Thank you for standing by. This is the conference operator. Welcome to the Quest Resource Holding Corp’s Third Quarter 2023 Earnings Conference Call. As a reminder, all participants are in listen-only mode and 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. This is Dave Mossberg. Your line is cutting out a little bit. So I am going to go ahead and get started. Let me know if you can hear us. Well, 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 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 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 will be 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 to investors understanding of the assessment of the company's ongoing core operations and prospects for the future. Unless it is otherwise stated, it 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 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. I want to start off by emphasizing how excited I am about what lies ahead for Quest in the next several years. We have made significant strides in laying the foundation for growth and earnings. This year, we have made a lot of positive progress, building our growth engine and investing in technology to drive efficiencies to support that growth. In recent months, we have seen a noticeable uptick of the number and the size of opportunities in our pipeline, and we have seen faster than anticipated ramp-up at one of our largest new customers. We also have a robust outlook for growth. In addition, at the end of third quarter we completed the systems integration of RWS. We uncovered isolated issues related to RWS legacy systems, which resulted in cost of sales adjustments, mostly related to the activity prior to 2023. This is the primary cause of gross profit dollars from RWS being approximately $800,000 below our expectations during the third quarter. While RWS systems integration has been frustrating, it is complete and we have taken action to realize approximately $1.7 million in annualized SG&A cost savings, beginning in the fourth quarter of this year. In addition, we are bringing online several technology enhancements to our platform. We expect these enhancements to improve efficiency, scalability and continuously improve our client value proposition. In summary, I am more excited than ever with the underlying strength and the foundation of our business. I am looking forward to realizing the resulting bottom-line improvements from our investments in the platform. I'll now turn the call over to our CFO, Brett Johnson, for a financial overview. I will be back soon to discuss progress on our strategies.

Thanks, Ray, and good afternoon, everyone. A quick note about the sequential decrease in revenue. It was primarily related to commodity price fluctuations and normal quarterly volume fluctuations. As discussed on previous calls, commodity price fluctuations have not historically had material effects on gross profit dollars. Our customer agreements produced consistent gross profit dollars, based on volumes that are not tied to commodity price fluctuations. For those of you new to the story, this is the reason we use gross profit dollars as a key metric to measure financial performance. During the third quarter, gross profit dollars were $12.4 million, an increase of 2% versus the third quarter last year and a $1.1 million sequential decrease from second quarter. The sequential decrease primarily reflected $800,000 from the underperformance of RWS. To a lesser extent, sequential comparisons were affected by decreased contribution from an RWS client that has been acquired by another company. That company that acquired this RWS client manages waste disposal internally, and decided to manage the RWS client similarly. As part of the process of fully integrating RWS onto our platform, we have gained efficiencies and have been able to reduce headcount and cut operating costs at RWS. We anticipate approximately $1.7 million in annualized cost savings beginning in the fourth quarter of this year. Sequential comparisons during the third quarter were also affected by a billing adjustment of approximately $400,000 from a quickly ramping new customer. While it did affect third quarter results, it represents a very small percentage of this client's total billings, and we maintain a strong relationship with this client. In fact, excluding this adjustment, the contribution from this client grew during the third quarter and continues to ramp in the fourth. Looking to the fourth quarter, we expect gross profit dollars to increase…

Thank you, Brett. While the cleanup adjustments for RWF have been frustrating and have made our quarterly comparisons challenging. I want to emphasize the conviction on our trajectory and the overall outlook for the company. We've made tremendous progress during the last several years and are as confident as ever about our outlook for continued double digit growth over the next several years. We are now running all of our business on a common platform, so our integration efforts and other and other actions, we've been able to lower head count and can now begin to realize greater efficiencies from these acquired operations. As I said earlier, we'll recognize approximately $1.7 million in annualized savings from RWS in the fourth quarter. In addition, we expect to continue to lower overall operating costs and drive efficiencies across the operating platform. Let me make a brief comment about the macro environment and concerns over inflation and economic uncertainty. During the third quarter, we continued to see stable activity across our end markets. We managed cost pressures and fluctuation in the price of recycled materials as well. The waste business is generally resistant to recessions, and our clients continue to generate waste during the top and the bottom of the cycle. We also have compelling and differentiated value propositions, which create strong client relationships that endure during periods of economic weakness. Through our value add, we strive to have long-term strategic relationships with our customers and not have relationships that are transactional in nature. To illustrate that point, we recently reviewed the longevity of our top 20 clients and noticed the average engagement for Quest was over nine years. We also recently signed a new five year extension and expansion agreement with one of our largest and longest standing clients. While our core…

Thank you. [Operator Instructions]. Our first question is from Aaron Spychalla with Craig-Hallum. Please go ahead.

Good afternoon, Ray and Brett. Thanks for taking the questions. Maybe first for me. You kind of touched on it a little bit, but just with the uptake in kind of number and size of deals in the pipeline. It sounds like, it is pretty broad-based. But can you just talk about some of the drivers behind that and any areas or end markets in particular?

Actually, there are several end markets, Aaron. Thanks for your questions. Industrial continues to be a real opportunity for us and there is some opportunities in retail as well. I think I mentioned in the remarks, referenceable clients has helped us quite a bit. But also we have had a lot of work going on and prospecting is starting to come to fruition. So the focus that our leadership team on the sales side has putting a lot of great new prospects on the top, is starting to prove out and we are excited about that.

All right. Good. Thanks for that. And then maybe just on the food waste and Proganics. Seeing numerous states start to implement kind of reduction goals on the food side and penalties starting kind of early in 2024. Can you just give us an update there on where conversations stand with customers and how you see this business contributing to growth going forward?

Yes, sure. And you are absolutely right, Aaron. Food waste continues to be an area of focus and it continues to be probably the biggest opportunity or target for diversion from landfills. We have some great customers in that space today and we have some tremendous prospects that we are talking to as well. And to be honest with you, in many cases, grocers are really starting to look at opportunities to do more diversion than they did in the past, based on those pressures that you are just referencing, Aaron. So I encourage more and more regulation and pressures. It speeds up the sales process and we are encouraged by that.

The next question is from Gerry Sweeney with ROTH Capital.

Going back to the RWS and then I think the 400,000 charge for the ramp up, two different issues, but maybe looking at root cause. Is there any concern about processes, systems, et cetera that you have to take a look at to make sure this doesn't happen again? Or how do we look at kind of the mitigation strategies around this?

Hey, this is Brett. I'll take that question. Starting with RWS, I wouldn't call these the broad base. They were really isolated to two specific issues that were difficult to identify. We've done a lot to work on our visibility within RWS before we brought them into our current environment. But we still had a few gaps there. These popped up as we went live in the new systems. And so we feel confident with the processes we have in place, being in our environment, managed through our accounting teams and our operational teams, that we've got much better visibility and consistency as we look at more of the recent numbers as we've gone live. And then to your other question on the quickly ramping customer, again, it's a fairly large customer. It's really a very small percentage overall. Not systems related, not really a process. It was just an error that was made. And it was over a longer period of time that it was missed and we had a true up. And these things happen sometimes, and I don't want to diminish it. We're working on -- we don't want any, but we certainly don't see any broader base concerns on these types of things.

Was the RWS -- was the issue in the third quarter or was that a lingering issue from over time over the last couple of quarters as you had integrated it? And as you brought…

It was a lingering issue. As we stated, most of it was related to activities prior to 2023. So kind of sitting in there and even most of that was non-cash.

And then on the sales cycle, it seems like it some areas taking longer. I'm just curious if there's any industries that are moving, maybe the ramp up is going faster than you anticipated and some are slower. And in particular, maybe if you have a lot of rest referenceable accounts in one industry, is that sales cycle sort of faster than an industry where you have less referenceable accounts?

Yes, referenceable customers definitely helps speed up the process, Gerry. There's no question. It's almost like a due diligence that doesn't have to be performed by the prospect. So I don't think there's industry specific delay or improvement at or in-market specific. I mean, I think it depends on where the prospect is in their decision cycle, how they do it. Some of them are more complex than others. Some of them have a ridiculously long, frankly sign off process that goes through numerous departments. Some of them are much more quicker than that. But I guess what I'm saying is I don't see that as in-market specific. It's more company culture specific and how quickly they make decisions.

And some very large companies -- sometimes these opportunities for signing when they come up every like over the course of one year or cycle, is that also part of it? It's just the way these companies manage the outsourcing services, is that also a way of looking at it?

If your question was larger companies, Gerry, they take longer, is that what you are saying? I couldn't hear you very clearly.

Yes. It is actually yes.

Okay. Yes. Well, it goes back to complexity, right? The larger the company, the more locations, the more waste streams, typically, the more -- well, bureaucracy, I guess, that exists. So there is a pattern based on the size of the companies that larger companies take longer, no question.

Final question and then I will jump back to queue. Any competition popping up? Obviously, I mean, you mentioned one client that went away, but that was internalized, right? Completely understandable. But just curious if you are seeing any competition even on the fringes or what's happening out there on that landscape?

We talk about that quite a bit, Gerry. And no, as you mentioned, just I appreciate you reiterating that. That lost client we talked about was strictly -- they were acquired by somebody else, and they took it internally. So it didn't have anything to do with us. And I should mention, I guess, that we have situations where our clients buying other companies and we get growth out of it too. So it happens both ways. But competitively, I haven't seen a lot of changes. I have been watching to see if our price points going down, aggressiveness, that type of thing, with economic conditions changing. And I really don't -- we really haven't seen anything to that effect. It is a very competitive industry, as you know. I think it has pretty much stayed the same. I haven't seen a lot of changes.

The next question is from Sameer Joshi with H.C. Wainwright. Please go ahead.

Good afternoon, guys. Thanks for taking my questions. Just on RWS, it seems that the revenue loss also played into this quarter. It seems $6 million less than year-over-year growth here. Is there any reason for that lost revenue or can you just shed some light on that?

Yes. I will take a little bit of that. So we have certainly -- we have got the commodities that run through that business as well. So I would say a portion of that is certainly related to reductions in just overall commodity values. We did talk about the lost customer. So we got a portion of that in the quarter as well. And then, the rest is probably actually, it is probably related to some of the adjustments that were made throughout last year as well.

Okay. Some of my other questions have been answered. But just checking on, I think on the last call, you mentioned double-digit growth in gross profit dollars and in adjusted EBITDA for 2023. Are we still on-track for that?

Yes. I mean, if you take out the exceptions that I think Brett did a really good job of laying out. I mean, we are there. But we are looking to continue that. The outlook is strong going forward, definitely strong going forward in future quarters.

And then the last one, was there any further principal payments made to Monroe? I think in the last quarter around $2 million was prepaid.

No. We did not make another one subsequent to this quarter. We did talk at the end or in our Q2 earnings call that we had made one subsequent. So we did have a payment of $2 million within the quarter, but we talked about that one as being a subsequent transaction to Q2.

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

Hi, Ray and Brett. I wanted to ask a question about Brett's commentary. It sounds -- if I got what Brett said correct, I think that Brett said, he expects sequential gross profit increase in the fourth quarter and expects something similar to Q2. And so Q2 gross profit was 13.5. Is the right way to interpret that statement that you think Q4 is around 13.5?

I think that's kind of our baseline for just overall performance of the business, Greg. We talked about, we have got some opportunities and some growth coming in as well. In Q4 of last year, we talked about some cyclicality or some seasonality that came in, that can really vary customer-by-customer. So, there is a -- we don't have full visibility on how that's going to impact Q4. But just in terms of strength of business, we certainly look at Q2 as being much more reflective of the continued sequential performance. And you can get there basically with the adjustments we talked about, gets us really closely in line with Q2.

Thank you. And I wanted to make sure that, I understood, how much of the adjustment was to gross profit in the quarter? I think that you highlighted $500,000 of RWS was a gross profit impact, and then was the $400,000 impact with the one fast-growing customer, was that also a gross profit impact? So was it $900,000 reduction to gross profit or was it more?

Yes, that's correct. It is about a $900,000 adjustment to gross profit that we took in Q3.

Okay, great. And so, then, getting close to double-digit gross profit growth for the year, if you add back $900,000 and do around $13.5 million of gross profit for the Q4, but maybe a little less this year, is kind of how that looks to me. And so -- but I do hear you talking about your confidence in getting double-digit growth going forward, and you talked about some of it, just a lot of different areas in which you can attain it. And so I would appreciate if you can help us to understand how much of that do you think is coming from your existing customers like wins that are already in hand, how much of it is coming from optimization, which you touched on? And then how much -- is there, like, a go get where you need to go get $1 million of gross profit to get to 10%? Or do you think that it is kind of already in hand?

I would say -- yes, that's a tough one to quantify, Greg, obviously, because there's a go get factor in there, which is always hard to put your finger on. But I would say first of all, that optimization that you talked about, the profit optimization is with existing clients. So -- and that's been an ongoing thing that Dave's team has done a fantastic job by lowering costs, leveraging costs and lowering costs, and increasing the gross profit for a long time. And that's still a big contributor to us. But there's a portion to go get. I would go ahead and say, I think more than half that is in the existing client opportunity. The go get stuff's looking a lot stronger than it has been in the past. So the confidence flows pretty high, but we've got a big head start with the existing clients, Greg, and we've already got mapped out a lot of those things that draw that increasing gross profit, it's calendared and mapped out already on existing clients. So we feel good about that.

And on the $1.7 million SG&A cost savings, RWS. You talked about seeing some of that in the fourth quarter, but I think I also heard you say that SG&A should be around $9.5 million. How much of that -- and that's kind of in line with your prior commentary, how much cost savings from the RWS $1.7 million a year, which is like $425,000 a quarter, how much do you think can fall into Q4 versus you start in Q4 and you'll see it in future quarters?

Yes, most of it should be in Q4. We'll get a little bit of additional pickup after Q4, but most all of it will be in place. We've got a couple of other SG&A lines that are coming in and offsetting a bit of that. But overall, we expect the full amount to be realized in quarter four.

And so $1.7 million annualized, like $425,000. So, you've put this cost savings plan into place very early, like in the September time period is like September 1st -- or first couple of weeks of September if you think you're going to get most of it in the fourth quarter. Is that fair?

Yes, it kind of had a rolling aspect to it, so this wasn't a one-time thing. But yes, we've certainly by the end of the Q3 had most of the savings already realized.

So it's important to note that this isn't a want to do, this is already done. And we've given the annualized number, but the execution of the initiative is already completed.

And then on the new customer that I think you said was going to start ramping September 1st, that sounded like that was going great. Is there total number of locations 380 locations or is that just the size of the initial opportunity that they gave you?

No, that's the number of locations the size of the initial opportunity is. It's a lot locations are different sizes. Some of them are smaller, some or large. It's not uniform. So the number of locations is less important than the waste generated and the amount of it. So it starts out with one part of it, and we're adding waste streams as we go. And we're also adding new locations and I'm really proud of the team that we have here that's convinced them that they need to accelerate and move forward with additional waste streams and locations as opposed to phasing it over the longer period of time. We were thinking it was going to be, frankly. There is still a phase in aspect, Greg. But we feel pretty confident it has accelerated from what we thought it was initially.

That's awesome. And is there a way to think about the opportunity with some of those competitors, which it sounds like you think, you are also pursuing, are any of those in that bucket? I think you quantified, Ray, as something like far along in the process and/or maybe at the closing stages something. I don't remember the exact way you described it, but is there a way to think about how some of those other competitors are in the pipeline, where they are?

Are we getting those prospects from other competitors? Is that what you are asking, Greg?

Yes. Sorry if I said it poorly. I think that you have been reticent to give a lot of detail about that specific company, this new customer that you have because there are other competitors in their same market, that you are going to try to win as customers. And so I think that, my takeaway has been that you're pursuing those customers. Are any of those kind of in that later stage? In your prepared remarks, you talked about some of your customers being chunky and later in the pipeline. Are any of those competitive players to this new mystery customer? Are they furthering the pipeline? Or how would you characterize where they are in the pipeline? Sorry, I rambled. Hopefully, that was clear.

I understand your question, Greg, and I think you are going to understand that I continue to be reticent, for competitive reasons to speak to that much detail. But there is a lot of opportunities that are created by other competitors, frankly, that aren't taking care of their clients as well as we think we can. But I am probably not going to mention anything specific relative to that. I think you understand that.

Yes. And my last one, and sorry, I will hop off and you see the floor. Have you explored, I think on the last quarterly call, you talked about, exploring opportunities to maybe refinance your debt? I can't -- I believe that you said that, but I could be wrong. And I would love to hear, Brett's remarks sounded like you guys are focused on reducing your interest expense by managing your cash well, and you have done a good job of that this year and by reducing the principal on your debt. I would love to hear how you think about your refinancing plans?

Hey, Greg. This is Brett again. Yes, I will take that. We did talk in Q2 that we were having conversations and we have continued to have conversations, and continue to be excited about the opportunities that we have for refinancing. We are taking a really slow, deliberate approach to it, because we have got a lot of exciting growth opportunities that we have talked about during the call. And we want to make sure that whatever we set up is in place to really help to support that growth over the longer-term. So we are taking a little bit more time. It's certainly not because we don't have really good options. We continue to be really excited about potential partners that we have got out there. But just going to take a little bit more diligent time in making sure we get the right thing in place.

The next question is from [Greg] (sic) [George] Melas with MKH Management. Please go ahead.

Hi, guys. I would like to extend and then maybe a more sort of detailed question. On the growth question, Ray, you talked about doubling over the last, three years and about one-third of that coming from existing customers. So I would suffice with some very simple math that suggests that you should have grown with your existing base by roughly 10% per year. But it seems a little high to me. And I wonder if that's about how where the numbers fall around 10% in terms of organic growth.

George, I am going to answer your question that I believe I heard. Unfortunately, the connection is not good. But I think your question was around the doubling of our business and one-third came from existing clients in essence. But the fact that you did the math, and it sounds like 10% is a little high. Is that what you're thinking? Is that what you're asking, George?

Yes, exactly. And is that the goal going forward?

Yes. It does seem, I bet it is actually what this team has been doing. And that's growth in gross profit dollars not revenue necessarily. And so we talked about the procurement initiatives about continuing to leverage and optimize the waste services and create more value from the commodities. And the team has been doing that. So they have been doing that for many years. So yes, George, those numbers are accurate and we are really thankful to have those long-term relationships with these great clients, and we are able to do that.

So as you go, as you look forward to '24 and '25 with the improvements in the platform that you are making, is that still what you expect in terms of gross profit dollars, in terms of organic growth? Are you sort of targeting 10%? Or how do you think about it?

We are targeting 10% overall in growth and plus -- 10% plus. But we expect pretty consistent contribution from the existing clients. The improvement in the platform is going to do a number of things for us, but it is probably going to impact SG&A quite a bit because of the automation type of elements of it and those types of things. So not necessarily as much of a gross profit type of indicator, but there are some gross profit pieces there, too. Like, we mentioned the procurement tool the guys are able to use, and identify better pricing and better locations in a shorter period of time. But I would look for the -- I guess, I will answer your question with two answers. One, we have no reason to expect that contribution growth from existing clients to really change over the pattern it had several years. And two, the technology platform is going to be really beneficial in a lot of ways, but a lot of it is going to come from scalability and leverage internally on our operating costs.

Okay, great. And then maybe one question for Brett. Brett, your working capital days, I guess, the way I calculate them were sort of roughly 15 days and they have been pretty consistent there in '23. It's quite a bit better than '22. And what do you expect going forward? Do you have a target in terms of working capital days or working capital dollars?

Yes. We continue to focus on that as an opportunity. [ARR] was up a little bit in the quarter compared to last quarter, we had some timing issues and related to we had some projects come on late. So we haven't had a chance to collect those because they had happened later in the quarter, and then a little bit of delayed billings on the RWS piece as we transitioned the billing onto our new system. Again, nothing real concerning there, but we continue to look for opportunities. It's tough on a target. The one thing that's cautionary is we are working with very large customers who are trying to manage their working capital as well. And especially at the -- coming into the end of the year, they tend to hold payments as well. So -- but it's certainly a focus and we think there's some opportunities to get better there as well.

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

Thank you, operator. I just want to take this opportunity, guys. I want to reiterate our positive outlook. I want to make sure that I came across as I intended that very, very confident. When you look at our business today and look forward, I don't think I've ever felt better about where we're headed. I mean, there's so many positive things on in the forefront. So I'm very, very encouraged by that. I want to thank you again for all your interest in Quest. I'm really appreciative of our shareholders, and the support that we get from you guys. And I want to thank the rest of the Quest team. I never want to forget this. For the ongoing efforts to deliver value to the client and to the shareholders. They put in a lot of time and effort and work, and it shows in those client retention, client relationships, client contract resigning, those types of things. They don't happen if you're not doing a good job. And these guys are doing a great job. I'm very appreciative of that. We have a number of key initiatives that we're working on, and we've really started ramping them up as we move into Q4. And I'm really excited about what they're going to do. They're going to be enhancements to our platform, enhancements to our ability to grow revenue and to grow gross profit, which should yield a greater EBITDA going forward. So that's kind of where we are. Again, excited about it. I hope you are too. Looking forward to keeping you up to date in the quarters to come. And thanks again.

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