Dave Mossberg - Founder & CEO, Three Part Advisors Ray Hatch - President & CEO Laurie Latham - SVP & CFO.

Gerry Sweeney - ROTH Capital Partners Amit Dayal - H. C. Wainwright & Co..

Good day, and welcome to the Quest Resource Holding Corporation's First Quarter 2018 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dave Mossberg, Investor Relations. Please go ahead..

Thank you, Ashley, and thank you, everyone, for joining us on the call today. Before we begin, I'd like to remind everyone that this conference call may contain predictions, estimates and other forward-looking statements regarding the 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; Quest's prospects, outlook and business strategies going forward and Quest's belief regarding progress and timing.

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's results could differ materially from those discussed in the forward-looking statements as a result of various factors, including, changing market trends, reduced demand, and other competitive nature of Quest industries discussed in greater detail in Quest's filings with the Securities and Exchange Commission, including its report on Form 10-K for the year ended December 31, 2017.

You are cautioned not to place undue reliance on such statements and to consult our SEC filings for additional risks and uncertainties. You can find those documents on Quest's website at qrhc.com. Quest's forward-looking statements are presented as of the date made, and we disclaim any duty to update such statements unless required by law to do so.

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 observations and view 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 this call.

These non-GAAP measures are used by management to make strategic decisions, forecast future results and evaluate the company's current performance. Management believes the presentation of these non-GAAP financial measures are useful for investors understanding and 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 financial basis. Full reconciliation of non-GAAP and 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 welcome to everyone on our call to discuss our fourth quarter financial results. Joining me today is Laurie Latham, our Senior Vice President and Chief Financial Officer. The first quarter's performance was in-line with the expectations that we laid out during our last call.

And we made progress towards achieving our goals for this year. We're successfully adding services to our existing customers this quarter. We also saw a steady ramp of business in the industrial market.

And finally, we position ourselves for growth by expanding our pipeline and the forming of new channel partner relationship we Shell Lubricants to access new customers and expand our addressable market.

As a result of our strategy to focus on the right business, for the right customers in the right market we continue to show improvement in our profitability.

As we continue to grow with a strategic focus, we expect to leverage the fixed cost in our business and as a result a significant portion of each incremental sales dollar will fall to the bottom line. Before I get into further detail on the progress with our initiatives, I'll now turn the call over to Laurie to review the financials..

Thank you, Ray and good afternoon to everyone on the call. Starting with the revenue comparison. First quarter revenue was $24.7 million which compares to $42.5 million during the first quarter last year.

The year-over-year decrease reflected our disciplined approach to customer acquisition and renewal which included discontinuing services of some customers during 2017 that we have discussed on previous calls.

On an apples-to-apples basis, the year-over-year revenue comparisons will continue to remain difficult for the next couple of quarters due to the inclusion of a significant portion of revenues in prior years comparisons that was not continued into 2018.

As expected, we did show a 10% sequential growth in revenue from the fourth quarter which is primarily driven by the implementation of a new contract with a national automotive service provider as well as continued implementation activity in the industrial vertical.

We continue to expect that sequential growth will accelerate during the second half of the year. Gross profit for the quarter was $3.5 million compared to $4.2 million last year. Gross margin for the first quarter of 2018 was 14.4%, a 4.6 percentage point improvement compared to last year.

The decrease in gross profit and the increase in gross margin percentage was primarily due to the net effect of reductions of services for certain customers which was partially offset by overall lower cost of sub-contracted services. We have fully turned the corner in terms of gross margin and are operating at the high-end of our targeted range.

I do want to remind everyone that due to periodic changes in our revenue mix, our gross margin is likely to very considerably from period to period but we intend to manage the business within a targeted gross margin that ranges in the low to mid-teens in order to meet our long-term objectives for profitability.

Operating expenses during the first quarter decreased 21% year-over-year to $4.7 million. The primary drivers were lowered headcount related expenses and lower stock related compensation. The loss per basic and diluted share was $0.09 for the first quarter which improved from the net loss per share of $0.13 from the same quarter last year.

Our adjusted EBITDA was a positive $114,000 for the first quarter of 2018, a $388,000 improvement sequentially from the fourth quarter of 2017 and an increase of 9% from the first quarter last year. Turning to the balance sheet, we had $1.1 million in cash at the end of the first quarter which was unchanged from the end of 2017.

Total net long-term debt at March 31, 2018 was $5.1 million. Our $20 million credit facility which we entered into a year ago gives us significant financial flexibility and provides the incremental borrowing capacity to support our long-term growth plans and associated working capital. At this time, Ray will discuss our initiatives and the outlook..

Thank you, Laurie. We covered a lot on our year-end earnings call six weeks ago. So, I'm going to focus my comments today on a couple of key areas.

First, I will cover the significance of the innovative channel partner program that we've developed with Shell Lubricants and second I'm going to walk through a few examples of how we're adding value to customers in new and existing market.

I want to use these examples to illustrate how we provide superior value for our customers which is key to our sustainable growth in revenue and profitability. So, to start, let's review the program that we announced with Shell Lubricants few weeks ago. The program with Shell provides two primary benefits for Quest.

First, it gives us access to a new market. Quest currently targets customers that are national and super regional throughout the United States. This partnership will allow us to cost effectively market and acquire smaller and mid-market customers and sub market would not fall through historical.

The second benefit for Quest is that adding a channel partner like Shell provides an avenue to growth without adding headcount to acquire new customers. Our partner will offer Quest ways to recycling service business as part of the bundle solution to their current and prospective customers.

Adding a channel partnership like this offers us an exceptional way to expand our reach into a new subset of the market that would be inefficient for us to sell to otherwise. We believe the program is also compelling for Shell.

Shell chose to partner with us because we are the only independent company that has a national footprint and can offer a full suite of other services such as recycling of oil filters, part washer service, used tires and so on. At the end of the day, this program also must provide significant value to the automotive service provider.

For the automotive service provider Quest offers a track record of delivering consistent and exceptional service. In addition, we have efficiencies of scale and scope and can offer competitive pricing along with the efficiencies of dealing with one vendor to handle all of the customer's recycling needs.

We believe this partnership is unique in the industry and that provides a win, win; win for Quest, Shell and our customers. Shell has rolled this program out to a sales force just a couple weeks ago there's no playbook so far on how we might penetrate this new market opportunity or how long it's going to take us.

Nevertheless, this is a very big opportunity and we're excited to work with a world leader such as Shell. Now, I want to review a few examples of customer experiences that illustrate our core value proposition. Having a differentiated service is the key to attaining and maintaining long-term relationships with our customers.

And ultimately as the key to improving our margin profile and creating a sustainable above average return to the shareholders. First, I want to give you an example of how we're helping the customer divert waste from the landfill.

By way of background I should note that this is a big opportunity for us the majority of fortune 500 companies have some sort of diversion from landfill percentage goal and we offer a compelling single vendor solution to handle a national footprint and a comprehensive set of ways to it.

This is also an area where our asset light model is differently really differentiated versus vertically integrated asset heavy company that pick-up waste and they own their own landfill. Since the highest margin business for our vertically integrated competition is related to the landfills we have.

They're really not intended to help customers divert ways from the most profitable business. Conversely Quest doesn't own landfills and we are directly aligned with the customer to help them reach their goal.

Back to my example for this customer during the course of the first 10 months of our relationship, we diverted more than 750 tons of materials away from the landfill. We identified materials in the way stream that could either be commoditized are being used to feed power generation plants.

Material that Quest recycle for e-waste consisted a different grade of cardboard, metals, woods plastics. The feed stock for the power generation plants were multiple grades of plastics. Not only did this increase our clients landfill diversion right by 13% it also reduced cost and drove rebates.

I think this is a good example of how our relationship with the customer is clearly not transactional instead we've become a valuable strategic partner by lowering cost, generating rebates, producing ROI and improving sustainability. I want to put that 750 tons into a frame of reference for the listeners on the call.

750 ton is equivalent of 11 space shuttles with an empty payload. 100 elephants that helps us get a picture of what we're looking at and remember this is only in less than a year with just one customer. Overall, we annually help customers to -- over 1.5 million tons of material.

The next example how we add superior value to our clients is related to helping clients with rules and regulations. Quest has built a significant expertise in the area of regulatory compliance involving waste. In addition, due to our broad geographic footprint in multiple waste stream platform, we have high visibility to changes enforcement trend.

We communicate with clients about this intelligence and give guidance on how to become compliant and to avoid fine. We recently came to an aid of a customer in the Western United States that was putting their business at high risk due to mishandling of material.

We were able to identify a compliant method of disposal for the materials and help them avoid the potential from millions of dollars in fines. Moving on to our outlook. Looking forward we're expecting another year of significant improvement and profitability for Quest.

We're on track to meet our goals for 2018 which I'll remind everyone is an adjusted EBITDA of $4 million to $7 million. We're expanding our business with current and new customers. We're growing our pipeline and we continue to gain traction in our new vertical markets.

At the same time, we continue to make significant strides to improve our profitability. We're very excited about our prospects, our outlook and our business opportunities going forward. We expect the pace at which we add our new business will accelerate.

We believe that our strong foundation will allow for sustainable business that can consistently grow both our revenue, profitability and our shareholder value. And with that we'll open up the call for questions.

Operator?.

Thank you. [Operator Instructions] We'll take our first question from Gerry Sweeney with ROTH Capital. Please go ahead..

Yes, good afternoon board to take my call..

Hi Gerry..

So, one to start off with reference side.

So obviously there is a lot of to start with business and onboarding and I guess there is definitely sort of building up on the timing of onboarding, So I think you're confident in improving in terms of the outlook for the rest of the year? Short answer, if you maybe give us an idea of how many, how much backlog you have on the customers that still need to be on boarded on a go forward basis because that's where you are coming above accelerating for the rest of the year..

Please stand by. And you are now connected..

Sorry for the interruption, our line was dropped.

Jerry are you still there? Can you repeat your question?.

So, what I was curious about was if you could I mean - on board that our European continent. It sounds like in terms of your guidance et cetera and while we trying to quantify the various opportunity. But I was wondering you have won several customers in the last 12 months or so.

How much backlog do you have in terms of onboarding opportunities that are how far through that customers base in terms of the onboarding process here and I'll tell you it's 50% time just trying to gauge how much opportunity remained?.

Well, it varies by customer Gerry obviously. The biggest one we have that we've been working on for a while the largest one is and then we calculated based on a number of locations and you got to be careful that all locations were different sites that I think were less than 30% penetrated, right around 30% penetrated and locations of that client.

So, there is a lot of ramp left to go and we're doing the best we can to accelerate. So, with all the clients for different stages, I think of penetration as a definition that we're moving forward in all of them and that's the good news and we also would love the headroom to go as well..

With the largest one I think it's probably the industrial phase by being contractually obligated to go to 100%.

How does that work?.

Well yeah, I want to get into obviously contract language on the call but yes, the process. I mean that's the business range that we have an infinite all the way through..

Got it. And maybe drop it..

I'm sorry Gerry..

I dropped it half a second. Anyhow I'm not quite sure it was my phone or the other end. I'm not sure. But I can follow-up offline. But what about the SG&A also in your comments I think that lowered about that by lord about that managing expensive and leveraging the SG&A content.

Looking at SG&A spend today how much can you grow your revenue before you have to add a significant amount of personnel G&A type expense?.

So Gerry, we're in a good place right now where as we grow we can add some substantial revenue and then as we get to where we need to add more positions that are directly related to adding those clients we really expect that to really be more along half the rate of growth that we're having in revenue.

But for this year, we think we're in pretty good shape but we have some areas that we mention in sales that we would like to add in marketing so that's where an emphasis has been. So that's the other area that we expect to growth in our SG&A..

Got it. Great. I'll jump back in line. Thank you. I appreciate it..

Thanks Gerry..

Thank you..

We'll take our next question from Amit Dayal with H. C. Wainwright. Please go ahead..

Thank you. Hi Ray, hi Laurie. Just bring you back of previous caller's question on revenue trends for the remainder of the year. Laurie I think you mentioned acceleration in sequential revenue growth in the second half of the year.

Just in terms of what you think revenues will look like in the first half of the second half split is there any color you have on you know how revenues will shape up with an 60-40 split between the second half or the first half or is it a different ratio?.

You know Amit, it is very difficult for us to predict quarter-to-quarter what our timing is but we do know that if we get further into the year we have more time to get our new contracts initiated. So, in general we just see the back half having more accelerated growth that we do in the first two quarters.

But as far as really any particular quarter it could vary but we do expect that to accelerate when we look at third and fourth quarter. And that's really about as much insight that we can give..

I understand.

And in terms of shedding the lower margin customers are you almost done with most of these contracts could you give us any color on where we are in sort of coming to plateau now in terms of having got rid of those contracts?.

Sure. Yes, Amit and I think we alluded to a little bit on the last call too. Remember fourth quarter was, I think we saw full realization of that strategy I guess in the fourth quarter full impact as we came down. So, the trends are new and that shouldn't be an impact -.

It's not our first business we forward now..

We have completed that actually we had completed that in fourth quarter that you saw the final impact of that..

Yes, so the focus was on expansion with current customers, bringing on new customers and continuing to hold our operational expense..

So, we should be hopefully seeing better comps in one Q 19 et cetera, right?.

Yes, absolutely. Great. That's the point. That's exactly right on..

You highlighted in your channel partner in the last call has this relationship begun contributing anything to the revenues yet?.

No, not yet. They just this new channel partner agreement let's just find recently and actually just introduced to their sales people within the last two weeks.

So, it's a brand-new piece that's just literally had it happened the it's got a massive amount of potential for us, but you know we obviously haven't really, it's not been done before that we know of. And that being said it's a little difficult to predict the impact.

But we do know this, I mean it's a large market and it's a great channel partner, it's an industry leader and right off the back we're excited to be chosen to be associated with them in the center and from that we anticipate hopefully some good opportunities..

Understood. And this relationship with Shell.

Could you provide any color on what resources we need to contribute here and our margin expectations on this opportunity like that?.

So, Amit the night that for us with this new sales channel is that it already just overlays into what we do as a business.

So, the expectations from a -- we have a process in place already it just feeds into our current structure and as far as services which we mentioned in the call earlier these are all services we currently provide so we would expect margins to be in line with what our current gross margin profile is in that range.

So, it's very something we can reach out and accomplish based on the waiver structured now..

Got it. And just one final one from me Laurie maybe for you. Were the operating expenses side of the story for the remainder of the year should we sort of use the force first quarter numbers as a proxy for the next 2 quarters? I think that's a great place to start.

I think we'll see some uptick, modest uptick and some of the expenses as far as just SG&A but we also when you look at some of the closures we've had regarding our amortization we also have some amortization that will be coming down significantly later on in the year. So if you will look in those areas I think that will help give you some insight..

Yes. Thank you. That's all I have. Appreciate it..

Thank you..

And with no further questions at this time, I would like to turn this call back to Ray Hatch for any additional or closing comments..

Thank you, operator. I would just like to thank everybody who was on the call. We appreciate your continued interest in Quest. And we thank all operators at Quest that have done such a wonderful job in helping us continue to transition this business.

We're excited about the future we operate in great space and we really believe there's great opportunities for us and we look forward to future calls and sharing the progress on those opportunities. But thanks for being here..

And that concludes today's conference call. We thank you all for your participation and you may now disconnect..