Earnings Call Insights: Calian Group and Quest Resource Holding Corporation

Calian Group Ltd. (CLNFF) Q3 2024 Earnings Call Transcript

Jennifer McCaughey - Director of Investor Relations Kevin Ford - Chief Executive Officer Patrick Houston - Chief Financial Officer and Chief Development Officer Conference Call Participants Benoit Poirier - Desjardins Capital Markets Tanvi Gabriel - Ventum Financial Corp. Sam Schmidt - CIBC Capital Markets Good day, and welcome to the Calian Group Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, this call may be recorded. I would like to turn the call over to Jennifer McCaughey, Director of Investor Relations. Please go ahead. Jennifer McCaughey Thank you, Michelle, and good morning, everyone. Thank you for joining us for Calian's Q3 2024 conference call. Presenting this morning are Kevin Ford, Chief Executive Officer; and Patrick Houston, Chief Financial Officer. They will present financial highlights on our consolidated performance and key business highlights. As noted on Slide 2, please be advised that certain information discussed today is forward-looking and subject to important risks and uncertainties. The results predicted in these statements may be materially different from actual results. As a reminder, all amounts are expressed in Canadian dollars, except as otherwise specified. Thank you, Jennifer, and good morning, everyone. Before we get on to the business of our third quarter results, I want to give you an update on our progress to reach our 3-year plan objectives. For those of you who joined us on our last Investor Day, you recall we laid out an ambitious target to grow revenues 50% over the next 3 years and double our EBITDA. Not only would this get us to the $1 billion level, but we would position Calian to take advantage of greater scale and establish as leaders in all that we do in Canada, the United States, and Europe. We don't take these objectives lightly. We have delivered and surpassed in the last 2, 3 year plans we put in place, and our plan is to do the same here again. Our diverse business with strong proven fundamentals will be the tailwind that will propel us to this target. So, how are we tracking? We are delivering organic growth in line with our estimates and our M&A efforts are going faster than anticipated. I will provide some more color on our progress at the end of the call. Now, let's turn to our recent quarter. We reported record results for the third quarter with revenues, gross profit and adjusted EBITDA, up year-over-year. Revenues were up 11% with all segments contributing to the growth, particularly our Health and Advanced Tech, which demonstrated double-digit growth. In terms of profitability, gross profit was up 21% and adjusted EBITDA was up 22%, with their respective margins all up year-over-year. Again, in this quarter, profitability growth surpassed top-line growth, a testament to the strength of our business model, a pivot to higher margin businesses and the successful start of our 3-year strategic plan. We completed the strategic acquisition of Mabway, expanding our military training and simulation solutions globally, signed and acquired new contracts valued at over $300 million, growing our backlog to $1.2 billion, and furthered our innovation agenda, more specifically, in our GNSS, Corolar Virtual Care, and our exercise management tool for global military training. Turning briefly to our segments. We had two segments this quarter that demonstrated double-digit revenue and EBITDA growth, Advanced Tech and Health. Advanced Tech revenues were up 17%, and EBITDA was up an amazing 47%. These results reflect a strong performance from our acquisitions of Hawaii Pacific Teleport and nuclear assets from MDA, or inorganically our transition to increased product revenue. You may have noticed that recently we increased our product catalog with the addition of the dedicated DOCSIS test products from Rohde & Schwarz. Similarly, Health revenues in EBITDA were both up 14%, all from organic sources. Health continued its growth momentum and hit the second highest revenue since the peak of COVID. It is now officially under $200 million revenue run rate for the past 4 quarters, above $50 million. Despite these strong results, we did encounter some temporary headwinds in the quarter in two of our other segments. First, as we mentioned last quarter, the Canadian government had announced increases in defense spending for the long-term with an objective of spending 2% of GDP by 2030. We should be positive for Calian in the long run. But in the short-term, they're actually asking the Canadian enforcement to deliver short-term reductions in certain areas as they allocate budget to other economic initiatives. As of last quarter, it was difficult to forecast the timing and magnitude of any impact on Calian. In June, we began to see some reductions in activity, and despite winning new contracts, the ramping up of those activities has been significantly slower than in our past experience. So far, we have seen impacts on our ITCS and Advanced Tech segments, and more significant impacts on our Learning segment, our Health Services has not been affected. We expect some of these short-term reductions to continue to impact us in Q4, while we work with the customer to realign their capacity to their mission-critical needs. We have been a trusted vendor of the Canadian Forces for over 20 years, and have managed demand variability in these long-term contracts. In our experience, while there can be a reallocation of demand from quarter to quarter, we expect the majority of the services over the length of the contracts. As a result, we see this as a timing issue, nothing more. What we provide the Canadian Forces are critical solutions and services needed to generate broad-force capabilities, and the demand on the men and women of the military are only increasing to the global uncertainties. Our efforts to diversify our business into Europe will help offset some of the short-term domestic environments. Our European and UK military training operations perform well in the quarter. And my recent visits to the region have only reinforced my conclusions that the urgency in Europe is significantly greater than here in Canada. I also want to briefly comment on the ITCS performance as looking at the results at face value and may lead to misinterpretations. ITCS was impacted by a few external factors and internal decisions this quarter. First, the macro environment is characterized with the elongated procurement cycles and lower government spending. Second, we've made the decision to increase investments as Mike Tremblay is positioning the segment for the future. And third, and most importantly, the quarter variability. Recall that ITCS had a very high EBITDA on Q2 at $12 million as a result of a pull forward from Q3 and the Decisive seasonality. When you take quarter variability of the equation, on a year-to-date basis, ITCS revenues were up 19%, and EBITDA is up 25%. In the face of a broader slowdown, our business is maintaining its position and ready to capitalize on the initiatives we begin putting in place. To conclude, despite some short-term headwinds, we remain on track to deliver our 7th consecutive year of double-digit revenue growth and one step closer, objective of reaching $1 billion in revenue by the end of FY 2026. Now, I'll turn the call over to Patrick to discuss consolidated results and guidance for FY 2024. Over to you, Patrick. Patrick Houston Thank you, Kevin, and good morning. Q3 revenues increased 11% to $185 million. This represents the highest third quarter revenue in the company's history. Acquisitive growth was 11% was generated by strong performance from Hawaii Pacific Teleport, Decisive, the nuclear assets acquired from MDA and about half a quarter from Mabway. Organic growth was flat as strong double-digit growth from Health was offset by declines in the three other segments. On a year-to-date basis, organic growth stands at 5%, in line with our 3-year client objectives. Gross margin reached 33.4%. It represents the 9th straight quarter above 30%. This consistent performance demonstrates we can sustain plus 30% gross margins going forward. Adjusted EBITDA increased 22% to $17.7 million, driven by higher margin contribution from acquisitions, revenue growth across all segments as well as progress to expand geographically and increase share of product revenues. Adjusted EBITDA margins reached 9.5%, up from 8.7% last year. On a year-to-date basis, adjusted EBITDA stood at $63 million. This almost eclipses the EBITDA of all of last year and adjusted EBITDA margin stands at 11.1%. In Q3, we signed and acquired $317 million in gross new contracts, translating into a book-to-bill ratio of 1.7. Recall that in our business, long-term contracts will be complete every quarter, when we renew, extend or sign additional long-term contracts such as this quarter with our defense health contract and the UK government to Mabway, we get a sizeable boosted backlog. In fact, we ended the quarter with a backlog of $1.2 billion, positioning us well for the remainder of the year and into FY 2025. Net profit in Q3 decreased to $1.3 million or $0.11 per diluted share, compared to $4.7 million or $0.40 per share for the same period last year. The decrease was mainly explained by higher amortization and interest expenses related to acquisitions. This was partially offset by higher adjusted EBITDA and lower income tax expenses. As a reminder, the acquisition-related expenses including amortization, deemed compensation and change in fair value related to earn-outs are all non-cash, we typically amortize these costs over the first 5 years after the acquisitions made, making their stride [ph] greater than immediate years following the acquisition. We generated cash flow from operations of $14 million in Q3, up from $3 million from last year. We recaptured close to $0.5 million of working capital in the quarter, while we used working capital in Q3 of last year. As expected, our working capital performance reversed from Q2, but remain positive as we monitor it very closely. As a result, for the total year, we expect working capital will be positive. It's worth mentioning that our long-term efforts to find more working capital efficiency as we grow is working. We've been able to reduce the percentage of working capital consistently over the last 4 years. In FY 2020, it stood at 21% of revenue, as of last year, it was down to 14%, and this quarter, it reduced further to 8%. Operating free cash flow stood at $10 million or $0.84 per share in Q3, and represented a 57% conversion rate from adjusted EBITDA. The conversion rate was lower than our target in Q3, primarily due to higher CapEx generated by onetime IS infrastructure projects. Year-to-date, we generated $42 million of operating free cash flow or $3.55 per share versus $34 million or $2.92 per share for the same period last year. After 9 months, we've generated over 90% of the free cash flow of all of last year and our conversion rate stands at 67% in line with our targets. In the third quarter, we invested in our business with the acquisition of Mabway in the UK for a net cash outflow of $30 million. Year-to-date, we've invested $88 million in acquisitions. We also made CapEx investments of $4 million, both the $3 million of this was due to infrastructure upgrade at Decisive. Besides this onetime project, our CapEx levels have remained stable despite significant increase in the size of our business over the last few years. We also provided a return to shareholders in the form of dividends. We paid dividends of $3 million or $0.28 per share, representing a 33% of operating free cash flow. On a TTM basis, dividend represents 25% of operating free cash flows in line with our target. In addition, after a short pause in Q2, we reinstated our share buyback program in Q3. We purchased 26,600 shares for a total consideration of $1.5 million. With our current NCIB coming due at the end of August, our intention is to renew our share buyback program, subject to TSX approval. Let's take a look at the balance sheet and liquidity capacity. With our solid operating and working capital performance, our balance sheet and leverage position is in great shape. As of June 30, we had drawn $94 million on our debt facility. During Q3, we drew an additional $25 million on our facility to support our M&A agenda. We ended the quarter with a net debt of $48 million, representing a net debt-to-adjusted EBITDA ratio of 0.6 times. This is still well below our target level of 2.5 times, meaning we have ample capacity on the balance sheet to complement our strong cash flow performance. Let's take a look at our guidance for FY 2024. After raising our guidance last quarter, we are now anticipating being at the bottom end of the range, given short-term operating budget reductions from the Canadian Armed Forces, which we expect will have an impact of close to $4 million on EBITDA in the second half of the year. As a reminder, our guidance calls for revenues in the range of $750 million to $810 million, and EBITDA of $86 million to $92 million, including approximately $2 million of transaction costs related to three acquisitions we announced this year. Recall that last quarter, we stated we got in the middle of the range around $89 million. The reduction of our estimate is primarily due to recent budget reductions from the Canadian Armed Forces combined with elongated procurement cycles with the federal government. At the bottom of the range, this guidance reflects revenue and adjusted EBITDA growth of 14% and 30%, respectively. Note that EBITDA growth is significantly outpacing revenue growth as we continue to expand into higher margin businesses. It also implies an adjusted EBITDA margin above 11%. This growth is driven from contributions from both our organic and acquisitive agendas. The acquisitions of HPT for 10 months, Decisive for 11 months, the nuclear assets from MDA for 7 months and Mabway for 4.5 months represents double-digit acquisitive growth for FY 2023 with organic growth in the single-digit revenue. It would represent the 7th consecutive year of double-digit revenue growth. With this guidance, we're on track to achieve another record year in FY 2024 are off to a great start to achieve our $1 billion revenue target by the end of FY 2026. As a reminder, we are expecting to experience increased fluctuations in our quarterly results due to revenue mix, which is more highly skewed towards products, where the timing of deliveries come into play as well as commercial customers characterized by greater demand variability. This is by design as we roll out higher margin solutions across all of our markets. In addition, with the acceleration of our M&A agenda in the past few years, our business profile has changed as a result. Our seasonality has evolved. Our busiest quarter is now Q2 due to Canadian government fiscal year-end, while Q1 and Q3 are the slowest due to timing of vacation periods, statutory holidays and industry-specific cycles. As always, we must caution that this guidance is ultimately dependent on the extended timing of future contract awards and customer realization of existing contract vehicles. The guidance also implies no major changes to current economic environment, additional or more extreme defense and spending cuts, and supply chains as well as no major increases in interest rates and labor costs. Note that our guidance does not incorporate any additional M&A activity than those already mentioned. And should we close any new opportunities, their contributions would be incremental. But in terms of capital deployment for the year, we expect to maintain our CapEx investments in the range of $10 million to $12 million, and our current dividend at $1.10 per share. We also plan to use our share buyback program opportunistically during the balance of the year. We believe this guidance reflects the resiliency in our business. And, now, I'll turn the call back over to Kevin for his closing remarks. Kevin? Kevin Ford Thank you, Patrick. As I mentioned at the start of this call, we are running our business with a goal to reach our 3-year objectives of growing revenues double-digits and significantly increasing profitability. For those new to the story, our strategic plan begins this year and ends in fiscal 2026. And let me provide a quick summary. We look to drive revenue growth through a combination of organic initiatives and acquisitions for a total CAGR of 15%. This effectively translates into growing our top-line by 50% and essentially doubling our adjusted EBITDA over a 3-year period. I think that bears repeating, we plan on doubling our adjusted EBITDA over 3 years from $66 million to $125 million. We plan on achieving this by growing organically and deploying between $250 million and $300 million of capital for acquisitions aligned to our strategic plan, paying multiple between 5x and 8x, and generating about $230 million of revenues and $39 million of EBITDA from those acquisitions. These acquisitions are expected to be funded through a combination of debt and internally generated operating free cash flow, and we estimate that we can convert about 70% of adjusted EBITDA into operating free cash flow during this period. Finally, we plan to do all of this while maintaining a solid balance sheet with a net debt-to-EBITDA ratio below 2.5 times. The overarching objective of this plan is to build a multibillion-dollar sustainable growth company that is established in Canada, the U.S. and Europe. That offers differentiated products and services and value to customers' environments where they cannot fail. Certainly an ambitious plan, but I know we can do it in very uncertain times, I still believe the world needs more Calian. Let's see where we stand after 9 months of our One 2026 strategy. With regard to results, our plan called for 15% revenue growth per year, and we've generated 17% so far. Our plan also called for essentially doubling EBITDA over 3 years or generating an additional $60 million. At the bottom of our guidance range, we provided $20 million or one-third of our objective after year 1, right on track with our 3-year plan. Next, our M&A agenda. Year-to-date, we deployed close to $90 million of capital towards acquisitions, which are expected to generate about $90 million of EBITDA on an annualized basis. After 9 months, over one-third of our capital has been deployed and close to half of our EBITDA objective has been reached. With this performance, we're actually ahead of pace on our M&A targets, and we've done this while maintaining a strong balance sheet and a very conservative leverage ratio. To conclude, we had a solid quarter and a right of our pace to achieve our 3-year strategic plan objectives with double-digit revenue and EBITDA growth after year 1. Looking forward, we're currently working on some exciting and strategic opportunities and partnerships that we look forward to sharing with you soon. We're also working on AI use cases in several parts of our business, and our M&A pipeline is healthy, and we hope to close a few more acquisitions before the end of the calendar year. While we are not in a position to provide FY 2025 guidance before our Q4 results in November, current course and speed, we can see that we're currently expecting to generate another year of double-digits revenue and EBITDA growth. On that note, I want to thank our staff for the commitments, thank our customers for their loyalty, our suppliers for the collaboration and our shareholders for their continued support. So with that, Michelle, I'd like to now open the call to questions. Thank you. [Operator Instructions] Our first question comes from Benoit Poirier with Desjardins Capital Markets. Yeah. Just on ITCS, you experienced some issues due to lower government spending, longer sales cycle and the value-added resale business. So could you provide some color on how those issues differ versus the one you reported a year ago back in Q3? Kevin Ford I think we're dealing with some fundamental - just some timing, to be honest, as I mentioned in Q2, then was we saw the variability a $12 million a quarter in Q2 and Q3, obviously, we had some timing issues on VAR. So, I'm not sure it's changed fundamentally. I think the dynamics and what I've been trying to say on these calls is that variability just due to the nature and the scope of the VAR is that something we're going to see in ITCS moving forward, number one. Number two, what's changed definitely from last year is that we continue to see the federal government procurement processes slow down and even slower than last year, I would say. We had the [arrived can] [ph] a bunch of different things going on with government that is just causing procurement to do a lot more checks and balances on any of the procurement that they are doing. So it's just slowing on the process. I don't understand why they're doing it, but it is affecting not just Calian, frankly, all suppliers to the federal government. And then, finally, as I mentioned with Mike Tremblay y coming on board in December, excited about the vision he's created for that organization. And I'm working with them on investment with his team on reposturing some areas, especially in our cyber services, our SOx and NOx and how do we then move forward with more enterprise customers. So what's changed from last year is we have a new leader, we have a new vision. We're investing in that vision. I believe in the vision. And frankly, I think, again, between variability and investment in the long-term, we're on the right track with ITCS. Benoit Poirier Okay. That's great color. And from a margin standpoint for ITCS, you mentioned that you've been dealing with an increase in fixed costs from the acquisition of Decisive, but also investment in sales capacity. But even if we assume a higher revenue base for the quarter, it looks like selling and marketing and also G&A expense have been trending higher in terms of percentage of revenue versus last year. So any opportunities to potentially right size those two elements? Or is it just a matter of timing and investing into the future? Kevin Ford So I think to me, I would say it's the latter, investing in the future. As we grow this company, as we look at that $1 billion number, it is clear to me the investment in our sales capacity across all Calian, frankly, not just ITCS, it will be a requirement, and we're going to do that. And, as I've told many of our shareholders are not running the company quarter-by-quarter, I'm on a 3-year plan to reach $1 billion and scale this company globally. So, right now, it's investing in that sales capacity. If you look at even 5% organic growth, those numbers are getting - frankly, they are larger than some of the divisions when I got here. So we have to scale. We have to invest in our sales capacity, our marketing capacity. So in the short-term, maybe that looks like it's up. But long-term, it's absolutely the right thing for us to be doing to drive sustainable growth long-term. Benoit Poirier Okay. And maybe last one for Advanced Tech. If we look at Q4 last year, maybe the question is more for Pat, but it looks like you finished the quarter last year on a strong note in terms of revenue. So I was just curious to see what kind of organic growth should we expect in Q4 this year, as I'm wondering if you could face a tough compare. So could we expect another negative organic growth for the quarter? Patrick Houston Yeah. If you remember last year, Benoit, I was a bit lumpy. If you remember, Advanced Tech had some supply chain issues at the beginning of the year. We worked hard to resolve that. We resolved them in Q4 last year, we finished the year strong. I think what's more impressive this year is just how much of a step forward we've taken overall in the year in the AT and the margins have improved significantly. So we might be down on a compare versus Q4 last year. But I think if you look at the whole year, I think it's been a really successful year for AT. And to be honest, the momentum going into next year, I think, we're very positive about the assets that we have there. It should be a growth engine for us going forward. Kevin Ford Benoit, it's Kevin. Look, I want to restate this because I've seen some of the results in the analysis. Like on the EBITDA, we're up 80% year-over-year right now in Advanced Technologies, 80%. I just want us to digest that on how much work that is from that Advanced Tech team, definitely acquisitive, but we are investing more in our product development, more in innovation and it's reflecting in the results. So as we look at the results in the quarter, I hope people are recognizing the incredible progress we're making with our Advanced Tech Group. Benoit Poirier Yeah, that's a great point. Okay. Thanks for the color. Thank you. Our next question comes from Paul Treiber with RBC Capital Markets. Your line is open. Paul, your telephone may be muted. Our next question comes from Tanvi Gabriel with V. Your line is open. Tanvi Gabriel Hi, good morning. I am Tanvi, I'll be stepping in for Rob Goff from Ventum Financial. So one of the questions that we have is, you spoke to headwinds that you've faced in the quarter. How do you plan to sort of address these headwinds moving forward? Kevin Ford Yeah, great question. I think to me, number one, I think it's temporary. I've done this a long time. I've been around defense a long time. And these things are always - it's a headwind for a period of time, and then the reality kicks in that you can't slowdown training in the military. You can try, but over time, and our men and women are being asked a lot of the military right now with regard to our deployment in last year, just the state of the world, you need forces that are generating capability, you need forces that are ready to go that are trained. And I've seen this before or short-term, by the budget, and I do feel for our military right now. Frustrating as a Canadian to see into this environment, the men and women being asked to cut $1 billion, but they're going to do it, and they're going to figure out how to do it, because they can get it done, they do get it done. In the short-term, it will be some headwinds. Long-term for my comments, it always comes back because at the fundamental end of the day, you need to have people ready to go, trained to deploy. And I am confident that we are going to continue to work with the military to do exactly that as the state of the world demands nothing else. Tanvi Gabriel Great. Okay. Thank you. And do you also anticipate any delays within the M&A strategy? Or are you confident in continuing at your current pace? Patrick Houston No. We're not slowing down. I mean as Kevin mentioned, we're already done half the targets we've set out for 3 years after 3 quarters. So the team is working hard. It's been certainly a busy last 9 months, but we're certainly not slowing down. We've got the balance sheet. That's not a restriction. We've got the liquidity. As we said, we're way below our leverage target. So in one was just finding a target and executing the deals, and we're optimistic that we'll either exceed our targets over the 3 years. So we're certainly not slowing down. Tanvi Gabriel Okay. And my last question is within the Learning segment, are there any large outstanding RFPs within the sales pipeline? Patrick Houston Lots of opportunities. I mean our expansion to Europe has led to a lot more opportunities. That's been one of the investments we've made, and I think, as we mentioned, we had a very strong quarter and year-to-date performance in Europe, lots of new opportunities there. We're winning opportunities in Canada. It's just that they've been ramping up much lower because of the budget reductions. But back to Kevin's point that we've been doing this for over 20 years, our experience is when we win these contracts, we deliver the services against the contract over the period. So some of this will come back to us in the future years. Kevin Ford Yeah, and it's probably worth mentioning as well that the election cycle that's going on in Europe, you saw the UK change government, they're initiating a defense review. We saw the same in Belgium. These things happen. New governments came in, they do defense reviews and that generally will put some damper on just pace. But the funnel is very strong, and the team's doing a great job. They expect, again, Europe and our NATO presence and now the UK, we're going to continue to invest in that. I am convinced that that's where we need to be from a growth perspective, again, spending a lot of time there this year, personally including last year. As I mentioned, the urgency is there in Europe. So we are going to continue to invest, and I expect those opportunities will be there, short-term and long-term. Thank you. [Operator Instructions] Our next question comes from Sam Schmidt with CIBC. Your line is open. Sam Schmidt Hi, there. It's Sam Schmidt on for Scott Fletcher at CIBC. One question for me on the Health segment. Organic growth was strong in the quarter. And you noted that came from existing customers. Could you unpack what drove that growth in terms of contract renewals or extensions or maybe the nature of work like was it mostly Health services? Thank you. Kevin Ford Yeah, great question. So really driven by 2 factors, I would say. Number one, despite what we're seeing on the Learning and IT and some of the other areas in our business and defense, we have seen no slowdown in demand on our healthcare contract at defense. I was meeting with some of the executives, and I don't think that's going to change in the short-term. The military is cognizant a healthy workforce is critical to their mandate, and I don't see them slowing down there. So number one, we've had continued demand as those forces ramp up for deployment. We continue to see strong demand in the healthcare business. And frankly, credit to our team, that's not easy. And our team is stepping up and knocking other part, frankly, on an increased demand. So I want to shed all the shadow to our health services team there. Secondly, we've had some good strong organic growth opportunities that we're just finishing up in some areas of our business and other customers. And we're starting to see now as well some exciting opportunities in our digital health portfolio, our pharma business as well, so stay tuned. We still see good opportunities in our funnel in that. So in the short-term, it's Health and some of the other government business we have. And longer-term, I expect that's going to be more balanced with more commercial health in government and some of our digital platforms through our pharma business. So I think a combination of factors right now. Sam Schmidt Thank you. That's helpful. And then one more for me on the Learning segment. You noted that investments in the European expansion drove growth in the quarter. Could you provide any color on how much of the Learning segment revenues or bookings are coming from that region at this point? And maybe how you see that evolving over time? And I'll pass the line. Thank you. Patrick Houston Yeah. I think long-term, once we have Mabway, which is the most recent acquisition, kind of on a pro forma basis, we should be generating about one-third of our revenues in Learning in Europe. So I think that's a pretty big drastic, that if you think a couple of years ago, it was 100% in Canada. We've got 3 acquisitions that have been growing organically there. So it should be a third and to Kevin's remarks, we're seeing a lot more growth there. So I think it will become a bigger contribution over the next couple of years. Thank you. There are no further questions at this time. I'd like to turn the call over to Kevin Ford for any closing remarks. Kevin Ford Thanks, Michelle, and I appreciate that. So listen, folks, I am still very excited about the opportunity. We are on track for another double-digit growth year. We're on track with our One 2026 objectives. The $1 billion no longer seems like a faraway number to me. I see it. I can feel it. I know the team is behind me to get there. And, as importantly, if you look at the pace in today's macro environment we're working in, when they look at year-to-date results and I look at actual consolidated results, even with the bottom end of our guidance, 14%, 15% revenue growth, 30% EBITDA growth, increasing our margins, diversifying our business, doing it efficiently, doing it prudently with our balance sheet. I really hope that people bring that into their discussions as we look at, not a quarter, but the trajectory line of the business. So with that, I'd like to close the call. Thank you for your time today. We look forward to further discussions as we set in our Q4 and set the guidance for next year, which I'm excited about as well. So have a great day. Thank you so much for joining today. Thank you for your participation. You may now disconnect. Everyone have a great day.

Quest Resource Holding Corporation (QRHC) Q2 2024 Earnings Call Transcript

Dave Mossberg - Investor Relations Ray Hatch - President and Chief Executive Officer Brett Johnston - Chief Financial Officer Good afternoon, ladies and gentlemen, and welcome to Quest Resource Holding Corporation Second Quarter 2024 Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, August 8, 2024. I would now like to turn the conference over to Dave Mossberg, Investor Relations representative. Dave Mossberg Thank you, John, 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 and 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 detail in Quest's filings with the Securities and Exchange Commission. If 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 for observations and views about industry conditions and developments. The data and the information are based on Quest's estimates, independent publications, government publications and reports by market research firms and other sources. Although Quest believes the sources are reliable and that the data and other information are accurate, we caution that Quest does not independently verify the reliability and sources of the information 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 in understanding and 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 that all said, I'll now turn the call over to Ray Hatch, President and Chief Executive Officer. Ray Hatch Thanks, Dave, and thanks to all of you for joining us on today's call. During the second quarter, we delivered strong results. We earned more than $5 million in EBITDA for the second quarter in a row, and we continue to gain momentum with our efficiency programs and our organic growth initiatives. Our pipeline of new customers continues to grow, and our land and expand strategy has provided us with strong incremental customer growth. In the second quarter, we added three 7-figure expansions with existing clients. Revenue grew slower sequentially during the second quarter than expected for two reasons. First, we've signed more new business in the first and second quarters than we have in our history as we've been onboarding this record number of new customers, we've experienced some customer-related delays, which caused slower-than-expected ramp. All of these implementations with new customers are now well underway and will increasingly contribute to sequential growth in the coming quarters. In addition, this strong growth with existing and new clients was offset by lower-than-expected volumes from one of our largest clients. This client is in the industrial vertical and is lower production levels due to end market-related reasons. Given the nature of this customer's business, the slowdown has primarily affected revenue and to a lesser extent, the gross profit line. While we will likely have lower volumes from this client in the coming quarters, we have a strong relationship with them and expect to somewhat offset lower volumes with new services. Our efficiency initiatives continue to show gains. As of today, about three quarters of our vendors are being processed through our new AP automation platform, half of which require no human interaction at all. These improvements are helping us to increase our ability to service our customers and over time, will enable us to lower cost per transaction. I've been speaking to most of the investors on this call for many years, some as long as 8 years. And I think you all know that I don't make strong statements lightly. We're in a great place, and it's exciting. This is about the technology that is coming to fruition. This is about the value proposition we're delivering. New account growth and tremendous growth of our people and customer service execution. Our ability to execute has grown so much and the market has grown increasingly receptive to that. I'm going to take this opportunity to reiterate that we are extremely optimistic about where we are today and especially about where we're going tomorrow. Thanks, Ray, and good afternoon, everyone. Revenue was $73.1 million, a 2% decrease year-over-year and a 1% increase sequentially from the first quarter. Newly added customers and strong overall demand from the remaining business contributed approximately $10 million of incremental revenue during the second quarter. This was offset by the decline in volumes from one of our large industrial clients and three other large clients that we have referenced previously. As Ray commented, the relationship with the large industrial customer continues to be strong, and there are opportunities to continue to add services with them, but they are slowing production, which is likely to temporarily affect volumes for the next 12 months. In the second half of the year, excluding commodity price fluctuations, we expect revenue growth will accelerate as recent and new wins increasingly contribute to revenues. During the second quarter, gross profit dollars were $13.5 million, flat in comparison with last year. Year-over-year comparisons for the second quarter were flat, mostly due to the same factors that affected revenue comparisons. On a sequential basis, we had anticipated an increase in gross profit dollars. However, due to client-related delays with several new clients and lower-than-anticipated volumes from the large industrial customer mentioned previously, comparisons were flat sequentially. We did see some incremental contribution in gross profit dollars from new customers. But due to customer delays, the ramp in onboarding activity within the quarter was simply later than we had originally anticipated. All of the new customers we discussed in previous calls are being implemented now and will contribute an increasing amount of gross profit in the coming quarters. Looking at gross profit dollars for the remainder of 2024, we are encouraged by new and existing customer wins and continue to expect double-digit growth in gross profit dollars for the year. Moving on to SG&A, which was $9.4 million during the second quarter, an increase of $200,000 from a year ago and down $400,000 sequentially from the first quarter. This was lower than we had anticipated. The sequential decrease was primarily related to quarterly fluctuations in bad debt expense. We had posted a larger-than-average accrual during the first quarter for bad debt expense, and we're able to collect more than what we had anticipated in the second. While this did affect sequential comparisons, if you look on a year-to-date basis, bad debt expense was roughly flat year-over-year, and the rate was consistent with what it has been in the past. Looking forward, we expect 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 investments 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 third 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. As we previously commented, we have 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 continue to hear 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 $17.7 million of available borrowing capacity on our $35 million operating borrowing line and $2.5 million available on our $5 million term loan facility. In this interest rate environment, we continue to actively look to reduce interest expense by optimizing cash management, carrying less cash and minimize borrowings on the line of credit. Thus, our cash balance was $958,000 at the end of the second quarter. For the second quarter, we generated $807,000 in cash from operations. At the end of the quarter, receivables remained elevated, which was partially related to the ramp of new customer activity late in the quarter. We continued to make progress with shortening the cash cycle times from some of our large customers, but we still have some room to make improvements. I will note that the increased DSOs are temporary. We have great relationships with these customers and slower-than-expected payment is not related to collectability. Also, I want to reiterate that our targeted DSOs are in the mid-60s. But due to the timing of onboarding new large clients, it is possible that we will see fluctuations in the DSOs from quarter-to-quarter like we did in the second quarter. CapEx for the quarter was $2.2 million and was $4.2 million year-to-date. $3.1 million of the CapEx was related to compactors that we were able to opportunistically purchase at an attractive place. We will be looking to purchase additional compactors from time to time, but do not anticipate significant spending in the next few quarters unless we run across another attractive opportunity. From a financial and strategic standpoint, it makes more sense to own these contractors instead of running them. Going forward, we expect CapEx to run $300,000 to $400,000 per quarter without considering any opportunistic compactor purchases. At the end of the quarter, we had $73.8 million in notes payable versus $67.8 million at the beginning of the year. The increase reflects growth in borrowing on our line with PNC to fund working capital and the assets purchase that I described earlier. Thank you, Brett. Before I review new business wins and strategies, I want to take a minute to share some anecdotes and unsolicited positive feedback that we've received from both new and existing customers as it directly highlights why I believe we're winning new business and becoming the provider of choice. We clearly have built a differentiated service platform, and we have the right tools and processes in place to deliver for our clients. Equally important to providing outstanding customer service, you have the right people and culture that really care about customer outcomes. Here's the feedback we got from one of our largest and long-standing retail clients. We recently were awarded a 5-year extension in our agreement with this customer. The length of this agreement in and of itself speaks to the strength of our relationship. This is what the client told us. They said, Quest is a customer service company that happens to take care of waste your assets are your people and your customer service. The 5-year contract that we signed says a lot about the partnership between our two companies. The customer further commented that they were not aware of any other 5-year agreements with any other vendor ever that they have made. For comparison, while the tenure of our client relationships is much longer, our average contract is 3 years. We had another instance of positive feedback from a new client within just 7 days of going live on our platform the customer said that the implementation went so well that they volunteered to be a strong, referenceable client for us. As a market leader in what is a new end market for us, their reference will go a long way in helping us penetrate and acquire more customers in this area. I'll also show the feedback we received from a new retail customer that we secured and recently began onboarding during the first half of the year. This was the second 7-figure competitive win for us to provide services to a portion of the states in which they operate. The client's leadership told us that they are very excited about our ability to launch so successfully, and they're already looking to adding additional states to our program. We've not yet signed an extension with this client, but based on the feedback, I expect we will in short order. I am very proud of our team. They really care about client outcomes, and they are the key to the success in creating a long-term client relationship. We constantly hear feedback from our customers like this, and it gives me great confidence that the new clients and existing clients are well taken care of. Moving on, I'll now cover some of the wins we had during the second quarter. In our last earnings call in early May, I covered the 8-figure win that we have with the market leader in the grocery sector. We won the client at 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. A key reason for our success over the last few years has been our ability to expand our relationships with existing customers across geographies and by adding value-added services. Since our last earnings call, we've had 3 new expansion wins with existing clients. As we demonstrate our capabilities, provide differentiated service and deliver value customer service, it's rewarding that our largest clients are coming to us and asking us to do more. I'll now provide a little more detail on the three client expansions we've recently secured. We have a 7-figure expansion win with the existing automotive client that has an opportunity to grow into 8 figures annually. This is an existing service that we will be expanding to all of their locations. In addition, we had a 7-figure expansion win with an existing retail client. We've been servicing all of the retail locations of this national company, but with this win, we'll also be servicing all of their distribution centers. And finally, we had a 7-figure expansion win with the new client that we just secured earlier this year. They were so impressed with their implementation they've asked us to handle additional waste streams for them. In addition to these client expansions, we've continued to see a noticeable uptick in not only the number but also the size of the opportunities in our pipeline. Given the success we're 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 we expect to generate in the business. In talking with investors during this past quarter, there seems to be some confusion over the strategic and financial rationale behind our investment in compactors. Even though we expect this to be a relatively small portion of our overall business, I thought I would take a minute to reiterate and hopefully clarify. First, I want to reiterate that we very much intend to remain an asset-light business. We don't plan on owning trucks, landfills and similar hard assets. We will be looking at increasing the number of compactors that we own when it makes sense. In fact, prior to this recent acquisition, we already owned about 200 compactors, and we regularly buy them in lower quantities to meet customer needs. Providing compact to rental services provides three key strategic advantages for us. First, compactors help with customer retention. It's typical for compact or rental agreements to have 5-year terms than they historically have very high renewal rates. This compares to an average 3-year contract term for our traditional services that I mentioned earlier, and it is consistent with the rest of the industry. The second strategic reason is that it helps us to secure new business with existing and new clients. We're selling compact or rental services to existing ways to recycling clients, and we're selling our waste and recycling services to our new compact rental clients. Finally, this opportunistic purchase of compactors gave us enough scale to build an internal capability as well as a network of vendors to maintain and repair compactors on a national basis. We're beginning to leverage suspender network and have just started to offer compact repair and maintenance services as a separate offering to our existing as well as prospective customers. From a financial standpoint, compactor rentals produced a recurring revenue stream with an attractive margin and a high return on capital. Overall, we're targeting greater than 20% return when we invest in these contractors. The business is relatively simple to manage its scale, low risk and provides highly predictable and recurring returns over a long period of time. Once in place at a customer location, contractors are seldom moved, they require limited maintenance and their utilization is typically in the high 90% range. I'll now review the investments 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 helped us maintain enduring client relationships due to the incremental value we provide. We're actively introducing additional technology improvements in 2024. As we discussed on our last call, during the first half of the year, we've begun to rollout our AP automation solution that utilizes artificial intelligence to further automate the processing of vendor invoices. We continue to make progress. And as of today, approximately three quarters of our vendors are being processed through our new AP automation platform. Half of the invoice is generated by these vendors require no human interaction and are what we call zero touch. We process hundreds of thousands of invoices every year, and this is part of our goal to reach 100% zero-touch invoice processing. Automating invoice processing helps us to ensure payments are only made for services delivered and helps us to eliminate exceptions that typically add cost and add touches across multiple departments. By automating invoice processing, along with our other technology enhancements, we're lowering costs, continuously improving client and vendor value and providing major enhancements in our ability to scale along with 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've made tremendous progress during our last several years and have never been more confident about our outlook for continued double-digit growth. I feel very good about the organic growth we have in front of us, pressure to improve sustainability, expanding regulation, increasing cost of landfills, they all continue to lower the bar for adoption of recycling services. We have multiple sources of organic growth from expanding our existing clients to ramping up recent wins and growing pipeline of new business. I also 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 under our platform, we've proven our ability to optimize cost of services 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 that we've made over the last several years, driving improved operating performance and expanding our EBITDA margins. The work we have done is centered on building a consistent and sustainable business focused on providing valued services 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. I couldn't be more excited about what's to come. I really look forward to keeping you updated on our progress, and I'd like now for the operator to provide instructions on how listeners can queue up. Operator? Thank you. [Operator Instructions] Your first question comes from the line of Aaron Spychalla from Craig-Hallum. Your line is open. Aaron Spychalla Yes. HI, Ray. Hi, Brett. Thanks for taking the questions. First for me on the land and expand with the existing clients this quarter. I just want to confirm, you highlighted a couple of last quarter. So, I just want to confirm these are kind of new in the quarter. And then can you maybe just talk about how many other opportunities like this you see across the rest of your existing client base? Ray Hatch Hi, Aaron. Thanks. This is Ray. Yes, these three we just mentioned, we were pretty specific on those because they're incremental to the previous quarter. And we did talk about some growth opportunities that we had taken there as well. So yes, these are new. And again, as we kind of quantified them, and we're quite excited by them. And as far as your second part of your question on future opportunities, there are so many. I mean, as we continue to add these high-quality, high-profile customers that have large businesses with many needs, and at the same time, our team continues to expand the capabilities that they can meet. So, I anticipate seeing more and more continuous type of opportunities just like this here going forward. Aaron Spychalla Great. That's good to hear. And then maybe on the technology improvements. It sounds like the implementation is going well. Are you still targeting 80% zero touch by the end of this year? I thought I heard you say 100%. And just any notable improvements that you've seen to date with the rollout. And then as you get that finalized, just how are you thinking that can benefit incremental margins? Brett Johnston Hey, Aaron. This is Brett. I'll take that one. We continue to be increasingly excited about our technology rollout. As you mentioned, our ultimate target is 100% zero touch. Near-term, we've got pretty good visibility to still get to that 80% zero touch, maybe even up to 90% that last 10% to 20%. It will be a little bit harder. So, we're still on pace. We've got a couple of kinks to work out, but still continue to make good progress. As we mentioned, we do have all of our solid waste vendors on our platform right now. So excited to get them going. We just brought a new batch online this month. So, we'll see how that plays out. But in terms of just overall performance, we do continue to expect some significant efficiencies out of these. Hopeful we'll get those by Q4, start seeing some of those come in. And then certainly, by the time we get into next year, early on, we'll be ramping up and hopefully fully realizing those. Aaron Spychalla Alright. And then just on the volume front, I mean, I know you called out the larger customer that's seen some softening conditions. Maybe just broadly across the rest of your customer base, are you seeing overall waste volumes hold steady, grow a little bit given the macro? I mean, outside of landing and expanding with them? Ray Hatch Yes, I'll take that, Aaron. From a macro standpoint, I will tell you that we aren't seeing any significant type of changes outside of the one we referenced. And this gives me a chance maybe to reiterate the strength of our position is we're so diversified now in our revenue streams and the end markets that we serve. When one thing goes down, another one has a tendency to go up, we saw that maybe like during COVID times, so no, we're really not seeing any changes. But I have pretty high confidence, Aaron, that we'll be fine regardless based on that diversified revenue streams that we have today. So, it's pretty isolated right now the situation we discussed. Aaron Spychalla Okay. And then maybe if I can just sneak in one more on pro-organics kind of nine states look like they've implemented laws to divert food waste from landfills and others are looking to implement something as well. Can you just give us an update on the pipeline and interest there and how big of an opportunity you see this for you going forward? Ray Hatch I see the opportunity continuing to grow as the demand and the need regulation, you're dead on, on your observation there continues to go in our favor and it creates a more favorable environment. We have some really great food clients, and we have some really great fruit prospects. And we think that pro-organics along with our general just overall food waste programs are becoming more and more in demand. And I think they're really going to help us in future quarters. [Operator Instructions] Your next question comes from the line of Greg Kitt from Pinnacle Family. Your line is now open. Greg Kitt Hi, Ray and Brett. How are you doing? Thanks for taking my questions. First on new wins. Can you give us a little bit of color on how many of those started contributing in Q2? And how many of those do you think will start contributing in Q3? I think you had seven wins that you announced year-to-date. Brett Johnston Hi, Greg. It's Brett. I'll take that one. So, we had, I would say, all but two contributed in Q2 to some extent, two large ones we will go live or went live in July 1, and then we had another one to live August. Greg Kitt Great. Thank you very much. I think that you talked about UNFI because you were able to disclose that customer going live in the middle of Q3. So, I guess, was that the August 1 go live? Ray Hatch No. We already talked about that, what was going on in Q2. My fault. Okay, thank you very much. On the expansions that you talked about - actually, can I start in a different place. You talked about that new retail customer that you started onboarding earlier this year that you're working with in six states, and there is an opportunity to expand into additional states. What's the current footprint that you're servicing? I don't know how big this retailer is? Is it national so 50 states? And what is the opportunity? Ray Hatch Yes. It's a significant opportunity. And actually, I think we have three states, which a lot of locations. So that gives you an idea. So, let's do our math, Greg that leaves us 47% to go. Greg Kitt Okay, great. Thank you. And if you do get an expansion because it sounded like you were excited about the opportunity to get into additional states. Do you think that, that continues to be iterative a couple of states at a time? Or do you think that there's an opportunity to be a national replacement win? Brett Johnston Well, I think there's an opportunity there always was to be a national replacement. Whatever process they have as far as awarding us new states is going to be earned by us and their ability to make operational changes. So, it's hard to predict that. So, my comment was really based on the fact that they've made tremendous comments about Dave's team's ability to implement and how well they executed and the fact that they have a lot of other states to go and we're a better supplier. So, we're pretty confident that we're going to get more opportunities. We just don't know how much and when. That's all. Greg Kitt Thank you. On the expansions that you announced. Congratulations on those, and I'm excited about those. I think last quarter, you talked about - you gave an example of identifying 50 potential projects with a large customer that had like tens of thousands of dollars to 8-figure dollar opportunities with recurring work. And I was wondering if that one customer was one of the customers that you signed an expansion with or not? Ray Hatch No, this is incremental to that. The three that we very specifically called out in the remarks or incremental to that, these are all brand new and they are contractually signed, not just, hey, guys, we'll call you more business. There are contractual expansions that are really exciting and sizable. Greg Kitt Thank you. And when you sign those deals, do those programs start immediately? Or what kind of a lead time does that have? Ray Hatch Yes, they're all different, Greg. First of all, they're all different types of projects and different types of customers, different industries. So, there's a lot of variances. There are some starts right away, some tail end over time. Greg Kitt Thank you. And did any of those have the opportunity to start contributing in Q2 or not yet? Ray Hatch No, these are all Q3 opportunities. So, they're all incremental to what we got. That's what I'm trying to describe. Greg Kitt Perfect. And I was wondering if you can give us some color on the new client that within 7 days, said that they would volunteer to be a strong reference client. What industry is that client in? That's great. And for AR days, Brett, I heard what you said about some of the new customers pulling up the AR days as they ramped into the end of the quarter, and I think that makes sense. Do you think that there's an opportunity to get those days? It seems like it will be hard to get those days back down to 65 as you have a lot of customers ramping right now. Do you think that there's an opportunity to do that in Q3 or Q4 or unlikely this year with so many customers ramping? Brett Johnston Hey, Craig, yes, I think in the script specifically targeted getting back to where we had been historically, which is in the mid-60s for DSO. So, we're not backing away from that. As we said, we did have a couple of things pushed. Obviously, that has impact on DSOs. When they ramp later in the quarter. We've made some really good progress on our existing customers. We had some large payments come in that just crossed over past the quarter. So, if we can pull those in, and I'm confident we'll be able to do so sooner rather than later and that will have a meaningful impact on DSOs as well. So, we remain confident. Obviously, that's going to drive some operating cash flow as well. Greg Kitt Absolutely. If you got to 65 days next quarter, it looks like that frees up like $7 million to $8 million of cash, which is really meaningful when you can pay down your debt with that. So hopeful that you can make progress towards that. My last one for me right now, I think, is on zero touch. I think what's so exciting to me about that opportunity. And Ray, I think you touched on it in your opening remarks was on reducing your cost to serve or enable a lower cost per transaction, I think, is what you said. And when you're operating in a competitive market and you can lower your cost to serve customers or lower your cost per transaction. You have the ability to go win business a lot more easily if you so choose because you can price more aggressively. I would like to hear how investors should be thinking about the impact from Quest ability to lower its cost-of-service customers? Ray Hatch Well, the first impact, I could just jump in, Brett, if I missed something, is we should have lower cost or transaction, which ultimately falls down and translates into EBITDA margins. We can do more with less kind of thing. But I like the fact you picked up on the competitive side of it because the ability to grow this business is really why we're here. And if we can go to market with a more efficient, better mousetrap, we're able to win more and more competitive situations and increase market share and accelerated rate. So, I think from an investor perspective, you should look at a steadily improving enhancement to EBITDA margin as we implement. And then we should also be able to even accelerate in already what I think is an excellent pace in prospects and opportunities to win more business. Brett Johnston Greg, I'll just add in real quick queue other than just that piece. But coming from a manual process can be fraught with errors at times and the exceptions that, that creates and drives throughout the organization. So being able to free up people's times that are spent on non-value add and get to work on enhancing customer relationships and driving new services and all that good stuff gets freed up as well. So, that will be a contributing factor to as we move forward. Greg Kitt Yes. Thank you very much, and thank you for your hard work. Your next question comes from the line of George Melas from MKH Management. Your line is now open. Great. Can you talk a little bit about the pipeline? It seems the pipeline is healthy. And what is leading to the growth in the pipeline? Is it that you have better references? Is that you have a more targeted [indiscernible]? Is it the technology that enables you to respond to more RFPs. What is leading to this good situation with the pipeline? Brett Johnston Yes. I always like saying that. All of the above. Good job, George. But seriously, we've got such a maturation and improved process on prospecting in of itself. The references piece is invaluable, as you know. I mean it's almost like another quality customers. Our business has done due diligence on us, so people can just take that. So, the references help, the process helps. I think we've accelerated our offerings that we have for clients to make us more and more of a problem to solve perform at a time when they have these issues. And we've actually added to and adjusted our sales structure a little bit, and we've added some different roles and kind of going to market a little bit differently to enhance what we're doing before. So, I think it's all of the above, George. And I appreciate the excitement. We're very excited about the quality of our pipeline today. There are no further questions at this time. I will now hand over to management for closing remarks. Ray Hatch Thank you, operator. I'll wrap this. I just want to, again, thank everybody for their interest in Quest. I'm always amazed and thankful for that. I want to reiterate our positive outlook. I know I said it at least twice during the remarks, but I don't want to close this call without reiterating that. This '24 is going to be a great year for us. It is a great year for us. '25 will be as well. I want to thank the Quest team and a number of you are on this call. We've gone through so much as an organization. We've grown so much. We've enhanced our ability to serve customers, our customer service level as evidenced by some of these wonderful and holistic comments that come from you guys, and the work that you're doing, and we're greatly appreciative of this. We have a number of initiatives that we have constantly going. The whole team is executing on. They're working well and helping create some great positive momentum. So, with that momentum, I'm really looking forward to what the next quarter looks like. And I look forward to the opportunity to keep you all updated. And again, thanks for your interest in Quest. Appreciate it. Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for our participation. You may now disconnect.