Dave Mossberg - Investor Relations Ray Hatch - President and Chief Executive Officer Laurie Latham - Senior Vice President and Chief Financial Officer.

Amit Dayal - H. C. Wainwright Gerry Sweeney - ROTH Capital.

Good day, and welcome to the Quest Resource Holding Corporation's Second 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 representative. Please go ahead, sir..

Thank you, James. 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 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, reducing 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 Web site 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 industry information are based on Quest's estimates, independent publications, government publications and reports by market research firms and other sources.

Although, Quest believes these sources are reliable and the data and other information are accurate, we caution that Quest does not independently verify 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 is useful to 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 on this call will be on a non-GAAP financial 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 welcome to everyone on our call to discuss our second quarter financial results. Joining me today is Laurie Latham, our Senior Vice President and Chief Financial Officer. I want to start off by thanking our team for their hard work they’ve done over the past couple of years to implement our strategic plan.

They’ve done a great job of transforming the Company. Customers increasingly view us as a turnkey strategic partner that can help them meet their sustainability goals and not just at the vendor that picks up there waste. This transformation process was not easy.

It calls for us to walk away from a significant amount of business that was more transactional in nature. As such, we cut got a very large portion of our revenue base, which until recently, made it difficult to see the progress we were making in our financial results.

While we still have a way to go to reach our targets, we’re now starting to see the improvement show up in our financial results. These improvements should only get better through the balance of this year and the next.

The second quarter’s financial performance was in line with our expectations and was a greater illustration of our initiatives to focus on the right business with the right customers in the right market is delivering sustainable improvements in our profitability.

Revenue grew 13% sequentially from the first quarter and delivered even greater improvements in our profitability. Gross profit dollars increased 25% sequentially. Our second quarter’s gross profit of $4.4 million was unchanged compared to last year.

But it's important to note that we produced the same gross profit dollars from the revenue base that was almost 40% lower than last year. I also want to point out the gross profit dollar for the second quarter were a record in terms of quarterly performance from both this year and last year.

Adjusted EBITDA increased $665,000 sequentially and increased 63% year-over-year. I'll also point out that second quarter's adjusted EBITDA was the highest performance in 15 quarters. Clearly, we're making progress with our strategic plan and are demonstrating sustainable improvement in our financial results.

Before I give further detail on the progress with our 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, starting with the revenue comparison. Second quarter revenue was $27.9 million, which compares to $41.4 million during the second quarter last year.

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

As expected, we achieved 13% sequential growth in revenue from the first quarter, which was primarily driven by implementation activity in the industrial vertical and expanded contracts with existing customers in the automotive and retail market sectors. Gross profit was $4.4 million, which was essentially flat in comparison with last year.

But as Ray mentioned a moment ago, this was quite an accomplishment considering that we delivered the same gross profit dollars despite in our revenue base that was almost 40% lower. Second quarter financial results also illustrate the earnings leverage in our business, as the 13% sequential growth in revenue generated 25% growth in gross profit.

We expect the positive sequential growth will continue during the second quarter half of the year. Gross margin percentage was 15.9%, a 5.1 percentage point improvement compared to last year.

This represents the highest gross margin level in the Company's history and is at the top end of our gross margin targeted range, which is in the low to mid-teens. The improvements in gross profit and gross margin are primarily related to our strategy to focus on customer business where we can demonstrate our value-add.

In addition, we have worked with our customers to match service levels with our customers’ business needs, thereby increasing asset utilization for our vendors and lowering costs.

I do want to remind everyone that we are managing our business to deliver a target gross margin in the low to mid-teens, and our gross margin is likely to vary significantly from period-to-period, depending on the sales mix of services. For the balance of the year, we expect gross margin will remain within our target of low to mid teens.

Operating expenses during the second quarter decreased 13% year-over-year to $4.9 million. The primary drivers were lower headcount, lower stock related compensation and other employee related expenses. The loss per share was $0.04, which include from a net loss per share of $0.08 last year.

While we still have way to go to reach our adjusted EBITDA target of 4% to 6%, we have made significant strides in adjusted EBITDA during the quarter. Adjusted EBITDA margin was 2.8%, which represents the highest margin level in our history.

For the second quarter, adjusted EBITDA was $780,000, a $665,000 improvement sequentially from the first quarter of 2018 and up 63% from second quarter last year.

We have significant operating leverage within our business model and we should be able to continue to grow adjusted EBITDA and profitability at a faster pace than the top line in the coming quarters. Turning to the balance sheet in cash flow.

We generated $2.1 million cash flow from operations during the first half of the year and used most of the cash generation to pay down our line of credit. We have $4 .9 million drawn on our line of credit as of June 30, 2018 versus $6.8 million at the end of the year.

We had $1.1 million in cash at the end of second quarter, which was unchanged from the end of 2017. And under our $20 million credit facility, we had $12.1 million availability as of June 30th. So at this time, Ray will discuss our initiatives and outlook..

Thank you, Laurie.

Today, I’ll be updating you on several areas of our strategic plan; first, I’ll talk about the progress we’re making in the industrial vertical; second, I will talk about how our sales organization has created a significant pipeline of opportunities; third, I will walk through an example of recent customer engagement that will show our value proposition and show how we’ve been able to track new customers and achieve higher margin levels; and finally, I will give an update on our outlook.

So I’ll start with the significant progress we’re making in industrial market vertical.

We added complexity, multiple waste streams and high service levels required in the industrial market allow us to deliver tremendous value add to our customers through the cost savings, efficiencies and the actual data that we can provide, implementation activity at one of our largest industrial customers during the first half of the year and to provide meaningful incremental revenue and feasibility into growth for this year and the next.

We have added and begun implementing programs with industrial customers, and are building a pipeline of new business. I’ll go through some of the examples later in my remarks. I want to move to a discussion about our sales organization. We’ve made several changes over the past two years.

First, we changed the culture of our sales team so that it’s clearly aligned with our strategic direction, which means selling based on value, not just based on price. In addition, it means we’re selling more of the comprehensive consultant versus selling a single point solution. The second major change in our sales force was the structure.

We have a clear delineation between farmers and hunters in our sales organization. This requires separation of these functions, so we have a team focused on selling more to our existing customer base and a separate team that can focus on bringing in new customer relationships. More recently we’ve added additional horsepower to our sales team.

Several talented sales executives with vertical market expertise have joined our Quest team. And these are not sales reps making cold calls. They are seasoned professionals who have 15 to 20 years of experience and existing relationships in specific verticals. As a result of these changes, we've seen a significant increase in size of our pipeline.

Obviously, pipeline represents potential for future sales and does not necessarily directly correlate with future sales trends. Nevertheless, I can tell you that the amount of proposal activity has more than doubled in the past year, and that gives us much greater confidence that we’ll see a significant ramp of revenue in the coming quarters.

Couple of examples of the types of business opportunities currently in our pipeline; in our existing market, for automotive waste, we’re proposing to service and manage oil and other waste streams for large fleets; every year we recycle millions of gallons of oil along with large quantities of oil filters and other automotive waste streams, primarily for automotive service provider and fleet maintenance garages; companies with large fleets often perform maintenance services in-house in multiple locations throughout the country.

Our national footprint and the experience with wide scope of waste streams makes us value added partner for these fleet companies and a natural expansion of a market that we already serve.

Another example we’re leveraging our scale, scope and expertise of handling food waste programs for national retailers and restaurants now proposing programs for food manufacturers.

We have several natural food manufacturers in our pipeline and expect their success with these programs could lead to opportunities to handle other waste streams for them as well. Next on the agenda, I'll cover an example of a customer experience that illustrates our core value preposition.

Providing a differentiated service is the key to obtaining and maintaining long term relationships with our customers. And ultimately is the key to improving our margin profile and creating a sustainable above average return to shareholders.

To reach overall sustainability goals, most Fortune 500 companies have specific objectives to diverting waste from landfills. We have a proven track record of helping customers achieve these goals.

In addition, our technology helps measure and report on progress and our business model directly aligns our interest with helping customers find the most economically viable solutions, which in many cases also saves the customers’ money.

We can stream line and match the right level of services according to the customers’ ever changing business activity levels, historical volume data and Quest in smart data.

For example, when I started using an [indiscernible] container that’s half full and takes out three times per week, we can recommend to our customer change to [indiscernible] container for twice a week. We can change the size of the container and/or the frequency of collection and significantly lower the overall cost.

For example, we recently put in place such a program along with the supporting reports that improve the national retailers’ landfill waste aversion by an additional 13%. We achieved this result while also saving 10% on their annual waste cost. From a competitive standpoint, this is a real differentiator for our asset light model.

Other types of asset based providers are paid based on frequency of collections and will have a difficult of times suggesting changes that would actually lower the utilization of their trucks.

Since we don’t have trucks, we can find the right solution to match the customers’ needs while also create a value add to the customers which translates into a stronger more sustainable customer relationship, as well as higher profit margin profile for our business.

Before I open the call to questions, I have a few comments I'll make about on our outlook. Our outlook remains unchanged.

Although, it looks like we’ll have a ways to go to meet the lower end of the $4 million EBITDA number on our target, we showed significant progress towards that target in the second quarter, and are definitely moving in the right direction when it comes to showing sustainable improvement in our financial performance.

We also have a much better visibility to reach the lower end of that range, regardless of the near-term magnitude of the ramp and financial performance with the sustainable changes we’ve made to form strategic partnerships with our customers and the positive changes we’ve made to our sales force, I believe we have reignited the growth engine of our business.

We’ve also built a significant pipeline during the first half that gives us visibility to continue sequential growth in the second half of 2018 and lays the groundwork for double-digit growth in 2019.

I would also like to point out the improvements we’ve made to our Company both strategically and operationally are just now beginning to show up in our financial performance. Achieving $4 million in EBITDA during 2018 would represent the highest level in the Company's history by a factor of more than 2.5 times.

And it’s really just the beginning of what we believe we can expect to do in the future. And with that, I'll open up the call for questions.

Operator?.

Thank you [Operator Instructions]. And our first question today will come from Amit Dayal with H. C. Wainwright..

Just in revision to the comments around the guidance, the press release is still indicating $4 million, the prior it was -- the range was $4 million to $7 million. Has this been narrowed, are you still shooting for the higher end of the range? I’m just trying to reconcile this change a little bit..

I really don’t see this change as we’re looking at the lower end, meaning something we feel we can achieve. But there is headwind out there -- there are variables outside of our control, such as timing of implementation, which we spoken about the full and some of those things that make it a little more difficult to predict relative to that.

So we’re now giving up on anything relative to the range, but we’re definitely focused on making sure that we achieve the lower end of it..

And again on the net income side, last quarter I think range was $500,000 to $3 million.

Are you still shooting for that range on the net income side?.

Well, I think what we talked about, if I remember correctly, was that we want to target breaking even on a GAAP basis by the end of the year. I don’t remember ever putting out $3 million on the net income. But that’s what -- so that’s what I remember we were talking about as far as from the net income.

And as you could see from the [Technical Difficulty] certainly getting close to that. The only thing we would add [Multiple Speakers] So at this time, we were just reiterating our EBITDA target. And please go ahead and finish your question….

I was just trying to just get into the margin side of the story. It looks like all the efforts around losing or getting rid of the lower margin customers is starting to pay off. I know you expect some level of variability on the margin front. But is there any particular vertical that you see better margins in, is it industrial side, automotive side.

Is there anything that is supporting the strength in the margin more specifically?.

Yes, I'll state that the verticals and the margin contribution on it. Our verticals we’re targeting now have got where we believe the higher margin profile than what we’re doing a couple of years ago and this is why we’re targeting them.

And so yes those are being higher margin surely because of complexity and the type of the broader range of expertise that Quest has bring to that client that they need and typically got it's quite a better yield for us. But overall what we’re trying to do is just stay away from just the type of business where the market is single-digit.

And so by doing that, we've really diversified where our revenue is coming from and it's coming primarily outside of the billings that we're driving lower margins before. So it's not just -- it was never really the clients that were lower margin that we moved away, you mentioned earlier that we moved away from low margin customer.

Actually what we moved away from is the low margin lines of business within those existing -- we still have those clients it's just if we’re not serving the ones that won't bring any contribution.

So the net effect was the other lines of business we're doing with those clients are bringing us some better yield, which you’re seeing in results this quarter and before..

And in terms of the pipeline the commentary you provided you’re looking at almost have doubled opportunities compared to last year given the changes you've made in the [Technical Difficulty].

In terms of deal sizes, are you still looking at new phases that you potentially were a year ago has -- has that changed, are you looking at larger opportunities now.

What is the focus on that front?.

I have to go back a year ago and see what was in there, but I can speak specifically there the deals sizes I mean they’re very high end. We're just looking at yesterday and we've got -- there is lot of those opportunities in there that are in the $20 million to $30 million in total opportunities.

And we always had some big ones in there, it's just now we're moving them further to the pipeline. I think we’re targeting with better alignment with those type of clients. And we've got some significance sized opportunities within there.

And then what we mentioned specifically was doubling the proposal stage levels and that's really what I wanted to highlight is there has been a pipeline it looks like a funnel. And as you move down more into the proposal stage, we were a lot more serious about what the opportunities are and the finding.

So the proposal stage is actually the most, we've got so many more proposals in front of us, opportunities to move forward with clients than we have before. And there we have lot of deal sizes are so quite, maybe quite large on it I mean that's one of the beauties of this business.

I mean we've got opportunities to really have some significant hits with just couple of successes actually..

Next we’ll hear from Gerry Sweeney with ROTH Capital..

Ray, we've spoken a little bit about in the past about sales and opportunity to add increased sales personnel.

If you spend more on the sales side, would you be able to grow faster?.

That’s a great question. I mean, I think I spend -- our spend on the sale side is based on opportunity and we have the opportunity to hire somebody that has the caliber and the criteria that we have. We’ve taken advantage of it. I don’t have a -- I don’t think its right to budget those things.

I think you take advantage of opportunities that present themselves, Gerry. So what I’m telling you is spending more doesn’t necessarily do it, spending more on the right people will. And when we find the right people, we’re committed to moving forward with it..

So somewhat it’s basically one right person pops up on the screen if there is an opportunity you’ll go after them and he will be additive, or could be additive?.

Absolutely, we’re not holding up on any spend relative to that, it’s just we’re always looking for that right additive element as you mentioned..

And then the second half of the question is that adding to sales but on the G&A side. How much sales could you add before you really need to maybe step up on some internal expenses to meet new sales? So how much leverage on the OpEx side maybe is the right way to ask that question..

I think we have a considerable amount. I mean it’s -- Laurie and I talked about this quite a bit. We’ve positioned ourselves where we’re significantly more scalable today than we were a year ago particularly than two years ago.

So it’s hard to tell you exactly how much revenue, because it depends on the type of accounts you bring in, some that them -- at the same million dollars or $10 million, or pick a number, could require more resources than a different $10 million.

So what I’m saying is that retail we have very scalable and we definitely have room and current capacity today to take somewhat growth by additional spend but it depends on where that growth comes from, some are more compressed than average.

But it’s targeted [indiscernible] so at what point in our growth do we add more resources?.

Certainly, we have room right now….

Yes, we have room right now….

Yes, through the next -- certainly the next quarter and potentially through the end of the year, and just the depends on the pace [Multiple Speakers]….

No, it definitely depends on the pace and again the complexity of the client. We got such a variety of clients. I’m not trying to give you soft answer Gerry I’m just saying it really does based on that. But to Laurie’s point, we continue to go out with those and that happen to add more internal infrastructure.

But I really hope that we just -- revenue range down to the point where I guess we may have to add a little. But we’re in a position -- we’re in a scalable position today and we don’t anticipate significant spend in the near-term..

I appreciate that, and then just third and final question and I will jump back in line probably for setback. How many you mentioned adding additional sales people and select people previously.

Are you want to position that we’re of course starting to put other companies on notice or sales guys have notice that, they are making a bigger difference and start and come to here then I appreciate it and congratulations on the nice quarter. Thank you..

Thank you, Jay. I appreciate and thanks for calling in even though you’re international today. So you just asked a really good question, it’s based on our position in marketplace. And I always dealing from strength versus dealing to weakness and I think I know that we’ve transitioned more into the strength side of that equitation, if you will.

And I think if I understand your question correctly, we do have some quality folks coming to us and we’re will really appreciative of that. And I don’t see that change and I see it accelerate. So I think we're doing much more from the position of strength based on our new sales approach, our position in the marketplace.

The fact that we’re not a price only sales company, we're not cold calling and focusing on our [indiscernible] we're focusing on where these sales reps can earn by using their relationships and skills rather than filling out spreadsheets….

We can really we stand on our great history and experience too. I think we’re a well known brand….

Yes, our brand is helping too. And I think what this past year is [indiscernible] relative to a lot of things, attracting sales people is one but it obviously goes beyond that is that we've put some strengths behind the brand and there is a future in the Company that people feel good about.

And they want to be a part of it and it's really helped us from a recruiting standpoint on talent. But you can't have enough talent as an organization. We constantly are searching for what we always [indiscernible]….

Thank you..

Thank you, Gerry..

And that will conclude today's question-and-answer session. I will now turn the conference over to management for any additional or closing remarks..

Thank you, Operator. I just want to take a moment. And again, I want to start by thanking the team here at Quest. As I mentioned in the beginning of my remarks, there has been a lot of effort going into implementing our strategy, is going back two years.

And it's really, really nice to be able to show the returns on that strategy but it’s the people that made it happen and there is a lot of hard work, a lot of folks here at Quest have done that.

And in fact I appreciate all the investors around the call and those that aren't for their focus on Quest and we want to continue to be of interest to all of you. So thanks for being with us today. And anything else -- that's great, thank you very much..

Thank you..

That does conclude today's conference call. Thank you for your participation. You may now disconnect..