis Your line is open.

Thank you.

The question I have is.

That new acquisition.

Yeah.

He made is when you say it.

Seven figures.

Going into the eight figures I believe is what you.

It maybe a year or so does would that if that was to happen would that make you just would that make it the single largest largest customer.

If it moved into eight figures would it be is.

Is that what youre, asking because basically play I just signed them.

I doubt it.

I doubt that would push it into eight figures, let me do the math, that's like $10 million plus right.

And we have customers that could be higher than that.

But it would definitely put them up in the top bracket of our customers based on volume.

Okay.

Alright, thank you.

You bet. Thank you Bruce.

And with no further questions in the queue I will turn it back to management for closing remarks.

Thank you very much operator.

I just want to take a moment at the end of this call I want to thank everybody again for your interest in quest, we greatly appreciate it I get the opportunity to speak for them.

All of the quest employees here and it's an honor for me to do that and I want to thank that team for their ongoing efforts to deliver value for our customers and shareholders they've done a fantastic job consistently quarter over quarter.

All of our initiatives are working well and we've gained a lot of momentum during the last four quarters I feel like we're still early stages of our growth efforts and we have a long road of profitable growth ahead, and I really look forward to keeping all of you up to date on the quarters to come. Thank you everybody.

And that does conclude our call for today. Thank you for your participation you may now disconnect.

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