Jeff Elliott - Investor Relations Representative Ray Hatch - President and Chief Executive Officer Laurie Latham - SVP and Chief Financial Officer.

Gerry Sweeney - ROTH Capital Mike Vermut - Newland Capital Nelson Obus - Wynnefield Capital.

Good day, and welcome to the Quest Resource Holding Corporation's Second Quarter 2017 Earnings Conference Call. Today's conference is being recorded. I'll now turn the call over to Jeff Elliott, Investor Relations Representative. Please go ahead, sir..

Thank you, Justin 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 words like anticipate, project, estimate, expect, intend, believe, and other similar expressions are intended to identify those forward-looking statements.

Forward-looking statements also include statements regarding Quest's future opportunities for growth, Quest's expectations for revenue, margins, and profitability in future periods; Quest's industry position and industry trend; and future opportunities related to Quest's e-commerce Web site and comprehensive proposals.

Such forward-looking statements represent Quest's current judgment about the future, and they are subject to various risks and uncertainties. Risk factors and other considerations that could cause Quest's actual results to be materially different are described in Quest's Securities Filings, including its forms 10-K, 10-Q and 8-K.

You can find those documents on Quest's Web site at www.qrhc.com. Quest does not assume any obligation to update that information. Actual events or results may differ materially from those projected, including changing market trends, reduced demand, and competitive nature of Quest's industries.

In addition, in this call we will include a substantial amount of 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.

In addition, Quest's observation and views about industry conditions and developments are its own and may not be supported or agreed with by other industry participants or observers. 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 its investors' understanding and 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 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. Please go ahead sir..

Thank you, Jeff and welcome everybody on our call to discuss the second quarter results. Also, joining me today is Laurie Latham, our Senior Vice President and Chief Financial Officer. Before I move on, I'd like to make a few brief comments to start the call today.

Our second quarter financial performance was well ahead of our expectations and built on the momentum that we saw in the first quarter. We were able to deliver record gross profit dollars and successive quarters of positive adjusted EBITDA.

Our revenue declined year-over-year, but this was in line with our strategy that we've discussed in the prior quarters. We put up preliminary numbers a couple of weeks ago and in that update, we changed the revenue outlook and discussed the expected revenue decline in the coming quarters.

That change was a result of discontinued service with some customers including a portion of services with two of our largest. However, we reiterated our outlook for positive adjusted EBITDA for this year and improvement in gross profit, which is also consistent with our prior outlook in that aspect.

Overall, we're on track with our strategies and I'm very optimistic about our future. We're expanding with current and new customers and growing our pipeline. At the same time we're reaching record levels of gross profit. We're excited and very encouraged by our current direction.

Before I get into further details on our progress and the initiatives, I'll now turn the call over to Laurie to review the financials.

Laurie?.

Thank you, Ray, and good afternoon to everyone on the call. Second quarter revenue decreased 11.7% year-over-year to 41.4 million compared with the corresponding period in 2016. The decrease was primarily due to a combination of changes in the mix of services and customers.

The decrease in revenue was more than offset by a 6.3 million reduction in the cost of services resulting in a 21.7% improvement in gross profit dollars. Second quarter 2017's gross profit dollars increased 794,000 to a record 4.4 million, compared with 3.7 million for the second quarter of 2016.

The gross margin percentage for the second quarter of 2017 was also a record at 10.8% of sales, a three percentage point improvement from second quarter last year.

The improvement in gross profit was ahead of our expectations and was a result of a shift in the mix of services and customers we performed during the quarter, resulting from our disciplined service and customer review strategy, as well as optimization of the procurement side to align cost and improve efficiencies.

As we said in the press release, we expect gross profit dollars will decrease by approximately 2% during the second half of the year, as compared to the first half. On a year-over-year basis, our second half outlook represents an expected increase in gross profit dollars of more than 15%.

This improvement along with stronger than expected performance during the first half of the year puts us on track to exceed the one to two percentage points that we had previously expected. Operating expenses for Q2 2017 were relatively flat in comparison with last year at 5.6 million.

We expect operating expenses will decrease slightly during the second half of the year, which is primarily related to a reduction in overhead for the expected lower service volumes.

The loss per basic and diluted share was $0.08 for the second quarter 2017, an improvement compared with the loss per basic and diluted share of $0.14 for the second quarter of 2016.

Our earnings before interest, taxes, depreciation, amortization, stock-related compensation charges and other adjustments or adjusted EBITDA was 478,000 for the second quarter of 2017, which is an improvement of 872,000 relative to the same period last year. The improvement was primarily driven by the increase in gross profit of 794,000.

We have clearly turned the corner on adjusted EBITDA this year with back to back positive quarters and expectations for positive adjusted EBITDA for the year. We compute adjusted EBITDA, which is a non-GAAP financial measure, to provide additional insight into our financial performance.

I would refer you to the table in today's press release for the reconciliation to GAAP. Now, turning to the balance sheet, we had 1.4 million in cash at the end of the second quarter as compared with 1.3 million at the end of the prior year.

Working capital as of June 30, 2017 was 3.7 million, an increase from the 3.1 million of working capital as of December 31, 2016. As of June 30, 2017, our total long-term debt excluding unamortized debt issuance cost was 6.7 million, compared with 5.1 million as of December 31, 2016.

In addition, we had approximately 12.8 million available borrowing capacity under our credit facility, beyond the 6.6 million outstanding as of June 30, 2017.

Our credit facility, which we entered this past February, add significant financial flexibility and provides incremental borrowing capacity to support our long-term growth plans and associated working capital. So at this time Ray will discuss our initiatives and outlook..

Okay. Thank you, Laurie. I appreciate that. Before we get into a detailed review of our strategies, I want to take a moment to review the relationship between gross profit dollar improvement relative to decrease in revenue. As I've stated before, we're measuring our near-term success based on the growth of gross profit.

As already mentioned, we had a decline of revenue by 11.7%, but at the same time we improved gross profit dollars by 21.7%. That's a very important ratio to us and its much like the last quarter if you recall, we also had an [indiscernible] much similar to that.

Revenue is an important metric, but it's likely to continue to decrease temporarily before it resumes growth. Revenue is meaningful to us, but only the right gross profit contribution, that's the type that we're focused on.

Although, in the second half of the year, revenue is expected to decrease year-over-year, we expect gross profit dollars to grow by more than 15% in the back half.

The reason for this generally is that we're essentially foregoing some transactional business heavily dependent on price, while adding business that allows us to highlight Quest's unique value proposition as a strategic partner with our customers.

Let me emphasize that we fully expect to resume double digit year-over-year revenue growth as we exit this transitional period. Now, we're renewing business with several of our largest customers. A good example of this is the renewal that we recently announced with Kroger, nation's third largest retailer.

We’ve had several recent renewals with other large retail and grocery customers. I'll now take a little time to review the progress we've made on several of the key initiatives.

One, one of our initiatives is to renew and add the right business with the right customers that help us achieve our overall financial goals, not just revenue for the sake of revenue.

This isn't about increasing price, it's about delivering the services that we know can add the most value to our customers and give us the opportunity to show our competitive differentiation. With that comes more value and the customer recognizes that.

We've initiated this strategy a little over a year ago resulting in some business in our portfolio not meeting our new standards. However, this strategy is also resulting in a more positive relationship with our current and new customers, while increasing operational and financial performance.

We're also adding new business with new customers in new vertical markets, which I'll talk about more in a minute. While the growth in this part of the business has been matched by decrease in revenue that's more transactional, we're really excited about what growth in these new areas can do for our business.

As I just said, the key part of this initiative is to target verticals at [miracle] [ph] markets that can provide incremental growth with attractive margins. So far we've announced two of our key customer wins in the industrial and construction markets, while it takes time for this business to ramp up with these customers.

We're making a lot of progress and expect incremental contribution in the back half of the year as well as into 2018. We're also targeting more accounts in these verticals. We're still in the early stages, but our pipeline of business continues to grow in these areas.

We also have plans to entering a new vertical market this year and expect to have to talk with you about that in the future. Another strategic initiative is improvements and profitability including focusing on our procurement process. To succeed in our business relationships with our sub-contractors can be just important as our customer relationships.

As such we've made investments in a new team procurement specialist, whose purpose is not just to evaluate, but also to manage the relationships and ultimately help our sub-contractors succeed. Our procurement strategy is not about leveraging our vendors on price, which is not a sustainable strategy.

Basically we try to help our vendors add new business that they could not have been able to possibly compete for individually and help them become more efficient. This reduction in cost results in improved economics for all parties. The more we help our vendors to add revenue and improve profitability, the more value we add to our vendor partners.

That translates into better service and value for our customers as well. Essentially, we're working to create a win-win-win for customers, Quest and our sub-contractors with this strategy. This represents a change in our organization culture and takes a little time to implement.

However, the implementation of this change has already begun to reduce cost of sales and is contributing to the improved gross margins that we've already reported. And finally, the last strategic initiative I'll discuss today is how we embrace the new technology to truly differentiate our service offering.

The data we provide allows customers to have greater control, have regulatory compliance and against demand side into their spending across a broad set of location and services in terms of adding opportunities to improve their operations and their owner reporting.

This is particularly important to our target customers that have a large footprint and multiple waste strengths. Providing a standard platform or the broad scale and scope of data is a great way to differentiate ourselves and establish strategic relationships with our customers.

We're able to help customers create benchmarks that they otherwise would not have been able to do because frankly they weren't available and they weren't visible. For example, what this could have meaning, we have a client that recently is able to use our data to identify variances between their locations, where logic says there shouldn't have been.

This analysis allows the customer to investigate, identify changes that save them money either through their ordering process being more efficient or improve in their compliance processes.

So moving on to our outlook, regarding our near-term outlook, I'd like to say it's important to note that the changes we've discussed today will take time to affect our financial. And we'll continue to face revenue headwinds for the next several quarters.

However and more importantly, the changes will continue to show year-over-year gross profit dollar improvement, which is how we're measuring our success. As we look out over the long term, we expect to resume double-digit top line growth after we exit this transitionary period. At this point, we believe that to be sometime in late 2018.

We also expect to show continued improvement in profitability during the next several years and have a three to five-year gross margin target in the low to mid-teens and a three to five-year adjusted EBITDA target of 4% to 6%.

Ultimately, we believe the focus on providing differentiated services and a solid customer value proposition will create sustainable and greater long-term shareholder value. I really look forward to updating you on our progress in that regard. Operator, please open the call for questions..

Well, thank you. [Operator Instructions] And our first question today comes from Gerry Sweeney with ROTH Capital..

Hi. Good afternoon, Laurie and Ray..

Hi, Gerry..

Hi..

I hope you can hear me alright, not in the best location. But congratulations, I know it's been a long process, shedding some of the tougher revenue. Two questions for you, one, you did address this a little bit on the call but I want to see if we can dig a little deeper than that’s you did I believe remove some revenue from your top two costumers.

How are those relationships and how are those customers handling this change? Are they understanding the value that you're bringing on board and understand that the business that you're removing is important for you but also important for you to keep up giving them better service that that I just want to delve a little bit further into that relationship and see how it's doing?.

Sure. Yeah, Gerry, I would be happy to answer that of course. Speaking for your customers is always a challenge but I'll give it a shot. I can tell you that our relationship is continuing with those two largest customers we talked about in lines that made sense for us as you just related to.

And truly, I can tell you specifically with one recent call that relationship has actually improved quite a bit.

There is a situation where we're able to do the things that make sense for our business and bring a lot of – be a resource for them across a whole platform so I would say the customer relationships are strong or stronger than it was before but that's not an issue - ..

Got it. That's very helpful. I think removes some concern from that perspective. And then two, obviously the balance sheet seems like it's in very good shape. You're obviously turning EBITDA positive. You had a new line of credit. There is some room on that facility. You're forecasting increase in profitability through this year into next year.

I understand you're going through this, the culling of the revenue side, but does this give you a little bit more flexibility to either speed up revenue or alternatively in the past you talked about adding some ancillary lines along like the compact or some things like that that could drive a little bit better margin and also give some additional services to your clients but they were a little bit more capital intensive? Does that change or does that speed things up, just curious from that perspective?.

I'll tell you that I'll let Laurie speak to the capital side. But from a general resource perspective, our ability to maybe accelerate moving into some of the other lines dedicating internal resources we have, it's going to help us hopefully accelerate this process to get into some other areas.

From the capital standpoint, Laurie, he was asking about maybe compact....

What we're seeing is that we have a lot of opportunity with our customers right now beyond compactors or equipment, which is really exciting. So that has just been rapidly expanding our opportunities in our pipeline.

And in regards to any kind of capital equipment, we've certainly been able to meet any capital request up to this point for supplying equipment with customers, but we have other alternative means of accessing capital we have another partner who is more than happy to work with us too on say if we have rental equipment needs that type of thing.

So I think we've been able to work on that side to be very flexible and be able to address any needs that we have either internally or in conjunction with our customers..

At the end of the day, I mean, capital structures are in very good position and you're well positioned to meet any type needed then if not accelerate some of your business..

Yeah, Gerry, I'd say we have some really good flexibility there to do what's appropriate based on the transaction..

That's great. I really appreciate it. I'll jump back in queue. Thank you..

Thanks, Gerry..

And next will be Mike Vermut with Newland Capital..

Hi, there. Congratulations on the progress you've made, it's really - it's excellent to date..

Thanks..

I got a few questions here. Looking at what we just shed the revenue that we let go and I know it's been a process and it's something you've been targeting for a long time.

I assume it's certainly on the lower end of the spectrum if not the lowest that we have but how much more is there to let go? Is there more revenue that we still say as new management teams come in here and say that we don't want this business, we're going to let it go over maybe two years, but if we want to get to that 13%, 14%, 15% margin we got to let it go.

Is there still a lot of that left after we're done with this?.

Yeah, it’s hard to find a lot, Mike, but I would never say here's the way I would look at it. We actually talked about that specific question internally quite a bit.

When you're a company like ours, you look at your client portfolio and they're really like those are your assets and you just like I'm sure the companies you hold those assets are either performing or not performing, you have a strategy to make it that way.

And so there's always going to be challenges within our portfolio of performance levels that we want to be higher. The way we get there, it can be dramatic, it can be subtle, it can take a while, it can be short. I guess all I'm saying is that there's still what we would term relative to our threshold some underperforming business out there.

But there's other ways to deal with it as well. I guess we always try to make business fit the profile, if it does then we transition to something that's best..

And I think, Ray, as we add a lot of these new clients, it's been important to have this new focus that will be ongoing to make sure we enter into business that's really a good fit for both the customer and us..

Yeah..

Both operationally and financially..

–But yeah, there’s some, you mentioned a point earlier, yeah, their contribution for lack of a better term was relatively low on that revenue that went out and you can tell by looking at their financial metrics.

And having a good process for on-boarding clients that I think we have now, I know we have now that involves looking at what do we want a client to be able to do for us or us to be able to do for them and what kind of return are we looking for? We enter into those conversations in depth long before we on-board somebody.

So we feel like that that steady improvement is going to continue to happen..

Excellent. And then I guess it's really leading into that on the flip side here is we had two really nice wins I guess that are starting to contribute or will start to contribute.

Can you give us a little look into the pipeline, how many more of these construction, industrial and then the numbers that seem endless but where we are like a little more specific, are we closed on these, what's the margin profile in general that I know you don't want to disclose it but what we're looking at? Can we really shift this thing as this large revenue rolls off, could we see that jump up in our EBITDA margin sooner than later as these new kind of projects layer on?.

Yeah, yeah, I'll start with - let's just pick a couple of those verticals, industrial and construction that we've been speaking about the last couple of quarters. I think there's good news. The good news, best news is that yeah, we're advancing in that and feeling pretty good about having some of that ramp up, I guess.

And as we move into it there's more and more opportunities besides those key clients, some of the ancillary clients we're picking up quite a bit as well.

And even better news I think is our market share is still tiny relative to the overall opportunity within that space and I love that because there's a lot of headroom there, Mike that we feel like we're going to exploit over time as we get better at it.

And they're rolling on of that versus a rolling off of others that's why I continue to focus on gross profit dollars as a measure. We really don't focus on looking at the revenue of the client versus revenue that's moved off our portfolio and more about the [indiscernible] dollars. And that's enabled us I believe to be what it is.

It's the key metric why we are able to stand by our EBITDA positive 2017 direction we've given before while we expect it to ramp up into 2018, it’s based on gross profit dollars rather than revenue.

So I guess what I'm saying is not an even one to one off and it's not as simple as that, but our goal is to continue to push the positive EBITDA by making sure we've got the right customer profile, right gross profit dollars and that we can manage it cost effectively internally as well..

All right.

And then just to clear so the latest that we should be I guess double-digit revenue growth starting again would be third quarter of '18, correct as we lap this?.

I would say yes..

Revenue drop?.

Yeah, it's basically about a lapping effect, Mike, in that regard. I mean that that you're actually right, yes..

Right. Okay.

And then just a comment to the Board I think a lot of headache for the stock over the past year has been selling from Board members and the comment to the Board and to management, I think at these levels when we're $1.50 and the outlook probably hasn't been brighter for the Company that either we see a turnaround in attitude towards buying and selling stock and management and the Board starts to buy stock or are those on the Board start to rethink their position on the Board.

So from an investor I would like to see that Board members to start thinking about that..

Right. Thanks for your comment. And we are enthusiastic and we believe the outlook for the Company has never been better..

Great. Thank you..

You bet. Thank you, Mike..

Yeah..

[Operator Instructions] The next question will come from Nelson Obus with Wynnefield Capital..

I was just wondering when you have a large customer such as you've alluded to on the call where you retain some business then the commodity side goes away, are they - are you conducting multiple negotiations within the organization or is there a central arena that you can - I guess you could say trade off or create an understanding that you're going to do this but not that?.

Well, yeah, it's a good question and it varies by client. Out of the two, we're talking about there, one of them it's central, multiple lines of business managed by one party if you will. And then the other one, it's very, very separate actually others.

They're all over the board now and some of them are managed like totally different companies within the same line and some of them are very centrally managed, we had all the above..

Okay. Well that obviously the central is a better situation because you know then you could really make it very clear that you're an ally and the other way is a little bit harder to communicate. You really want to get a partnership and move into a value added arena rather than a commodity one but I'm sure you know that better than I do..

Well, you're right. And obviously it doesn't mean that we can't try, it's just a little more challenging when it's not one and it's not one -.

Yeah, exactly..

But we still make that attempt. I totally agree with you in making a value relationship as strong as possible, you need to be able to illustrate that across the board..

Thanks..

[Operator Instructions] And there are no further questions at this time. I'll now turn the conference back over to you for any additional or closing remarks..

Thank you, operator. This is Ray again and I want to thank everybody for being on the call and more importantly I want to thank everybody for their interest in Quest. We're excited about where we are and where we're going and look forward to updating you on future calls..

Well, thank you. That does conclude today's conference call. We do thank you for your participation today..