Good day, and welcome to the Quest Resource Holding Corporation Third Quarter 2022 Earnings Call. Today’s conference 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, Jenny, 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 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 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 filings with the Securities and Exchange Commission. 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 observations and views about industry conditions and developments. The data and information are based on Quest 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 does not independently verify the reliability of the sources 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 understanding in the assessment of the company’s ongoing core operations and prospects for the future. Unless it is otherwise noted, should be assumed that any financials discussed in this call will be on a non-GAAP basis. Full reconciliation of non-GAAP to GAAP financial measures are included in today’s earnings results – release. With that said, I’ll now turn it over to Ray Hatch, President and Chief Executive Officer. Ray?

Thank you, Dave, and thanks, everyone, for your interest in Quest. We had another good quarter. We delivered a 78% increase in gross profit, a 57% growth in adjusted EBITDA. We generated $73.4 million in revenue, $12.2 million in gross profit and $3.8 million in adjusted EBITDA. In the quarter, there was an adjustment of $850,000 for expenses related to one vendor at one of our recently acquired companies, which lowered our gross profit. Without that expense, adjusted EBITDA for the quarter would have been $4.7 million. Our outlook remains very positive. We are executing on all of our strategic initiatives and expect a strong finish to what has been an exceptional year of growth for Quest. Our results continue to demonstrate the strength of our business model and how we can perform well in a market environment that’s been challenging for others. We’re able to offset inflationary cost pressure with flexible pricing and cost recovery fees. And due to the nature of our pricing structure, gross profit dollars were not materially impacted by commodity price fluctuations. In addition, we continue to make positive progress optimizing recent acquisitions. We are moving new opportunities through the pipeline, which I’ll explain more in detail later. And we see relatively stable economic activity across our customer base, all of which positions us well for continued profitable growth during the fourth quarter and next year. Before I get into more detail, I want to welcome our new CFO, Brett Johnston, to his first earnings call with Quest Resource. Brett is a great addition to our team, and with extensive financial leadership experience, and I’m happy to have him on Board. I’ll turn it over to Brett now to cover the financial overview.

Thanks, Ray, and good afternoon, everyone. I’m excited to join Quest, especially at this point in its history, and I am excited to be part of the transformation that is well underway. Quest has a unique value proposition in a very large market, and I see a lot of potential for continued growth. Plus, also has a strong culture and proven leadership, and I’m thrilled to become part of the team. Before I review the financials, I’d also like to thank Laurie Latham, our former CFO, for her ongoing support as we make the transition. She has been immensely helpful in getting me up to speed in the past couple of weeks. Now moving on to our results. Third quarter financial results were in line with expectations, and all the major growth drivers of our business contributed to year-over-year growth. Revenue increased 96% year-over-year due to a combination of growth from new customers, expansion with existing customers and M&A activity. During the third quarter, gross profit dollars increased to $12.2 million, which was a 78% increase year-over-year. In addition to incremental gross profit dollar contribution from acquisitions, we expanded service programs with existing customers, and we continue to see strong year-over-year growth from new customers that we have added in the past 12 months to 18 months. Gross profit dollar growth will continue to benefit from new customers as we both roll out our services across their footprint and add new services. Additionally, growth will come as we optimize the delivery and cost structure of service delivery across our customer footprint. Over the last few quarters, there have been variations in the sequential comparisons for gross profit dollars. So I want to take a minute to explain these fluctuations. The sequential decrease in gross profit dollars during the third quarter…

Thank you, Brett. I’ll start off with some thoughts on the resilience of our business model and how we’ve continued to perform well in a volatile economic environment. Regarding inflation, as we have mentioned on previous calls, we’re able to offset cost pressures with flexible contracts that allow us to pass through increases such as future surcharges. These pass-through increases have been in place throughout the year, including in the third quarter, and have not affected our gross profit dollars. Regarding volatility in commodity prices, we structure our agreement so the gross profit dollars are not materially affected by these swings. These are the same contract structures we have had in place since the early days of our company, when used motor oil was one of the largest recycling streams. We now recycle a wide variety of commodity waste streams being generated by our clients, including used motor oil, scrap metals, used cooking oil, plastics, pallets, cardboard and other commodities. The price and the value of these recycled commodities can fluctuate significantly from quarter-to-quarter, which was the case this past quarter. To give you an example, we estimate during this last quarter, there was a $6 million sequential decrease in the value of the scrap metals that we recycle for our clients. This has a one-for-one impact on our revenue. However, the gross profit dollars and the volume of these materials remained relatively even with the prior quarter. Regarding the economic environment in general. We continue to see stable activity levels across our end markets, and our value proposition is resonating well with both existing and new customers. I continue to feel good about the growth we have in front of us. Within our installed base of customers, we use the land and expand strategy to deliver growth. This strategy…

Thank you. [Operator Instructions] And we will go first to Aaron Spychalla with Craig-Hallum.

Hi, Ray. Hi, Brett. Thanks for taking the questions.

Hi, Aaron.

Hello. Maybe first on just you talked a little bit about expenses from one vendor and one of the recently acquired companies. Can you just provide a little bit more color on what that was? And it sounds like it’s not something that you think should be recurring going forward.

No, I think that was the point there. It was one acquired company, one vendor, and it was some identifying expenses. As you recall, Aaron, and we talked last quarter through our diligence, our integration effort. We found a lot of client non-billings, meaning clients that have been received as services not billed, we caught up on that. This quarter, we also found something on the vendor side that hadn’t been recorded properly, and that’s done now. And so it is an isolated instance to your point.

All right. Thanks. And then maybe just on the pipeline, good to hear about a couple of those new wins. Can you just talk about where qualitatively that might stand today as a whole and just how that compares to the last few quarters? And it sounds like maybe the close rate is starting to improve there.

Yes. I think the close rate – I think it’s more about – it’s been slower to fruition, and I think a lot of these have taken longer to get done than anybody anticipated, including the client. And so now it’s – that’s catching up. And we feel like as we – in this quarter, we’ll get some nice – more good news and hopefully, will continue on into Q1. Because the pipeline is just as strong as it was last quarter. It’s actually bigger because we’ve added more to the top of the funnel as we’re starting to move these out the bottom. So it’s hard to quantify it, Aaron, because really what it boils down to is getting these things signed. But one of the indicative elements of it, I think, is important, several years ago or even a couple of years ago, our pipeline had a lot of customers that I don’t know, maybe they were smaller in their potential purchase. These clients have all got, not all, but the vast majority, have got really significant ability for revenue. They’re large multi-location, in some cases, industrial that are generating quite a bit of complex waste streams. So we’re really excited about what that can do for us. One win can have a lot of impact two or three wins is going to have even a huge impact. So the funnel is bigger than it was, but we’ve got to keep filling the top of it, Aaron, as we get these things closed on the bottom.

Right. Right. Okay. Good to hear and good luck. Thanks for taking the questions. I’ll turn it over.

You bet. Thank you, Aaron.

And we’ll go next to Gregg Kitt with Pinnacle Fund.

Hi, Ray. How are you?

Great. How are you, Gregg?

I’m doing great. And hi, Brett, thank you for joining the team. We’re excited to get the opportunity to talk with you going forward.

That’s very thoughtful of you. Thank you.

Yes, thank you. You talked about – I think, if I heard you correctly, three customer expansions and one in a wood pallet. And I think you said two existing in scrap metal recycling at retail locations. Did I hear that correctly?

Yes. Yes, you did.

Okay. Great. And then you also – go ahead.

I was going to say those are – yes, those are existing clients, great clients, and we’ve added some service profiles, some service abilities capacities that we’ve been able to cross-sell into them, which is really exciting.

Thanks, Ray. And then you added the two new customer wins that were both seven-figure customers. Could any of those – either the new wins or the expansions end up being more like mid-seven-figure or eight-figure type of opportunities?

One of them has that potential for sure. The other one I’m not quite sure. I’d like to go back and look, but less likely.

Thank you. And I have one more question. You talked about investing in scalability and investing in capability of the data platform and the release what will these investments allow you to do?

Yes, it’s a great question, Gregg. I mean, this is something we’ve been focused on for quite a while. I mean, we all – and we’ve talked about this. We believe one of the key value propositions for Quest is that scalability. And so what our systems that we’re investing in and allow us to be quicker, more automated, more accurate to allow builds in and build out in a much more efficient way, which allows us to add new revenue volume with relatively little additional G&A. And also, we’re expanding our capabilities as far as reporting data back as well on an ongoing basis. But the net effect, Gregg, if you boil it all down, there’s a lot of complexity associated with the charts that show what we’re doing. But at the end of the day, it allows us to do a lot more with a lot less, which enables us to rapidly grow without having to go find a lot of people to help us do it.

Thank you very much and congratulations on the expansions and the two new wins. It’s been – we’ve been waiting all year, and it sounds like there’s opportunities for more of those things in the pipeline to cross the finish line potentially this year.

You bet. Thank you, Gregg. Appreciate it.

Thank you.

And we’ll go next to Gerry Sweeney with ROTH Capital.

Hey, Ray. Thanks for taking the call.

Hey, Gerry.

Question on – this is a little bit higher level. You look at your, let’s say, portfolio of customers, do you have – is there a way that you can gauge how many of your customers have – I’m not sure, I’m trying to figure out the easy way to say it. If your customer base has fully inundated with all your services, or another way to look at it, how many – how much of your customer base still has the ability to take on more services?

Yes, you’re talking about wallet share, basically, right?

That would be a much easier way of saying it, yes.

Well, that’s the term that we use here. It’s hard to quantify that, Gerry. I mean, I can tell you, I can’t think of a single client where there’s not more opportunity, but some there’s a lot more than others. And I will tell you, I can’t emphasize enough the expanded capabilities like the cross-selling that some of these acquisitions brought us to sell into our significant client base. that represents a lot of growth opportunity. But again, Gerry, it’s difficult to quantify. But we have a pretty good list. We know by client. We have a client services group that just – that really, really takes care of our existing clients. And we know what they’re buying from us, what they’re not. And we know services that they have that we don’t have. And that’s an emphasis for our client services group to continue to work to expand within that existing spend. I just – we know by client, but we don’t really have a macro number probably.

Got it. And then you brought up cross-selling. How would you characterize the success of cross-selling? Is it meeting your expectation? Exceeding? Underperforming?

No, that’s a great question. I hate to admit this. My expectation really wasn’t very high. I was hopeful as opposed to expecting, maybe that’s a better way to put it. And I think I was surprised – or I am surprised by maybe the size of some of the markets and spend in some areas we weren’t addressing before like pallets. It’s a significant amount of spend in the pallet space. And there’s very few clients we have that don’t use some type of pellet service. So I would say, it definitely has the potential to massively exceed any expectation I have. And currently, it’s more than I thought where we would be at this point. It’s a relatively early stage. But it’s progressing, and I’m quite happy about that.

Got it. Final question. You’ve seen strength in any areas of the economy more so than others in terms of one activity to client additions?

I don’t know that we’re seeing a lot of changes in the – you’re talking about the client themselves, the strength of the business segments, end markets?

Yes.

Yes. I don’t know that we’re seeing any change at this point, Gerry. I know there’s a lot of talk about all these different segments doing well or bad. But our automotive sector is fine. The grocery sector is fine. Manufacturing, if anything, I think is there’s more onshoring going on. Maybe seeing a little increase there. Again, I’m not an economist, but I can look at what we see, and I haven’t seen any indication of weakness in any of our end markets, frankly.

Are you seeing strength in any areas in terms of customer wins? Or is it still final sort of movement to the finish line? Yes. That was...

Yes. On the new customer win side, I would say – and I’m not sure if Andy is on the call. Andy has done a great job on the sales side, work in our industrial side, along with Stephen and others. The industrial side is really – I think there’s a lot of manufacturers that are looking for better solutions to complex waste streams than they have today. And I really believe that we represent that. So there’s numerous opportunities there. The food waste segment continues to grow because of the – for no other reason, because of the landfill diversion goals, a lot of these grocers and manufacturers have and finding ways to meet those. So I mean, really, if I had to pick one, I would have to say our industrial sector is strong. But the food waste side has got a lot of interest going, too, as well.

Got it. I appreciate it and thanks for taking the call.

You bet, Gerry. Thank you.

We’ll go next to George Melas with MKH Management.

Thank you. Hi Ray, good afternoon. And hell Brett, welcome to the team.

Thank you, George.

George, thank you.

You’re welcome. Okay. Quick question on that vendor catch-up statement. Was that sort of a catch-up payment for the first quarter, the second quarter and part of the third quarter? Can you help us a little bit understand not what’s the nature of that, but how would it be distributed during the year.

Hey George, this is Brett. I’ll take that question. Yes. So we called it out just to give a little bit better visibility into Q3. And so you could see the performance a little bit. But that would be mostly related to the first half of the year.

Okay. Great. Thank you for that. Yes and thanks for bringing it up. It’s very helpful.

Sure.

If you think of the integration in streaming RWS, kind of what innings are you got in from a systems perspective, from a process perspective, from a depots perspective? Where are you guys in sort of that integration?

That’s multiple games there. I’ll give you innings on all three of those, George, respectively. I think on the people side, we’re in the late innings. I really do. Very happy with the folks that we have with these teams. They’re doing a great job really working through the change. It’s difficult when your company is purchased by another company to adapt as well, and I think they’ve done a fine job. On the process side, far along, but maybe not quite as far along as the people side. We’ve really worked hard on the processes. I will say that our accounting group working closely with them. Our sales group and marketing group are fully integrated into what they’re doing. So I’d say, process standpoint, and also on the vendor relations sourcing procurement side, I think they’re probably in the middle to later innings as well. On the systems side, that’s lagging behind a little bit for obvious reasons. I mean, they’re on a different platform. You don’t want to upset the apple cart. We’ve worked out the plans. We’ll be moving those as soon as possible. But we’re on down the innings on all three, just different stages on those, George.

Okay. Great. Good to know that. And then just want to point out something, but I’m not exactly sure how to wrap that into a question. But like at the beginning of 2021, we’re looking at customer concentration, and the top two were 47% of revenue, and now the top two are just 21%. And I think your largest customer during the quarter was just 11%. So it seems like the customer risk has massively, massively sort of come down with the growth and also partly with the acquisition. So it’s great to see that.

Well, I’ll call that a question, George, so I can answer it. Yes, it is great to see.

Yes.

.:

Great. And then maybe just one question. On the competition front, do you see any particular changes?

Competitively?

Yes.

I really don’t think so. George, the interesting thing is we don’t focus a lot on those guys. I know that sounds silly, but we focus on finding the prospects that need, what we do best. And typically, there’s nobody out there that does everything we do. There’s a lot of people that pick up trash, there’s a lot of people that will pick up used motor oil. But there’s very few that do all these things like we do. And so competitively, I don’t think the front has changed at all, George. I think it’s just more incumbent on us to do as good a job as possible of showing the marketplace what we do well as opposed to our competitors.

Great. Okay. Thank you, both of you. Thanks very much.

Thank you, George. Appreciate it.

And with no other questions in the queue, I would now like to turn the call over to Ray Hatch for any additional or closing comments.

Thank you, operator. I just want to thank everybody again for their interest in Quest. We really greatly appreciate it. I want to thank the employees of Quest and the acquired companies we have. I appreciate all their efforts. We feel very, very confident about where we are. We’ve come a long ways, and we really got a lot of traction and moving forward. We’re excited about the resiliency of Quest and the strength of our customers and our ability to continue to serve more and grow more as we go forward. And I want to take another moment to, one, welcome Brett to the team; and two, to thank Laurie for all of her service and all the things she’s done for all of us. We appreciate her, and we’re excited to have Brett as well. And excited to have all of you as shareholders. So thank you very much. I appreciate it.

And so this concludes today’s call. Thank you for your participation. You may now disconnect.