Q3 2022 Quest Resource Holding Corp Earnings Call
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Good day and welcome to the Quest resource holding Corporation third quarter 2022 earnings call. Today's conference 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 Jenny 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 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 quests current expectations estimates projections beliefs and assumptions and involve significant risks and uncertainties.
Actual events or quest results could differ materially from those discussed in the forward looking statements as a result of various factors, which are discussed in greater detail in <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 of course 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.
<unk> 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 is 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. Fortunately forecast future results and evaluate the Companys current performance management believes the presentation of these non-GAAP financial measures.
Useful to investors understanding and assessment of the company's ongoing core operations and prospects for the future.
Unless it is otherwise known as it should be assumed that any financials 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 results.
Really soon.
That said I'll turn it over to Ray Hatch, President and Chief Executive Officer, Greg.
Thank you, Dave and thanks to everyone for your interest in quest.
We had another good quarter, we delivered a 78% increase in gross profit of 57% growth in adjusted EBITDA.
We generated $73 4 million in revenue $12 2 million in gross profit at $3 8 million and adjusted EBITDA.
In the quarter, there was an adjustment of $850000 for expenses related to one vendor.
One of our recently acquired companies, which lowered our gross profit.
Without that expense adjusted EBITDA for the quarter would have been $4 7 million.
Our outlook remains very positive.
Executing on all of our strategic initiatives and expect a strong finish to what it's been an exceptional year of growth for class.
Our results continue to demonstrate the strength of our business model and how we can perform well in a market environment, that's been challenging for others.
We're able to offset inflationary cost pressure with flexible pricing and cost recovery fees.
And due to the nature of our pricing structure gross profit dollars were not materially impacted by commodity price fluctuations and.
In addition, we continue to make positive progress optimizing recent acquisitions.
We're moving new opportunities through the pipeline, which I will explain more in detail later.
We see relatively stable economic activity across our customer base.
All of which positions us well for continued profitable growth during the fourth quarter and next year.
Before I get into more detail I want to welcome our new CFO , Brett Johnson to his first earnings call of Quest resource.
Brad It's a great addition to our team with extensive financial leadership experience.
And I'm happy to have him on board I'll turn it over to Brett now to cover the financial overview.
Yeah.
Thanks, Ray and good afternoon, everyone I'm excited to join clubs, especially at this point in its history and I'm excited to be part of the transformation that is well underway.
West has a unique value proposition and a very large market.
I see a lot of potential for continued growth.
<unk> also has a strong culture and proven leadership and I'm thrilled to become part of the team.
Before I review the financials I'd also like to thank Laurie Latham, our former CFO for her ongoing support as we make the transition.
He has been immensely helpful in getting the speed in the past couple of weeks.
Now moving on to our results.
Third quarter financial results were in line with expectations and all the major growth drivers of our business contributed to year over year growth.
Revenue increased 96% year over year due to a combination of growth from new customers.
Expansion with existing customers and M&A activity.
During the third quarter gross profit dollars increased to $12 2 million, which was a 78% increase year over year.
In addition to incremental gross profit dollar contribution from acquisitions, we expanded service programs with existing customers.
And we continue to see strong year over year growth from new customers that we've added in the past 12 months to 18 months.
Gross profit dollar growth will continue to benefit from new customers as we both roll out our services across their footprint.
And add new services.
Additionally growth will come as we optimize the delivery and cost structure of service delivery across our customer foot clear.
Over the last few quarters, there have been variation in the sequential comparison for gross profit dollars.
So I want to take a minute to explain these fluctuations.
Sequential decrease in gross profit dollars during the third quarter was primarily related to ongoing integration work for the acquisitions. We completed during the end of 2021.
As was discussed on our last call during the ongoing process.
<unk> operational and accounting best practices to the acquisitions, we completed at the end of 2021.
We identified and made some one time positive adjustments with some catch up billings during the second quarter.
Similarly during third quarter.
<unk>, a necessary adjustment that negatively impacted cost of sale.
I will point out that this adjustment has not affected our expectations for our acquisitions and our year to date results are in line with our plan and are consistent with annual performance expectations, We gave last quarter.
I also want to note that sequential gross profit dollar comparisons were not material.
Not materially affected by inflationary pressures or lower commodity prices.
As Ray said earlier.
We were able to offset inflationary cost pressure with flexible pricing and cost recovery fees.
Due to the nature of our pricing structure, which produce fairly consistent gross profit dollars per unit of measure regardless of commodity price fluctuations. Our gross profit dollars were not impacted during third quarter.
Our outlook for gross profit dollars is unchanged for the year.
As was mentioned during the last quarters call. We expect gross profit dollars during the second half to be similar to the first half of the year.
Additionally, gross profit should benefit from continued momentum in organic growth and continued improvements from our integration efforts and be partially offset by the return of a normalized seasonal pattern that we've seen historically during the fourth quarter.
Our SG&A expenses were $9 3 million during the third quarter compared to $5 3 million. During the same period last year and relatively unchanged compared to the first and second quarters of 2022.
The year over year increases the year over year increase relates to the business operations that we acquired during 2021 and during the first quarter of this year.
During the fourth quarter, we expect SG&A costs will continue to be about 9% to $9 5 million.
The increase reflects the added overhead costs from acquired business operations ongoing acquisition and integration costs.
And increased investment in systems processes and people to continuously improve our efficiency and scalability of our platform.
During the third quarter, depreciation and amortization increased to $2 5 million versus 508000, a year ago.
The increase was primarily related to amortization of acquisition intangibles.
We expect depreciation and amortization to be approximately $9 5 million for 2022.
During the third quarter interest expense increased to $1 9 million versus 542000 last year.
The increase is primarily related to the debt financing for acquisitions and an increase in the interest rate.
Q3, adjusted EBITDA decreased increased 57% to $3 8 million year over year.
Moving on to a review of the cash flow and balance sheet.
Our cash balance was $7 1 million at the end of the quarter versus $4 2 million at the end of the second quarter and $8 4 million at the beginning of the year.
We used $4 3 million in operating cash flow during the first nine months of the year and the pace of operating cash flow use.
And the pace of operating cash flow used slowed down to about 521000 in the third quarter.
Use of cash year to date and to a lesser extent in the third quarter was primarily related to investment in working capital to support more than doubling the size of our company year over year.
While our September 30th receivable balance was larger I would point out that the collectability of our receivables is within our normal expectations.
As was noted on our last earnings call. We have had several new customers that have ramped quickly during the year.
In particular, our industrial customers were on boarded with extended payment terms.
During the third quarter, we transitioned those terms to a more typical payment schedule, which will cycle through during the fourth quarter.
As such we expect to generate positive cash flow from operations during the fourth quarter.
That is of course, barring any significant acquisition or meaningful step up in organic growth from the current run rate.
During the first nine months of 2022, Capex was 627000, and we utilized approximately $3 $1 million in cash to finance a smaller acquisition during the first quarter.
At the end of the quarter, we had $74 9 million in notes payable versus $67 9 million at the beginning of the year.
That increase primarily reflects the financing for the acquisition that we completed.
During the first quarter.
At this time I'll turn the call back to Ray.
Thank you Brad I'll start off with some thoughts on the resilience of our business model and how we've continued to perform well in a volatile economic environment.
Regarding inflation.
As we have mentioned on previous calls we were able to offset cost pressures with flexible contracts that allow us to pass through increases such as future surcharges.
These pass through increases have been in place throughout the year, including the third quarter and have not affected our gross profit dollars.
Regarding volatility in commodity prices, we structure our agreements. So the gross profit dollars are not materially affected by these swings.
These are the same contract structures, we had in place since the early days of our company when used motor oil was one of the largest recycling streams.
We know recycle a wide variety of commodity waste streams being generated by our clients, including used motor oil scrap metals used cooking oil plastics pallets cardboard and other commodities.
Price and the value of these recycled commodities can fluctuate significantly from quarter to quarter.
Which was the case this past quarter.
To give you. An example, we estimate during this last quarter there was a $6 million sequential decrease in the value of the scrap metals that we recycle for our clients.
This has a one for one impact on our revenue.
However, the gross profit dollars and volume of these materials remained relatively even with the prior quarter.
Regarding the economic environment in general we continue to see stable activity levels across our end markets and our value proposition is resonating well with both existing and new customers.
I continue to feel good about the growth we have in front of us.
Within our install base of customers, we use the land and expand strategy to deliver growth. This strategy has consistently delivered a base of organic growth for the last five years.
Added several new service capabilities with our recent acquisitions and we're actively introducing those new services to our existing clients.
We spoke about adding a wood pallet recycling program, that's a new service offering last quarter. We recently added this program to a second existing customer each of these expansions will produce seven figures in revenue at maturity.
In addition, we recently rolled out a new scrap metal recycling program, our retail business locations. This new service line has been well received and we are now implementing it but to existing customers each of which we expect to generate seven figures in revenue at maturity.
By adding new services like these and continuing to expand geographies, we feel confident that existing customers will continue to provide a major contribution to our organic growth for years to come.
On top of growth from existing customers. During the last couple of years, we've we've approved new client targeting <unk>.
We are closed on the write new clients during the third quarter, we added new prospects in several large opportunities across multiple end markets. Since the end of the third quarter. We've had two new seven figure customer wins, one in the industrial end market and one of the automotive surface market.
We will begin implementing our new industrial customer in January and it will eventually ramp up to seven figures in annual annual revenue over the course of the following 12 to 18 months.
Our data platform with its ability to provide a uniform as supported datasets across multiple waste streams played a key role in this win.
In addition by centralizing the management of all of their waste streams with quest, we can use our scale and expertise to improve efficiencies divert more waste from landfills and maximize the value from recycled commodities.
These are the core elements of our value proposition, helping our clients become more environmentally friendly and cost effective manner.
I'll also note that with success comes more success as.
As we've grown in the industrial market, having multiple reference of all clients has helped us secure this new client.
The automotive service win is a sister company of an existing customer will begin onboarding. This new customer in December and expect it to be fully ramped up in the next 90 days.
Our data platform also played a key role in winning this business.
Specifically, our data platform and expertise in environmental disposal compliance allows us to efficiently manage the federal state and local regulations as well as reporting and data archiving requirements, especially in hazardous waste streams from this customer.
Along with this data platform. We also offer innovative processes to ensure compliance such as color coding system to manage the different containerized waste at each facility couple.
A couple of things like color coding containers and other processes substantially reduce the risk of.
Then properly disposing of Hasbro hazardous waste.
As we've discussed in the last couple of calls we've been busy integrating our ws and extreme the large acquisitions, we made in 2021.
As Brent mentioned, the integration has got some volatility and the sequential comparisons.
For all of these acquisitions are performing according to plan.
We continue to evaluate additional M&A transactions I want to reiterate that we will also continue to maintain discipline in making acquisitions, we will only execute those that fit our criteria.
As I've said before there'll be years like 'twenty, one where we found several good deals that fit our criteria, but there may be periods, when we don't find any.
Regarding our outlook.
Overall, our positive outlook for profitable growth has not changed we expect continued positive momentum during the fourth quarter and for 2023.
We manage tremendous growth year to date and have been successfully ramping new customers and integrating acquisitions.
Now that we have at least partially digested. This growth we expect to return to operating cash flow generation in the fourth quarter.
Pressure to improve sustainability, increasing regulation and increasing cost of landfills are lowering the bar for adoption of recycling services.
We continue to view inflation and commodity price fluctuations is net neutral to our business as our contracts have mechanisms in place to adjust.
The contribution from new client wins, we will continue to provide incremental gross profit dollars as we onboard these programs.
We expect acquisition integration to provide incremental contribution from both increased efficiencies and from cross selling.
Based on all of these factors and let the business we have in hand, we're optimistic we'll continue with positive momentum for the next several years.
I look forward to keeping you updated on our progress.
We'd now like the operator provide instructions on how listeners can queue up for questions operator.
Thank you.
I would like to ask a question. Please signal by pressing star one on your telephone keypad and if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment I can press star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions.
And we will go first to Aaron Spatola of Craig Hallum.
Hi, Ray Hi, Brett Thanks for taking the questions.
Hi, Aaron maybe.
Hello, maybe first on just you talked a little bit about expenses from one vendor and one of the recently acquired companies can you just provide a little bit more color on what that was and it sounds like it's not something that you think should be recurring going forward.
No I think that was the point there it's whatever the one acquired company one vendor.
And it was some.
Identifying expense as you recall era, and we talked last quarter.
Our diligence our integration effort.
We've found a lot of.
Client non billings, meaning.
Clients have been received or is not build we caught up on that this quarter. We also found something on the vendor side that hadn't been recorded properly and that's done now and so it is an isolated instance to your point.
Alright, Thanks, and then maybe just on the pipeline good to hear about a couple of those new wins can you just talk about where you know qualitatively that might stand today as a whole and just how that compares to the last few quarters.
And it sounds like maybe the close rate is starting to improve there.
Yes, I think the close rate.
I think it's more about it.
Been slower to fruition.
A lot of days have taken longer to get sign than anybody anticipated, including the client.
And so now that's catching up and we feel like as we as we in this quarter, we will get some nice more good news and hopefully will continue on into Q1, because the pipeline is just as strong as it was last quarter its actually bigger because we've added more to the top of the funnel as we're starting to move these out the bottom so it's hard to quantify it erinn because it really.
What it boils down to is getting these things signed but one of the indicative elements of it I think it's important.
Years ago, or even a couple of years ago, our pipeline had a lot of customers that.
Maybe they were smaller than their potential purchase.
These clients have all got not all but the vast majority of them got really significant ability for revenue.
There are large.
Multi location in some cases industrial that are generating quite a bit of a complex waste streams.
So we're really excited about what that can do for US one win can have a lot of impact two or three way, it's going to have a huge impact so that funnel is bigger than it was.
But we've got to keep filling the top of it Aaron is we get these things closed on the bottom.
Right right, Okay, good to hear and good luck. Thanks for taking the questions. So I'll turn it over.
You bet. Thank you Eric.
And we'll go next to Greg hit with Pinnacle Fund.
Hi, Ray how are you.
Great. Thank you Greg.
I'm doing great and hi, Brett.
Thank you for joining the team we're excited to get the opportunity to talk with you going forward.
Thank you.
Thank you.
Yes. Thank you.
<unk>.
You talked about I think if I heard you correctly three customer expansions.
And one in our wood pellet and then I think you said two existing scrap metal recycling at retail locations did I hear that correctly.
Yeah, Yeah, you did.
Okay, Great and then you also know what it is.
<unk>.
Oh go ahead.
No I was going to say those are yes, those are existing clients great clients and we've added some service profile some service abilities.
Past cities that we've been able to cross sell into them.
It is really exciting.
Thanks, Ray and then you added the two new <unk>.
Customer wins that were both seven figure customers you could could any of those.
Other than new wins or the expansions end up being more like mid seven figure eight figure type of opportunities.
One of them has that potential for sure.
The other one I'm not quite sure I'd have to go back and let that less likely.
Thank you and I have I have one more question you talked about investing in scalability and investing in capability of the data platform and the release what will these investments allow you to do.
Yes, it's a great question, Greg I mean, this is something we've been focused on for quite a while I mean, we all and we've talked about this we believe one of the key value propositions for classes is that scalability and so what what our systems that we're investing and allow us to.
The quicker.
More automated more accurate.
To allow builds and builds out.
A much more efficient way, which allows us to add new revenue volume with relatively little additional G&A.
It also we're expanding our capabilities as far as reporting data back as well on an ongoing basis, but the net effect, Greg if you boil it all down Theres a lot of complexity associated with what the charts that show what we're doing but at the end of the day. It allows us to do a lot more with a lot less which enables us to rapidly grow without having to go.
To find a lot of people to help us do that.
Thank you very much and congratulations on the expansion and the two new wins.
Ben we've been waiting all year and it sounds like there is opportunities for more of those things in the pipeline to cross the finish line potentially this year.
You bet. Thank you Greg we appreciate it.
Thank you.
And we'll go next to Gerry Sweeney with Roth capital.
Hey, guys. Thanks for taking my call.
Hey, Jerry.
Question on this has been a little bit higher level.
You look at your let's say portfolio of customers you have or is there a way that you can gauge how many of your customers have.
I'm not sure.
I'm trying to figure out the easy way to say if your customer base.
Fully in and data with all your services or the other way to look at it how many how much of your customer base still has the ability to take on more services.
Yes, youre talking about wallet share basically right.
That was our way of saying it yes.
[laughter].
That's the term that we use here.
It's hard to quantify that Jerry I mean.
I can tell you I can't think of a single client where theres not more opportunity. There is some there is a lot more than others.
And I will tell you I can't emphasize enough.
The expanded capabilities like the cross selling from some of these acquisitions brought us.
To sell into our significant client base that represents a lot of growth opportunity again Gerry.
It's difficult to quantify.
So we have a pretty good list, we know by client.
We have a client services group that just that really takes care of our existing clients and.
And we know what they are buying from us what they are not and we know services that they have that we don't have.
And that's a that's an emphasis for our client services group to continue to work to expand within that existing spend I. Just we know by client, but we don't really have a macro number probably.
Got it.
And as you brought up cross selling and how would you characterize the success of cross selling is it.
Meeting your expectations exceeding.
Underperforming.
No that's a great question.
Hate to admit this my expectation really wasn't very high.
I was hopeful.
As opposed to expecting maybe thats, a better way to put it in.
I think I was surprised or am surprised by maybe the size of some of the markets and spend in some areas we werent.
Addressing before like balances.
A significant amount of spend on the pallet space and Theres very few clients, we have that don't use some type of pellet surface.
So I would say.
It definitely has the potential to massively exceed any expectation I have and currently it's more than I thought where we'd be at this point, it's a relatively early stage.
But its progressing quite happy about that.
Got it and final question.
Seeing strengthen any areas of the economy more so than others in terms of one activity to client additions.
And I don't know that were seeing a lot of changes in the.
Youre talking about the client themselves the strength of the business setbacks and markets, yes, yes.
I don't know that were seeing any change at this point, Jerry I know Theres a lot of talk about all of these different segments doing well or bad that our automotive sector is fine the grocery sector sign of manufacturing if anything I think as there's more onshoring going on.
<unk> seen a little increase there.
Again, I'm not an economist that I can look at what we see and I haven't seen any indication of weakness in any of our end markets frankly.
Mhm.
What are you seeing strength in any areas in terms of new customer wins or is it still faneuil hall on any sort of movement to the finish line. Yes that was yes on the new customer win side I would say.
Hi.
I'm not sure if any is on the call. We've got Andy has done a great job on sales side work in our industrial side, along with Steven and others.
The industrial side is really.
I think theres a lot of manufacturers that are looking for better solutions to complex waste rates than they have today.
I really believe that we represent that so theres numerous opportunities there.
The food waste segment continues to grow because of that.
If for no other reason because of the.
Landfill diversion goals.
A lot of these grocers and manufacturers have at finding ways to meet those.
So I mean really I, if I had to pick one I would have to say our industrial sectors.
As strong, but the food waste side is you've got a lot of interest going to as well.
Got it I appreciate it.
And thanks for taking my call.
You bet Jerry Thank you.
We'll go next to George Melas with MK each management.
Thank you hi, good afternoon, and Hello, Brad, let's turn to the team.
Thank you George George Thank you.
Youre welcome Okay, great question on that that.
Catch up.
Yeah.
Was that sort of a catch up payment for the first quarter, the second quarter and part of the third quarter can you help us a little bit understand.
What's not and what's the nature of that but we wouldn't be distributed during.
During the year.
Hey, George this is Brett I'll take that question, yes, so we called it out just to give a little bit better visibility.
Visibility into Q3, and so you can see the performance a little bit but that would be mostly related to the first half of the year.
Okay great.
Thank you for that and thanks for pointing it out.
Paul.
Sure.
If you think of the integration of mainstreaming, the RW and kind of what.
<unk> got in from a systems perspective from a process perspective from a deepwater perspective.
Where.
You guys did sort of that integration.
Net multiple games there I'll give you earnings on all three of those George each respectively.
Bob.
I think on the people side, we're in the late innings.
I really do.
Very happy with the folks that we have at these teams are doing a great job.
Really working through the change.
Its difficult when Youre companies purchased by another company to adapt as well and I think they've done a fine job.
On a process side.
Uh huh.
Along but maybe not quite as far along as the people side, we've really worked hard on our processes.
I will say that our accounting group working closely with them.
Our sales group and marketing group are fully integrated into what they are doing so I'd say process standpoint.
Also on the vendor relationships sourcing and procurement side.
They are probably in the middle to later innings as well on the systems side, that's lagging behind a little bit for obvious reasons. I mean, they are on a different platform you don't want to upset the Applecart. We've worked out the plans will be moving those.
It is possible.
But we're on down the innings on all three just different stages on those George.
Okay great.
And then just wanted to point out something but I'm not exactly sure how to wrap that into a question but.
No.
At the beginning of 'twenty, one are we looking at customer concentration in the top two with 47% of revenue.
And now they're tough to adjust 21, and I think your largest customer during the quarter was just elaborate so it seems like the customer base has massively massively sort of come down.
With the growth and also partly with your acquisitions. So it's great to see that.
Well I'll call that a question George So I can answer it yes. It is great.
Yes.
[laughter].
We're excited about that we're adding some really great quality customers to the portfolio.
Our customer diversification has always been our goal and not an easy one to achieve when you get good customers to grow like Crazy you got to get more of them to keep up and so yes. There has been and the acquisitions are part of that.
But we brought on several strong customers that have kind of diluted the individual impact of the one or two that we're driving that at the beginning of 'twenty one.
Great.
And then just one quick thing.
On the other competition trying to do you see any particular changes.
Ah competitively.
I really don't think so.
George the interesting thing is we don't focus a lot on those guys I know that sounds silly, but.
We focus on finding the prospects that that need what we do best and typically there is nobody out there that does everything we do there's a lot of people would pick up trash. There's a lot of people that will pick up used motor oil, but there's very few that do all these things like we do and so competitively.
I don't think the front has changed at all as George I think it's.
I think it's just more incumbent on us to do as good a job as possible show in the marketplace, what we do well as opposed to our competitors.
Great. Okay. Thank you both of you very much.
Thank you George appreciate it.
And with no other questions in the queue I would now like to turn the call over to Ray hatch for any additional or closing comments.
Thank you operator, I just want to thank.
Thank you everybody again for their interest in quest and we really greatly appreciate it.
I want to thank the employees of quest and the acquired companies. We have appreciate all their efforts.
Feel very very confident.
About where we are we've come a long ways and we're really got a lot of traction and moving forward.
We're excited about the resiliency of quest and the strength of our customers and our ability to continue to serve more and grow more as we go forward and I wanted to take another moment to.
Yeah.
One welcome Brett to the team and to thank Laurie.
For all of her service and all the things she has done for all of us.
We appreciate her and we're excited to have Brad as well and are excited to have all your shareholders. So thank you very much I appreciate it.
Okay.
And so.
This concludes today's call. Thank you for your participation you may now disconnect.
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Yes.
Yeah.
Yes.
Yeah.
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