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

Thank you, Cody. And thank you everyone for joining us on this call. Before we begin, I'd like to remind everyone that this conference call may contain predictions, estimates and other forward-looking statements regarding future events or future performance of Quest. Use of the words like anticipate, project, estimate, expect, intend, believe, and other similar expressions are intended to identify those forward-looking statements.

Thank you, Dave. And thanks everyone for your interest in Quest. We hope that you and your families are healthy and safe and we appreciate that you've taken the time to join us to discuss our fourth quarter and 2020 financial results. Let me start by saying that the performance of our team during 2020 was exceptional. And I'm very proud and humbled by the dedicated efforts to overcome many of the challenges put forth by the pandemic. We continue to deliver exceptional value to our customers, while ensuring each other's safety and also producing solid financial results.

Thank you, Ray. And good afternoon to everyone on the call. Fourth quarter revenue was $27.7 million, an increase of 20.5% compared to fourth quarter last year. As we pointed out in the press release, about $2.6 million, or a little more than half of the increase in fourth quarter revenue was related to the Green Remedies acquisition, which we completed and began contributing to revenue in mid-October. The remaining half a fourth quarters revenue growth came organically. In fiscal 2020, revenue was $98.7 million, which was relatively flat year-over-year. This was quite an accomplishment considering the lower level of economic activity experienced in some of our end markets, especially at the beginning of the pandemic. We were able to offset weaknesses in some markets with strength in others. And later in the year we expanded with existing customers. During the fourth quarter, gross profit was $5.6 million, an increase of 19.7% when compared with the fourth quarter last year, and an increase of 22.5% sequentially from the third quarter of 2020. Gross margin for the fourth quarter was 20.2% of revenue, which is still above our targeted level.

Thank you, Laurie. I'm very proud of how we performed during 2020, after the strong finish during the fourth quarter. With the work we've done in previous years to transform our business, we were well prepared to overcome the adversity presented to us by COVID-19. On the gross profit dollar line and the adjusted EBITDA lines, we delivered record performances in a year where the financial performances of many businesses were severely impacted. We entered the year well prepared to deal with the adversity by increasing margin profile of our businesses and diversifying our end markets. Over the past several years, we're able to expand our gross margin profile by more than 10 percentage points from 8% of sales in 2016 to 19% in 2019. During 2020 gross margin increased slightly from 2019 and remain above our targeted levels, which Laurie mentioned earlier. It's important to note that our margin expansion was not related to increase in price. In fact, we often end up saving our customers money by switching to our service offerings. Instead, the margin expansion was related to adding more value to our customers, a change in the mix of services performed and being more efficient. Regarding diversifying our end market mix, several years ago, almost all of our revenue came from two end markets, retail and automotive. Today we have five major end markets, retail/grocery, automotive, industrial, restaurants, and with the acquisition of Green Remedies, our fifth end market is multifamily housing. By having a more diversified end market mix in customer base, strength in some markets such as retail/grocery has been able to offset weakness in others such as full-service restaurants. We're also fortunate in that most of our customers operate in end markets considered essential and remains at least partially operational throughout the pandemic. Now, it's probably a good time to give a quick update on what we're seeing in our end markets. The retail/grocery end market has stayed stable throughout this entire period. And in some cases, it has experienced moderate - modest growth year-over-year. We continue to work with our retail and grocery customers to divert most - more waste from the landfills and to grow the programs that we have in place.

Thank you. And we'll take our first question from Amit Dayal with H.C. Wainwright.

Thank you. Hi, guys. Thank you for taking my question.

Hi, Amit.

So Ray, you know with such a strong performance in a typically seasonally slower period. And it looks like you signed up more customers and larger contracts on top of it. I mean, what should we expect in terms of growth for you guys in 2021 relative to 2022 - I am sorry 2020?

Yeah. Amit, what I can say is, and thank you for that. And thanks for the question. What I can say is, is that Q4, again, as you mentioned was really a good performance for the company. And I can tell you that we see the momentum carrying into Q1 as well. So as we look at our growth, again, there's forecasting issues relative to the economic environment, but our confidence level, is that we'll continue our growth, like you've seen in the past, I think you'll see a lot of repetition and momentum carrying through the year. But I'm not really ready to tell you what we feel as total growth for 2021.

Okay. That's understandable. Laurie, you mentioned, you know, potential M&A related expenses, et cetera, could be part of your operating costs this year. Do you have targets that you are exploring for further M&A in 2021?

Yeah, I'll take that on, we surely are. And you're aware of what our credit facility looks like that we've targeted for M&A. And we have a whole initiative associated with that, including staffing. So we're continuing to look at targets through the year. And we have - people are looking at them right now. So there's - we feel really good about the pipeline of opportunities. And we find the right one and the right situation, we're ready to execute on it.

Do you think you could introduce maybe price increases as a part of your execution in 2021 or '22? And you said, you really extracted all this performance just from efficiency gains. Are you moving to maybe do something on the pricing front with customers?

You know, our business is little different than maybe some of the other folks in the waste environment. When you read their reports, which I do, I know you do as well, we don't generate, we have not generated our increase - our continued improvement in gross profit through price increases. We develop it through synergies, better sourcing with our subcontractors, and focusing on waste streams that maybe bring a higher return. So contrary to our competitors in many cases, I don't anticipate price increases, I anticipate increased growth, increased leverage in our cost of goods, and bring an even greater value to the customers, which gives us more growth. So we're a little different in that respect Amit. I mean, we anticipate continuing to drive great gross profit. But the way we do it is through those other aspects, as opposed to just pure price increases.

And with respect to this food waste opportunity, is this tied more to restaurants or is it to retail/groceries?

It's currently dominated by the retail/grocer. That's the - I'll call it the lowest hanging fruit in the food waste program. Food service operators, it's a little more challenging to separate and it's happening, it's going there. But it's dominated now by retail/grocers. And food waste is - organic food waste is a significant amount of tonnage for a grocer, that's going to landfill today unless they can enter into a food waste program like we have. So it's a very good target with a lot of headroom force on it to continue to grow it.

Understood. That's all I had. Thank you so much.

Thank you.

Thank you.

Thank you. We'll take our next question from Greg Kitt with Pinnacle Family.

Hi, Ray and Laurie. Thank you for taking my question.

Hi, Greg.

Congratulations. I mean, first off, the thing that struck me was 9% organic growth. I really thought that 2020 was going to be the year that you showed organic growth for the first time and I - after COVID happened I didn't think of that, had a chance of happening last year. And so I'm so excited to get to see that now and after this transition that you've gone through over the last five years, have returned organic growth, and it's pretty exciting. And I think I hear you when you're saying that you're seeing some of that momentum continue this year. I was wondering if - I think on the last call, you talked about a national auto service - national auto service customer pilot, and I heard you talk about that food waste win and then some expansions in terms of number of locations and lines of service within customers. Are there other - is there a way to think about how you're looking at your pipeline today? And how that compares to what you've seen in the past?

Yeah. There is a - I can give you a - I'll just give you a general observation, Greg about the way we're looking at pipelines today versus the past. And again, to your point, we do have - we have signed wins, you know that were - we're working on, you know, implement in Q1. They really didn't hit Q2 with a force. But we'll see impact in Q1. The pipeline is moving much better from left to right, I call it and I think I've mentioned that before. And I think the best way to look at the pipeline, instead of just the pure size of it is the movement of it. And we're able to push them across the goal line. And honestly, since COVID started, we're seeing actually things moving across the goal line now. And I anticipate - personally, I anticipate that accelerating as we more normalized, you know, our communications and our decision-making process at the prospect level, there's a lot more interest. And I think the word we used is since the challenge is starting to dissipate for all of these customers, we're having more and more conversations than we are. So our pipeline has got a number of seven figure type opportunities in it, that we feel have got possibilities. And we've got a couple that we're they're on right now. And as far as expansion, I mean, I'm glad you mentioned that, expansion within our existing client base has been a tremendous thing for this company for a long time. And it continues. I mean, there's nothing that says more things about your company than when your existing clients are expanding their growth with you. They don't do that with vendors they don't feel good about. And so that gives me a really good sense there. So I guess the best way to look at our new pipeline for new accounts, is it's moving and some are going to cross in the goal line. And I see some more in the relative near future, hopefully. And our - it has not slowed down at all, our expansion within existing clients has continued to grow. And I can't say enough about our client services team to continue to do that as well.

Thank you very much. I had one more question. I was encouraged to see that sequential growth in EBITDA, or I mean, that - I am sorry, the sequential growth in gross profit, resulting sequential and year-over-year growth in EBITDA. I also heard Laurie talk about higher levels of OpEx. If you are able to grow gross profit in 2021, do you think that some of that incremental gross profit dollar contribution contributes to EBITDA as well?

I think we still have the structure in place for leverage, and to accomplish exactly what you're saying. So that if we have growth in our gross profit dollars, we'll continue to see a portion of that, a considerable portion of that falls down to the EBITDA.

Okay. Great…

Greg…

Go ahead, Ray.

I'm sorry, I was just going to build on what Laurie said, I think Q4 actually 2020, but Q4 is a real statement to what we've been saying our business model and grow on gross profit and having more and more fall to the bottom line. I'm really happy to see that validation, really.

I'm happy as well. So, you know, looking at Q4 that was a little bit over a $7 million EBITDA run rate quarter, annually. And so if you could just continue that trend for the upcoming year, is there a way to think - are there any outstanding CapEx uses for 2021, as I'm trying to get to a free cash number, CapEx.

The CapEx for this upcoming year will be higher than we've had in the past couple of years for a couple of things going on. Green Remedies have those - that customer base has opportunity for us to place certain service equipment in place. So we expect to spend some money there as that grows. And we do have some internal initiatives to work on our IT platform and finish - filling out some areas of that, that we'd like to devote, certainly contribute to our growth and efficiencies as we're continuing our path.

Okay, great. That was it for me. Thank you both very much for your time and hard work.

You bet.

Okay.

Thank you very much, Greg.

Thank you. Thank you. We'll take our next question from George Melas with MKH Management.

Thank you. Good afternoon, Ray and Laurie. Fantastic...

Thank you, George.

Start to the year. Congratulations.

Thank you.

Thank you.

Yeah. I want to ask question, which is very much related to the previous question. So if you feel like you've already answered it, maybe just let me know then. It seems like there was an improvement in the sales execution. You are saying that the pipeline is really moving and towards potential deals? Can you help us understand a little bit the execution of the sales? And what you guys are doing internally? Or what have you done to that has probably resulted in sort of movement in the pipeline?

I can tell you, first of all, thanks for that observation, George. And seeing things move across the goal line is a very comforting to me, as I'm sure it is to you, as an investor. What I've seen happening is a tremendous teamwork between our solutions team internally, and the sales team. We're targeting customers that - and working with customers that are looking for specific solutions. And it's nice to see the inside operations team working so hand-in-hand with the sales team. I love seeing that because that way, we're right off the beginning, understanding the customer problem, developing specific solutions to that customer, presenting and executing them, you know, in a more seamless way. So that's happening. But I got to let you know or at least mention again, these efforts are going on before COVID. I mean it was working through with COVID. I think as it's moving through, we're seeing results, I think that we would have been seeing maybe sooner without that extraneous situation. But they are working well together. I think the solution - I know that the solutions are bringing to clients or prospects to present. This seem to be - is outstanding. I think there's just some excellent work going on there. George, along with a softening of this peer environment we've been operating in.

Great, okay. Good to know. Appreciate this income . Thank you very much.

Thank you, George.

Thank you.

That does conclude today's conference - the question-and-answer session. I'd like to turn the conference back over to management for any additional closing remarks.

Thanks. I'll just close real quickly by reiterating how much the team here appreciates the support from all of you. And I want to reiterate how proud I am of the work this team has done. It's been a challenging time period and the results and the efforts, I just can't say enough about the efforts that have gone into creating the results that we have. So I'll take this moment to thank them. And also to thank you and the investment community for your support and your interest in Quest.

Thank you. That does conclude today's conference. Thank you all for your participation. And you may now disconnect.