Good day, everyone, and welcome to the Quest Resource Holding Third Quarter 2021 Earnings Call. Today's call is being recorded. At this time, I would like to turn the conference over to Dave Mossberg, Investor Relations representative. Please go ahead, sir..

Thank you, Christy, 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 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 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 to investors in 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. Thanks, everyone for your interest in Quest. This past quarter marked our fourth consecutive quarter of double digit year-over-year growth in gross profit dollars.

I'm proud to say that this is a result of the strong execution across all of our growth strategies and great contributions from our entire team in partnership with our terrific clients. The third quarter is financial performance continued to be exceptional.

As we have said repeatedly on these calls, we are and will continue to focus on managing the business to grow gross profit dollars, which is the key metric we use to gauge our success. And during the third quarter we delivered an impressive 50% growth in gross profit dollars year-over-year.

I will point out that this growth is not limited to the post pandemic economic recovery. When compared with pre-pandemic levels in 2019, organic growth increased at a double digit pace, and that organic growth came from the combination of both new and existing customers. Our disciplined M&A strategy also contributed nicely to our growth.

Adjusted EBITDA grew at even faster pace and was $2.5 million for the quarter, an increase of 148%, year-to-date adjusted EBITDA was $7.6 million. We have a lot of activity in recent quarters and I'm excited to give you an update on the progress.

Before I go into that I'm going to turn the call over to Laurie Latham, our Chief Financial Officer to review the financials.

Laurie?.

Thank you, Ray, and good afternoon to everyone. Third quarter revenue was $37.4 million, an increase of 58% compared to the third quarter last year. Gross profit dollars increase 50.4% to $6.9 million. As Ray said earlier, gross profit dollars is a key metric we use to measure the success of our initiatives.

Organic growth represented more than half of the increase in gross profit dollars year-over-year, with contribution from both new and existing customers. The remaining portion of the increase in gross profit dollars came from acquisitions. The Green Remedies acquisition continues to perform in line with our expectations.

And we began to see contribution from the smaller acquisition we completed at the end of June. Gross profit dollars increased 1% sequentially from the second quarter.

As we have discussed in previous quarter, there were heightened activity levels at our industrial clients' locations during the first and second quarters of 2021 when compared to the COVID related constraints last year, activity levels normalized during the third quarter for the industrial segment, which was offset by the increase in contribution for new customers and acquisitions.

Gross margin for the third quarter was 18.3% of revenue, which was 90 basis points lower than last year, but within our targeted range. The year-over-year decrease in gross margin was related to the service mix, which will fluctuate from quarter-to- quarter.

SG&A expenses were $5.3 million during the third quarter, an increase of $1 million compared to the same period last year. More than half of the year-over-year increase was related to the rebound in our business from last year, when we took significant cost cutting initiatives related to COVID.

As you might expect with recovery of business activity, we have increased labor costs, marketing, tradeshow, travel and other costs related to SG&A. The remaining portion of the increase was related to increased M&A activity and also costs associated with some of our IT initiatives.

Depreciation increased to $508,000 versus $150,000, a year ago, the increase was primarily related to amortization from the Green Remedies asset acquisition. Overall SG&A costs grew at 24% year-over-year, which is less than half of the rate of revenue in gross profit dollar growth for the third quarter.

We anticipate the SG&A will increase as we add to the national accounts sales staff, and other personnel to support growth. We also plan to increase investment in technology that is expected to enhance our capabilities and operations and add scalability to our platform.

During the third quarter, interest expense increased to $543,000 from $73,000 last year. The increase is primarily related to the Q4 2020 debt financing for the Green Remedies acquisition.

Net income attributable to common stockholders was $0.02 per diluted share for the third quarter, compared to a net loss of $0.02 per diluted share for the same period last year. Adjusted EBITDA increased 148% year-over-year for the third quarter to $2.5 million. Moving on to a review of the cash flow and balance sheet.

We generated $3.4 million in operating cash flow for the nine months of 2021. The increase in cash flow was related to our strong net income performance. CapEx was approximately $0.5 million, and we utilized approximately $2.3 million in cash to finance the acquisition that closed on June 30.

Our cash balance was $9.1 million at the end of the quarter, up from $7.5 million at the beginning of the year. At the end of the quarter, our debt levels were relatively unchanged at $19 million versus $18.5 million at the end of 2020. At this time, I'll turn the call back to Ray..

Thank you, Laurie. I'll now walk you through what we're seeing in our end markets and our business strategies. First, let's talk about our end markets. We continue to see post pandemic recovery in all of them. The grocery market has continued to be stable throughout this entire period. Retail has continued to show modest recovery.

Although foot traffic is still down significantly from pre-pandemic levels. We're fortunate in that most of our retail customers are especially retailers that have been stable and even modest volume gains during the pandemic.

In the automotive aftermarket, demand for automotive repair and maintenance services has continued to improve during the third quarter. The number of miles driven which we use as a proxy for activity in this market was flat with 2019 which is consistent with the trends we've seen with our customers.

The industrial end market has also seen recovery but activity levels have varied significantly from customer to customer. As we have commented previously, we have a large industrial customer that experienced a significant increase in activity during the first half of 2021, reflecting pent-up demand in their customer base.

During the third quarter, activity levels returned to more normalized levels. At the end of the third quarter, supply chain and other companies' specific issues are affecting that customer in some parts of the country. This may have a short term impact, but the impact is likely to be offset by higher volumes as these issues are resolved.

That said as a result of strength across our business, we continue to expect year-over-year growth in gross profit dollars in the first fourth quarter and beyond. Regarding wins with new customers, since the end of the third quarter, we had a large win with another new industrial customer; we will begin to onboard this customer early next year.

And we would expect to be fully implemented before the end of next year. We expect this customer win to generate annual sales in the mid seven figure range with opportunities to expand the relationship above eight figures with additional services. This marks the second significant win in the past year with a new customer in the industrial market.

Clearly, our value proposition is resonating with customers. And we're gaining traction in this end market. In this win, we're selected due to our ability to build out long-term solution path to help them reach the goal of being qualified as a zero waste company.

Our ability to provide a uniform and auditable dataset across multiple waste streams for use and sustainability and operational reporting played a big role in our selection. By centralizing all the waste streams with Quest, we were able to improve efficiencies and maximize value from the commodities which also played a role in our selection.

I'll also point out that new customer wins we had discussed earlier in the year continue to ramp during the third quarter and are increasingly contributing to our growth. Along with growth in other areas, we are continuing to diversify our customers and end markets steadily reducing the impact of only any one customer on our results in the future.

Moving on to a discussion on our acquisition strategy. Last week, we closed on a small acquisition which we expect to add more than $400,000 to our EBITDA run rate. This company has customers in multiple end markets including multifamily, healthcare and restaurants.

We've really accelerated our M&A efforts in the past several quarters and have expanded our pipeline of potential acquisitions. As such, we continue to expect acquisitions to be a meaningful part of our growth during the next few years. Now I'll talk about how we're preparing for future growth and making investments in our platform.

Based on the recent success of our growth strategies, we are actively increasing the size of our client facing staff responsible for producing gross profit. This includes both hunters and farmers in our salesforce, client solutions team members, as well as vendor management personnel.

As the pace of our growth accelerates, it's even more important that we continuously improve our ability to adjust growth without skipping a beat on delivering exceptional customer service.

To this end, we created a new role and recently hired a senior VP of strategy to lead our efforts and manage new investments in technology and changes to our process that will further improve operations and scalability to our program platform.

This leader will help us to further automate our processes for onboarding new customers, integration of acquisitions, as well as maximize operational efficiencies. Regarding our outlook, as I mentioned earlier, we're very pleased with the performance of our business and the progress we're making executing our strategy.

We expect year-over-year growth to continue going forward. Our end markets are strong for their continued recover. We continue to view inflation as a net neutral to our businesses as our contracts have mechanisms in place to adjust.

Pressure to improve sustainability and increasing cost of landfills are lowering the bar for adoption of our recycling services. The contribution from new client wins will continue to provide incremental growth as we onboard these programs.

We've seen increased movement and opportunities through our pipeline, and the pace of organic growth is picking up. As such we continue to have success adding new clients and expanding business with existing clients.

We're investing in personnel, technology and processes to further grow gross profit dollars without compromising customer service levels or the ability for our model to significantly produce operating leverage. Acquisition activity is continuing, and we expect it to be an ongoing contributor to our growth.

Based on all these factors and the business we have in hand, we're optimistic that we'll continue to deliver strong growth and gross profit during the fourth quarter and into next year. We expect EBITDA profitability will continue to outpace top line growth as we benefit from greater scale and the operating leverage inherent in our business model.

I look forward to keeping you updated on our progress. We now like the operator to provide instruction on how listeners can queue up for questions.

Operator?.

First we'll go Sameer Joshi from HC Wainwright..

Good afternoon, Ray, Laurie. Congratulations on a great quarter. During the prepared remarks, you mentioned a new industrial, large industrial customer.

How does that compare -- this customer compared to your previous large when in terms of gross margin or other gross profit dollar contribution?.

We really don't comment on gross profit dollars per customer, but we expect this customer to be a very large contributes to us in general, very much in line with the other business that we have in that space..

Okay, so similar is a good description..

Yes. Similar is a good description..

Okay. And then you talked about hiring new employees and expanding your, you mentioned the new Senior VP hire.

Is that the only thing that is driving your SG&A up a little bit sequentially this year? Or are there other factors, like anything that has to do with supply chain issues that may be affecting your cost?.

Well, one of the big factors that can affect it quarter-to-quarter is also the acquisition activity that we do. That is going to be more difficult to predict quarter-to-quarter since it's really tied to those activities. So I would say that's one of the big drivers.

And I think we covered in our scripts that we were going over earlier in our comments that the recovery of our business as we start to market more and more salespeople, we've also has growth, and we need to add some variable headcount.

So those are the two, I would say the two biggest buckets is the acquisition and related costs to that, along with the business growth side..

Yes, we have a couple of hires, Sameer that actually -- couple of hires just happened. They weren't reflected in third quarter. So I think what Laurie was talking about was probably a much bigger contributor, professional services, maybe some travel and things are loosened up that weren't loosened up before..

Right.

So we can expect another update in the SG&A, at least GAAP SG&A for 4Q sequentially?.

Yes, we're looking at our activity, and particularly acquisition activity. And we think that will push it up some..

Yes. And not to nitpick but when you mentioned the $400,000 contribution acquisition from last week that has clients and multifamily, healthcare and restaurant industries, you mentioned gross profit dollar contribution, are the gross margins, they're also similar 18%, 19%, or are they lower, but you're acquiring this for gross profit dollars..

It's also much as a margin as a percentage, we're just talking about the dollars that can be contributed from that business acquisition. It's heavily based on the contracts there. So there's not particularly a lot of depreciation, amortization, that kind of thing.

So our gross profit dollars in this case are very similar to what we expect from an EBITDA run rate also. So just that's how we are disclosing it. So it's about $400,000 on an annual basis that we could see EBITDA. .

That's the EBITDA run rate..

Yes..

Next, we'll go to Bruce Vali from Wilson Davis..

Thank you. The question I have is that new acquisition, you make is, when you say it well it's seven figures, going into eight figures, I believe is what used it maybe a year or so.

Does would -- if that would happen would that make it the single largest customer?.

If it moved into eight figures, would it be -- is that what you're asking? Because that's the point I would -- just signed them. I doubt it. I doubt that would push it into eight figures. Let me do the math. That's like $10 million plus, right? We have customers that could be higher than that.

But they would definitely put them up in the top brackets of our customers based on volume. And with no further questions in the queue, I'll turn it back to management for closing remarks..

Thank you very much, operator. I just want to take a moment at the end of this call. I want to thank everybody again for your interest in Quest. We greatly appreciate it. I get the opportunity to speak for all the Quest employees here. And it's an honor for me to do that.

And I want to thank that team for their ongoing efforts to deliver value for our customers and shareholders. They've done a fantastic job consistently quarter-over-quarter. All of our initiatives are working well. And we've gained a lot of momentum during the last four quarters. I feel like we're still early stages of our growth efforts.

And we have a long road of profitable growth ahead. And I really look forward to keeping all of you up to date on the quarters to come. Thank you everybody..

And that does conclude our call for today. Thank you for your participation. You may now disconnect..