Quest Resource Holding Corporation Q1 2023 Earnings Call
Thank you for standing by this is the conference operator welcome to the Quest resource holding Corp. First quarter 2022 earnings Conference call. As a reminder, all participants are in listen only mode and the conference is being recorded after the presentation there'll be an opportunity to.
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Please go ahead.
Thank you Ashley and thanks, everyone for joining us on the call today before we begin I'd like to remind everyone that this call may contain predictions estimates and other forward looking statements regarding future events or future performance of quest. The 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 <unk> current expectations estimates projections beliefs, and assumptions and involve significant risks and uncertainties actual events our questions.
<unk> 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 since you 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 other 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 does not independently has not independently verified the reliability of these sources or the accuracy of disinformation.
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 elevate company's current performance management Leafs beliefs.
The presentation of these non-GAAP financial measures is useful to investors' understanding and assessment of the company's ongoing core operations and prospects for the future.
Unless otherwise stated 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 release.
So all that said I'll now turn the call over to rehash, President and CEO .
Thank you, Dave and thanks to everyone for your interest in quest.
Overall, we had a solid start to the year with more than 12% growth in gross profit dollars.
Most of the year over year growth came from ramping up new customers and adding new programs with existing customers and.
In addition, the improvements at our Ws, we discussed last quarter are on track and we expect pricing initiatives will positively impact results for the next three quarters.
We also generated significant cash flow during the quarter.
On average during the past two quarters average operating cash flow was $2 million we.
We feel good about our ability to continue to generate cash flow and subsequent to the end of the quarter, we paid down $5 million on our Monroe line.
Our outlook for profitable growth in 2023, and beyond remains unchanged and we're executing well with all of our strategies.
I will now turn the call over to our CFO , Brad Johnson for a financial overview and I'll be back to discuss our strategies.
Thanks, Ray and good afternoon, everyone.
During the first quarter gross profit dollars increased 12% year over year to $12 6 million the.
On a sequential basis gross profit dollars increased 17% from the fourth quarter of 2022 due to a mix of organic growth seasonal trends and improvements at our ws.
As we discussed during last quarter's call. Our Ws was previously not passing through cost and fuel surcharges that we normally take as part of our contracted agreements as.
As we stated previously we have corrected this issue and we have just begun to see the benefits of implementing pass through costs and fuel surcharges.
Our ws customers during the first quarter and expect to see continued incremental profit incremental improvements in gross profit from this business throughout the year.
A quick note about the revenue comparisons.
As discussed on previous calls commodity price fluctuations may have an effect on revenue comparisons, but have not historically had significant effects on gross profit dollars.
Our customer agreements produced consistent gross profit dollars based on volumes and are not tied to commodity price fluctuations.
The value of the commodities, we recycle on behalf of our clients simply passes through our P&L.
I want to reiterate that this is why we use gross profit dollars as a key metric to measure our financial comparisons.
Looking forward our outlook for gross profit dollars for the year is robust and we remain confident in our ability to deliver double digit growth in gross profit dollars during 2023.
Gross profit dollars should benefit from continued momentum in organic growth and continued improvement from our integration efforts.
As you look at modeling out our business for the next several quarters. We would suggest that you model for continued sequential growth in gross profit throughout the year and adjust for normal fourth quarter seasonality.
Want to point out that year over year gross profit dollar comparisons will be made difficult due to several acquisition related adjustments. We made during the second third and fourth quarters of 2022.
Moving on to SG&A expenses, which were $9 4 million during the first quarter compared to $9 3 million during the same period last year we.
We had lower M&A costs year over year, which were offset by increased cost for integration and continued investment in our platform.
During the second quarter of 2023, we expect SG&A costs will be about $9 5 million, which reflects the ongoing run rate of our business along with ongoing integration costs and increased investment in systems processes and people to continuously improve our efficiency and the ski.
<unk> ability of our platform.
During the fourth quarter, depreciation and amortization was $2 $4 million flat in comparison with a year ago, we expect.
Depreciation and amortization to be approximately $10 million for 2023.
Moving on to a review of the cash flow and balance sheet.
We are in good shape liquidity wise and continue to enhance our liquidity our cash balance was $9 8 million at the end of the first quarter and we recently increased the size of our operating borrowing line with P&C from 15 million to $25 million.
We also produced strong operating cash flow during the first quarter of <unk>.
A 3.0 million, which came primarily from improvements in working capital I will note that operating cash flow for the quarter included a $1 2 million acquisition related earn out payments.
Without this payment first quarter operating cash flow would have been in excess of $4 million.
Our working capital demands will continue to fluctuate based on the pace of growth, which may cause fluctuations in operating cash flows from quarter to quarter.
Nevertheless, we expect to be a strong cash flow generator during 2023.
At the end of the quarter, we had $72 $4 million in notes payable versus $74 9 million at the beginning of the year, which reflects normal principle payments and a lower bar and a lower borrowings on our asset baseline with PNC.
As Ray mentioned earlier subsequent to the end of the quarter, we have paid down $5 million of our credit facility with Monroe capital.
At this time I'll turn the call back to Ray.
Thank you Brett it's only been seven weeks since our last call in late March and we see continued strength in our business and maintain our optimism for continued profitable growth.
Regarding the economic environment in general we continue to see stable activity levels across our end markets and our value proposition continues to resonate well with customers.
I realize we've said this before but it bears repeating that our business model is positioned well to weather inflation at swings in commodity prices.
Year over year price comparisons for most of the commodities, we recycle are still lower than the prior year, but as Brent mentioned earlier restructure agreement. So the gross profit dollars are not affected by swings in commodity prices.
Also in an inflationary environment, we were able to offset cost pressures with flexible contracts that allow us to pass through increases in many costs such as fuel surcharges.
This structure is a key reason that we're able to deliver 12% growth in gross profit dollars on a relatively low growth revenue.
Now for an update on our Ws.
<unk> is on schedule to be fully integrated by the end of the year in.
In addition, we began passing through contract costs in our WNS during Q1, and we expect the positive impact to be fully recognized throughout the year.
As a reminder, we estimated that not passing through these increased costs at our Ws last year had one and a half million dollar impact on gross profit.
We remain excited about the potential for our <unk> and the contribution that can make as part of our company.
I also want to thank our team for the efforts and hard work to get our Ws back on track.
Moving onto a discussion about growth I feel very good about the organic growth we have in front of US we have multiple sources of growth that gave us confidence in our ability to post double digit gains in gross profit to share.
First we continue to use the land and expand strategy to deliver organic growth. This strategy has consistently delivered a solid base of growth for the last five years.
The other source of organic growth continues to come from new service capabilities gained through the acquired businesses. We added several new service offerings with our recent acquisitions and we're actively introducing these new services to existing clients.
Growth will also come from continuing to rollout services to several of the recent plans discussed during the prior 12 months, we started to ramp up to new customers in Q1 and are still onboarding. These and other customers and expect them to ramp over the course of this next year.
In addition, we continue to add new prospects across multiple end markets that are working their way through our pipeline.
I also want to stress, we have a large opportunity to drive profitability by optimizing business that we have in hand over the last three years, we've more than doubled the size of our business with about two thirds of that growth coming from acquisitions and new customers.
As we bring revenue onto our platform, we have opportunities to optimize the cost of services through vendor relations and procurement management.
This includes activities such as right sizing of route optimization and leveraging the overall fixed cost base.
We're going to market with our vendors focused on a window and contract provisions by adding volume from the entire quest footprint vendors can benefit.
With a greater asset utilization and lower costs from route optimization cost benefits from lower costs, which has positive impact on pricing for our clients.
Moving on to a discussion about M&A and M&A integration.
We expect M&A will continue to be an important pillar for growth of the company.
I want to reiterate that we will maintain discipline in making acquisitions.
I'll only execute those that fit our criteria.
Depending on the availability of the right deals there are likely to be periods. When we have a lot of activity in periods, where we don't have any.
In 2020, we completed six acquisitions and continuing to develop our capabilities.
Since then and now evaluation integration planning and execution.
And as described earlier in the first quarter, we made steady progress with the integration of our Ws and have completed the integration of all of the other recently acquired businesses. Our <unk> integration is on schedule to be completed by year end.
Before I move on to our outlook I want to describe a recent example of how we're able to move quickly and solve a pressing need.
One of our clients had a warehouse full of commodity destroyed in a fire. When these types of events happened. Unfortunately, the usual course of action is to gather that material and take it to the landfill.
Our client had very strict goals on sustainability and our team was able to quickly find an alternative use for this material.
Because of the scale and scope of our service offering and the innovative approach of our team.
We're able to help the client avoid the landfill and actually save money on that disposal.
This is a pure capability to take on RFP and to execute a solution that other companies just don't have in their playbook.
While this is a one time project. It's a great example of how we create incremental value and strong and trusted customer relationships.
Regarding our outlook.
Overall, our positive outlook for profitable growth has not changed we expect to be a strong cash flow generator in 2023.
We expect acquisition integration to provide incremental contribution from both increased efficiencies and cross selling.
We have multiple sources of organic growth, including doing more with existing clients ramping recent wins and converting prospects into customers.
We will continue to drive operating efficiencies and invest in capabilities to continuously improve our customer value proposition.
While further improving the profitability of the scalability of our business.
Pressure to improve sustainability, increasing regulation and increasing cost of landfills are lowering the bar for adoption of our recycling services.
We are optimistic that we'll continue with positive momentum for 2023 and the next several years I look forward to keeping you updated on our progress we would now like the operator provide instructions on how listeners can queue up for questions operator.
We will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you will hear a tone acknowledging your request.
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Our first question comes from Hans <unk> with Craig Hallum. Please go ahead.
Yeah, Hi, Ray Hey, Brad Thanks for taking the questions.
Hi, how are you doing.
Good thanks.
Maybe first can you just give a little more color on rolling out some of the new services and capabilities to existing customers.
How far how far along are you in that process and what's the response been and I know you've kind of talked about pallets in the past is there anything else.
That you're excited about from a from a service standpoint there.
Yeah pallets is at the top just because.
Well every almost every country has some type of pilot program. So it's a real it's a real ripe feel to go after but we have other types of items that we increased our IRA.
Recycling capabilities around that were able to extend as well on a smaller scale as as far as where we are at this point I'm happy to say, we're still early in that because theres still a lot of upside to be realized as we as we try to penetrate these with existing clients. So I think we still have a lot more upside Erin.
All of the cross selling opportunities as we move forward.
Okay. Good and then maybe just as a follow up.
Talk a little bit more about some of the investments on the technology side.
You're excited about and you know how those could help benefit the business going forward.
Yes, its really two fold.
If we got the customer facing piece, which we continued to refine and improve which is the customer portals, which of course the real value. There is all the waste data reported in that we're able to give them comprehensively.
That continues to improve and it it really is that I think is developed in one of the key criteria customers have.
On which supplier they go after their waste programs.
And then internally facing the team has been working very very hard over the past year to really develop a lot of automated processes and streamline processes internally and the reason that's important is it enables us to scale much more easily as we bring in new revenue.
New volume, because we're not having to add nearly as much G&A to support it as we make more automated processes and improvement of mistakes and all that type of thing.
That automation Bronx, So it's really a twofold.
Initiative, Erin and we're excited about what both can do for us.
Good good that's good to hear I'll turn it over thank you.
Thanks Darren.
The next question comes from Gerry Sweeney with Roth Capital. Please go ahead.
Hey, good afternoon, Brett and Dave Thanks for taking my call.
Yeah, Hey, Gerry.
Similar question.
That air pillows, but maybe set a little bit differently I'm just curious.
Have you ever looked at.
Your total roster of companies and I know theyre in different industries and some of them are going to have different service requirements and others, but do you ever look at him and just determine what percentage companies.
In your roster are using all your available services.
And how many.
You can actually add additional services too.
Yes, we do that are high.
I think we may have mentioned on the last call.
Our client services team that manages all of these great existing customers. They know what these services. These folks are using and they know what services, we're providing to them and a big part of their upside in their role is to penetrate even more so youre right. Jerry our customers are extremely diverse I mean, it's every kind of business you can imagine.
So every one of them has a unique set of needs typically relative to the services. There's also geographies as well I mean in most cases, we have all of their locations, but in many cases were down as well. So these folks are continuously monitoring what services that they are using that we are providing and basically working on up selling them.
Consistently so that's that's a big initiative of ours.
I also think about last call you talked about even incentivizing some of that land and expand.
Strategy I think internally with some of the I don't know if theyre account managers or what exactly you call them, but I'm curious if you've started that program in a few Scott any sort of initial feedback.
We have and that actually that program started right. When we did the last call. So it's only been a few weeks.
Yes, David implemented it on that on that side and there seems to be a lot of excitement about that I think these folks did a great job of that without the incentives.
Right now, they're probably even more excited about it I think it's I believe it's important.
That it is a recognition of the.
The value of the sales activity that happens internally rather than just externally.
So we're excited about what to do for us here.
Yes, no I think it's a great program.
And final question is around <unk>, So I think we.
We've discussed about $1 5 million of gross profit.
And youre implementing I'm, sorry, integrating that over the course of this year will that be.
Sort of that.
Sequentially four quarters.
Evenly spread out or is there going to be or will that be a little bit chunkier different times.
Cadence wise is probably a better way to ask it so.
Hey, just spread I'll I'll take that so as we mentioned in Q1, we were really just ramping up some of those increase.
Pricing pass through so you won't see much of that in Q1, and then it'll it'll it'll start fully ramping into Q2. So I would look at Q2 kind of ramping up and then a little bit more evened out across Q3, and Q4 with maybe a little bit of opportunity on the backend.
Pushed together some more efficiency, but that's yeah, that's the way to look at it.
Okay, Great I appreciate I'll jump back in queue. Thanks, guys.
Okay.
Sure.
The next question comes from Chip Moore with Es.
Please go ahead.
Hey, good evening, Thanks for taking my question.
I wanted to ask about some of the newer customers that you've talked about on some of the past.
Calls just how the ramp is going there ray and sort of you know, it's still early innings and how to think maybe call. It next.
Rolling 12 months for 12 months on the ramp of some of those bigger wins.
Yeah.
Chip I appreciate that.
We do have some great early stage customers here, meaning.
And the nice thing about the ramp is just contractually committed typically has just taken the time to digest. It. So I think we're in an early stage nowhere in the early stages.
With a couple and so we're anticipating that given us a lot of tailwind through the balance of the year.
Okay. My follow up there would be on I guess the pipeline more broadly I think you talked about prosper.
Prospects rolling through the pipeline can you talk about that pipeline and sort of size and scope of some of those potential opportunities.
Yes, Im happy too.
Theres, a theres smaller wins that we experience all the time that we really don't reference or talk to the pipeline comments, we usually make a revolving around.
Customers are more significant size and it is it is really.
There's a lot of significant size.
The pipeline, we feel good about is moving a lot slower than any of us want.
But it is moving that's the important thing.
So we're excited about a number of those coming across during this fiscal.
Because we've been working them for the last year year and a half. So it's unfortunately, a slow sales cycle with a lot of these larger industrial type accounts typically.
But at the end to pay off is really worth it. So we I feel good about our pipeline and like everybody else in our company I'm anxiously wanting it to go quicker.
That's great to hear and understood.
And then just one last one on the M&A environment.
You talked about that and how it can be a little more sporadic obviously, but maybe just speak to the <unk>.
Competitive environment out there and what you're seeing in terms of assets.
Sure. Thank you chip the M&A environment is something that right now there's there's not as many things out there and I think theres a lot of economic reasons, why it's kind of slowed down a little bit and thats fine with us I mean, when the right opportunity comes along and if the right situation I'm sure will be.
Looking to exercise on them, but right now our focus is driving efficient and accurate.
Integration through what we have and I'm really pleased with the progress we've had with that.
But on the M&A environment, it's a little slower right now chip in our space.
Australia.
Got it okay, great I appreciate all the color. Thanks.
You bet. Thanks.
The next question comes from Greg <unk> with Pinnacle Fund. Please go ahead.
Hi, Ray and Brett Thank you for taking my questions.
Sure.
First I wanted to say I was so excited to hear about your focus on free cash flow is one of your largest shareholders. This is what I was hoping to hear.
And I'm really excited to hear about the pay down of some of the Monroe facility. After the end of the quarter.
And kind of following up on Chip's question. It sounds like maybe right now not so much the focus on acquisitions, just because youre not seeing the opportunities and using cash to pay down debt as how it sounded to me is I just want to make sure that I heard that correctly.
Yeah, I think that's pretty accurate representation, Greg I mean, we're excited about that.
The cash flow generation as well, we're excited to be able to.
It's really positively all pay down that line, a little bit and we hope to continue as we stated that we're going to generate positive cash significant positive cash flow this year.
And the M&A activity just kind of is what it is right now I mean, we've always said every quarter. They were very opportunistic and those opportunities. If they are great and we'll move on it but they're not we've got an opportunity to do some really good stuff with our cash.
Yes.
Thank you.
The your release said.
You were focused on delivering double digit profitable growth.
And I was unclear was that talking about double digit gross profit dollars.
Percentage growth or where you're talking about EBITDA growth.
Our gross profit dollar growth and im sure that correlates almost directly to EBITDA.
Okay, great Yeah. Thank you very much.
And then I.
I heard some of the comments that you made around.
The investments that you're making in scalability and so when you do talk about double digit gross profit dollar growth and implementing some of these internal.
Like analytics and reporting.
Investments that you've made it sounds like then we should see pretty good flow through like we traditionally had of gross profit dollars fall into EBITDA.
Is that right also.
Hey, Greg This is Brett I'll take that one absolutely.
I would just say that we expect.
We're optimistic that we can get some of that and by Q4, but really looking at next year is when we start to expect more significant efficiencies gained from that and scalability, but but we are optimistic we will see some of that by the end of this year.
Thank you.
That's all that I had thanks for a good quarter.
Thank you Greg.
Yeah.
The next question comes from George Melas with <unk> management. Please go ahead.
Thank you good afternoon.
Hello, George.
Hi quick question on the cash cycle working capital cycle. It has improved nicely over the last two quarters.
And when I look at each store weekly.
The cash cycle was basically single digit days prior to the acquisition in December 'twenty one.
And I know, Greg you were not there at that time, but.
Yes.
The acquisition have been issuing sort of cash model of cash cycle model. They tend to bill later.
Or.
And can we get back to you.
The cash cycle that you had prior to the acquisitions.
Yeah.
To your question.
If theres anything different with any of the businesses. We have acquired Theres really nothing there other than we have talked about.
A part of our Ws has some advanced billing so that helps a little bit but beyond that nothing significant nothing I would.
See any reason why we're not going to continue to get.
Back to where we were previously because of that so.
To your answer no nothing that should hold us back.
Okay, Great and then two others.
With financial questions.
Uh huh.
How do you see acquisition and integration costs for the rest of GE you see you see them relatively flat versus what we had in the first quarter.
I think thats, a good way to look at it especially for through the first three quarters, maybe we maybe that comes down a little bit in Q4, as we get fully integrated but I would consider that mostly flat through through then.
Okay, Great and then just a question on that.
Benign that you extended.
Can you actually borrow more from PNC, given your solid working capital.
Down one row debt with that.
Yes, that's certainly an option as we move forward.
And get a little more confidence and have quarter over quarter over quarter of generating strong operating cash flow.
Obviously once you once you use that pay down that Monroe that it's locked in.
So it's not something you can redraw so we want to make sure that we're very confident that we're going to be able to continue to generate the cash flow to support the growth that we expect.
Right right, Okay, great makes sense, great nice nice execution. Thank you very much.
Thank you George I appreciate it.
Okay.
Okay.
This concludes the question and answer session I would like to turn the conference back over to Ray hatch for any closing remarks.
Thanks, operator, I just want to reiterate.
Our positive outlook for 'twenty three.
I'm really excited and thankful to the team.
They're very very hard work and it's going to continue to pay off for US I also want to thank all of you for your interest in quest.
All of our initiatives are working well and we're excited about where we're going to we're going to basis Dallas This year and into the next years. So thank you everybody.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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