Good day and welcome to the Quest Resource Holding Corporation’s Third Quarter 2020 Earnings Call. Today's conference is being recorded. At this time I'd like to turn the conference over to David Mossberg, Investor Relations. Please go ahead sir..

Thank you, Kareena. And thank you everyone for joining us on the call today. 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 requests.

Use of the words like anticipate, project, estimate, expect, intend, believe, and other similar expressions are intended to identify those forward-looking statements..

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 third quarter results. To start off, I'm happy to report that our business is on extremely solid footing.

That said we recognize the uncertainty in the current environment and remain ready to act in the event of any short-term softness in our business.

During the third quarter, gross profit dollars improved sequentially from the second quarter, year-over-year gross profit dollars decreased by less than 5% as weakness in some of our end markets almost entirely offset by strengthening the others.

We benefited from a flexible cost structure and did a good job controlling costs which led to a 15% year-over-year growth in EBITDA..

Thank you, Ray and good afternoon to everyone on the call. Third quarter revenue was $23.7 million relatively flat compared with $23.9 million in the third quarter last year. The decrease was primarily due to lower levels of services due to COVID-19 related shutdowns or reduced operations in some of our customers.

These impacts are mostly offset by increased services above our continuing and new customer base. Gross profit was $4.6 million, a decrease of 4.5% when compared with the third quarter last year, and an increase of 4.2% sequentially from the second quarter of 2020.

Gross margin for the third quarter was 19.2% which was 70 basis point decline compared with last year, but still well above our targeted level. The year-over-year decrease was primarily related to the mix of services that we performed. SG&A expenses were $4.3 million during the third quarter, compared to $4.2 million during the same period last year.

Included in SG&A for third quarter was $355,000 professional fees related to M&A activity. Excluding these fees, SG&A expenses would have decreased about 7% year-over-year. Most of that decline was related to reduced labor and travel 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 from Q3 levels due to business recovery. I’ll also note that we expect corporate development expenses in the fourth quarter will remain at elevated levels related to the closing of the Green Remedies transaction.

During the third quarter, depreciation and amortization decreased year-over-year by approximately $180,000. This was primarily related to a fully amortization of one of our intangible assets at the end of the second quarter..

Thank you, Laurie. Today I'd like to cover several key points in my prepared remarks. First, I'll give some details of what we're seeing in our major end-markets. Second, I'll discuss how new business opportunities that are going to move our pipeline again.

And finally, I will cover M&A activities and describe the opportunity we have for growth in the multifamily housing markets with the acquisition of Green Remedies.

So first, our view what we're seeing in our end-markets, we're in frequent contact with the customers and monitoring end-markets across geographies, in order to be prepared to adjust in the event of changes to our customers business.

Keep in mind that what I'm about to describe is what we're seeing in terms of market activity levels, which does correlate but not always on a one to one basis with our financial performance. Unfortunately, mostly service businesses that are considered essential and have remained operational through the period.

We also have a diversified end-market mix, so strength in some markets, offset weakness in others. The grocery market has stayed stable throughout this entire period and in some cases experienced modest growth year-over-year. We continue to work with our grocery customers to divert more waste from landfills and grow the programs that we have in place.

In the automotive market, demand for automotive repair and maintenance services has improved since April. That is still down year-over-year. The number of passenger miles driven can be used as a proxy to the overall economic activity in the segment. According to the U.S.

Department of Transportation, faster miles driven were down about 14% on average during the third quarter, passenger miles were down 18% at the beginning of the quarter, and have remained down approximately 10% to 12% for the last couple of months.

For reference, this is a significant recovery relative to the 50% decrease during the lows of the pandemic in April. Activity levels in the industrial market have also recovered sequentially from the second quarter, but are still down year-over-year.

The pandemic had less effect on investment and did shift order deliveries due to temporary closures related to virus and supply chain issues. Our customers are now working through backlogs and activity levels had pick back up.

Of all of our end-markets as you might expect restaurant is seeing the largest impact from the pandemic, well this is one of our fastest growth areas prior to the COVID-19. But I want to emphasize our restaurant business is still a smallest market in our overall mix. Well first our 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 second quarter, still significantly lower year-over-year. I want to talk about new customers and the velocity of our sales pipeline.

During the early stages of the pandemic, there was little or no movement in our pipeline as many prospects slowed or even stopped the evaluation projects. Their attention was diverted to focus on protecting the health and safety of their employees and adapting their operations to market changes caused by the pandemic..

Thank you. We'll take our first question from Gerry Sweeney with Roth Capital. Please go ahead..

Good afternoon, Laurie and Ray. Thanks for taking my call..

Hi, Gerry, how are you?.

Hi..

I wanted to start maybe a little bit on the COVID side and recognize that you may or may not want to answer the question in its entirety.

But we've got to put it out there and how much visibility or communication do you have with your clients on what their view of the next several months in regards to COVID? And the second part of the question is, as you look at fasting internally at Quest, are you prepared to handle moves and up and down as your customers vision dictates?.

Okay, Gerry, I appreciate that. I'll answer your second question, first. I think what I'll do is I'll just refer directly to the way Quest was able to handle the significant challenge of March and April, early in the pandemic. We assess, we evaluated, we assessed, we executed and the company managed quite well to it.

And all I would say is that we would expect to do to manage this in the future situation in the same effective way. On second part on the visibility to our customers and the COVID situation is quite challenging.

First of all, we do have constant communication with those customers, our services team is in contact regularly and management group, do business reviews, and that is steady higher, bigger picture conversations for them. And there's a lot of optimism. The fact is, we get to see what happens. And they don't know what's going on either.

They don't know what the future holds. But with what happened last time, I was very, very pleased with the outset of the pandemic and the communication that our team had with the customers and our ability to react to whatever their situations became, they communicated with us quite well.

And we executed well and involves a lot of service changes up and down. And it's just communication shares. So the visibility is or seasonally, communication is great, visibility so far is just based on as you can imagine, it's difficult for them to know in many cases..

Got it, I appreciate it. I know it's not necessarily an easy question to answer.

Switching gears to the automotive client that you're working with a pilot project, is there any way you can give us a little bit of either two things, one the potential size of the contract or how large that customer is? And then the progression, potential progression from pilot program to something that's more permanent? What would that tell?.

Well the client, I can tell you the size of the opportunity is significant. Should we say that the average deal size is our average deal size have made seven figures. And this one definitely is above the seven figure number, I would think from an opportunity perspective, the acceleration to the pilot, I'm not sure exactly what the timeframe is.

But we anticipate it being successful, it'll be in Q1 or Q2 as we see impacts on that hopefully. But it is a significant opportunity. And we're happy because it challenges a lot of our business, different types of our business..

Got it. And the pile will go in and be performed during Q1 and Q2..

It is start in Q1..

Got it, not really yes the question about the timing to explain the pilot and rollout and I'm not really sure that that's still probably up to the customer on that one? Well, that's what I meant was, maybe different way of asking it would be what kind of metrics would they be looking for in terms of maybe the customer taking it from a pilot to the next steps but maybe a better way to asking this question, apologies..

Yes, sure. This is a customer that's looking for solutions to problems they have today and they're looking for on a consolidated basis. They're looking for cost savings. And they're looking for environmental efficiency relative to that.

So I think there's a number of scorecards on it, Gerry, and we have high confidence level and our ability to perform on that..

Got it. I'll jump back on the line and I don't want to dominate the question. Thanks..

Okay, thank you, Gerry..

I will go ahead and take our next question from Amit Dayal with H.C. Wainwright..

Hi, guys, how are you? Thanks for taking my questions.

With respect to sort of the Green Remedies -- with respect to the Green Remedies acquisition, the $2.5 million you’re looking at in terms of net income contribution from its acquisition, does this factor in one growth coming from your side? Or does it just represent what that business is as it stands today?.

.

That was the last trailing 12 months as it stands today through June..

And it doesn’t include the future..

Okay, Amit..

No, booked part of..

Okay. And then in terms of initiatives you may be putting in place to drive growth in this business.

Can you give us some color on what some of those initiatives could be?.

Driving growth on the multifamily with Green Remedies acquisition?.

Yes..

Okay, sure. That's a great question, first the description of Green Remedies is they’re a regional player, and 100%, exclusive to the multifamily segment. And they've done a great job doing that, the company itself run up against size constraints, meaning our ability to handle the oncoming growth they have from an infrastructure standpoint.

So there's number of things that makes sense for us to grow the business one, just from a technology platform that we already have and have built in, we're able to fold that in and exponentially create capacity for growth in that respect, just strictly from an onboarding customer perspective.

Secondly, geographically, we as you know are not a regional player, we’re national player, we have a network in every market in the country, so the limitations that they had via network are don't, we don't have that limitation.

So we can sell, we can take they can sell nationally, the program they're so successful with recently, and be supported by our national network. And then the last thing I would mention is, Green Remedies offered a singular service profile, a high service profile, but around one way stream.

And we offer a numerous as you know, different alternative for Waste that's created by their customer. And the customers that wanted the ability to possibly add different types of recycling programs, we can upsell into that, we're very encouraged by that as well.

So that's really three pieces Amit that we feel are going to be pretty much close to immediate as far as our ability to impact that..

Understood, thank you. And then you talked a little bit about sort of potential hurdles or challenges coming from lockdowns that we're starting to see been put in place. I'm assuming we’re much better prepared, if there is no PPP et cetera, I mean, how are we positioned to manage working capital, et cetera.

Just trying to get a sense of what steps you may be taking to just put measures in place that allow you to maybe right through the next few months or uncertainty around all of this?.

So, Amit and as you're aware, we're in good position, we're in a very good position our ABL, and we have flex, as we are not only in our SG&A line but as you know, 100% of our cost of sales is flexible too.

So we had many fibers, we can maintain low travel expense, we've maintained all those types of controls on expenses already and continue to do that from COVID. So we have the ability to feel very comfortable that we can weather through some bumps, it will still continue to have those from COVID..

Yes, even without the PPP. And we're thankful for that. But it enabled us, it made it easier. But our business is almost highly variable as Laurie mentioned and think it’s necessary both on the cost of goods and our need to serve. So I think we're probably I believe we're probably tradition as well, if not better than anybody to waver to that.

And also want to mention again, I think real important aspect of Quest versus maybe some other companies is the diversity of the end markets that we serve.

No matter what happens on these types of things that, there's no way it's going to, I mean we get our work from heavy manufacturing, to grocery, to food manufacturing, to automotive, I mean, we're all over the place.

And so since we have diversity of end-market segments and hesitancies, some of these hammer type impacts that come from non-controllables like that. So when you add our variable cost structure, and the diversity of the client base that we serve, I think we're really well positioned regardless of what happens..

I’m sorry, Amit. Please go ahead..

Operator. Amit, okay..

He’s not responding. We'll go ahead and take our next question from George Melas with MKH Management. Please go ahead..

Thank you. Thanks for taking my call. Could you talk a little bit? I think you mentioned a few wins in the prepared remarks. You talked about dealer QSR.

Could you maybe characterize those wins and also help us understand the pipeline? And maybe how has the composition of the pipeline evolved? Or at what stage, sort of prospects are in the pipeline? And how has that evolved in the last six months?.

Yes, the first part of your question, I don't think I picked it up or you asked me, were you asking about QSR restaurants and characterization?.

You mentioned that you had a few wins, and maybe could you characterize that and tell us a little bit about that?.

Yes, we've got a win in the Quick Service Restaurant franchisee group, which we're really excited about potentially as they grow, which we believe they all will, QSR did well to the segment. We mentioned the….

Specialty retailer..

While the specialty retailer that that we brought on, which is a lot of locations we're boarding currently. And then also we mentioned the pilot with the automotive service company. It's got a lot of locations throughout the U.S. It's got a ton of potential for us as well. Those are three of them, George, we're talking about right now..

Okay, great. And maybe….

Go ahead, George. I was kind of I didn't finished answering all your questions, though.

On the pipeline and you had asked about things haven't been won yet? Well, first I want to reiterate, there seems to be much more of a receptiveness now, maybe people are getting used to this thing, I don't really know to at least take virtual meetings, and have conversations around.

I'm going to speculate here, I believe that it makes sense to me that with some of the recent positive news and the light at the end of the tunnel, regardless of situation people face in a day, they realize a business is going to come out.

And they want to be in a strong shape tomorrow, when the vaccines are all in place, and we return to that wonderful normalcy environment we all dream of. So that means audiences are easier to get and maybe some incentive around considering some of our offerings.

So first of all, I would say it's nice to see, the conversation starting back up that had been quite scaled for a number of months. I think that's the first indicator on the pipeline. Now beyond that, it's really, really all over the place again, restaurants part of it, we have a lot of automotive opportunities.

There's a lot of people wanting to be engaged more and understanding the tracking and the ability to move programs like food waste in the store, so they didn't have them before food waste type of diversion programs, so I guess it's pretty broad on the pipeline opportunities as well. I think the best thing to say about it is it's moving.

And the reason it's moving is because people are more open to having conversations or being active about finding ways to consider new programs like ours..

Great. And then maybe getting one quick thing.

But is there anything that you have done that Quest have done to approach sales somewhat differently and in terms of your internal processes?.

Yes, actually we've done quite a bit, we've, we've moved some of the cost systems around, we've changed our marketing programs, we actually have, we've made an addition there that's really got a very cohesive joint marketing and sales activity which involves a lot of lead generation outreach programs.

So and we're learning how to be more effective, more virtually, George. I think a lot of companies probably are, and we're utilizing a lot of the tools that maybe we've had access to but didn't really use a lot before social media type of lead generation activities. So I guess I want to say, we stepped a little more into the modern age.

And I think it's generating more activity and opportunities for us..

Okay, great. Thank you very much..

Thank you, George..

Thank you..

And that concludes today's question-and-answer session and today's conference call. We do appreciate your participation. You may now disconnect your phone lines..