Thank you for standing by. This is the conference operator. Welcome to the Quest Resource Holding Corp. Second Quarter 2023 Earnings Conference Call. As a reminder all participants are in a listen-only mode.. The conference is being recorded. [Operator Instructions]. I would now like to turn the conference over to Dave Mossberg, Investor Relations representative. Please go ahead.

Thank you, Ashia, 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. Such forward-looking statements are based on Quest’s current expectations, estimates, projections, beliefs and assumptions and involve certain 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 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’s observations and views about industry conditions and developments. The data and information are of Quest – 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. Certain non-GAAP financial measures are also discussed during the 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 for investors’ understanding of the assessment of the company’s ongoing core operations and prospects for the future. Unless this is otherwise noted, 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.

Thank you, Dave, and thanks, everyone, for your interest in Quest. We gained momentum during the second quarter with another significant increase in sequential financial performance. The $13.5 million in gross profit and the $5 million in quarterly EBITDA was the second highest gross profit and EBITDA quarterly performance in the company’s history. Adjusted EBITDA increased 26% and gross profit dollars increased 7% sequentially. Most of the growth came from ramping up new clients and penetrating existing ones. Improvements at RWS also contributed to the sequential increase and we expect the business to provide a strong incremental contribution going forward. We also generated significant cash flow during the quarter and expect to be a strong cash generator this year. We’ve used the bulk of cash flow to reduce debt levels. Subsequent to the end of the quarter, we paid down another $2 million on our line with Monroe Capital for a total reduction of $7 million year-to-date. We continued to gain momentum during the second quarter, and we’re executing well with our strategies. And we are on plan to deliver double-digit growth in gross profit dollars and adjusted EBITDA for the year. I’ll now turn the call over to our CFO, Brett Johnston, for a financial overview, and I’ll be back to discuss progress on our strategies. Brett?

Thanks, Ray, and good afternoon, everyone. During the second quarter, we saw a strong sequential comparison in gross profit dollars, which increased 6.9% from the first quarter. This improvement reflected organic growth from the continued ramp of new clients and from penetrating existing ones. The sequential comparison also benefited from the integration work that we have done to adopt standardized processes across acquired businesses. This includes the full benefit from realizing contracted pass-through costs at RWS, which we discussed on previous calls. I want to make a note about year-over-year comparisons. As we discussed on our previous earnings calls, the integration challenges at RWS during 2022 impacted year-over-year comparisons and masked the improvements we have achieved for the first half of 2023. Given the unique events of last year, we think sequential comparison is a better indicator of current performance and momentum. As discussed on previous calls, prices for recyclable materials may have an effect on revenue, but has not historically had significant effects on gross profit dollars. And this last quarter is no different. Our client agreements produced consistent gross profit dollars based on volumes and are not tied to fluctuations in the price of recyclable materials. The value of the materials 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, as Ray mentioned earlier, 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 for the year. 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 second…

Thank you, Brett. I want to start off by saying how excited I am about what lies ahead for Quest for the balance of the year and the next several years. For the last 18 months, we’ve had a heavy lift to manage significant organic growth and to integrate acquisitions. While acquisition and integration has not been perfect. Those issues are behind us now. We’ve learned a lot, and we continue to enhance our client value proposition. And overall, I’m very proud of the job the team has done. The business is firing on all cylinders, and we’ve gained significant momentum over the last two quarters, and I’m really excited about the profitable growth we have in front of us for the balance of this year and for the next several years. Let me make a brief comment about the macro environment and concerns over inflation and economic uncertainty. The good news is that the waste business is generally resistant to recessions. Our clients, which are primarily large businesses with multiple locations, continue to generate waste during the top and the bottom of the cycle. And our model is agnostic to price swings and recycled materials. We can pass through increases in costs such as fuel surcharges. Because of this, we feel like we are well positioned to endure economic headwinds. During the second quarter, we continued to see stable activity levels across our end markets, and we managed cost pressures and fluctuations in the price of recycled materials well. Moving on to a discussion about growth. I feel very good about organic growth we have in front of us. We saw significant sequential growth in gross profit dollars during the second quarter, and we expect that momentum to continue into the back half of the year. We have multiple…

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Aaron Spychalla with Craig Hallum. Please go ahead.

Yes, hi, Ray and Brett. Thanks for taking the questions.

Hi, Aaron.

Hi. First for me, can you talk a little bit about the vertical for this new customer and maybe some of the key waste streams that are there? And then just you kind of talked about other new business wins. Are you starting to see any improvement in the timing of closing of new business given the kind of value proposition you offer in the face of higher landfill costs and internal and external requirements for customers?

Yes. A couple of things, Aaron. Thank you for the question. First of all, I think it’s getting easier to have conversations and audiences with prospects based on what you just mentioned, increasing costs and increasing demand for sustainability, we found the desire for data reporting is also creating a lot of opportunities for us to have conversations. So we have a number that we feel really good about that are right on the goal line. So that’s why I was so optimistic in my comments relative to future growth, along with existing clients. As far as the new vertical, it’s not a big vertical as far as number of players in it. So I don’t want to get too detailed on it, but it’s a large commercial company that has a lot of different waste streams. They’re not manufacturing, but they have unique needs. They’re more in the freight and transportation type of space, which brings not only new – I want to emphasize, it’s not just the new waste streams, although that’s always important. It’s the scale brought to us with existing waste streams that may not be that big for us today that allows us to play in a much larger space, both in scale and in geography associated with that. But we – it’s a vertical that has a tremendous amount of potential. I believe that it’s a matter of fact, I know that it’s left of its own devices to location in many cases, there’s not a unified database for reporting. And they’re having to echo with multiple pain points to solve their issues and we can do all of them, if that helps, Aaron.

No, that does. That’s good to hear. And then maybe just second for me, on the kind of vendor network. Can you talk about the health there and kind of impact given some of the challenges that we’re seeing in the market? And then just broadly the ability you have to continue to optimize that network as our business scales.

I will tell you, that’s a great question. I will tell you that I’m pleasantly surprised a little bit. I anticipated – or I usually do, I guess, more issues than we’ve had. The health of our vendor base is very strong. We haven’t had any folding up turn on some of these difficult times. As a matter of fact, I think we had the right vendors that maybe when some others – have folded up, they may have gotten stronger. So we really haven’t experienced the kind of issues that you would think and I think some of our competitors may have. So I’m really thankful for the strength and the commitment of our vendor base. And so our ability to continue to expand that is tied directly to the value that we’re bringing to these folks. I think I mentioned in the prepared remarks, asset utilization or route optimization. So we’re bringing continued strength to our vendor base, I believe. We’re bringing in really good clients to them, increasing their volume and giving them a chance to optimize. So with that, Dave and team have definitely got a strong ability to continue to bring in strong and competitive vendors. So we’ve had really good luck and are thankful for the strength of the vendors that we have, Aaron.

Great. Thanks for taking the questions. I’ll turn it over.

You bet.

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

Hey Ray. Brett, thanks for taking my call.

You bet. Hi Gerry.

I’m going to start with the easier or maybe the easier my questions, at least the easier one to ask. On the – on RWS, how far to the integration process are you maybe specifically in terms of how much of a margin headwind remains to be caught up with the rest of the business?

Hey Gerry, this is Brett. So we went live in our new integration on August 1. So we’re just now getting through some of the hurdles with that and working through the normal challenges that kind of pop up through the integration. So we’ll get through our first close and continue to iron out the kinks. But I would expect us by the end of the quarter to certainly be on a normal run rate with the benefits coming from getting onto one single platform.

Got it. And you made up some margin impact in 2Q. Is that correct? Or was that still [indiscernible] compared to the…

We certainly saw some improvement in the business sequentially from Q1, absolutely.

Got it. Okay. My other question, and forgive me, I’m going to try and articulate it well enough. Ray, you talked a little bit about strategy. You hinted at taking, using the Board and leveraging their expertise in multiple areas. We have a lot of client wins. You talked about leveraging increasing service portfolio. I’ve started to sort of write about what not just being a waste [ph] company, but maybe even a repository data information and the distributor of services. I’m just curious if maybe you could open up the kimono a little bit and talk a little bit about where the strategy review is going to go or what maybe you’re thinking about since you have brought it up. So.

I did. I opened the door for the kimono [ph] thing, right, Gerry? So yes, I think I’m more than hinted at that. I mean, our Board is grown and bringing a lot of different value. And a matter of fact, as you know, we recently added a board member with significant technology experience and bringing businesses advancing in technology. And we think of ourselves exactly what you does picture, Gerry, I’ve never really thought of us as a trash or even a recycling company, but a services provider. And the advancement on the technology side is vital to that. Otherwise, we’re just picking up stuff and taking it somewhere. There’s a lot more to it when it comes to the value that we bring. And again, I think, as I mentioned, and as you just said, that’s one of the reasons we’re able to get a lot of audiences with companies that without that, I doubt we would have been able to. But the strategic planning process is about expanding where we are today even and looking at the opportunities, assessing different verticals. We’re really doing a lot of quantification around those, looking at the different technology aspects that we can implement into our business and enhance our value proposition. And I will tell you, to this point, it’s very exciting to me to see what we can do. We don’t have limitations that capital asset heavy companies have. We have the ability to now more so than before to enable and leverage expertise and technology to make our offerings stronger. So I know I’m being a little, I guess, generalistic Gerry, and I need to be, but I want you to understand the direction that strategic planning is taking us. It’s assessing market opportunities and assessing our ability to execute primarily with innovation is what we’re looking to be and we’re excited about it.

Got it. I’m going to swing the question – last question all the way back to the other end of the spectrum, I talked about getting some increasing leverage with this new win in terms of some waste streams that you’re – maybe didn’t have leverage in before. How many waste streams are out there that you would love to see that you can get more leverage and really go after? I’m just curious as to sort of the opportunity there is?

Gerry, and we’ve talked about it before. I think we do like 100 – over 100 waste stream. But out of that 100, there’s quite a few of those we have relatively little scale just because there’s not a lot of it out there with the clients that we have. So I would say probably two-thirds of that we could really use more scale and will get more scale as we add strategic customers to fill those out. And I mean, there’s some without getting specific as I can, but I’m thinking of one way stream, we thought we were really, really strong, and we were, but then we made – one of our acquisitions brought us I don’t know, another 20 or 25 vendors that we didn’t have in that space that all of a sudden, with the same commodity or recycled material we had infinitely larger leverage in geographic coverage. So I don’t know, it’s a tough question to answer, but I’d probably say at least two-thirds of the waste streams that we have today, we’ve got significant opportunities to expand scale within those.

And that I would assume would be additive to the margin front, right…

Yeah totally additive. Exactly.

All right awesome. I appreciate it. I’ll jump back in line. Thanks.

Thank you, Gerry.

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

Hi Ray and Brett, congratulations on a great quarter.

Thank you, Greg.

Thank you, Greg.

On the Q1 earnings call, you talked about double-digit percentage growth in gross profit and EBITDA over several years. And I don’t think – and I heard you talk about it for this year as well. I don’t think I had ever heard you make that statement about gross profit, gross profit growth over several years before. What gave you the confidence to make that statement for the first time on the Q1 earnings call.

Well, I think, Greg, it’s a great question. It does call for obviously a longer-term viewpoint. As I look at the way our business is maturing and what I view as the receptiveness of the market. I’m looking at bringing on new customers, which I feel very confident about, especially with some recent additions. And then the continued expansion within our existing clients, it’s – I don’t want to say it sees to amaze me, but it’s continued to perform at a high level. So I just have a high confidence based on those two main contributors, and that’s all organic that we’ll see that happening. We see it now. I just don’t see anything to break that stream, Greg. So we’re pretty confident based on what we’ve seen so far.

Thank you. You expect – you talked about expecting EBITDA growth to be greater than gross profit growth as you benefit from past investments to improve efficiencies and operating leverage. Can you tell us – you gave us a couple of examples of how these investments are practically allowing you to do things differently – is there anything else that we should think about that’s tangible that’s allowing you to generate materially more EBITDA off of every gross profit dollar?

I’ll go ahead and say you’re headed right down the path. I mean, I mentioned a couple, I think, in the remarks. And those are just current examples that are out there. There are so many more in the platform that’s being developed. There’s so much opportunity, Greg for us to streamline is not the right word. But increase the efficiency and reduce errors, which also increases efficiency and reduce cost in essence on how we handle invoices. How we source vendors for bids how we identify getting vendors on board. I mean these are little things like vendor onboarding. I mentioned that one tool. Think about how cumbersome and how much time and effort and touches it takes to get that done. And when you can automate a process like that, what does it free up for you, right? We’ve got a lot of talent here that now – then they can be focused on identifying new waste streams and new vendors for those waste streams, which in turn enhances our ability to be more additive on gross profit. But beyond that, internally, a bunch of examples I didn’t give, but we’ve got some significant platform investments that have taken place and are moving more toward maturity, where we’ll see more and more of these things take place in different aspects of our business internally. So it’s all about leveraging. It’s the same thing this business model. We’ve always been attracted about Greg, you and others is the ability to leverage costs with – as we grow our EBITDA growing at a faster rate than gross profit is exactly how we measure and it was always our expectation.

Thank you very much. And thank you for paying down – continuing to pay down debt, the $7 million debt that you’ve paid down year-to-date, I think adds about $0.04 to earnings per share. You delivered $6.3 million of operating cash flow and $5.5 million of free cash flow in the first half, so $11 million annualized free cash flow which is great. If you delivered another $5 million plus of free cash flow in the back half of the year, should we continue to expect you to pay down debt with that cash?

Hey Greg, I’ll take that one. So yes, obviously – we’ll continue to look and be as aggressive as we can about paying down debt. We, of course, want to be sensitive to the fact that we expect to grow the business, and that’s going to require some investment from working capital to dollars. So we certainly don’t want to shortcut or handicap the growth by not by overpaying down debt. But that said, yes, absolutely, we’ll continue to look for those opportunities as much as possible. We’ve got a great team. We brought in a new treasury professional that’s doing a fantastic job of managing cash and really. And the other piece is the consolidating of the bank accounts as we get through our integrations you’ve got some loose cash sitting around in different bank accounts that you can start pulling in and have better cash management. All of those things will generate more opportunity to pay down debt, and we’ll continue to look at it.

Thank you. It looks like you could comfortably be below three times levered by the end of the year, which I think drives your Monroe interest rate down 1% from its current rate. Is that – am I understanding that correctly?

That, yes. Partially, though, we were able to get our leverage under four for this quarter end. So we’ve already saved 0.5, a point coming in starting into Q3.

Right. That’s great. Thanks, Brett. One last question for me. I’ve known you guys for seven years, and we’ve been invested for 4.5 year or so. And I think this is the most exciting the Quest has ever been for me. You had several competitors get acquired recently at good multiples, and you’re driving incremental gross profit that’s contributing to EBITDA at very high levels. And in converting that EBITDA to cash. And so my perception is that your platform is the best position it’s ever been to handle drastically more scale. How would you gauge your platform today, Quest platform today when compared to a couple of years ago?

Yes, I’ll take that one, Greg. That’s – as you know, when you asked that is significantly different. Let’s go with the, say, five years ago, then three years ago and then now, and there’s been a significant amount of progress consistently through all those years. So our platform today – well let me just say this, if we had five years ago platform with the volume we’re doing now, we would really be struggling. And our ability to handle it now and to bring what I would consider best-in-class service to the marketplace is enabled by our existing platform. And the best news about that, Greg, is I firmly believe that it’s going to continue to improve going forward, if not at an accelerated rate. So a lot of my excitement about where we are is the improvement in our platform and our ability to drive better value to customers, bring in more customers and revenue and drive a higher and higher rate of that to the bottom line as we move forward. So that’s kind of where we are. It’s been a drastic improvement, and I appreciate your observation on that. Thank you.

Thank you very much.

You bet.

[Operator Instructions]. The next question comes from Nelson Obus with Wynnefield Capital. Please go ahead.

Yes. Hi there. I got a couple of questions. First of all, I really was concerned about this – the comparisons in this quarter because of the outlier of Q2 2022, which was really an anomalous EBITDA number that hopefully you’ll start annualizing at that, but it was really out of whack with reality. So coming in where you did this year is really a very positive development in my opinion. Just a couple of – you’ve given us a lot of information here that’s interesting. I want to just quickly explore seasonality because you said that double-digit gross profit growth would characterize 2023. And for the first six months, you have $26 million versus $26 million. So if you do the math, and I won’t bother to take you through it, but it’s pretty simple, you wind up with actually doing more gross profit in the second half, $28 million. That’s based on 10% increase in gross profit versus what you did last year for the whole year, which was $48 million. So there was a caveat earlier on the call about fourth quarter seasonality, but it looks as though your gross profit growth will be enough to overcome that seasonality on a year-to-year basis, if you’re going to grow gross profits by 10% in 2023 versus 2022? Do you follow that?

Yes, absolutely. That’s very similar math to what we did to get comfortable with the statement. So yes, we’re very confident.

All right, that’s very good because seasonality would normally create a second half that would be weaker. You’ve also done something, which I give you high credit for; you’ll probably never do it again. But you put the queue out in advance of the conference call. And there’s a paragraph in the queue that’s full of interesting little breadcrumbs under the MD&A, where you talk about – I’ll just real quick for everybody. The decrease for the quarter was primarily due to an approximately $3 million decrease in recyclable material revenues and also due to an approximately $5 million decrease in revenues from the certain 2021 acquisition. These declines were offset by an overall, strong increase in demand for non-recyclable material services from both new and continuing customers resulting in an almost $6 million in additional revenues. Would you go over what those on non-recyclable material services stack up and look like? I mean just in category. Non-recyclable revenues.

Yes. Really, what we were trying to talk to is the organic growth in the business. So take away the value changes year-over-year with recyclable materials. We’ve talked about those commodity values and how they can fluctuate. And this year was no different. But really highlighting with those numbers, the 8% organic growth year-over-year really was something we wanted to highlight because it’s an important story about our – to your point earlier, how we’re going to get to the double-digit growth year-over-year.

Got it. Okay. So that’s that part. And this $5 million decrease in revenues from the acquisition in 2021. Is some of that – can we – can we get some of that back? Or do you have any comment about that?

No. As we’ve talked, especially going quite a bit last year, with the challenges and some of the adjustments that we made period-to-period related and then we had the final adjustment in Q4. So I’d say that’s mostly related to just kind of the quarter-to-quarter volatility we had. But certainly, from a standpoint of returning to normal, we feel very confident that wasn’t a result of any lost customer, significant lost customers or anything like that just speaks to the challenges that we had last year.

So you’ve made it clear. You’ve learned a lot about how to handle acquisitions and integration, and there’s – and you’re the new sheriff in town. So that’s good to know. And finally, and I know this is really back of the envelope. But I think Greg mentioned your 3x leverage now, and you’re – we’re paying about – it will go down, but we’re still if we annualize, we’re still paying $10 million in interest expense on less than $60 million of debt. Now I know it’s tough out there, but at what point when you think about it – I mean, that would be like mid-teen interest rate. Is refying something that you think about? And is there a point where you could find a more traditional lender that I could imagine a situation where you get your debt down to, say, $50 million and you pay 10% and bingo, we have $5 million more of free cash flow. Just your thoughts about that.

So just to clarify, for Greg, his – if I understood him correctly, he was talking about his modeling had to sit a 3x leverage point or below by the end of the year. So…

I mean you can do $20 million of EBITDA. I mean that’s within reach. I mean, if you annualize Q2.

Yes, just wanted to clarify. But absolutely, refinancing is something we’re looking at. I think we’ve talked about that. We’ve got some opportunities. We’re talking to some really good banks out there, to your point, some traditional type of lenders that we do think we could see some savings. We’ll continue to work through those. But we’re very excited about the opportunities around refinancing and what it can do for us going forward.

The exciting thing about this story, in my opinion, is that you should be able to find a lender who would allow you to invest in growth platforms while charging you a less confiscatory interest rate. And I really think that’s something that could seriously unlock value, maybe not immediately, but I’m glad you’re thinking about it. That’s all.

Absolutely. Yes.

Thank you, Nelson.

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

Thank you, operator, and thank you all are on the call, and I appreciate the questions. And more importantly, I really appreciate the interest in Quest. Many of you who have been there for a long time and show a lot of confidence in our team and we appreciate it greatly. I want to reiterate our positive outlook for 2023. I hope we expressed it clearly, if not, I’ll do it again. We feel really great about a confluence of events. Everything we think, moving in the right direction and the execution from this team has been tremendous. I want to thank them for the efforts. These things are done with a lot of effort from a lot of great folks, and I’m constantly humbled by their dedication and hard work, all of these shareholders as well. And we look forward to keeping you up-to-date in quarters to come. Great Quest story will continue to – it will write better chapters every quarter as we go by. So thank you, everyone. Appreciate it.

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