Q3 2024 Quest Resource Holding Corp Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the Quest Resource Holding Corp. 3rd Quarter 2024 Earnings Call.
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Following the presentation, we will conduct a question and answer session.
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This call is being recorded on Thursday, November 7th, 2024.
Speaker Change: I would now like to turn the call over to David Mossberg and Vestry Relations. Please go ahead.
David Mossberg: Thank you, Andrew, 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.
for future performance requests.
David Mossberg: 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 quest currents, expectations, estimates, projections, beliefs, and assumptions.
David Mossberg: 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 quest filings with the Securities and Exchange Commission.
David Mossberg: You are cautioned not to place undue reliance on such statements and to consult RSEC filings for additional risks and uncertainties. Request 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.
David Mossberg: Although Quest believes these sources are reliable and that the data and other information are accurate, we caution that Quest has not independently verified the reliability of the sources of the information.
David Mossberg: Management believes that 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.
David Mossberg: Unless it is 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 press release.
Speaker Change: With all that said, I'll now turn the call over to Ray Hatch, President and Chief Executive Officer.
Ray Hatch: Thank you, Dave, and thank you all for joining us on today's call.
Ray Hatch: Our financial results for the third quarter did not show the growth outcome that we had anticipated.
Ray Hatch: I'm disappointed that despite the record level of new client growth and enhancements to our technology platform results have been muted by a temporary increase in costs.
Ray Hatch: I'm disappointed that despite the record level of new client growth and the enhancements to our technology platform, results have been muted by a temporary increase in costs and economic headwinds being experienced by clients in the industrial end market.
Ray Hatch: And economic headwinds being experienced by clients in the industrial end market.
Ray Hatch: Well it is not yet apparent in our financial results, we remain incredibly excited about the future of the company.
Ray Hatch: While it's not yet apparent in the financial results, we remain incredibly excited about the future of the company.
Ray Hatch: We can see the fundamentals of the business are strong.
Ray Hatch: We can see the fundamentals of the business are strong. We can see the size and growth of the pipeline, and the organic growth engine is hitting on all cylinders.
Ray Hatch: We can see the size and growth of the pipeline and the organic growth engine is hitting on all cylinders.
Ray Hatch: You can see how technology amphoteric implementation is progressing.
We can see how technology implementation is progressing.
Ray Hatch: And beginning to demonstrate efficiency gains.
and beginning to demonstrate efficiency gains.
Ray Hatch: But at the same time, we're frustrated that as we continue to build a scalable platform periodic events.
Ray Hatch: But at the same time, we're frustrated that as we continue to build a scalable platform, periodic events, most of which have been more than one-off in nature, have impacted our ability to consistently demonstrate the fundamental improvements in our financial results.
Ray Hatch: Most of which have been women at more than one off in nature have impacted.
Ray Hatch: And our ability to consistently demonstrate the fundamental improvements in our financial results.
Ray Hatch: We are confident that our company will be better off having overcome the challenges that have come from the rapid growth and driving efficiencies through the business.
Ray Hatch: We are confident that our company will be better off having overcome the challenges that have come from the rapid growth and driving efficiencies through the business.
Ray Hatch: And despite the disappointing results we've continued to position our company for success in the future.
Ray Hatch: and despite the disappointing results, we've continued to position our company for success in the future.
Ray Hatch: The financial outlook for our company is strong revenue contribution from new and existing clients added year to date continues to ramp as expected.
Ray Hatch: The financial outlook for our company is strong. Revenue contribution from new and existing clients added year-to-date continues to ramp as expected.
Ray Hatch: With revenue contribution during the third quarter from the nine new clients added this year at just 60% of the expected fully ramped run rate, contribution from new clients should continue to be a significant source of embedded growth in the quarters to come.
Ray Hatch: With revenue contribution during the third quarter from the nine new clients added. This year had just 60% of the expected fully ramped run rate contribution from new clients should continue to be a significant source of embedded growth in the quarters to come.
Ray Hatch: In addition efficiency initiatives and operating leverage should continue to drive improvements in profitability.
Ray Hatch: In addition, efficiency initiatives and operating leverage should continue to drive improvements and profitability.
Ray Hatch: We've continued to work to strengthen our balance sheet.
Ray Hatch: And we expect to complete the refinancing of our debt period prior to the end of the year and in doing so we expect to benefit from a significant reduction in our overall interest rates and also an improved terms.
Speaker Change: I'll now turn the call over to our CFO, Brad Johnson to review financials, and I'll be back to give you a review on our strategic initiatives.
Brad Johnson: Thanks, Ray and good afternoon, everyone.
Revenue was $72 8 million or three 3% increase year over year and roughly flat sequentially from the second quarter.
Brad Johnson: We had strong growth from new and existing clients, which accounted for $16 million of third quarter revenue.
Brad Johnson: This increase was mostly related to a record level of onboarding activity from seven significant new new client wins that have secured during the first half as well as significant expansions with three existing clients that we have discussed on previous calls.
Brad Johnson: The rollout of services to the new clients and expanded agreements is on track.
Brad Johnson: New client secured during 2024 generated approximately 60% of their anticipated full year revenue run rate during the third quarter we.
Brad Johnson: We expect these wins to provide incremental growth in both revenue and gross profit dollars as we complete the rollout and optimized services.
Ray Hatch: Growth was offset by an approximate third approximate $13 million decrease in revenue due to softer than expected conditions that certain clients in our industrial end market.
Ray Hatch: And client attrition.
Ray Hatch: Among those clients volumes at a large industrial client that we referred to last quarter experienced another significant sequential decrease more than what we had anticipated as.
Ray Hatch: As we said previously the relationship with this client continues to be strong and then there are opportunities to add services with them in the long term.
Ray Hatch: They are slowing production for now which is likely to affect volumes for the near term.
Ray Hatch: In addition, we had lower than expected volumes from another large client that we have ramped significantly during 2023 and 2024.
Ray Hatch: The sequential revenue comparison was relatively flat from this client as growth from newly added service lines was offset by higher than expected fluctuations in project work and seasonal production changes.
Ray Hatch: This client relationship is also very strong.
Ray Hatch: Looking into 2025, as we get a full year of contribution from new clients already signed during 2024, we expect to realize more than 20 million in net incremental revenue from new client wins.
Ray Hatch: Less customer attrition.
Ray Hatch: This net number does not include growth from existing clients. It also does not include anticipated future wins from new clients or revenue changes due to fluctuations in commodity prices or volumes.
Ray Hatch: During the third quarter gross profit dollars were $11 7 million.
Ray Hatch: Five 9% decrease from last year, and a 13.5% decrease sequentially from the second quarter.
Ray Hatch: The decrease in gross profit dollar comparisons was primarily primarily related to three factors one a shift in revenue mix to higher than anticipated cost of services and three higher than anticipated billing credits.
Ray Hatch: Regarding the mix shift as I discussed earlier, we had less revenue than expected for more mature client relationships, where the margin profile has been optimized and it was replaced by revenue from new clients and expanding engagements where it typically takes several quarters to optimize the margin profile.
Ray Hatch: Regarding higher than anticipated cost of sales to ensure a smooth transition to our new automated vendor management system.
Ray Hatch: This temporary increase in costs, mainly relates to making sure that while we are implementing our new management system clients do not receive interruptions in their level of service to implement the new system requires accelerate accurate data from both the client and vendors and the initial setup.
Ray Hatch: In a few cases, there are data errors received from either the client or the vendor, which can cause disruption in service.
Ray Hatch: For example, vendors may incorrectly assume payment terms or 15 days as opposed to contracts really agreed terms are 30 days.
Ray Hatch: Discrepancy between terms, sometimes caused this disruption.
Ray Hatch: When the vendor assumes incorrectly that they have not been paid on time, they take action and we have to use other vendors to pick up the waste at higher rates that are not pre negotiated to make sure. The client does not experience an interruption.
Part of the reason we are implementing this new system is to reduce these types of errors and potential disruption.
Ray Hatch: We have made significant progress.
Ray Hatch: So far in Q4 now that the system is fully operational we are seeing a reduced error rate. This is an encouraging sign that our incremental spend on cost of sales will be less going forward.
Ray Hatch: We are temporarily spending more on client services to make sure there's a smooth transition as we onboard new clients.
Ray Hatch: We had a record amount of onboarding activity during this quarter for perspective during the quarter alone.
Ray Hatch: We began onboarding more than 2200 locations. This was more than a tenfold increase from the same period a year ago.
Ray Hatch: New clients place a lot of trust in us to make sure there are no interruptions in service.
Ray Hatch: Making this temporary incremental investment is well worthwhile.
Ray Hatch: As Ray will comment on later, we continue to receive great feedback across the board from new clients about how smooth their on boarding process has gone.
Ray Hatch: In addition to the temporary mix shift and the temporary increase of cost of sales gross profit dollars were affected by higher than anticipated billing credits.
Ray Hatch: This increase was isolated to a small group of long standing and related clients that had provided us with inaccurate information, which led to approximately $1 million in one time billing credits.
Ray Hatch: We have enhanced our procedures and processes to optimize to minimize the potential for billing credits of this size in the future.
Ray Hatch: I should note that this is unrelated to the implementation of our automated vendor processing tool.
Ray Hatch: Moving on to SG&A, which was $10 3 million during the third quarter, an increase of 650000 from a year ago and an increase of 890000 sequentially from the second quarter.
Ray Hatch: But in line with our expectations.
Ray Hatch: Looking forward, we expect to gain efficiencies from the investments we have made in our platform and through process improvement. We expect these savings to be partially offset by continued investment in growth and other initiatives.
And we expect SG&A will grow at a slower pace than gross profit dollars.
Ray Hatch: As a result, we expect SG&A will be about $10 million in the fourth quarter.
Ray Hatch: Moving on to a review of cash flows and balance sheet.
Ray Hatch: Our liquidity is in good shape in the first quarter, we extended the maturities on our debt with Monroe until October of 2026 and extended the maturity of our credit line with PNC until April of 2026.
Ray Hatch: Which gave us added runway to run a rigorous process to evaluate long term debt financing speaking with numerous potential lenders and advisors.
Ray Hatch: We are nearing completion with the process and expect to complete refinancing of our debt by the end of the year with a significant reduction in borrowing costs.
Ray Hatch: Incremental to the fed reduction and with better terms that preserve the ability to maximize growth.
Ray Hatch: At the end of the third quarter, we had $16 5 million of available borrowing capacity on our $35 million operating borrowing line and $2 5 million available on our $5 million equipment facility.
Ray Hatch: For the third quarter, we used approximately 500000 in cash to fund operations, we continued to make progress with shortening the cash cycle times from some of our larger clients, but we still have some room to make improvements.
Ray Hatch: You'll note that increase dsos in the past few quarters are temporary we have great relationships with these clients and slower than expected payment is not related to collectability.
Ray Hatch: So I want to reiterate that our targeted dsos are in the mid sixties, but it is possible that we will see fluctuations in the dsos from time to time like we have seen this year, especially with the timing of ramping new clients.
At the end of the quarter, we had $74 8 million in notes payable versus $67 8 million at the beginning of the year the.
Ray Hatch: The increase primarily reflects growth in borrowing on our lines with PNC to fund working capital.
Speaker Change: At this time I'll turn the call back to Ray.
Ray Hatch: Thanks, Brett.
Ray Hatch: I wanted to start off by thanking our team for their hard work and dedication during this past quarter and year.
Speaker Change: We're very busy with a record level of Onboarding activity.
Speaker Change: And the implementation of new automated vendor management program.
Speaker Change: One of the major obstacles to overcome in winning new business is related to concerns over potential disruptions and switching out vendors.
Therefore, it's imperative that we onboard new clients well.
Speaker Change: I would assess the execution of our team in this area is exceptional we've.
Speaker Change: We've received overwhelmingly positive feedback from new clients on how smooth the onboarding transitions have gone.
Speaker Change: Strong execution is bolstering our reputation as a partner of choice.
Speaker Change: And helping to remove the apprehension of switching service providers.
Speaker Change: Last quarter I shared an example of this within just seven days of going live on our platform. Our new clients said the implementation went so well that they volunteer to be a strong reference for us, which actually is already happening.
Speaker Change: Since our last call we had another great example of our strong execution.
Speaker Change: Our new client referred us to a new prospect to prospect checked with another reference which commented that they were blown away by what we were able to do in only two months and they were amazed by the responsiveness of our call Center and response to their service needs.
Speaker Change: I'm very proud of our team for how they care about client outcomes and how they are building a service platform that can efficiently and effectively help clients meet their waste management and recycling goals.
Speaker Change: We consistently hear positive feedback from our clients like this and it gives me great confidence that the new clients and existing clients are well taken care of.
I will now review the investments, we're making in technology.
Speaker Change: Over the years, we've built a technology platform that will be able to scale to the size of a much larger enterprise.
Speaker Change: Platform has been a key deciding factor for several competitive wins and has helped us maintain enduring client relationships due to the incremental value we provide.
Speaker Change: In addition to enhancing our differentiated value proposition, we also expect to gain significant efficiencies and cost savings by continuously enhancing our platform.
Speaker Change: The latest enhancement as our new automated vendor management solution that we've discussed on previous calls.
Speaker Change: Once its fully implemented we expect to realize $2 million to $3 million in recurring cost savings.
Speaker Change: At our current run rate some of which we've started to realize in the fourth quarter already.
Speaker Change: We believe that our technology is the first in the industry that audits are 100% of vendor invoices at the line item level utilizing artificial intelligence we've.
Speaker Change: We believe it's the first fully digital process in our industry, where every invoice charge is match back to the clients' agreement and business rules for consistency and continuity.
Speaker Change: We recently had a great example of how this platform is differentiating our value proposition and is bolstering our reputation in the marketplace.
Speaker Change: While we were Onboarding, a new client this past quarter, we identified a charge at prior vendors for passing through that was not part of their service.
Speaker Change: With our technology in the industry knowledge of our team, we're able to catch these erroneous charges and get them removed the previous vendor it follow discharge.
Speaker Change: Now this chart to go through for years, and simply did not have the technology or the people capable of uncovering.
Speaker Change: Moving on to a discussion about growth.
Speaker Change: I feel very good about the organic growth we have in front of us over the past year or so we have overhauled our organic growth machine and it is consistently producing multiple sources of growth including the following.
Speaker Change: The first sore throat is from existing clients.
Speaker Change: As we've previously discussed through the first half of the year. We've had three expanded agreements with existing clients one of which is expected to produce more than seven figures in annual revenue.
Speaker Change: We had another significant win with an existing client in the automotive sector recently.
Speaker Change: Due to the years of trust, we built with this client they've asked us to help them with a rather large project. This project will produce more than seven figures in revenue.
Speaker Change: And we're able to offer a way for the client to maximize the value of this waste stream.
Speaker Change: At the same time minimizing volumes sent to the landfill.
Speaker Change: Our technology platform also allows them to track and provide an auditable data record for use in their sustainability reporting.
Speaker Change: The second source of growth as new clients.
Speaker Change: As we've previously discussed through the first half of the year, we secured seven new client wins since our last earnings call. We've added two more.
Speaker Change: For a total of nine new significant wins for the year. This.
Speaker Change: This is more client activity than ever in our history.
Speaker Change: One of these seven figure wins is for decline in the automotive service sector with 150 locations.
Speaker Change: It's a new client that switched from a competitor based on what we heard from them. The prior service provider could not live up to our standards for quality of service and this new client has several peers of similar size utilizing the same vendor.
Speaker Change: We are proactively reaching out to these targets and expect to win additional new ones from that peer group.
Speaker Change: Second win is with a large food distribution company. We escape. We expect this client to produce seven figures in annual revenue and over time should grow to an eight figure annual revenue account.
Speaker Change: The food distribution market is a very large end market. It represents great opportunity for quest.
Speaker Change: We encourage therein chest a few months, we have already signed up our first two clients in this end market.
Speaker Change: And we have several other prospects in our pipeline.
Speaker Change: At various stages of discussion.
Speaker Change: The third source of growth is coming from the ramp of the new business, we have already secured this year.
Speaker Change: As we mentioned before for the new clients. We've added year to date third quarter revenue was approximately 60% of the full annual run rate, we anticipate once they're onboard.
Speaker Change: We're well on our way to Onboarding new clients, we added in the first half of the year and the two new wins I just mentioned will start on boarding in the December or January timeframe.
Speaker Change: Poor source of growth is from our prospect pipeline we've.
Speaker Change: We've made new investments in our sales force added new sales leadership and added several several proven sales executives to our team.
Speaker Change: In addition, we've been making investments in sales operations that allow our sales folks to spend more time on closing.
Speaker Change: And less time on the more administrative functions such as proposals and lead generation.
Speaker Change: In addition, we've made an effort to shorten the sales cycle by simplifying our contracts.
Speaker Change: And using our internally developed sourcing tool to turnaround proposals more quickly.
Speaker Change: As a result of these efforts we have grown not only the number.
Speaker Change: But the size of the deals in our pipeline.
Speaker Change: As evidenced by the new client wins. This year. These investments in sales are clearly, helping us to shorten the cycle and to create a better yield in converting proposals into agreements.
Speaker Change: I hesitate to estimate when the deals in the pipeline may close, but I can say is several very large opportunities have progressed to the final stages of approval.
Speaker Change: And I'm confident that we'll be able to consistently add new look new large clients in the quarters ahead.
Speaker Change: Finally, the first source of growth is not related to revenue, but directly related to growth in gross profit dollars. We have a large opportunity to drive GP dollar growth on the cost side by optimizing the business we have in hand.
Speaker Change: As we bring revenue onto our platform, we have proven our ability to optimize the cost of service through vendor relations and procurement management and drive our continued growth in gross profit dollars.
Speaker Change: Regarding our outlook.
Speaker Change: I want to emphasize my conviction on our trajectory and the overall outlook for the company. We've made tremendous progress over the last several years and have never been more confident about our outlook for future profitable growth.
Speaker Change: The work we've done has centered on building a consistent and sustainable business focused on providing value services to our clients. The foundation is set for success and.
Speaker Change: And to build for value of our shareholders.
Speaker Change: I look forward to keeping you updated on our progress wed now like the operator provide instructions on how listeners can queue up for questions operator.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, we will now begin the question and answer session.
Speaker Change: Should you have a question. Please press the star followed by the number one on your Touchtone phone.
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Speaker Change: One moment. Please for your first question.
Speaker Change: Our first question is from <unk> from Craig Hallum. Please go ahead.
Speaker Change: Yes, good afternoon, Ray and Brad Thanks for taking the questions.
Speaker Change: Yeah, maybe first for me on the vendor management system can you just kind of quantify the impact there in the quarter.
Speaker Change: And then just to confirm it sounds like it's fully operational now is there any kind of carryover into the fourth quarter and I. Appreciate the commentary on the reduced error rate I mean, it sounds like it should really help help your process as you as you onboard.
Speaker Change: Yeah, Erin the spread I'll I'll take that.
Speaker Change: On on quantifying it it's a little different difficult to do that because.
Speaker Change: It leads into some other challenges on.
Speaker Change: Getting to a customer level on some some other breakouts, but.
Speaker Change: Directionally, it's less than $1 million, we called out for for the credits, but certainly significant enough to mention.
In terms of your second part of the question just how that looks going into to Q4 to your point, we do feel really confident on the implementation done.
Speaker Change: To date.
Speaker Change: We are seeing a lot of.
Speaker Change: Good progress already this quarter through the first full month, we've seen significant reductions in error rate. So we do expect those.
Speaker Change: Those costs to dwindle down they won't be zero, but they should be less much less impactful going forward.
Speaker Change: Yes.
Speaker Change: Did I did I answer all your questions.
Speaker Change: Yeah, No. That's helpful. And then maybe second I mean, you kind of talked about ray with the pipeline shortening the sales cycle and then you know.
Speaker Change: Gave some details on Onboarding can you just kind of talk about both of those where those stand.
Speaker Change: Kind of looking to improve.
Speaker Change:
Speaker Change: Those given given kind of the technology investments and the additions to the sales force like where do those stand today from a sales cycle and Onboarding perspective, and you know where can those get too.
Speaker Change: Yes, they are.
Speaker Change: Two things is the.
Speaker Change: Is bringing on new clients the sales cycle and then of course, the on boarding process, which is post contract.
Speaker Change: I will say the envoy as evidenced by nine new signings. This year I think thats ready evidenced that our sales cycle as is dramatically increased or sped up excuse me for us to be able to to bring that many on in such a short period of time, we've ever done anything close to that in the past.
Speaker Change: I credit the sales team and I credit the.
Speaker Change: Tools that we're using for proposals now that the operations team is able to do so.
Speaker Change: <unk> acceleration, so I would say we've cut we've cut that sales cycles significantly back which is great news on the Onboarding side.
Speaker Change: Again.
Speaker Change: It's really a great story.
Speaker Change: Kind of hidden by some of the results of the quarter.
You measure onboarding, both on the speed and the accuracy of it but also primarily I think on the.
Speaker Change: On the client feedback.
Speaker Change: As we've mentioned before these are operationally.
Speaker Change: Challenging things to change out hundreds and hundreds maybe thousands of locations and service providers and equipment. The complexity is immense.
Speaker Change: And it was a largely manual process in past years and now utilizing the tools that we have from a technology standpoint.
Speaker Change: I firmly believe that's why we're able to get the scores I guess deposit scores, we're getting from these new clients in the Onboarding process. So I think the onboarding process is faster and considerably more accurate.
Speaker Change: And the sales cycle.
Speaker Change: Has compressed significantly as well so we're really encouraged on both of those fronts.
Speaker Change: Alright. Thanks, Thanks for that and then maybe just last for me any current thoughts on how the.
Speaker Change: Election, New administration, and things might might impact your business moving forward. Thanks, Yeah.
Speaker Change: Great question, Eric and we've talked about that a lot internally long before this specific collection actually as we look at changes what we've found in the area, where we focus most on our sustainability as landfill diversion is where most of the impact from our activities show up.
Speaker Change: And the the.
Speaker Change: The landfills themselves are predominantly.
Speaker Change: Regulated managed what have you buy.
Speaker Change: By states and municipalities, which arent typically affected by federal elections.
Speaker Change: So overall.
Speaker Change: I think the decisions on whether it's really important for companies to maintain sustainable sustainability programs is driven more by.
Speaker Change: Investors in federal regulation.
Speaker Change: And the demand for companies to have higher more quality performance.
Speaker Change: So that's a long way of saying Aaron that we really don't anticipate.
Speaker Change: The election, having any changes at a federal level.
The demand and desire to divert from landfills at the local levels as higher higher than ever as you know it's difficult to permit new landfills, there's less landfills today than there were yesterday on there'll be less tomorrow than there are today so the emphasis.
Speaker Change: Landfill diversion and sustainability I think is less political and more practical than it has.
Speaker Change: Been in years past.
Speaker Change: That's my opinion anyway.
Speaker Change: No. That's helpful. Thanks, Thanks for the color I'll turn it over.
Darren: Thanks Darren.
Darren: Okay.
Speaker Change: Your next question is from Richard from Northland Securities. Please go ahead.
Speaker Change: Hey, guys.
Speaker Change: Can you guys a bit deeper into the land and expand sales and marketing strategy.
Speaker Change: And I know you guys need to get Scott the sales team, but is that optimized as it right now or is there still room.
Speaker Change: To grow that team.
Speaker Change: Oh, there's a tilt.
Speaker Change: Yeah, well, we're focused less on head count.
Speaker Change: Oh, and then I think that the overall capacity and efficiency.
Speaker Change: That being said, we've added and invested in head count as we said, but I think a big part of it is the way we're structuring that I mentioned STR sales development reps that are doing a lot of the groundwork if you will on the front side.
Speaker Change: To set up appointments and more of the admin stuff, which really creates significant capacity in your senior level sales team. So right. There you were able to add capacity or capability without even adding heads, but we have added several quality experienced people to our team along with the <unk>.
Speaker Change: The sales leadership that we've done this past year. So yes, there is still room to expand.
Speaker Change: You find the right salespeople with the right experience and they represent.
Speaker Change: We're always happy to look at those opportunities and we will continue.
Speaker Change: The land and expand.
Speaker Change: Our strategy really hasn't changed it's just it's doing well.
Speaker Change: One of the things that we've always anticipated getting in on one line or two and then grabbing more existing spend from the rest of them. When we always have done a good job I think our.
Speaker Change: Our history is we've been able to generate mid single digit growth with existing clients.
Speaker Change: Almost purely through the expansion program, we're talking about.
Speaker Change: But if that also seems to have improved lately with some of the technology advances. We've had when you have clients large client national clients come on board and they announced a large expansion weighted within two months.
Speaker Change: Of a launch.
Speaker Change: That's amazing.
Speaker Change: And it really adds a lot of credibility I think to the strategy and my hats off to the team.
Speaker Change: That if that have positioned us where we can have that kind of expansion with these clients.
Speaker Change: Got it got it. Thank you and then just secondly for me.
Speaker Change: How would you characterize the new business pipeline today.
Speaker Change: That's actually a real bright spot on and I'm glad you asked.
Speaker Change: The strength of our new pipeline as it was beyond what I was hoping for a year ago.
Speaker Change: I think I mentioned in the call. We obviously have the new signings, we talked about but we have several really key targets.
Speaker Change: They have moved toward the bottom of the funnel that we anticipate some good things happening in the relatively short term.
Speaker Change: But.
Speaker Change: Well one of the things he is always focused on paring, our sales leadership Harry Mas is what is that level to what does that middle of the pipeline look like to make sure that it's strong strong enough to continue to feed the bottom.
Speaker Change: And it's really reached a level of magnitude that we're all happy with as far as where we're at is in the funnel what that funnel looks like.
Speaker Change: So the simple answer to your question is.
Speaker Change: I know I say this a lot but it's.
Speaker Change: Beyond where I thought it would be at this point and continuing to get stronger.
Speaker Change: Great. Thanks, Thanks, Brad.
Ellen: Thanks Ellen.
Yes.
Ellen: Greg kick from critical family. Please go ahead.
Speaker Change: Hi, Ray and Brian. Thank you for taking my questions.
Ellen: Correct.
Ellen: So we've had a couple.
Ellen: Orders like this over the five half years, we've been invested and you've figured out how to get to the other side of it.
Ellen: Every time, thus far and so this is a disappointing quarter.
Ellen: But it sounds like you have quantified the issues some.
Ellen: Outside of your control that should reverse some opportunities to get better.
Speaker Change: Maybe just to touch on the three areas that you highlighted.
Speaker Change: For the reason for gross profit impact this quarter. The first was just a mix from some of your larger industrial customers.
Speaker Change: It sounds like just to be clear that there is not necessarily loss of service lines, but thats more.
Speaker Change: <unk> and.
Speaker Change: An economic slowdown with those customers, but you also believe they used to be a fortune 500 customers that.
Speaker Change: If economic growth continues reaccelerate at some point in those end markets that you would be well positioned to service those customers is that fair.
Greg: A very good description, Greg I think it's so important to draw distinction.
Speaker Change: Between.
Market share loss and volume fluctuations right.
Speaker Change: We haven't lost any lines our relationship is as strong as ever with these clients in that sector.
Speaker Change: We ride the tide with them, sometimes right. We we take take credit for the growth when they just generated and can we take a hit when the windows that happens, but now. These are these are fortune 500 strong companies, they're not going anywhere theyre going through some.
Speaker Change: I would consider temporary volume restrictions that impact us.
Speaker Change: Our service levels have remained high and our relationships remain strong. So that's just a timing factor.
Speaker Change: So I think your assessment is very accurate.
Speaker Change: Thank you.
Speaker Change: Could any of these customers.
Speaker Change: President elect Trump has talked about.
Wanting to.
Speaker Change: Deemphasize near shoring to focus on onshoring, which is probably good for you because you don't have operations in Mexico to the best of my knowledge is that is there any potential benefit.
Speaker Change: Companies choose to go.
Speaker Change: Some production onshore.
Speaker Change: Rather than near shoring within your customer base.
Speaker Change: Yeah, I would go even further and say in general Onshoring is is going to be beneficial whether it's this client or are all of the client.
Speaker Change: So no you're accurate we don't have operations in Mexico.
Speaker Change: Our overseas so anytime theres production Thats moved outside of our our trade area, it's not a positive.
Speaker Change: So.
Speaker Change: If there is if there is more on showing our shoreham business grows within the within the 48 are there within the U S.
Speaker Change: That's going to be beneficial for us.
Speaker Change: Okay. Thank you. So then on the second issue on higher costs.
Speaker Change: Thank you Erin.
Speaker Change: Asked a little bit about this.
Speaker Change: How to think about what that cost is.
Speaker Change: I think what I want to make sure I understand is that.
Speaker Change: It sounds like when you onboard new customers you just need to make sure that that services is.
Speaker Change:
Speaker Change: Essentially.
Speaker Change: Seamless is that transition as seamless as possible and so is is are the costs that you saw in Q3, something that you expect to continue to see as you onboard new customers I guess I'm first focused on the new customers Thats, probably something that you continue to see is that fair.
Speaker Change: Greg I'll answer that one I think it's more some of the challenge in Q3 is that we were bringing on a new system at the same time, we were doing record onboarding. So there was kind of a perfect storm.
Speaker Change: In the quarter.
Speaker Change: As we were learning the new system and working out the Kinks and optimizing it. So we had that that required some additional cost and then you had onboarding on top of that so you're really stressed a couple of areas. There at one time, so I wouldn't think of that as kind of an ongoing.
Speaker Change: <unk> costs in the future I think it was more limited to just the uniqueness of what we're all trying to do in the quarter.
Speaker Change: Yes.
Speaker Change: Okay, Great and I think I think you sized that at less than $1 million, but material enough to call out.
Speaker Change: Yes, certainly wanted to call it out it was a drag drag on the quarter.
Speaker Change: And again to your point, we wanted to highlight that it was more temporary in nature.
Speaker Change: As we get into the quarter.
Speaker Change: We have a lot of faith in the platform, we've built and the scalability. So we wouldn't expect to see.
Speaker Change: Big drive.
Big usage of cost as we bring new clients on.
Speaker Change: Okay.
Speaker Change: Great. Thank you and.
Speaker Change: And I think I think the third bucket was on billing credits. This one was a little bit confusing to me.
Speaker Change: And so it sounds like.
Speaker Change: Some customers identified some issues in which they were being built.
Speaker Change: It sounds like from vendors those are being passed on to the clients, but it was a year of responsibility to kick out it does charges that were inappropriate.
Speaker Change: With the relationship Wise no let me try to clarify a little bit it's hard to get into a lot of detail on this without.
Speaker Change: Spending.
Speaker Change: A ton of time on it but.
Speaker Change: They are unique in nature. This is a.
Speaker Change: Isolated customer group.
Speaker Change: And a specific end market for us and it's a unique billing structure in that.
Speaker Change: We're doing tenant billing and but relying on third party.
Speaker Change: Information and relying on the accuracy of that information, we got that information as to.
Speaker Change: Who to bill and how much to bill.
And with this model it.
Speaker Change: It can have a pretty significant impact all of that all of those credits go straight to the bottom line. So.
Speaker Change: We reviewed this week when we went through this process are initially we did do some extra diligence.
Speaker Change: To verify the accuracy of what we got but it just wasn't quite robust enough.
Speaker Change: Put in some extra build.
Speaker Change: Filters to help validate some extra processes and controls around this.
Speaker Change: Largely think we havent contained going forward.
Speaker Change: But it was a larger issue in Q3 for us.
The result of a bigger initiative to do some.
Speaker Change: Overall vendor cleanup.
Speaker Change: Tenant billing cleanup.
Speaker Change: Okay, and so the customer is giving you the information on who to Bill and you got bad information from the customer yes.
Speaker Change: Yes that are incomplete.
Speaker Change: Congrats on all of that.
Speaker Change: A chunk of it obviously was.
Speaker Change: Okay, and so so some some amount of misinformation or lack of information from your customer and then I just want to try to understand where does the billing credit come back to Hey, This came out of your pocket.
Speaker Change: <unk> on our customer air.
Speaker Change: That's the piece that I'm confused about.
Speaker Change: Well you got the customers related to landlord in the Walmart billing as a tenant.
Speaker Change: All the information so now you're into the debt Thats why its little confusion as the definition of customer.
Speaker Change: Right so the.
Speaker Change: The billing was it's a tenant bill situation you Bill tenants based on the information you get from your customer, which is the landlord to management company.
That information was not accurate.
Speaker Change: So since we build the the build it inaccurately, we had to reverse it as well, which is where the credit came from does that make more sense.
Speaker Change: And one of the thanks, Greg.
Speaker Change: Brad was pointing out I think it's important to understand is the impact in this situation is significant because.
Speaker Change: There is no reversing cost of goods, whether it's pure revenue, which has no associated cogs. So it's pure gross profit dollars.
Speaker Change: You see what I'm, saying, yes.
Speaker Change: Hey.
Speaker Change: And so does in this case, where the landlord gave you bad information essentially you have no recourse to the landlord to say Hey, you gave us this bad information so we charge people inaccurately.
Speaker Change: Help me understand what if anything you can do to go back to the landlord and say look at what your cost.
Speaker Change: There is there is nothing we can do.
Speaker Change: It's unfortunate, but we don't really have a rig.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Yes, it's disappointing quarter, but so if I understand correctly, the billing credits that should not recur again in the fourth quarter. So for looking at gross profit. This quarter, we should see a $1 million reversal in the fourth quarter to that shouldn't happen again, if I understood correctly and then on the.
Speaker Change: On the vendor management system.
Speaker Change: Some sequential improvement from this quarter from it sounds like that doesn't occur in the fourth quarter are those are those statements both right.
Speaker Change: I think those are Directionally correct, yes, yes.
Speaker Change: This should not be recurring.
Speaker Change: Address your point okay.
Speaker Change: Okay, if I can sneak.
Speaker Change: Two more in unless there is somebody else in the queue I'll hop out and come back.
Speaker Change: Go ahead Greg.
Greg: Okay great.
Speaker Change: On the refi is there some way to think about.
Speaker Change: You talked about significant reduction in interest rates.
Speaker Change: That getting done by the end of the year. So that's good news is there is there some way to think about what that reduction could be or would you rather wait until that's done and announced.
Speaker Change: Trust me, we really we really challenge ourselves with given a little bit more detail, but I think just without anything being complete it wouldn't be appropriate for us to.
Speaker Change: To comment.
Speaker Change: But we certainly are excited about getting a deal done and being able to talk about the improvements in the new structure. It shouldnt be long, yes, it shouldnt be long, Greg before we're able to give you that detail on.
Speaker Change: And I Echo what Brad said.
Speaker Change: Our excitement comes through the fact that we entered into we wanted to say more but you know how it goes but anyway, so suffice it to say.
Speaker Change: We really feel good about where we are in now and we'll get you more information as available.
Speaker Change: Okay great. Thank.
Thank you and on Ts.
Speaker Change: Dsos.
Speaker Change: This year has just been a unique year in part because of customer ramps is there.
Speaker Change: And Brett I have heard you say there is no reason that you can't get back to the mid <unk> again.
Speaker Change: And I would love to see it that.
Speaker Change: That would be that would be great I'm sure you would love to see it too.
Speaker Change: In a higher is there some reason that you look at it and you say in your communications with customers. There's just some shifts where you say you know what.
Speaker Change: Maybe maybe dsos are.
Speaker Change: Five days longer than than they've historically been.
Speaker Change: No I still.
Speaker Change: Expect to get back to the to the mid <unk> again.
Speaker Change: Backing out.
Speaker Change: Ramping new first of hopefully, we expect new customers continuously ramping so maybe you get kind of a normal.
Speaker Change: A piece of that going forward are more normalized but.
Speaker Change: We saw some improvement this quarter it got muted by <unk>.
Speaker Change: Ramping new customers, which is great. We will take we will take the offset.
Speaker Change: But we did see some improvement there and I'm still hopeful we've got some good progress as we've talked about in the past Q4 is always a little challenging or can be because we've got large customers that are trying to manage cash flow as well.
Speaker Change: We typically have good conversations in and can still get.
Speaker Change: All of our collections in but you just never know what what's motivating them when it comes down at the end of the year.
Speaker Change: But overall, we're we're still happy we have good relationships, we have reined in some that got a little extended.
Speaker Change: And I'm excited.
Speaker Change: I'd have to see as we get into next year, making some improvement there again.
Speaker Change: Thank you I think if I could just ended for me with one more open ended question I think.
Speaker Change: Your stock is down 10% to 15% after the close today and.
Speaker Change: I think this quarter doesn't reflect what you think the business can do I would just and I think some of your prepared remarks accomplish this but.
Speaker Change: Give it back to you to kind of help us understand as investors.
Speaker Change: Why do you think some of these issues are resolved.
Speaker Change: Why do you think this is going to happen going forward or will happen on a lesser degree there will obviously be issues over the next several years.
And hopefully you continue to deal with them get to the other side.
Speaker Change: But why it.
Speaker Change: Why should why should people want to own the stock now.
Speaker Change: And help US help investors that are looking at this see that vision.
Speaker Change: Yes, correct.
Speaker Change: That's a big question, so I'm trying to break it down into pieces first of all the impact items, we talked about they fall really in two buckets.
Speaker Change: Controllable and non controllable.
Speaker Change: I can't tell you what's going to happen.
Speaker Change: A couple of our key with some of our customers in the industrial market that have faced some challenges I can tell you that.
Speaker Change: I believe strong companies strong products and they'll come back and I think that our results reflect that that was a lot of our impact this quarter.
Speaker Change: Then there is the bucket of controllable, which I think Brad did a pretty good job of explaining the one off nature of those things.
Speaker Change: Credits are unfortunate, but they were.
Speaker Change: They were there it's an error that had to be corrected and the onboarding cost that we've we've associated with bringing on new clients and a lot of extra expenditure.
<unk> with making sure that service levels were pristine.
Speaker Change: I think that timed out with putting our new systems and at the same time, which you only introduce new systems. Once typically so theres a significant amount of nonrecurring elements to that.
Speaker Change: What I would want to tell you as investors is we know what happened this quarter.
Speaker Change: Definitively and we have action plans against all of the controls associated with that and as a matter of fact most of them are already in place. We're talking about Q3 results now and we're in early November.
Speaker Change: A lot of that correct correct corrective action has taken place so I would.
Speaker Change: I would stress Greg from an investor standpoint that you guys have been with US a long time, we've gone through some challenges and we've moved forward a lot.
Speaker Change: We're stronger today than we were.
Speaker Change: And we have stronger people that know how to address and improve these issues and it's being done.
Speaker Change: We feel like we're in a great marketplace I will tell you just.
Speaker Change: I was making a lot of notes during a lot of these conversations so I just wanted to say that.
Speaker Change: This is an important takeaway we know what went wrong and we have plans to address them to the extent that we can and they're being taken place now so my confidence level is really high on the nonrecurring elements of that.
Speaker Change: I don't want anybody to lose side of the fact that.
Speaker Change: We've added nine new key customers this year.
Speaker Change: We haven't even come close to that that's not the same hemisphere of where we've been in the past and we've been onboarding them.
Speaker Change: Had an almost 100% success rate.
Speaker Change: Those formulas bodes very very well for what tomorrow looks like here, we've got a market that's very accepting of what we're bringing to the table and thats evidenced by these new customers and we've got new customers coming on that are excited about the superior service levels, we're able to bring them. So our retention should be quite high.
Speaker Change: And our ability to drive incremental profits should be quite high.
Speaker Change: So with that I understand the disappointment I want I'm going to go out and go straight to closing I guess, if that's all right. So it sounds kind of do an error.
Speaker Change: I wanted to emphasize a few things.
Speaker Change: I never want to forget to so I'm going to jump here and say I want to thank everybody to people here class.
Speaker Change: Have been busting their tails, we mentioned earlier the activity level has been very high and frankly, the demands have been very high.
Speaker Change: And they've been meeting notes, so I'm grateful for those folks and thank all of you for those efforts.
Speaker Change: Okay.
Speaker Change: The initiatives that we have in place are working well simply put.
Speaker Change: It's too.
Speaker Change: Increased efficiencies drive the automation program increased efficiencies lever, our G&A, which has taken place as we speak and it's.
Speaker Change: I can't tell you the zero touch initiative has been a game changer for us in the last few weeks and it's accelerating and we're seeing the results right now.
Speaker Change: And also.
Speaker Change: The fact of the matter is we're bringing on high quality customers the pipeline is stronger than ever.
Speaker Change: Not just talk we've seen the signings and we've seen the rollout so I.
Speaker Change: I think the market's receptive for what we're doing is being proven I think that we've improved dramatically what we're doing internally with our with our new systems impact we've had some growing pains.
Speaker Change: And we've had some customers that have faced some challenges. The composite is what you saw last quarter, but on a go forward basis, our optimism as you can tell us is quite high.
Speaker Change: So Greg I hope that answers your question to the rest of the investors were greatly appreciative of your confidence in us.
Speaker Change: Taken with US were committed to giving you the kind of results that you are expecting and with that I will go and then the call. Thank you everybody.
Speaker Change: Ladies and gentlemen, this concludes your conference call for today.
We thank you for questions.
Speaker Change: Ask that you. Please disconnect your lines.