Thank you for standing by. This is the conference operator. Welcome to the Quest Resource Holding Corp. Second Quarter 2023 Earnings Conference Call. As a reminder, all participants are in a listen-only mode. The conference is being recorded. I would now like to turn the conference over to Dave Mossberg, Investor Relations representative. Please go ahead.

Thank you, everyone, for joining us on the 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 performance of Quest. The use of words like anticipate, project, estimate, expect, intend, believe, and other similar expressions are intended to identify those forward-looking statements. Such statements are based on Quest’s current expectations, estimates, projections, beliefs, and assumptions and involve certain significant risks and uncertainties. Actual events or Quest results could differ materially from those discussed in the forward-looking statements as a result of various factors. You are cautioned not to place undue reliance on such statements and to consult our SEC filings for additional risks and uncertainties. Quest forward-looking statements are presented as of the date made, and we disclaim any duty to update such statements unless required to do so by law. In addition, in this call, we may include industry and market data and other statistical information as well as Quest’s observations and views about industry conditions and developments. The data and information are based on Quest’s estimates, independent publications, government publications, and reports by market research firms and other sources. Although Quest believes these sources are reliable and the data and information are accurate, we caution that Quest has not independently verified the reliability of the sources or the accuracy of the information. Certain non-GAAP financial measures are also discussed during the 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 for investors’ understanding of the company’s ongoing core operations and prospects for the future. With all that said, I’ll now turn the call over to Ray Hatch, President and Chief Executive Officer.

Thank you, Dave, and thanks, everyone, for your interest in Quest. We gained momentum during the second quarter with another significant increase in sequential financial performance. The $13.5 million in gross profit and the $5 million in quarterly EBITDA was the second highest gross profit and EBITDA quarterly performance in the company’s history. Adjusted EBITDA increased 26% and gross profit dollars increased 7% sequentially. Most of the growth came from ramping up new clients and penetrating existing ones. Improvements at RWS also contributed to the sequential increase and we expect the business to provide a strong incremental contribution going forward. We also generated significant cash flow during the quarter and expect to be a strong cash generator this year. We’ve used the bulk of cash flow to reduce debt levels. Subsequent to the end of the quarter, we paid down another $2 million on our line with Monroe Capital for a total reduction of $7 million year-to-date. We continued to gain momentum during the second quarter, and we’re executing well with our strategies. And we are on plan to deliver double-digit growth in gross profit dollars and adjusted EBITDA for the year.

Thanks, Ray, and good afternoon, everyone. During the second quarter, we saw a strong sequential comparison in gross profit dollars, which increased 6.9% from the first quarter. This improvement reflected organic growth from the continued ramp of new clients and from penetrating existing ones. The sequential comparison also benefited from the integration work that we have done to adopt standardized processes across acquired businesses. This includes the full benefit from realizing contracted pass-through costs at RWS, which we discussed on previous calls. I want to make a note about year-over-year comparisons. As we discussed on our previous earnings calls, the integration challenges at RWS during 2022 impacted year-over-year comparisons and masked the improvements we have achieved for the first half of 2023. Given the unique events of last year, we think sequential comparison is a better indicator of current performance and momentum. Prices for recyclable materials may have an effect on revenue, but have not historically had significant effects on gross profit dollars. And this last quarter is no different. Our client agreements produced consistent gross profit dollars based on volumes and are not tied to fluctuations in the price of recyclable materials. I want to reiterate that this is why we use gross profit dollars as a key metric to measure our financial comparisons. Looking forward, as Ray mentioned earlier, our outlook for gross profit dollars for the year is robust, and we remain confident in our ability to deliver double-digit growth in gross profit dollars for the year. Gross profit dollars should benefit from continued momentum in organic growth and continued improvements from our integration efforts. As you look at modeling out our business for the second half of the year, we suggest that you model for continued sequential growth in gross profit for the third quarter and adjust for normal fourth-quarter seasonality. Moving on to SG&A expenses, which were $9.2 million during the second quarter compared to $9.3 million during the same period last year. We are ahead of schedule with integration and expect integration costs to be lower during the second half as we expect to finish up those efforts mostly by the end of the third quarter. We are also expecting to gain efficiencies from integration efforts and recent investments we have made in our platform. We expect to continue to invest some of these savings into growth initiatives that further improve efficiencies and increase our ability to bring value to our customers. As a result, we expect SG&A expenses will average about $9.5 million per quarter, which is flat in comparison with the back half of last year. And then we will start demonstrating the leverage in the platform, both in adjusted EBITDA dollars and EBITDA margin. During the second quarter, depreciation and amortization was $2.5 million, flat in comparison with a year ago, and we expect depreciation and amortization to be approximately $10 million for 2023. Therefore, to reiterate, for the back half of the year, we expect to see growth in operating leverage and acceleration in adjusted EBITDA as double-digit growth in gross profit dollars is leveraged over a relatively smaller increase in operating expenses. Moving on to a review of the cash flow and balance sheet. We are in good shape liquidity-wise and continue to enhance our liquidity. Our cash balance was $3 million at the end of the second quarter, and we have $5.5 million drawn on our $25 million operating borrowing line. We produced strong operating cash flow during the first half of the year generating $3.3 million during the second quarter and $6.3 million year-to-date. This improvement came primarily from improvements in working capital management. Our working capital demands will continue to fluctuate based on the pace of growth, which may cause fluctuations in operating cash flows from quarter to quarter. Nevertheless, we expect to be a strong cash flow generator during 2023.

Thank you, Brett. I want to start off by saying how excited I am about what lies ahead for Quest for the balance of the year and the next several years. For the last 18 months, we’ve had a heavy lift to manage significant organic growth and to integrate acquisitions. While acquisition and integration have not been perfect, those issues are behind us now. We’ve learned a lot, and we continue to enhance our client value proposition. Overall, I’m proud of the job the team has done. The business is firing on all cylinders, and we’ve gained significant momentum over the last two quarters, and I’m excited about the profitable growth we have in front of us for the balance of this year and for the next several years. Let me make a brief comment about the macro environment and concerns over inflation and economic uncertainty. The good news is that the waste business is generally resistant to recessions. Our clients, which are primarily large businesses with multiple locations, continue to generate waste during both the top and the bottom of the cycle. Our model is agnostic to price swings in recycled materials. We can pass through increases in costs such as fuel surcharges. Because of this, we feel like we are well positioned to endure economic headwinds. During the second quarter, we continued to see stable activity levels across our end markets, and we managed cost pressures and fluctuations in the price of recycled materials well. Moving on to a discussion about growth. I feel very good about the organic growth we have in front of us. We saw significant sequential growth in gross profit dollars during the second quarter, and we expect that momentum to continue into the back half of the year. We have multiple sources of growth that give us confidence in our ability to post double-digit gains in gross profit this year. First, as we pointed out in the press release, we had a win with a significant client in a new end-market vertical. This win has the potential to grow into an eight-figure annual revenue. We expect to begin the onboarding process on September 1, and then the engagement will ramp up over the next 12 to 24 months. We are starting with a small portion of the 380 locations and expect to handle about half a dozen waste streams. Previously, this client was handling their solid waste through a vertically integrated national provider and handling specialty waste streams on a site-by-site basis. The major selling points for our service were our cost-effectiveness, alignment to divert a greater portion of waste from the landfills, and the added visibility we can provide with our data platform. Second, we have ample opportunity to grow with our existing client base. Our land and expand strategy has consistently delivered solid growth for the last five years, and we feel there are ample opportunities for continued growth from our existing clients for multiple years to come. Another source of organic growth comes from new service capabilities gained through acquired businesses. We’ve added several new service offerings with our recent acquisitions, and we are actively introducing those new services to existing clients. As you know, we’ve also developed an innovative food waste recycling service we call Proganics. One of the largest materials going into landfills is food waste, and our Proganics service can help grocers deliver as much as 100% diversion of organic waste from the landfill. For many, that can equate to a reduction in the total landfill of 70% or more. We recently received a patent for this new and innovative service. We have a lot of interest and are active in conversations with several large prospects for this service. Growth will also come from continuing to roll out services to several of the significant wins we’ve discussed over the past 18 months. As we’ve discussed before, in some cases, it can take 12 to 24 months to fully ramp clients, and there are several new clients that are in the process of ramping, which will provide embedded growth for at least the next year. In addition, we continue to add new prospects across multiple end markets that are working their way through our pipeline. I remain confident that we will have success in securing sizable new clients during 2023. I would also note that there are large opportunities, and a win with any of them can provide a meaningful contribution to our growth at maturity. We’ve also hired additional talent to help us bring in new large clients. We announced last month that Perry Moss has joined Quest as Senior Vice President of Sales. Adding Perry is a big win for Quest. Perry has a 30-year track record, is a thought leader, and has strong relationships with the client base and other players in our industry. He is well known for his deal-making capabilities and securing major account wins. I also want to point out that we have a large opportunity to drive gross profit dollar growth on the cost side by optimizing the business we have in hand. Over the last three years, we’ve more than doubled the size of the business, with about two-thirds of that growth coming from acquisitions and new clients. As we bring revenue under our platform, we’ve proven our ability to optimize the cost of services through vendor relations and procurement management. We’re going to market with our vendors focused on win-win contract provisions by adding volume from the entire Quest footprint. Vendors can benefit from greater utilization and lower costs for route optimization. Quest benefits from lower costs, which has a positive impact on the pricing for our clients. Now for an update on acquisition integration. We’ve completed integration of five of the six acquisitions that we’ve made since we began a proactive M&A strategy in 2020. The sixth acquisition, RWS, went live on our ERP platform effective August 1. Having all of our acquired businesses on a single ERP platform gives us greater visibility as well as greater efficiencies and cost savings. All of the heavy lifting has been done to integrate RWS, and we should be completed before the end of the third quarter, which is about a quarter ahead of schedule. Integration work is not easy, and I want to thank our team for their extra efforts and late hours to complete this process. We’ve gone through a steep learning curve with these acquisitions, and we’ve honed our skill set in terms of evaluation and integration planning. We’re clearly in a better position to execute on M&A strategy going forward. We continue to see acquisition opportunities, and we’ll evaluate them as we always do based on strategic fit and potential financial impact. Before I move on to our outlook, I want to talk a little bit about our investment we’re making in technology. For years, we’ve been quietly building a scalable platform that uses technology to increase our customer value proposition and increase our efficiencies. Our philosophy has always been to develop and utilize technology so we can provide a rapid return on investments for us and for our clients. Our focus has been on investing in technologies based on direct benefits that can provide to our customers. Over the years, we’ve built a technology platform that will be able to scale to the size of a much larger enterprise and support customers’ evolving diversion and sustainability goals. The technology platform we’ve built has been the key deciding factor for several competitive wins and have helped us maintain our enduring customer relationships due to the incremental value that we provide. In recent years, we’ve stepped up investments in our technology platform so that we can stay ahead and continuously improve client value, efficiency, and scalability. I want to give you a few examples of technology developments that we’ve recently brought online. We’ve recently introduced a sourcing tool for our vendor relations team. It allows our staff to look across the entire footprint of vendors for qualification and pricing data. This tool will reduce the time our staff needs to find optimal solutions from days to minutes. We’ve also launched a new vendor onboarding system that better automates the process for bringing on new vendors. This will generate cleaner data internally, improving efficiency and overall client service. Now an update on our long-term strategy. We’ve worked hard over the last few years building scale, diversifying our customer base, strengthening our balance sheet, and building a strong management team, and we are pleased to be in a position to actively evaluate, prioritize and pursue a set of initiatives to support growth, efficiency, and customer value add. As part of our commitment to maximizing long-term shareholder return, we’ve launched a long-term strategic planning process with the support of our Board of Directors in order to prioritize and invest in the most attractive strategic initiatives. We’re actively engaging them in leveraging our experience in support of enhancing long-term strategic planning. Regarding our outlook, our positive outlook for profitable growth has not changed. We expect to be a strong cash flow generator during 2023. We expect acquisition integration to provide incremental contributions from both increased efficiencies and cross-selling. We have multiple sources of organic growth, including doing more with existing clients, ramping with recent wins, and converting prospects into clients. Pressure to improve sustainability, increasing regulation, and increasing cost of landfills are lowering the bar for adoption of our recycling services. We’re optimistic we’ll continue with positive momentum for 2023 and for the next several years. I look forward to keeping you updated on our progress. We now like the operator to provide instructions on how listeners can queue up for questions.

Thank you. We will now begin the question-and-answer session. The first question comes from Aaron Spychalla with Craig Hallum. Please go ahead.

Yes, hi, Ray and Brett. Thanks for taking the questions.

Hi, Aaron.

First for me, can you talk a little bit about the vertical for this new customer and maybe some of the key waste streams that are there? And then just you kind of talked about other new business wins. Are you starting to see any improvement in the timing of closing of new business given the kind of value proposition you offer in the face of higher landfill costs and internal and external requirements for customers?

Yes. A couple of things, Aaron. Thank you for the question. First of all, I think it’s getting easier to have conversations with prospects based on what you just mentioned: increasing costs and increasing demand for sustainability. We have a number that we feel really good about that are right on the goal line. So that’s why I was so optimistic in my comments relative to future growth, along with existing clients. As far as the new vertical, it’s not a big vertical in terms of the number of players in it, so I don’t want to get too detailed on it, but it’s a large commercial company that has a lot of different waste streams. They’re not manufacturing but have unique needs. They’re more in the freight and transportation type of space, which brings not only new waste streams but also scale to our existing waste streams. The vertical has a tremendous amount of potential and we can provide a unified database for reporting, which they currently lack.

No, that does. That’s good to hear. And then maybe just second for me, on the vendor network. Can you talk about the health there and the kind of impact given some of the challenges that we’re seeing in the market? And then just broadly the ability you have to continue to optimize that network as our business scales?

That’s a great question. I’m pleasantly surprised, actually. I anticipated more issues than we’ve had. The health of our vendor base is very strong. We haven’t experienced any significant issues even during these difficult times. In fact, it seems like some of our vendors may have gotten stronger when others in the market have folded. Our ability to expand the vendor network is directly tied to the value we bring to vendors. We are creating stability and opportunities for them to optimize their routes and increase utilization. Overall, we’ve had good luck and are thankful for the strength of the vendors we have.

Great. Thanks for taking the questions. I’ll turn it over.

You bet.

The next question comes from Gerry Sweeney with Roth Capital. Please go ahead.

Hey Ray. Brett, thanks for taking my call.

You bet. Hi Gerry.

I’m going to start with the easier one at least the easier one to ask. On the RWS, how far along is the integration process? How much of a margin headwind remains to be caught up with the rest of the business?

Hey Gerry, this is Brett. So we went live in our new integration on August 1. We’re just now getting through some of the hurdles and working through the normal challenges that come with the integration. We’ll get through our first close and continue to iron out the kinks. By the end of the quarter, I expect us to be on a normal run rate with the benefits of getting onto a single platform.

Got it. And you made up some margin impact in Q2. Is that correct?

We certainly saw some improvement in the business sequentially from Q1, absolutely.

Got it. Okay. My other question, Ray, you talked about strategy. You hinted at using the Board and leveraging their expertise in multiple areas. We have a lot of client wins. You hinted at leveraging your increasing service portfolio. I’m curious if you could talk about where the strategy review is going to go or what you’re thinking about since you’ve brought it up.

I’ve opened the door for that, right, Gerry? Our Board is growing and bringing a lot of different value. We’re assessing market opportunities and our ability to execute primarily with innovation. We’re excited about the strategic planning process, which includes expanding where we are today and identifying opportunities in different verticals. We don’t have the limitations that capital asset-heavy companies have, so we can leverage expertise and technology to strengthen our offerings.

Got it. I appreciate that. Last question about getting increasing leverage with this new win. How many waste streams are there that you would love to see you can get more leverage on?

We handle over 100 waste streams, but there are quite a few we have relatively little scale with the clients we have. I would estimate about two-thirds of those streams have significant opportunities for expansion. Recent acquisitions have brought us additional vendors that allow us to enhance our leverage in existing waste streams.

That, I would assume, would be additive to the margin front, right?

Yes, that’s totally additive.

Hi Ray and Brett, congratulations on a great quarter.

Thank you, Greg.

Thank you, Greg.

On the Q1 earnings call, you talked about double-digit percentage growth in gross profit and EBITDA over several years. What gave you the confidence to make that statement for the first time?

It’s a great question. As I look at the maturity of our business and the receptiveness of the market, I feel confident bringing on new customers, especially with some recent additions. Continued expansion within our existing clients reassures me that we can sustain this growth.

You expect EBITDA growth to be greater than gross profit growth as you benefit from past investments. Could you share any additional insights on how these investments are generating more EBITDA from each gross profit dollar?

You're correct. We're focused on increasing efficiency and reducing errors in processes like vendor onboarding. Automating these processes frees up talent to focus on identifying new opportunities, which enhances our ability to drive gross profit.

Thank you. You’re continuing to pay down debt, and it appears you’re on track to be below three times leveraged by the end of the year. Should we expect you to pay down more debt with that cash?

Yes, we’ll look to be aggressive in paying down debt while also ensuring we make necessary investments in working capital to support growth. We’ll see how cash management plays out with integration efforts, and we will continue to look for opportunities to pay down debt.

You mentioned that it looks like you could comfortably be below three times levered by year-end. Is that correct?

Yes, we were able to get our leverage under four by the end of this quarter, which has already resulted in a lower rate.

I find this to be the most exciting time for Quest. Several competitors have been acquired at good multiples, and your platform appears well-positioned to handle more scale. How would you gauge your platform today compared to two years ago?

I’d say the platform has improved significantly. If we had our platform from five years ago with today's volume, we would struggle. Our platform now enables us to deliver best-in-class service, and I am confident it will continue to improve as we move forward.

Yes. I got a couple of questions. I was concerned about the comparisons this quarter because of the outlier in Q2 2022. Coming in where you did this year is a very positive development. Could you explore seasonality and your expectations for gross profit growth in the second half?

Yes. We are confident that our gross profit growth will overcome seasonality effects in the second half. Our projections are in line with the positive outlook we've expressed for the year.

Can you provide insights on non-recyclable material services and how they’ve helped you achieve organic growth?

The increase in demand for non-recyclable material services reflects the organic growth we’re experiencing, indicating that we can adapt and succeed even amidst challenges.

What about the $5 million decrease in revenues from the acquisition in 2021? Can we expect to regain some of that?

The decline does relate to previous adjustments rather than significant lost customers. We’re confident that we can normalize this moving forward.

Have you considered refinancing to reduce your interest expense, which could significantly unlock value?

Yes, we are actively evaluating refinancing opportunities that could yield savings as we manage our debt down. We’re optimistic about the prospects for improvement.

Absolutely.

Thank you, Nelson.

This concludes the question-and-answer session. I would like to turn the conference back over to Ray Hatch for any closing remarks.

Thank you, operator, and thank you all for being on the call. I appreciate the questions and the interest in Quest. Many of you have been supportive for a long time, and we appreciate it greatly. I want to reiterate our positive outlook for 2023. We feel great about a confluence of events, with everything moving in the right direction and the execution from this team has been tremendous. I want to thank them for their efforts and hard work. We look forward to keeping you updated in future quarters. The Quest story will continue to write better chapters every quarter as we go forward. Thank you, everyone.

This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.