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

Thank you, Christie, and 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 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. Thanks to everyone for your interest in Quest. We are off to a great start in 2021, after what’s been an incredibly challenging year. During the first quarter, we had top line growth nearly 40%, with organic growth representing more than half of that. This performance reflects gains across our growth initiatives of supporting existing customers, driving organic growth and adding customers through acquisitions, plus a surge in demand due to COVID recovery in certain end markets. We also reached new records in terms of gross profit dollars and adjusted EBITDA.

Thank you, Ray, and good afternoon to everyone on the call. First quarter revenue was $35.1 million, an increase of 38.6% compared to the first quarter last year. Growth came from both, new and existing customers, and we were able to more than offset weakness in some markets with strength in others. About a third of the increase was related to the Green Remedies acquisition, which we completed during the fourth quarter last year. I would also point out that we benefited from a significant ramp-up in activity with our industrial end market. As we discussed in the press release, activity levels and waste volumes grew significantly at these locations as they looked to make up for COVID-related constraints last year. These activity levels were ahead of our expectations, and we believe are likely to subside as the production backlogs are reduced. During the first quarter, gross profit was $6.4 million, an increase of 41.8% when compared with the first quarter last year. Gross margin for the first quarter was 18.3% of revenue, which was 40 basis points ahead of last year and is in line with our targeted levels. SG&A expenses were $4.3 million during the first quarter, a decrease of $147,000 compared to the same period last year. The decrease was primarily related to lower travel, advertising, stock-based compensation and trade show expenses. In the near term, while certain SG&A expenses, such as travel, will continue to remain low, we expect SG&A costs will increase throughout the year due to business recovery. In addition, we plan on adding national account salespeople and other personnel to support growth, as well as vendor relationship managers. We also plan to increase investment in technology this year that will further improve operations and add scalability to our platform.

Thank you, Laurie. We had an exceptionally strong start to the year with a solid growth and record EBITDA. This performance represents the tangible results from the key strategies we implemented to reposition the Company over the last several years, as well as the actions we took during the downturn so that we could rebound quickly as the economy begins to recover. Our key strategies resulted in the expansion of gross margin by more than 10 percentage points over the last five years. The improvement in gross margin has also been stable and sustainable. The first quarter of 2021 marked the 12th consecutive quarter of gross margin, within or above our targeted range. Our key strategies also broadened scope of our services and diversified our end markets. Having a more diversified end market mix was very beneficial during the pandemic as strength in some markets, such as retail/grocery was able to offset weakness in others, such as full-service restaurants. Another key strategy was the introduction of a disciplined corporate development effort with a dedicated internal team. We successfully completed our first acquisition last year and have built a pipeline of potential targets. The goal is to find strong businesses with value-added services that can be layered over our existing national service platform, which is capable of operating at a much larger scale without having to make substantial incremental investment. This means we have significant operating leverage in our business, which is evident by the relative growth in profitability during the first quarter.

We’ll go first to Amit Dayal from H.C. Wainright. Your line is open.

Thank you. Hi Ray, hi Laurie. Congrats on the strong start to the year.

Thanks, Amit. Thanks

With respect to the revenue mix for the quarter, was it primarily from the industrial segment you saw a lot of strength with others potentially going to catch up -- other segments catching up maybe in the coming quarters? Could you tell in terms of percentage maybe what sort of the mix was, industrial versus other segments for the quarter?

I’ll start, Amit, and Laurie can follow up, if I miss something. But no, usually we don’t speak about percentages on how it breaks out. But, your assumption is correct that the industrial segment had an exceptional performance for us. And we believe a big part of it has to do with pent-up demand during the pandemic. So, there was a lot of growth there, but there was growth in other segments as well, as we laid out. And I believe they’re going to continue to recover and improve and grow the other segments as well through the balance of the year. But, there was growth in most all of the segments minus food service.

Yes. I think we mentioned in the call here in the prepared statement that the organic growth, i.e., excluding Green Remedies, was a little over -- was over half of the of the growth, and that would include the industrial. So, you add Green Remedies in there, which was a big chunk, and the industrial recovery was a surge for us, a little unexpected but it was a nice surge and showed recovery there plus some growth. And then, we talked about adding the three other new customers who are substantial, but they were just starting to contribute to our overall organic growth.

Understood.

Let me add one other thing. We do have some other end markets. And I think automotive is one we’ve talked about in the past that’s still recovering. So, we do as we progress through this year, we anticipate seeing some additional recovery from that end market.

Okay. And with respect to Green Remedies, Laurie, do you still believe you could see additional contribution or growth from Green Remedies, or do those revenues sort of stabilize at least for the near-term before maybe picking up again in the future?

Well, from the perspective of just the M&A growth is contributing growth because we acquired it. So that was -- if you look quarter-over-quarter, it will be contributing to growth from that perspective. But, as an operating group, we expect it to grow also during the year, so.

Yes, absolutely. One of the reasons we acquired Green Remedies is their consistent growth profile that they’ve had over the years, and it is continuing, and we expect to continue. So, as -- it’s a growth factor, not just obviously because of the acquisition. But in and of itself, the Quest platform actually enables to grow faster than it did before, is the intent.

And when we think about gross margins going forward, I know you were emphasizing the gross profit dollars. But, in terms of gross margins or even for the gross profit dollars, how should we think about drivers for margins or profits at the gross level with this new sort of revenue mix that you have?

So, are you asking if that gross profit margin profile would change based on this revenue mix?

Yes…

I guess, let me answer your question, I think, and then tell me if I’m answering it and help me. Our gross margins -- and again, you’re right, gross profit dollars is what we managed to. The gross profit percent to me really is just a mathematical equation. We got to keep growing gross profit dollars. But, there’s a consistent performance between the -- our profile with the business that we’re bringing on, with the current margin -- our gross profit profile we have today. So, I wouldn’t anticipate huge changes there by any stretch. And I think our -- as we add -- industrial is a nice, big part of our business, and -- it’s got a lot of profit opportunities, too. But, am I answering your question on it in the sense that I don’t see massive changes from a gross profit standpoint?

I get it and I’ll follow-up with you on that one. Yes.

Okay.

Okay. Yes. And it’s always going to vary when we have a big change in revenue mix, which we have had this quarter that we are going to see some movement. But it doesn’t mean that directionally, we aren’t seeing still gross profit dollars grow. So, I think that’s what we want to clarify.

So, just one last one from me. Do you think with how the year has started for you, 1Q could be probably the strongest quarter, or do you think you have an opportunity over the remainder of the year to maybe have a stronger quarter than what you saw in the first quarter?

Yes. Obviously, we believe there’s a chance to have that. I mean, this first quarter had a surge, we didn’t aspect, like Laurie mentioned, in our piece. That doesn’t mean that we can’t have it come from other channels as well, as we move down there. We’re adding new quality customers. We’re rolling out more locations with existing customers. And these type of unexpected -- surges like that can happen again. We just want to be clear that this is obviously the strongest quarter we’ve ever had as a company. We expect, at some point, to pass that too. I just don’t know that it’d necessarily be in Q2.

Next, we’ll go to Greg Kitt from Pinnacle Fund. Your line is open.

Hi, Ray and Laurie. Thank you for just an incredible quarter.

Yes. Thanks, Greg.

We’re very happy about it too.

Yes, we are.

So, I think on the Q3 earnings call, you talked about a national auto service customer pilot. Is that the potentially $10 million revenue contributor? Is it fully scales?

No, it’s actually -- it’s a new industrial client that is quite large as far as a number of locations and their volume. And that’s going to be a scale that’s going to be rolling out throughout the next several quarters. So, hopefully, that annualized number we laid out. But, it’s not in the automotive sector.

Okay, great. And is there an update on -- is that pilot concluded? And did that customer make a decision or not, as of yet?

Pilot’s not concluded. We’ve got some penetration in it. The revenue showed up. Some of the beginnings of the revenue showed up in Q1. It’s like many of these things, Greg. It takes a while to roll through all there. But no, it’s not concluded. There’s a lot of upside left from that opportunity.

Okay, great. I mean, it’s just so exciting having watch your company for so many years to start to see several seven-figure plus customers, new customers, all being added on to your platform. At the same time, I’m just so excited that you’re starting to see that organic revenue growth, not just because of reflation, but because you fine-tune the message to be able to win new customers. Is there anything that you can point to where you can say, you know what, now is different because we’re able to win new customers better than we had in the past?

Yes. Pointing that one specific thing will be difficult, Greg, but there are several things. I think we’ve -- I will tell you, I know that we’ve gotten better in delivering our message because we’re not a simple cell, because it’s not something that our business model, what we bring in the table isn’t something these folks have had before. And I think we’re getting much better at consolidating our message. I think, I mentioned in the call that we’ve kind of changed or added a lot to our marketing direction as well, the tools we’re using, and how we’re messaging our brand to these companies. So, first, I think we’re able to explain Quest maybe than we were in years past. And second, our execution continues to improve. We have a lot of very happy customers through that execution. That’s very helpful in helping you gain new ones as well.

Thank you. And the second thing that popped out at me were the incremental margins and I heard -- I think if I heard you correctly, we should expect OpEx dollars to grow at half of the rate of gross profit dollars. Did I hear that correctly? So, if you grew gross profit dollars by $1 million, should we expect OpEx to grow $500,000?

Yes. That’s directionally correct. That’s right.

Okay, great. So, I like that you’re making smart investments to position the Company to grow from a stronger platform while still showing positive incremental margins or positive operating leverage. And so, last question was, you also had that great free cash flow quarter, working capital benefit this quarter as well. Should we think about -- is it fair to think that you could still have 50ish percent of EBITDA converting to free cash flow over the course of a year?

Well, we have some other investments and things we’re going to be doing throughout the year. So, I think we’re going to continue to generate good cash flow. I’m not sure it’s exactly that ratio. Let me think about that, Greg. But, we did have an exceptional cash flow quarter. And it really benefited by almost half that cash flow was a benefit of working capital changes versus operational contributions from just the P&L. But the two together were very powerful, and we wound up with $4 million in cash generated.

Thank you. And so, just as I’m thinking through this opportunity, last point, you’re adding new customers, your existing customers are growing because of economic reflation, but you’re also growing service lines with them because they’ve grown in confidence with you. And so, growing with new and existing customers and you have positive incremental margins from gross profit dollars and generating positive cash. I think it’s just a really exciting opportunity and I wish that I owned more. So, thank you very much for your hard work. And yes, I can’t wait to see the rest of the year.

Thank you, Greg. We appreciate that, really do.

Thank you.

And next, we’ll go to George Melas with MKH Management. Your line is open.

Thank you. I just wanted to extend Greg thanks. I just want to thank you guys for -- and the whole team for the hard work. It’s an amazing result.

Thank you, George. We’ll pass that on to everybody. Thanks for that.

Yes. Greg and George, congratulations there. On the sales, I mean, this is a quarter where sales have been tremendous and amazing conversion from gross profit to EBITDA. And I think you said that you are actually making additional investments in sales and marketing, adding some national account salespeople and also, I think, some account managers. Can you talk a little bit about the transformation of the sales force, and what you see happening in 2021?

Yes, I’m happy to, George. Thanks. And internally, what we’re calling them is a broad sense is growth investments. And growth is more than just salespeople, although that’s a big part of it. So, we’re investing in salespeople growth for new account revenue. We’re investing in the client services side to help us continue to manage and penetrate and improve our position with existing clients. And we’re investing in -- we’re also investing in corp dev as well to help us continue to do a great job there. So, there’s a lot of -- vendor relations, I’m sorry, vendor relations as well, which is really, in our world, that’s sourcing, procurement, George. And these guys, it’s not only getting better pricing by negotiating with more folks. It’s helping us expand our service lines, because any time you expand your services, you’ve got to and broaden your network with which to accomplish that. And having talented team on client service -- or excuse me, vendor relations or sourcing enables us to do that better. So that’s truly a growth piece as well. On the sales force side, we’ll continue. We are continuing to focus people on individual market segments, whether it be industrial, whether it be automotive, that type of thing, where they speak the language and focus on it. So, we’re expanding on the same thing. We’ve just -- as I mentioned, I guess, it was Greg’s question. I think we’re a lot better in messaging, and I’m giving the marketing group credit for that as well. And in tools for our sales force to more targeted, George, reach out. I mean, we utilize a lot of great tools that are available today with this technology to help our salespeople be more targeted in their efforts, so they have higher close ratios. But we’re going to keep marching down that same step and just -- path and just do it better than we’ve done in the past.

And at this time, I’ll turn it back to Ray Hatch for closing remarks.

Thank you very much. As Laurie said, this is -- and I did too, this is a great quarter. I want to take this opportunity to thank my team. It’s a challenging role when you’re working from home mostly and trying to communicate and take care of your customers. And they’ve done a fantastic job, as evidenced by this quarter. The whole team has executed very well, and I’m appreciative of that. Secondly, I just want to comment on the growth and the changes in the evolution of this company. I’ve watched it for five years now. And it is continuing to impress as the change and adapt and expand and grow. So, we’re looking forward to a great year here at Quest. And thanks for everybody all of your support out there.

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