Thank you for standing by. This is the conference operator. Welcome to the Quest Resource Holding Corp. First Quarter 2023 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Dave Mossberg, Investor Relations representative. Please go ahead.

Thank you, Asha and thanks everyone for joining us on the call today. Before we begin, I’d like to remind everyone that this 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’s 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’s 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 other market data and other statistical information as well as Quest’s observations and views about industry conditions and developments. Today, the 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 does not independently – has not independently verified the reliability of these sources or the accuracy of this 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 elevate company’s current performance. Management believes the presentation of these non-GAAP financial measures is useful to investors understanding the assessment of the company’s ongoing core operations and prospects for the future. Unless as 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 will now turn the call over to Ray Hatch, President and CEO.

Thank you, Dave and thanks everyone for your interest in Quest. Overall, we had a solid start to the year with more than 12% growth in gross profit dollars. Most of the year-over-year growth came from ramping up new customers and adding new programs with existing customers. In addition, the improvements at RWS we discussed last quarter are on track, and we expect pricing initiatives will positively impact results for the next three quarters. We also generated significant cash flow during the quarter. On average, during the past two quarters, our average operating cash flow was $2 million. We feel good about our ability to continue to generate cash flow. And subsequent to the end of the quarter, we paid down $5 million on our Monroe line. Our outlook for profitable growth in 2023 and beyond remains unchanged and we are executing well at all of our strategies. I will now turn the call over to our CFO, Brett Johnston for a financial overview and I’ll be back to discuss our strategies.

Thanks, Ray and good afternoon everyone. During the first quarter, gross profit dollars increased 12% year-over-year to $12.6 million. The year-over-year increase in gross profit dollars came from organic sources as we continue to ramp new customers and add new programs with existing ones. On a sequential basis, gross profit dollars increased 17% from the fourth quarter of 2022 due to a mix of organic growth, seasonal trends and improvements at RWS. As we discussed during last quarter’s call, RWS was previously not passing through costs and fuel surcharges that we normally take as part of our contracted agreements. As we stated previously, we have corrected this issue and we have just begun to see the benefits of implementing pass-through costs and fuel surcharges to RWS customers during the first quarter and expect to see continued incremental profit – incremental improvements in gross profit from this business throughout the year. A quick note about the revenue comparisons. As discussed on previous calls, commodity price fluctuations may have an effect on revenue comparisons, but have not historically had significant effects on gross profit dollars. Our customer agreements produced consistent gross profit dollars based on volumes and are not tied to commodity price fluctuations. The value of the commodities we recycle on behalf of our clients simply passes through our P&L. I want to reiterate that this is why we use gross profit dollars as a key metric to measure our financial comparisons. Looking forward, 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 during 2023. 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 next…

Thank you, Brett. It’s only been 7 weeks since our last call in late March and we see continued strength in our business and maintain our optimism for continued profitable growth. Regarding the economic environment in general, we continue to see stable activity levels across our end markets and our value proposition continues to resonate well with customers. I realize that we have said this before, but it bears repeating that our business model is positioned well to weather inflation and swings in commodity prices. Year-over-year price comparisons for most of the commodity recycle are still lower than the prior year. But as Brett mentioned earlier, we structured our agreement so that gross profit dollars are not affected by swings in commodity prices. Also, in an inflationary environment, we were able to offset cost pressures with flexible contracts that allow us to pass through increases in many costs such as fuel surcharges. This structure is a key reason that we are able to deliver 12% growth in gross profit dollars on a relatively low growth in revenue. Now for an update on RWS. RWS is on schedule to be fully integrated by the end of the year. In addition, we began passing through contract costs at RWS. During Q1, and we expect the positive impact to be fully recognized throughout the year. As a reminder, we estimated that not passing through these increased costs at RWS last year, had a $1.5 million impact on gross profit. We remain excited about the potential for RWS and the contribution it can make as part of our company. I also want to thank our team for the efforts and hard work to get RWS back on track. Moving on to a discussion about growth. I feel very good about the organic growth we…

[Operator Instructions] The first question comes from Aaron Spychalla with Craig-Hallum. Please go ahead.

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

Hi, how are you doing?

Good. Thanks. Maybe first, can you just give a little more color on rolling out some of the new services and capabilities to existing customers? How far along are you in that process? And what’s the response been? And I know you’ve kind of talked about pallets in the past. Is there anything else that you’re excited about from a service standpoint there?

Yes. Pallets is at the top just because Well, every customer you have has some type of pallet program. So it’s a real ripe field to go after. But we have other types of items that we increased our recycling capabilities around that we’re able to extend as well on a smaller scale. As far as where we are at this point, I’m happy to say we’re still early in this because there is still a lot of upside to be realized, as we try to penetrate these with existing clients. So I think we still have a lot more upside there in all the cross-selling opportunities as we move forward.

Okay, good. And then maybe just as a follow-up. Can you talk a little bit more about some of the investments on the technology side that you’re excited about and how those could help benefit the business going forward?

Yes. It’s really twofold, Aaron, if we got the customer-facing piece, which we continue to refine and improve, which is the customer portals which, of course, the real value there is all the waste data reporting that we’re able to give them comprehensively. That continues to improve. And it really is – I think has developed one of the key criteria customers have on which supplier they go with for their waste programs. And then internally facing the team has been working very, very hard over the past year to really develop a lot of automated processes and streamlined processes internally. And the reason that’s important is it enables us to scale much more easily as we bring in new revenue, new volume because we’re not having to add nearly as much G&A to support it as we make more automated processes and improvement and mistakes and all that type of thing that automation brings. So it’s really a twofold initiative, Aaron, and we’re excited about what both can do for us.

Good. That’s good to hear. I will turn it over. Thank you.

Thanks, Aaron.

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

Thanks. Good afternoon, Ray, Brett and Dave thanks for taking my call.

Yes. Hi, Gerry.

Similar question that Aaron posed, but maybe said a little bit differently. I’m just curious, have you ever looked at your total roster of companies, and I know they are in different industries and some of them are going to have different service requirements than others. But do you ever look at them and just determine what percentage companies in your roster are using all your available services and how many that you can actually add additional services to?

Yes. We do that all time. I think we may have mentioned on the last call, our client services team that manages all these great existing customers, they know what these services these folks are using and they know what services we’re providing to them. And a big part of their upside and their role is to penetrate even more. So you’re right, Gerry. Our customers are extremely diverse. I mean it’s every kind of business you can imagine. So every one of them has a unique set of needs typically relative to the services. There is also geographies as well. I mean, in most cases, we have all their locations. But in many cases, we don’t as well. So these folks are continuously monitoring what services that they are using that we aren’t providing and basically working on upselling them consistently. So that’s a big initiative of ours.

And I also think on the last call, you talked about even incentivizing some of that land and expand strategy, I think, internally with some of the – I don’t know if they are account managers or what exactly you call them, but I’m just curious if you’ve started that program and if you’ve gotten any sort of initial feedback.

We have and actually, that program started right when we did the last call, so it’s only been a few weeks. But yes, Dave has implemented it on that side. And there seems to be a lot of excitement about that. I think these folks did a great job of that without the incentive. And now they are probably even more excited about it. I think it’s a – I believe it’s important that it’s a recognition of the value of the sales activity that happens internally rather than just externally. So we’re excited about what we do for us, Gerry.

Yes. I think it’s a great program. And the final question is around RWS. So I think we’ve discussed about $1.5 million of gross profit and you’re implementing – I’m sorry, integrating that over the course of this year. Will that be sort of sequentially four quarters evenly spread out or is there going to be – or is it – will that be a little bit chunkier at different times cadence wise is probably a better way to ask it, so…

This is Brett. I will take that. So, as we mentioned in Q1, we were really just ramping up some of those increased pricing pass-through. So, you won’t see much of that in Q1 and then it will start fully ramping into Q2. So, I would look at Q2 kind of ramping up and then a little bit more evened out across Q3 and Q4 with maybe a little bit of opportunity on the back end push together some more efficiencies. But that’s – yes, that’s the way to look at it.

Okay. Great. I appreciate. I will jump back in the queue. Thanks guys.

The next question comes from Chip Moore with EF Hutton. Please go ahead.

Hey. Good evening. Thanks for taking the question. Wanted to ask about some of the newer customers that you have talked about on some of the past calls, just how the ramp is going there, Ray and sort of still early innings and how to think maybe, call it, next rolling 12 months, next 4 months and 12 months on the ramp of some of those bigger wins?

Yes. Thanks Chip. I appreciate that. We do have some great early-stage customers here. I mean – and the nice thing about the ramp is it’s contractually committed typically. It’s just taking the time to digest it. So, I think we are in a early stage. I know we are in the early stages with a couple. And so we are anticipating that giving us a lot of tailwind through the balance of the year.

And Ray, my follow-up there would be on, I guess the pipeline more broadly. I think you talked about prospects rolling through the pipeline. Can you talk about that pipeline and sort of size and scope of some of those potential opportunities?

Yes. I am happy to. I mean there is – there are smaller wins that we experienced all the time that we really don’t reference or talk to. The pipeline comments we usually make or revolved around customers of more significant size. And it is really there is a lot of significant size in the pipeline. We feel good about it. It’s moving a lot slower than any of us want, but it is moving. That’s an important thing. So, we are excited about a number of those coming across during this fiscal because we have been working them for the last year, 1.5 years. So, it’s unfortunately a slow sales cycle with a lot of these larger industrial-type accounts typically. But at the end, the payoff is really worth it. So, I feel good about our pipeline. And like everybody else in the company, I am anxiously wanting it to grow quicker.

That’s great to hear and understood. And maybe just one last one on the M&A environment, you talked about that and how can be a little more sporadic, obviously, but maybe just speak to the competitive environment out there and what you are seeing in terms of assets? Thanks.

Sure. Thank you, Chip. The M&A environment is something that – right now, there is not as many things out there. And I think there is a lot of economic reasons why it’s kind of slowed down a little bit. And that’s fine with us. I mean when the right opportunity comes along in the right situation, I am sure we will be looking to exercise on it. But right now, our focus is driving efficient and accurate integration through what we have, and I am really pleased with the progress we have had with that. But on the M&A environment, it’s a little slower right now shipping our space, to be honest with you.

Got it. Okay. Great. I appreciate all the color. Thanks.

You bet. Thanks.

The next question comes from Greg Kitt with Pinnacle Fund. Please go ahead.

Hi everybody. It’s Greg. Thank you for taking my questions.

Sure.

First, I wanted to say, I was so excited to hear about your focus on free cash flow as one of your largest shareholders. This is what I was hoping to hear. And I am really excited to hear about the pay-down of some of the Monroe facility after the end of the quarter and kind of following up on Chip’s question, it sounds like maybe right now, not so much of a focus on acquisitions just because you are not seeing the opportunities in using the cash to pay down debt is how it sounded to me, I just want to make sure that I heard that correctly.

Yes. I think that’s pretty accurate representation, Greg. I mean we are excited about the cash flow generation as well. We are excited to be able to – it’s really positive, we will pay down that line a little bit and we hope to continue as we stated that we are going to generate positive – significant positive cash flow this year. And the M&A activity just kind of is what it is right now. I mean we have always said every quarter that we are very opportunistic. And those opportunities, if they are great, then we will move on it, but they are not – we have got an opportunity to do some really good stuff with our cash.

Thank you. On the – your release said that you were focused on delivering double-digit profitable growth. Were you – I was unclear, was that talking about double-digit gross profit dollar percentage growth, or were you talking about EBITDA growth?

Gross profit dollar growth. And I am sure that correlates almost directly to EBITDA.

Okay. Great. Yes. Thank you very much. And I heard some of the comments that you made around the investments that you are making in scalability. And so when you do talk about double-digit gross profit dollar growth and implementing some of these internal like analytics and reporting investments that you have made. It sounds like then we should see a pretty good flow through like we traditionally had a gross profit dollars fall into EBITDA. Is that right also?

Hey Greg, this is Brett. I will take that one. Absolutely, I would just say that we expect we are optimistic that we can get some of that in – by Q4, but really looking at next year is when we start to expect more significant efficiencies gained from that and scalability. But we are optimistic we will see some of that by the end of this year.

Thank you. That’s all that I had. Thanks for the good quarter.

Thank you, Greg.

The next question comes from George Melas with MKH Management. Please go ahead.

Thank you. Good afternoon.

Good afternoon George.

Hi. Quick question on the cash cycle, the working capital cycle, it has improved nicely over the last two quarters. And when I look at it historically, the cash cycle was basically single-digit days prior to the acquisitions in December ‘21. And I know, Brett, you were not there at that time, but is there – they did the acquisition have a different sort of cash model or cash cycle model? Did they tend to build later and could we get back to the cash cycle that you had prior to the acquisitions?

Yes. I – to your question, what was – if there is anything different with any of the businesses we have acquired, there is really nothing there other than we have talked about a part of RWS has some advanced billings. So, that helps a little bit. But beyond that, nothing significant. Nothing, I would see any reason why we are not going to continue to get back to where we were previously because of that. So, to your answer, no, nothing that should hold us back.

Okay. Great. And then two other quick financial questions. How do you see acquisition and integration costs for the rest of the year? Do you see them relatively flat versus what we had in the first quarter?

I think that’s a good way to look at it, especially through the first three quarters, maybe that comes down a little bit in Q4 as we get fully integrated. But I would consider that mostly flat through then.

Okay. Great. And then just a question on the line that you extended with P&C, can you actually borrow more from P&C given your solid working capital and pay down the Monroe debt with that?

Yes, that’s certainly an option as we move forward and get a little more confidence and have quarter-over-quarter-over-quarter of generating strong operating cash flow Obviously, once you use that pay down that Monroe debt, it’s locked in. So, it’s not something you can redraw, so we want to make sure that we are very confident that we are going to be able to continue to generate the cash flow to support the growth that we expect.

Great. Okay. Great. It makes sense. Great. Nice execution. Thank you very much.

Thank you, George. Appreciate it.

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

Thanks operator. I just want to reiterate our positive outlook for ‘23, really excited and thankful to the team for all their very, very hard work, and it’s going to continue to pay off for us. I also want to thank all of you for your interest in Quest. All our initiatives are working well. And we’re excited about where we are going to be through the balance of this year and into the next years. So, thank you everybody.

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