Good day, and welcome to the Quest Resource Holding Corporation’s First Quarter 2017 Earnings Conference Call. Today’s conference is being recorded. Before I turn the call over to management, I would like to remind everyone that this conference call may contain predictions, estimates and other forward-looking statements regarding future events or future performance of Quest. Use of words like anticipate, project, estimate, expect, intend, believe, and other similar expressions are intended to identify those forward-looking statements. Forward-looking statements also include statements regarding Quest’s future opportunities for growth, Quest’s expectations for revenue, margins, and profitability in future periods; Quest’s industry position and industry trend; and future opportunities related to Quest’s e-commerce Web site and comprehensive proposals such as forward-looking statements represent Quest’s current judgment about the future, and they are subject to various risks and uncertainties. Risk factors and other considerations that could cause Quest’s actual results to be materially different are described in Quest’s Securities Filings, including its forms 10-K, 10-Q, and 8-K. You can find those documents on Quest’s Web site at www.qrhc.com. Quest does not assume any obligation to update that information. Actual events or results may differ materially from those projected, including changing market trends, reduced demand, and competitive nature of Quest’s industries. In addition, in this call we will include a substantial amount of 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 other information are accurate, we caution that Quest has not independently verified the reliability of the sources or the accuracy of the information. In addition, Quest’s observation and views about industry conditions and developments are its own and may not be supported or agreed with by other industry participants or observers. 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 its investors’ 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 all that said, I’ll now turn the call over to Ray Hatch, President and Chief Executive Officer. Please go ahead sir.

Thank you, operator, and welcome to everyone listening in to and discuss our results. Now joining me on the call is Laurie Latham, our Senior VP and Chief Financial Officer. The first quarter financial performance was ahead of our expectation and built on the momentum we saw coming our of last year. We were able to deliver a 20% growth in gross profit dollars and the first five with EBITDA quarter and over nine quarters. Revenue did decline year-over-year but this was not unexpected. As we previously described, we’re focused on adding a wide revenue, not revenue for the sake of having revenue. With this disciplined approach our top line comparisons may be challenged over the next several quarters. But the disciplined approach is clearly showing positive results in our gross profit line and our bottom line. In fact first quarter gross profit dollars and gross margin were the highest quarterly levels we’ve achieved since 2013. Longer-term we expect to return to meaningful top line growth and our disciplined approach has more consistently produced attractive profitability levels and returns to our shareholders. After the end of the quarter, we also had our first significant win in the construction market. This is one of the key new markets that is a very large focus of growth for us. Before I get into further detail on the progress of our initiatives, I’ll now turn the call over to Laurie to review the financials. Laurie?

Thank you, Ray, and good afternoon to everyone. First quarter revenue decreased 7.1% year-over-year to $42.5 million compared to the corresponding period in 2016. The decrease was primarily due to a combination of changes in the mix of services, pricing and customers. The decrease in revenue was more than offset by a $3.9 million reduction in the cost of contracted services resulting in improved gross margin. First quarter 2017’s gross profit dollars increased $699,000 to $4.2 million, compared to $3.5 million for the first quarter of 2016. Gross margin percentage for the first quarter of 2017 was 9.8% sales, a greater than two percentage point improvement from first quarter last year. The improvement in gross margin was a result of a positive shift in the mix of services we performed during the quarter, resulting from our disciplined service and customer review strategy, as well as optimization on the procurement side to align cost and improve efficiency. It is important to note that our gross margins are affected quarter-to-quarter by a variety of factors, including shifts in service price and commodity index adjustments, cost of contracted services and revenue mix. And I would suggest that you do not model out the same magnitude of improvement in every quarter this year. Nevertheless, margin performance during the first quarter was ahead of our expectation and possessed in a good position to meet our goal of one to two percentage points gross margin improvement for the full year of 2017, compared to the prior year. Operating expenses increased $307,000 to $6 million. Comparison to the operating live may be as discipline as this year’s first quarter included a one-time severance cost for our former COO. Excluding this, operating expenses would have been relatively flat. We expect that operating expenses may continue with relatively modest…

Thanks Laurie. Now I’m going to take some time to review the progress we’ve made with several of our key initiatives. First one of our key initiatives is managing our existing customer relationships and make sure we’re adding the right new customers. The objective here is to grow the right business that can help us achieve our overall financial goal not just revenue for the sake of revenue. As I said before this change in strategy will make our top line comparisons difficult probably for the next several quarters but some in quarters we may actually have an inverse relationship between revenue and gross profit, such as the first quarter we’re talking about today where we had a 7% decrease in revenue, but that still allowed us to generate 20% increase in gross profit dollars. And that’s indicative of what our strategy is trying to attain from a gross profit standpoint. The decrease in revenue during the first quarter was mostly related to business we chose not to renew. We’re basically using a greater scrutiny to review the changes in the market prices and costs and simply choosing not to renewing business that just doesn’t make sense for Quest. The customers of our contracts vary between one to three years it will take time to fully implement this disciplined customer acquisition strategy, but during this interim period, revenue as a standalone metric won’t really reflect the underlying progress of our strategic initiatives, instead gross profit dollars would be a much better metric for all of us to use. We capital a lot of the low-hanging fruit and gross profits so far in Q1 or reflected in Q1. So don’t expect the rate to continue to increase at the same pace, however, we believe our strategies will continue to deliver incremental…

Thank you. [Operator Instructions] And we’ll take our first question from Gerry Sweeney with ROTH Capital.

Hey good afternoon Laurie and Ray.

Hey Gerry.

I want to spend a couple minutes on revenue then shift gears a little bit. But obviously you had communicated in the past that revenue you were going through a contracts and some may renew some may not renew and revenue could trend down. Curious if you could provide maybe some information on how much revenue exited the quarter revenue that you wanted to get rid of versus on boarding of new revenue?

I don’t have the amount there. And that’s a good question, but I don’t have that broken out. But I will tell you that it’s not just clients renewing or not within that it is maybe we may have several lines of business Gerry with a certain client. Some are profitable, some are not. So within existing clients we have them and they’re looking good because we’re able to get rid of or negotiate out of some less sub-optimal lines of business within the existing client. But without having the total number a significant portion of the revenue reduction was that is was specifically that tuye of pick up. I don’t have the exact number, but very significant.

Got it. Okay now that’s helpful. And then on the margin front obviously optimization programs going well. How far along are you on the review of contracts? I know they’re about one to three years in link, but also the opportunity with the procurement side working with their service providers?

Well starting with procurement side as we look at this Q1 and it seems like just a few days ago, I think, when we had our last call, I mean, so it hadn’t been that long, but we have made a lot of progress. Q1 I think we used low-hanging fruit a moment ago as one of the descriptors, now a lot of that low-hanging fruit had to do with our procurement process. Because of the timing that you just mentioned on on-boarding of business and existing contracts, that’s not nearly as immediate as the impact we can have in our cost of services and bringing – it’s been short term quicker much more impactful. When you combine our procurement issues that are already fully starting to roll we’re excited about how quickly that has happened frankly with getting out of some really just semi onerous agreements relative to gross margin. That where lot of the impact came from the Q1.

That’s [indiscernible]. I mean it was great result. Then finally on the technology side, I mean, I think, this is probably one of the most interesting value add that could be out there. And obviously you’re not necessarily charging for this in the near term as to develop it. But what’s the feedback from the clients that are using it? This could be a huge advantage to your clients on a go forward basis and a huge advantage for pricing opportunity if you should manage for obtaining new clients at some point.

You know what Gerry, we feel it’s a huge differentiator. Laurie and I and the team here and Dave and all read this we talk a lot about that. Just being a company that picks up your stuff is ultimately will back up to what we really have is a data value that is in a B2B world can bring immense upside to our client. And so we’re really excited about it. If clients’ expectations are going to grow you ask about what’s happening with them now. One of our large industrial clients is really easing it quite a bit. It’s absolutely vital to what they’re doing every day understanding where those dollars are going, where those tons are going. But more importantly, I believe not where they’re going but how they’re getting there in the first off. What kind of standards do I have whether it’s produced food waste, whether it’s metals, whatever we’re drawing away and tracking, what’s the baseline where should it be? And if there is some of my locations up on the customer that generate significantly higher percentage of tonnages when they should be close to the same, why is that tolerance so broad. And I think we may have missed it before, for example, in the space of food waste as one of our strengths, we talk a lot about and negotiate the cost of disposing of food waste which is a tiny fraction of what the cost of food waste in and of itself originally is. If you’re a retail store and you’re buying cucumbers I’m just going to pull that out there. Whatever cucumbers you buy, your hope is that they’re all going to go through the front register and bring you $2 for that $1 a pound you spend. Every pound that goes out in any kind of waste it is a hundred percent P&L loss to the operation. And if we can give them data that help their replenishment, for example, be much more in line with the demand. And they cut their spoilers down and actually reduce their food waste. That’s where the data takes down so much more value Gerry than just the art and the economics are picking up their food waste. So yes it’s a quick question I appreciate that. We do it as a big differentiator for us. And going forward you can see how that can translate into one higher stickiness level with your client because of the dependence on that is part of business. And secondly, if we’re providing services somebody else is not or maybe not doing to the extent that we are, it makes our service more value which ideally is to translate into margin long-term.

And then one real really industrial [ph] question. Severance, I think in a queue, $244,000 that’s in SG&A correct?

Yes.

Okay, perfect. Thank you very much.

We’ll go on next to Avi Fisher with Long Cast Advisers.

Hi Ray, long time never seen.

Hi Avi.

Just had a few very quick questions. Were there any one time benefits in gross profit?

One time, no...

Contract reassessments or anything?

No I get what you’re asking we’re kind of looking at each other to see...

No we’re not aware of any material significant type of things that come to mind. And we may have various types of services that one customer may do one quarter they don’t do another quarter. So there’s some variances in the mix of our services all the time.

No it’s from one-time perspective, I get your question like if there is any huge big thing that moves the needle the north. And the answer is no but I want to go back to something we mentioned earlier. We have a lot of low-hanging fruit that we’re attacking through all the things we’ve already mentioned in the call. And so I wouldn’t draw a straight line and expect that I think our improvement was 2.2% in gross margin, during – yes 2.2% obviously that’s not a – we don’t expect to do it every quarter. We grab the lowest hanging fruit. But to your point though it’s not one time it shouldn’t be one time. There might be some variances but that’s what we grabbed up first and hopefully we’ll continue to improve a lot of that if it’s marginal.

I guess what I’m saying is that our business practice should hopefully yield get stuff going forward, but I want to see that kind of increase quarter-over-quarter.

Right when you’re talking about low-hanging fruit I mean, this is harvesting low-hanging fruit that you planted, I should say, whatever metaphor for the last few quarters, this isn’t just that quick turn on one quarter of work.

No.

No it’s been worked on for a while a good point. And it comes to fruition, I guess, for using the fruit a lot. But it can be fruition. From a number standpoint in Q1, but obviously we were working on this Q2, Q3 and circumstances allow you to get to a certain point, but I’ll tell you different initiatives ramp up at different speeds and will continue to have more come in but we had some – when you have a negative spec line we call in this business with a large client where you losing and you’re not making money it, a particular line of service. And when that comes off it’s got a dramatic impact on your gross margin. And we knew about it and it takes a while to get to that point. On a procurement side it had a really broad effect on our margin positively and so we went out and took some really great philosophies out to the marketplace and really have had that benefit come home for us.

And then I’m going to put this question around asking a similar question differently, but are there any front-loaded profits and contrast where you bring on a new customers and it’s just sort of – you said these contracts vary from one to three years. Are any of them where profits are front loaded?

No we don’t have front loads in our agreement. I mean it takes place and it actually I don’t call it back loaded because that implies it’s different but as you reach maturity and I used the fruition word again when everything starts get integrated that’s when you have a better yield but no other there is no front loaded profit on new client agreements.

Got it. So I know you’ve been telling this but the burn off or exclusion of the low margin we’re seeing the benefit finally of burning off and getting rid of low margin contracts headed towards double digit gross profit margin.

Yes actually we secured double digit this quarter 9.8 this quarter. So they increased pretty significant and that’s one of the things I think I mentioned in a previous comment. We are looking – we’re on track to do what we said we were going to do last quarter moving toward double-digit margin. And I don’t think it surprised me by we. We reached a couple of these metrics maybe a little quicker than we expected. We’re very, very happy and encouraged by that.

Alright. You talked in your prepared comments about how you expect technology as a competitive advantage. But my sense of this business and I think most of this business is really scales when you can grow the volume on the top line and keep your SG&A cost flat. So you’ve talked a lot about the lumpiness and the outlook for revenues for potentially the pressure in the near-term long-term growth, but one thing we’ve also seen is the SG&A continuing to grow up until this quarter it’s been growing faster than revenue, and faster than gross profit. And we reached that inflection point where you can hold SG&A flat and grow gross profits faster and grow revenues faster than that?

Well I think there’s three different things and so I’ll try to speak to it. With three different things you brought up for me to speak to is revenue, gross profit and SG&A. And there’s some ties and I would say there’s no question that when you get your platforms established, I guess, it becomes more scalable as you grow your sales. And we’re working really hard too, but it’s got to be the right kind of scale. And we’ve had some situations in the past where we added a lot of revenue with that, and a lot of SG&A to support it with relatively little gross profit contribution dollars in that regard. So that’s the shift you’re seeing now. When I talk about the lumpiness and the revenue, it’s the simply to work in from where we were to where we’re going. And as we said we anticipate going back to double-digit growth 2018. Give us this year to get to our business situated where we have. The model you just described. And yes we should be able to – we definitely plan to grow revenue and gross profit at a higher rate than our SG&A on a go forward basis. That’s the model we’re moving to obviously very quickly right now.

And I guess the simple way of saying that is most of most of the businesses work when they get generate operating leverage off that SG&A. So where will this take and when do you get to a level where SG&A is basically flat and everything it’s gets to leverage that into higher sales and gross profit.

Well you mentioned...

Are you continuing to grow your SG&A as the revenue grow?

Well it’s not that SG&A will just stay flat. It’s just that as you mentioned, there’s operating leverage that we can now put in place. We expect that I think we mentioned in our prepared comments that we expect SG&A to have some modest increases. Those modest increases though certainly have a different perception than what we’ve seen in the past. We do have some leverage coming in place both from technology and we’re putting that against being able to onboard customers more efficiently. So we do see that we’re getting there to the operating efficiencies that you’re talking about. But there may still be some increases let’s say in a little bit of sales as we want to broaden our reach in certain market vertical or we may have such significant growth on the top line because we can make – bring businesses on rapidly that we just may have to add a little bit. But we believe that we’re there and at a point where we can start to leverage our SG&A.

Yes and the severance cost you mentioned are we done with those?

Well...

You mentioned sometimes [indiscernible] SG&A.

Cost are in most cases something that occurs in course in of a business but the time that we had call out is not something that is typical.

Yes that’s not recurring. Yes that’s not recurring.

Okay thanks very much Ray. I look forward to following-up you latter.

Thank you Avi.

Sure.

[Operator Instructions] We’ll take our next question from Ishfaque Faruk with WestPark Capital.

Hi good afternoon. Just a quick pick picture question from me, with regards to your gross margin Ray you said that you five-year outlook is in the low-to-mid teens. When do you expect it to be – what are some of the impediments that you’re currently facing that you expect to overcome to get to those levels?

Go ahead Laurie.

Well I think you’ve talked about it some maybe service mix and targeting the right customers with the added value.

Yes absolutely I wouldn’t call it an impediment so much as a journey we have to hit down. I mean the fact is what we’re looking is down the road and we started that journey obviously based on what you saw this quarter. And as Laurie just that our client mix, our customer mix as we add more and more of these targeted protocols that we’ve talked about, the construction services is brand new for us. And that’s a nice margin business, high demand and we’re really excited as that business grows, as the industrial business grows as our mixed of services that we’re offering start to lean more toward the much higher margin contribution that as we get there. And so Laurie I put that projection together it is really based on that journey from where we were a year ago to where we’re headed based on custom mix and the expected contribution from that make shift. Does that answer your questions?

Yes. A quick follow-up. So regarding the construction vertical is it safe to assume that the construction vertical has higher margins than maybe like the retial one which is like a pretty big one for you guys?

I’ll do that. Okay I think it’s a totally different service is the point. And margin is and always has higher pricing it’s basically matching a totally different service, for example, just to explain in a retail environment you’ve got scheduled pick us, in a construction services environment it’s all on demand and there’s a lot of technology and a lot of moving parts. And so the expectation is temporary on demand service type environment we’re going to drive there’ll be a lot higher margins associated with it. So since they are totally different services but yes it’s safe to assume the margin contribution is significantly different with those different services.

All right thank.

You bet.

That concludes today’s question-and-answer session. At this time I’ll turn the conference back to Mr. Ray Hatch for any final remarks.

Yes thank you operator. Just the final remark is I want to compliment the team that’s done a great job in moving down the path that we mentioned. We’ve had a couple of key important metrics, gross margin at 9.8% which is a huge jump from the previous quarter and the previous year. Adjusted EBITDA positive for the quarter is a huge milestone. And we’re excited about our results and what we’re able to present to you this quarter. And more importantly we appreciate all the interest in Quest and all the people signing in the call and listening today. Thanks very much.

This does conclude today’s conference. Thank you for your participation. You may now disconnect.