Quest Resource Holding Corp (QRHC) 2020 Q4 法說會逐字稿

Good day, and welcome to the Quest Resource Holding Corporation Fourth Quarter and Year-End 2020 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. David Mossberg, Investor Relations representative. Please go ahead, sir.

Thank you, Cody, 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 the 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's current expectations, estimates, projections, beliefs and assumptions and involve significant risks and uncertainties. Actual events or Quest's results could differ materially from those discussed in the forward-looking statements as a result of various factors, which are discussed in greater details in Quest's filings with the Securities and Exchange Commission. You are cautioned not to take undue reliance on such statements and to consult our SEC filings for additional risks and uncertainties. Quest's forward-looking statements are presented as of the date made, and we disclaim any duty to update such statements unless required to do so by law.

In addition, in this call, we may include industry and market data and other statistical information as well as Quest's observations and views about industry conditions and developments. The data and information are used in Quest's estimates, independent publications, government publications and reports by market research firms and other sources. Although Quest believes these sources are reliable and the data and other information are accurate, we caution that Quest has not independently verified the reliability of these 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, forecast our future results and evaluate the company's current performance. Management believes the presentation of these non-GAAP financial measures is useful for investors, understanding the assessment of the company's ongoing core operations and the prospects of the future. Unless it is otherwise stated, it should be assumed that any financials discussed in the call will be on a non-GAAP basis. A full reconciliation of non-GAAP to GAAP financial measures are included in today's earnings release.

With all that said, I'll now turn the call over to Ray Hatch, President and Chief Executive Officer.

Thank you, Dave, and thanks, everyone, for your interest in Quest. We hope that you and your families are healthy and safe, and we appreciate that you've taken the time to join us to discuss our fourth quarter and 2020 financial results. Let me start by saying that the performance of our team during 2020 was exceptional and I'm very proud and humbled by the dedicated efforts to overcome many of the challenges put forth by the pandemic. We continue to deliver exceptional value to our customers while ensuring each other's safety and also producing solid financial results.

During the fourth quarter, we continued to see improvement in financial performance, posting the first meaningful growth in gross profit dollars since the beginning of the pandemic. Year-over-year, gross profit dollars increased 20%, which came from a combination of organic growth and 10 weeks of contribution from our Green Remedies acquisition. These same factors, when layered over our relatively fixed cost structure, led to more than 100% increase in EBITDA for the fourth quarter. I think the strong relative growth in EBITDA is a nice illustration of the earnings power of our platform and our ability to take on incremental business, both from organic growth and from acquisitions, and layered over our platform with a relatively limited increase in incremental overhead costs.

While volumes in certain end markets are likely to continue to be a headwind in the near term, the intensity of the headwind appears to be weakening and the positive momentum that we saw in the back half of 2020 has continued into the new year. Not only are volumes picking up in some end markets, but customers are more settled, have resumed evaluation of how Quest can help them drive operational and financial efficiencies and to divert more waste from the landfill.

I'm going to turn the call over to Laurie Latham, our Chief Financial Officer, to review the financials. And then I'll be back to review the trends that we see in our major end markets and to discuss some of our strategic initiatives. Laurie?

Thank you, Ray, and good afternoon to everyone on the call. Fourth quarter revenue was $27.7 million, an increase of 20.5% compared to fourth quarter last year. As we pointed out in the press release, about $2.6 million or a little more than half of the increase in fourth quarter revenue was related to the Green Remedies acquisition, which we completed and began contributing to revenue in mid-October. The remaining half of fourth quarter's revenue growth came organically.

In fiscal 2020, revenue was $98.7 million, which was relatively flat year-over-year. This was quite an accomplishment considering the lower level of economic activity experienced in some of our end markets, especially at the beginning of the pandemic. We were able to offset weaknesses in some markets with strength in others, and later in the year, we expanded with existing customers. During the fourth quarter, gross profit was $5.6 million, an increase of 19.7% when compared with the fourth quarter last year and an increase of 22.5% sequentially from the third quarter of 2020. Gross margin for the fourth quarter was 20.2% of revenue, which is still above our targeted level. For fiscal 2020, gross profit was $19.1 million or 1.8% growth year-over-year.

SG&A expenses were $4.5 million during the fourth quarter compared to $4.2 million during the same period last year. The increase was primarily related to acquisitions, integration and corporate development costs, which were partially offset by lower travel, advertising and trade show expenses. For the fiscal year 2020, SG&A expenses increased 1.9% to $17.1 million as the increased expenses primarily related to corporate development, M&A and stock-based compensation were mostly offset by decreased labor, travel and professional fees and expenses. In the near term, while certain SG&A expenses, such as travel, will continue to remain low, we expect SG&A costs will increase throughout the year due to business recovery. I will also note that ongoing corporate development and M&A initiatives are likely to keep operating expenses at elevated levels during 2021.

During the fourth quarter, depreciation and amortization increased 4% year-over-year to $346,000. Going forward, we expect depreciation and amortization will be approximately $410,000 per quarter without consideration of future M&A activity. During the fourth quarter, interest expense increased to $458,000 from $87,000. The increase is primarily related to debt financing for the Green Remedies asset acquisition. Net income attributable to common stockholders per basic and diluted share was $0.01 for the fourth quarter of 2020 compared with breakeven for the fourth quarter of 2019. Year-to-date, net income per share improved from near breakeven last year to $0.05 per share this year.

As Ray mentioned, adjusted EBITDA increased 110% year-over-year for the fourth quarter to $1.8 million compared to $850,000 during the same period last year. The Green Remedies acquired business contributed approximately $590,000 in adjusted EBITDA or a little over half the fourth quarter increase. For fiscal 2020, adjusted EBITDA increased 33.6% to $4.5 million.

Moving onto a review of cash flow and the balance sheet. For fiscal 2020, we generated operating cash flow of $3.1 million. We maintained strong working capital discipline and continued to carefully monitor the status of our accounts receivable. DSOs remain within the normal range and through our efforts, we've been able to keep receivables in order. We ended the year with $7.5 million in cash, which is up from $3.4 million at the beginning of 2020. We ended the year with $18.5 million of notes payable versus $4.7 million at the end of 2019. The increase is primarily related to the financing of Green Remedies, which we've completed in October. The $18.5 million consists of $11.5 million as a term note, the principal of that note comes due in 2025; $2.7 million is in the form of a 5-year seller note, which is payable in quarterly installments; and the remaining $4.3 million is related to our working line of capital, which was down from $4.7 million at the end of last year.

From a liquidity perspective, we feel confident that the cash on our balance sheet, availability on our working capital line and strong cash flow generation, we have ample liquidity to fund operations and service debt.

At this time, I will turn the call back to Ray.

Thank you, Laurie. I'm very proud of how we performed during 2020 and for the strong finish during the fourth quarter. With the work we've done in previous years to transform our business, we were well prepared to overcome the adversity presented to us by COVID-19.

On the gross profit dollar line and the adjusted EBITDA lines, we delivered record performances in a year where the financial performances of many businesses were severely impacted. We entered the year well prepared to deal with the adversity by increasing margin profile of our businesses and diversifying our end markets. Over the past several years, we're able to expand our gross margin profile by more than 10 percentage points from 8% of sales in 2016 to 19% in 2019. During 2020, gross margin increased slightly from 2019 and remained above our targeted levels, which Laurie mentioned earlier.

It's important to note that our margin expansion was not related to increasing price. In fact, we often end up saving our customers' money by switching to our service offerings. Instead, the margin expansion was related to adding more value to our customers, a change in the mix of services performed and being more efficient. Regarding diversifying our end market mix, several years ago, almost all of our revenue came from 2 end markets, retail and automotive. Today, we have 5 major end markets, retail/grocery, automotive, industrial, restaurants and with the acquisition of Green Remedies, our fifth end market is multifamily housing. By having a more diversified end market mix and customer base, strength in some markets such as retail grocery has been able to offset weakness in others, such as full service restaurants. We are also fortunate in that most of our customers operate in end markets considered essential and remained at least partially operational throughout the pandemic.

Now is probably a good time to give a quick update on what we're seeing in our end markets. The retail/grocery end market has stayed stable throughout this entire period, and in some cases, it has experienced moderate -- modest growth year-over-year. We continue to work with our retail and grocery customers to divert most -- more waste from the landfills and to grow the programs that we have in place.

In the automotive market, demand for automotive repair and maintenance services has improved since the second quarter, but is still down year-over-year in the third and fourth quarters as well as the beginning of 2021 with the impact of COVID and the recent winter storms. The number of passenger miles driven can be used as a proxy to the overall economic activity in this market. According to the U.S. Department of Transportation, passenger miles driven were down about 14% on average during the third quarter, 13% during the fourth quarter and down 12% during the first 7 weeks of 2021.

Activity levels in the industrial market continue to recover sequentially from the third to the fourth quarter. The pandemic had less of an effect on end customer demand in this end market, but did shift order deliveries due to temporary closures and related to pandemic and supply chain issues.

Of all of our end markets, as you might expect, restaurants have seen the largest impact from the pandemic. While this is one of our fastest growth areas prior to COVID-19, I want to emphasize that our restaurant business is still our smallest end market in our overall mix. While full-service restaurant customers have been significantly impacted, quick-service customers have done well in terms of volumes. Overall, this end market has recovered sequentially from the third quarter, but it's still significantly lower year-over-year.

Regarding our newest end market, multifamily housing, this business comes to us through the acquisition of Green Remedies. As we said in the press release, we completed this acquisition in mid-October and it added about $2.6 million to 4Q revenue. On its own, Green Remedies grew in the mid-teens during 2020, which was due to a combination of adding new locations as well as increasing volume of waste generated for more people working from home.

Moving on to a discussion about our growth initiatives. While we were well prepared to deal with the lower volumes in certain end markets, there were significant delays in customer decision processes, especially early during the pandemic that curtailed our organic growth initiatives during 2020. However, the level of uncertainty in our customers' businesses is increasingly dissipating, and we've seen increased movement in opportunities through our pipeline, resulting in recent wins with existing customers during our fourth quarter. During the fourth quarter, we had several wins with existing customers, some to expand locations, some to add lines of service. We expanded lines of service with 2 of our manufacturing clients and added 500 locations to a retail client.

We also had a 7-figure win to expand our food waste program with existing clients. Our food waste diversion programs are growing -- are a growing category for a number of reasons. Sustainability concerns for both consumers and investors are putting pressure on grocery and restaurant chains to divert more and more waste -- food waste from the landfill. However, these low margin businesses, as you might expect, the incremental cost of these programs has kept the adoption of food waste programs from being totally widespread. However, with increases to landfill waste -- landfill costs, this may be changing. Most landfill operators have been and continue to implement price increases. This is good for our food waste program because in many areas food waste is now not only more environmentally attainable and sustainable, but it's becoming more economically attractive as well.

Now I want to cover recent M&A activities. The integration of Green Remedies business is progressing as planned and is substantially complete. The work is very similar to what we do to bring on board a new customer, basically moving billing, vendor relationships and customer service onto our platform. The integration work is really focused on enabling additional capacity for growth, not about cost savings. While we've been integrating operations, we've kept our eye on the ball and work together to continue to provide outstanding customer service. In addition, since the acquisition the business has kept pace with its growth rate. Green Remedies business gives us the beachhead with a large base of customers in the end market for multifamily housing. Its founder joined the Quest team and will lead our efforts to expand this market nationally.

With the integration substantially complete, we now turn our focus to accelerating the growth of this end market. Utilizing our national footprint and service capabilities, we believe we can take their success regionally and leverage that on a national level, significantly expanding the size of our business. Overall, Green Remedies is a great example of the types of M&A opportunities we're pursuing. We continue to expect M&A to be an important part of our growth and continue to evaluate and pursue other opportunities. Our industry is highly fragmented with 18,000 local original players, which provides plenty of opportunity for growth through consolidation.

In summary, I want to point out that we've been able to show an improvement in adjusted EBITDA and generate positive cash flow during one of the most challenging economic periods of our lifetimes. While there is still uncertainty regarding COVID, and nobody is in a position to make forecast, we are encouraged that our end markets are showing stability, we are winning new business and opportunities that resume move into our pipeline. While we're waiting for more certainty and a broader recovery, we'll continue to work diligently to expand business with our existing clients and to close new business and to actively pursue M&A. I look forward to keeping you updated on our progress.

We now like the operator to provide instructions on how listeners can queue up for questions. Operator?

(Operator Instructions) And we'll take our first question from Amit Dayal with H.C. Wainwright.

So Ray, with such a strong performance in a typically seasonally slower period and looks like you signed up more customers and larger contracts on top of it, what should we expect in terms of growth for you guys in 2021 relative to 2022 -- sorry, 2020?

Yes. What I can say is -- and thank you for that and thanks for the question. What I can say is that Q4, again, as you mentioned, was really a good performance for the company. And I can tell you that we see the momentum carrying into Q1 as well. So as we look at our growth, again, there's forecasting issues relative to the economic environment, but our confidence level is that we'll continue our growth like you've seen in the past. I think you'll see a lot of repetition and momentum carrying through the year. But I'm not really to tell you -- really ready to tell you what we feel as total growth for 2021.

Okay. That's understandable. Laurie mentioned potential M&A-related expenses, et cetera, could be part of your operating cost this year. Do you have targets that you are exploring for further M&A in 2021?

Yes. I'll take that, Amit. We surely are. And you're aware of what our credit facility looks like that we've targeted for M&A. And we have a whole initiative associated with that, including staffing. So we're continuing to look at targets through the year. And we have -- people are looking at them right now. So there's -- we feel really good about the pipeline of opportunities, and we find the right one and the right situation, we're ready to execute on it.

Do you think you could introduce maybe price increases as a part of your execution in 2021 or 2022? You said you really extracted all this performance, just for an efficiency gain. Are you moving to maybe do something on the pricing front with customers?

Our business is a little different than maybe some of the other folks in the waste environment when you read their reports, which I do, and I know you do as well. We don't generate -- we have not generated our increase -- our continued improvement in gross profit through price increases. We develop it through synergies, better sourcing with our subcontractors and focusing on waste streams that maybe bring a higher return. So contrary to our competitors, in many cases, I don't anticipate price increases. I anticipate increased growth, increased leverage in our cost of goods and bringing even greater value to the customers, which gives us more growth. So we're a little different in that respect, Amit. I mean we anticipate continuing to drive great gross profit. But the way we do it is through those other aspects as opposed to just pure price increases.

And Ray, with respect to this food waste opportunity, is this tied more to restaurants or is it for retail/groceries?

It's currently dominated by the retail grocer. That's the, I'll call it, the lowest hanging fruit in the food waste program. Food service operators is a little more challenging to separate. And it's happening. It's going there, but it's dominated now by retail grocers. And food waste is -- organic food waste is a significant amount of tonnage for a grocer that's going to the landfill today unless they can enter into a food waste program like we have. So it's a very good target with a lot of headroom for us on it to continue to grow it.

We'll take our next question from Greg Kitt with Pinnacle Family.

Congratulations. I mean, first off, the thing that struck me was 9% organic growth. I really thought that 2020 was going to be the year that you showed organic growth for the first time. And I -- after COVID happened, I didn't think that, that had a chance of happening last year. And so I'm so excited to get to see that now. And after this transition that you've gone through over the last 5 years, a return to organic growth in it's pretty exciting. And I think I hear you when you're saying that you're seeing some of that momentum continue this year.

I was wondering if -- I think on the last call, you talked about a national auto service customer pilot. And I heard you talk about that food waste win and then some expansions in terms of number of locations and lines of service within customers. Are there other -- is there a way to think about how you're looking at your pipeline today and how that compares to what you've seen in the past?

Yes, there is -- I can give you -- I'll just give you a general observation, Greg, about the way we're looking at pipeline today versus the past. And again, to your point, we do have -- we have some signed wins here that we're working on, implement in Q1. They really didn't hit Q2 with a force. But we'll see impact in Q1. The pipeline is moving much better from left to right, I call it and I think I mentioned that before. And I think the best way to look at the pipeline, instead of just the pure size of it is the movement of it. And we're able to push them across the goal line. And honestly, since COVID started, we're seeing actually things moving across the goal line now.

And I anticipate -- personally, I anticipate that accelerating as we more normalize our communications and our decision-making process at the prospect level. There's a lot more interest and I think the word we used is since the challenge is starting to dissipate for all of these customers, we're having more and more conversations than we are. So our pipeline has got a number of 7-figure type opportunities in it that we feel have got possibilities. And we've got a couple that we're there on right now.

And as far as expansion, I mean, I'm glad you mentioned that. Expansion within our existing client base has been a tremendous thing for this company for a long time, and it continues. I mean there's nothing that says more things about your company than when your existing clients are expanding their growth with you. They don't do that with vendors they don't feel good about. And so that gives me a really good sense there. So I guess the best way to look at our new pipeline from new accounts is it's moving and some are going to cross in the goal line. And I see some more in the relative near future, hopefully. And our -- it has not slowed down at all. Our expansion within existing clients has continued to grow. And I can't say enough about our client services team that they're continuing to do that as well.

I had one more question. I was encouraged to see that sequential growth in EBITDA -- or I mean, that's -- I'm sorry, the sequential growth in gross profit result in sequential and year-over-year growth in EBITDA. I also heard Laurie talk about higher levels of OpEx. If you are able to grow gross profit in 2021, do you think that some of that incremental gross profit dollar contribution contributes to EBITDA as well?

I think we still have the structure in place for leverage and to accomplish exactly what you're saying. So that if we have growth in our gross profit dollars, we'll continue to see a portion of that -- a considerable portion of that falls down to the EBITDA.

Yes. Greg I think ...

Okay. Great. [Do you guys have any] -- go ahead, Ray.

I'm sorry. I was just going to build on what Laurie said. I think Q4, and actually 2020, but Q4 is real statement to what we've been saying in our business model and growing gross profit and having more and more fall to the bottom line. I'm really happy to see that validation, really.

I'm happy as well. So looking at Q4, that was a little bit over a $7 million EBITDA run rate quarter annually. And so if you could just continue that trend for the upcoming year, is there a way to think -- are there any outstanding CapEx uses for 2021 as I'm trying to get to a free cash flow number?

CapEx for 2021.

The CapEx for this upcoming year will be higher than we've had in the past couple of years for a couple of things going on. Green Remedies has both that customer base have opportunity for us to place certain service equipment in place. So we expect to spend some money there as that grows. And we do have some internal initiatives to work on our IT platform and finish filling out some areas of that, that we'd like to. It will certainly contribute to our growth and efficiencies as we're continuing our path.

(Operator Instructions) We'll take our next question from George Melas with MKH Management.

Congratulations. Yes. I want to ask a question which is very much related to the previous question. So if you feel like you've already answered it, maybe just let me know then. It seems like there's an improvement in the sales execution. You are saying that the pipeline is really moving and towards potential deals. Can you help us understand a little bit the execution of the sales? And what you guys are doing internally? Or what have you done to -- that has probably resulted in sort of the movement in the pipeline?

I can tell you -- first of all, thanks for that observation, George. And seeing things move across the goal line is very comforting to me, as I'm sure it is to you as an investor. The -- what I've seen happening is a tremendous teamwork between our solutions team internally and the sales team. We're targeting customers that -- and working with customers that are looking for specific solutions. And it's nice to see the inside operations team working so hand-in-hand with the sales team. I love seeing that because that way we're right off the beginning, understanding the customer problem, developing specific solutions to that customer, presenting and executing them in a more seamless way. So that's happening.

But I got to let you know or at least mention again, these efforts are going on before COVID. I mean it was working through with COVID. I think as it's moving through, we're seeing results, I think, that we would have been seeing maybe sooner without that extraneous situation. But they are working well together. I think the -- I know that the solutions are bringing to clients or prospects to present. This seem to be -- is outstanding. I think there's just some excellent work going on there, George, along with a softening of this peer environment we've been operating in.

And that does conclude today's question-and-answer session. I'd like to turn the conference back over to management for any additional or closing remarks.

Thanks. I'll just close it real quickly by reiterating how much this team here appreciates the support from all of you. And I want to reiterate how proud I am of the work this team has done. It's been a challenging time period and the results and the efforts I just can't say enough about the efforts that have gone into creating the results that we have. So I'll take this moment to thank them, and also thank you and the investment community for your support and your interest in Quest.

Thank you. That does conclude today's conference. Thank you all for your participation, and you may now disconnect.