Quest Resource Holding Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, everyone, and welcome to the Quest Resource Holding Corp. First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note today’s call will be recorded and we will be standing by if you should need any assistance. It is now my pleasure to turn today’s conference over to Dave Mossberg, Investor Relations.

Dave Mossberg: Thank you, David, and thank you, everyone for joining us on the call. Before we begin, I’d like to remind everyone that this call may contain predictions, estimates, and other forward-looking statements regarding future events and future performance of Quest. Use of words like anticipate, project, estimate, expect, intend, believe and other similar expressions are intended to identify those forward-looking statements. Such forward-looking statements are based on Quest’s current expectations, estimates, projections, beliefs and assumptions and involve certain significant risk 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’s filings with the Securities and Exchange Commission.

You are cautioned not to place undue reliance on such statements and to consult our SEC filings for additional risks and uncertainties. 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 based on 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 information are accurate, we caution that Quest has not independently verified the reliability of the sources or the accuracy of the information.

Certain non-GAAP financial measures will be discussed during this call. These non-GAAP measures are used by management to make strategic decisions, forecast future results and evaluate the Company’s current performance. Management believes the presentation of these non-GAAP financial measures is useful to investors’ understanding and the assessment of the Company’s ongoing core operations and prospects for the future. 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 release. 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 for joining us on today’s call. We have strong momentum across our business to start the year. One area to highlight is organic growth of new clients. We previously discussed six new client wins last quarter and one large new win early in the second. To put those achievements in perspective, in the past couple of years, we’ve been averaging approximately one new client win per quarter. We also have strong momentum with our existing client base. I’ll talk about this a bit later, but to summarize, we are seeing strong growth in our existing client base and continue to uncover significant opportunities to expand services even further. We’re also having success adding new end markets, having added two in the past couple of quarters.

These areas have significant growth potential, and we’re well positioned to add additional new clients in these markets, as well as new service lines where there is a crossover of services within our existing client base. I will also note that our pipeline of opportunities with new and existing clients has grown and momentum appears to be durable, which bodes well for the next few years. Besides momentum seen during the first quarter, we began to see the benefits from the investments we’ve made and continue to make in scalability and efficiency of our technology platform and process improvements, increasing operating efficiencies. This is showing up in a number of ways. First is the accelerated pace of adding new business from both existing and new clients through our ability to quote more accurately, more completely and more timely.

Second is the increased efficiency in which we are operating waste programs. We’re driving costs down, which benefits our customers and our vendor partners as well as our own business in the form of lower cost of sales. And third, platform investments and process improvements are beginning to deliver operating leverage, so that we can significantly scale the business without a correlated increase in overhead costs. For example, during the first quarter, we grew EBITDA at more than twice the pace of gross profit dollars. We expect to demonstrate more and more of that operating leverage in the coming quarters. I’ll now turn the call over to our CFO, Brett Johnston.

Brett Johnston: Thanks, Ray, and good afternoon, everyone. We had strong first quarter results with double-digit growth in gross profit dollars and demonstrated operating leverage with the bottom line growing at an even faster pace. Revenue was $72.7 million versus $74.1 million a year ago, which is a 2% decrease year-over-year and a 5% increase sequentially from the fourth quarter. The year-over-year decrease was primarily related to a customer that had been acquired during the third quarter of 2023. As we discussed in our previous quarterly calls, the Company that acquired this client manages waste disposal internally and decided to manage our client in the same way. In addition, we had lower activity levels with a couple of accounts.

On average, these accounts typically have produced lower overall margins. The year-over-year comparison was partially offset by growth from existing and new customers with more attractive gross margin profiles. I will note that we began onboarding most of the new client wins on April 1. So new client wins secured during the first quarter did not affect first quarter revenue comparisons. During the first quarter, gross profit dollars were $14 million, an increase of 11.1% versus last year. Almost all of this increase came from program optimization and expanding business with our existing clients. Looking at gross profit dollars for the second quarter and the remainder of 2024, we are encouraged by the record number of new customer wins Ray mentioned earlier.

We expect sequential growth in gross profit dollars during the second quarter and anticipate that new client wins and growth with existing clients will increasingly add to our year-over-year gross profit dollar growth throughout the course of the year. Moving on to SG&A, which was $9.8 million during the fourth quarter, up approximately $400,000 from the same period last year and in line with our expectations. Looking forward, we expect lower integration costs and to gain efficiencies from the investments we made in our platform and through process improvements. We expect the savings from efficiency gains 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.

As a result, we expect SG&A will be about $10 million in the second quarter. Moving on to a review of the cash flows and balance sheet. Our liquidity is in good shape, and we’ve increased our borrowing capacity and availability. On April 1, we announced that we had 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, which gives us added runway to continue our process of evaluating alternative long-term debt financing structures. That will help us lower borrowing costs and preserve the ability to maximize growth. Based on the momentum we have had to date and how we expect to finish this year, we expect to attract lenders with competitive pricing in attractive terms.

We are already hearing from prospective lenders and advisers that lenders are more willing to sacrifice margin to submit more competitively priced lending options. Regarding the increase in our borrowing capacity, we also announced that we have increased the size of the borrowing line with PNC to $35 million from $25 million and added an incremental equipment term loan facility to finance up to $5 million of equipment purchases. At the end of the quarter, we had $17.5 million drawn on our $35 million operating borrowing line and nothing drawn on the $5 million term loan facility. This compares to $13.2 million drawn on our line with PNC at the beginning of the year. In this interest rate environment, we have been actively looking to reduce interest expense by optimizing cash management, carrying less cash and minimizing borrowings on the line of credit.

Thus, our cash balance was $581,000 at the end of the first quarter. For the quarter, we used $1.7 million to fund operations, which included a $1 million acquisition-related earnout payment. This was the final payment of that transaction. At the end of the quarter, receivables remained elevated from our average range with DSOs at 75 days. During the quarter, we partially resolved slow payments from several of our largest customers that we described on last quarter’s call. Also, I am happy with the continued progress made subsequent to the end of the quarter and expect to return to more normalized levels in the mid-60s by the end of the second quarter. I will note that the increased DSOs are temporary. We have great relationships with these customers and slower-than-expected payments is not related to collectability.

Also in the future, due to the timing of onboarding new large clients, it is possible that we will see fluctuations in the DSOs from quarter-to-quarter. CapEx for the quarter was $1.9 million, which is more than we normally spend during any given quarter. $1.6 million of the CapEx was related to the comp actors that we were able to opportunistically purchase at an attractive price. Subsequent to the end of the first quarter, we have spent another $1.5 million, adding additional compactors as part of this purchase. We will opportunistically be looking for other compactors, but do not anticipate significant spending in the next quarter — next few quarters, unless we run across another attractive opportunity. Ray will cover the rationale for this in his remarks.

But in summary, it made more sense to own these compactors instead of renting them, both from a financial and strategic perspective. At the end of the quarter, we had $71.8 million in notes payable versus $67.8 million at the beginning of the year. The increase primarily relates — reflects that growth and borrowing on our line with PNC to fund working capital and the asset purchase that I described earlier. At this time, I’ll turn the call back to Ray.

Ray Hatch: Thank you, Brett. We had a strong start to the year with solid financial performance in Q1 and significant ramp in adding business from both new and existing clients. We also began to see some benefits from the investments we’ve made in our — have been making in our technology platform and process improvements. I’ll start off by covering new client wins. We are seeing the results of the hard work of our team over the last two years to develop our go-to-market sales efforts. We covered a lot of detail with the six new business wins during our last earnings call, so I won’t go into a lot more detail covering those. However, I will tell you that we began to onboard most of these new client wins in the beginning of the second quarter and expect to see a nice step up in sequential gross profit dollar growth.

I will also give you a little more color on the win we secured early in the second quarter. We refer to this new client win in a press release in late April, when we announced the date — when we announced the date of our earnings call. This is a market leader in the grocery sector and is expected to produce eight figures in annual revenue and offer incremental growth opportunities. We won the client in a competitive process, and we were chosen based on our reputation, cost effectiveness, customer alignment with sustainability goals and the ability for us to provide added visibility from our data portal and platform. In addition to closing several deals in recent months, we’ve continued to see a noticeable uptick in not only number, but also the size of opportunities in our pipeline.

Given the success we are having with new client wins, we plan to accelerate our investment in organic growth initiatives, including investments in marketing and sales during 2024, reinvesting some of the profit gains generated in the business. I want to comment on the growth from existing clients. We have long said there is a great deal of opportunity with our existing client base, and that is still very much the case. We’ve done a good job over the last several years of adding new business with existing clients, which has been a stable source of growth for our company. However, I believe we’re just beginning to scratch the surface of what we can do for our existing clients. During the last several quarters that we’ve demonstrated our capabilities several of our largest clients are coming to us and asking us to do more.

They’ve been — they have seen the value of our platform and give the corporate level not only greater visibility into their spend at the local level, but also auditable data that allows them to confirm that waste is being handled according to local, regional and national regulations as well as their own corporate level specifications. It’s very rewarding that customers are coming to us and asking for solutions, and it shows how well we are regarded. As a result of this interest, we plan to take a more proactive approach to working directly with our clients. We are creating dedicated project teams to work with our larger clients to identify issues and help them understand how we can help. For example, we have been working with a large customer and uncovered more than 50 potential projects where we can help them improve waste management.

There are large and small projects that range from the tens of thousands of dollars to eight figures. And almost all of these projects have recurring waste management services once the initial projects are completed. Now I want to cover the rationale behind investing in compactors that Brett mentioned in his remarks. I don’t want anyone to take away from this commentary that we are changing our business model. We very much remain primarily an asset-light business. We don’t plan on owning trucks, landfills or similar hard assets. Compactors are a highly adjacent business and a very important part of the service offering in a number of sectors like retail and real estate. They offer significant complementary economics, and we’re not competing with our vendor partners by owning compactors.

We will look at increasing the number of contractors that we own when it makes sense. In fact, prior to this recent purchase, we already owned about 200 compactors, and we regularly buy them in lower quantities to meet customer needs. Once in place at a customer location, compactors are seldom moved, they require limited maintenance and their utilization is typically in the high 90% range. Compactors produced an attractive recurring revenue stream with attractive margin and a high return on capital. In addition to attractive financial metrics, they help us create more lasting relationships with clients. As part of this opportunistic purchase for approximately $3.1 million, we added about 200 compactors that were already under existing contracts.

As Brett said, $1.6 million was paid in the first quarter and $1.5 million in the second quarter. With this transaction, we doubled the size of our fleet and gain scale that makes this a much more attractive business, all without having to add more G&A. I now reveal the estimates we’re making in technology. Over the years, we’ve built a technology platform that will be able to scale to the size of a much larger enterprise. The technology 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. We are actively introducing additional technology improvements in 2024. In past calls, we’ve discussed the vendor sourcing tool, which is helping us to accelerate our quoting and onboarding processes.

More recently, we have begun rolling out an AP automation solution that utilizes artificial intelligence to further automate at the processing of vendor invoices. As of today, approximately half our invoices are being processed through our new AP automation platform, half of which required no human interaction and what we call zero touch. We provide hundreds of — hundreds of thousands of invoices every year, and this is part of our goal to reach the 100% zero touch invoice processing. Automating invoice processing helps us ensure payments are made for services delivered and help us eliminate exceptions. Exceptions require manpower to resolve and can cause delays, which in some cases, can degrade customer service levels and vendor relationships.

By automating invoice processing, along with other technology enhancements, we are lowering cost, continuously improving client and vendor value, providing major enhancements to our ability to scale, and expanding our margins. Regarding our outlook, I want to emphasize my conviction on our trajectory and the overall outlook for the Company in 2024 and beyond. We have made tremendous progress during the last several years and have never been more confident in our outlook for continued double-digit growth. I feel very good about our organic growth that we have in front of us, pressure to improve sustainability, expanding regulation, increasing cost of landfills, they all continue to lower the bar for the adoption of recycling services. We have multiple sources of organic growth from expanding with our existing clients to ramping up recent wins and a growing pipeline of new business.

I want to reiterate that we have a large opportunity to drive gross profit dollar growth on the cost side by optimizing the business we have in hand. As we bring revenue onto our platform, we’ve proven our ability to optimize cost of service through vendor relations and procurement management that drives our continued growth in gross profit dollars. In the same way, we have multiple ways of improving efficiency by utilizing the technology investments, we’ve made over the last several years, driving improved operating performance and expanding EBITDA margins. The work we have done is centered on building a consistent and sustainable business focused on providing valued service to our clients. The foundation is set for continued success and to build value for our shareholders.

We expect our momentum to carry through this year and beyond, and I couldn’t be more excited about what’s to come. I look forward to keeping you updated on our progress. We’d now like the operator to provide instructions on how listeners can queue up for questions. Operator?

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