Good morning, everybody. Gerry Sweeney with Roth Capital. Thanks for joining us on day two of the Roth Conference/Experience. If you missed it last night, we had a little Sugar Ray playing at the after-party, so that was pretty good. Show you some pictures.
Yeah.
Some video. But this morning we're doing a little discussion with Quest Resources. I have Ray Hatch, CEO, Brett Johnston, CFO. You know, I actually went back in time and looked up when your first time at the Roth Conference. I think it was March of 2016.
It was.
Quest was trading at $0.40.
Yeah.
Probably had 4% gross margins, maybe 5%.
Yeah, you're stretching it a little bit.
Yeah.
Yeah.
Yeah, so anyhow, but it's been a great trip, and, love to keep it going. So, but, you know, and thanks for always being very supportive. So-
Thank you.
I want to start off, I think it would be helpful, maybe for those who are less familiar with this story, maybe just to touch upon a little bit of an overview of the company, describe your customer base, and obviously, your value proposition.
Yeah, happy to. Thanks, Gerry. The relationship with Roth has been tremendous. It started in 2016. I've actually been on the road about two weeks-
Yes
-when we came out and did that. And it was an adventure, and things have continued to improve.
You've loved the public markets ever since.
The public markets are just joyous to be a part of this. It's great. So the company itself, Quest, has been around for about 15 years. We're an asset-light B2B problem solver, is what I like to call it. We just happen to do it in the waste and recycling space. Our clients are Fortune 500 companies, mostly Fortune 1000s, and we focus on the things that they don't need to be focusing on. They need to be making better wages, taking care of their customers, and, and we try to take that initiative, that is waste and recycling, and optimize it for them. Because all our customers are in the something else business. Nobody's in the trash business, so, we, we want to allow them to focus on those better widgets.
We've continued to grow the business. We've expanded our capabilities. We do more and more materials now. We do over 100 waste stream types of materials. We've really added, for example, industrial accounts to our client base, and they're wonderful for us because they're very complex. They have concerns beyond just cost. They care about data reporting, they care about sustainability, they care about regulatory compliance is obviously a big thing. So when you're able to bring more value outside of just picking up the trash every Tuesday and Thursday, that's one of the reasons our margins have moved from the numbers Gerry mentioned, up to 18-ish, something like that. And so we've really, the company has changed its profile dramatically. Our EBITDA was obviously negative, and now, you know, give or take, $20 million.
Revenue's about, run rate about $300 million right now, and looking to climb quite a bit over the next, year or so. So that's kinda it in a nutshell.
Yeah, that's great. I do have a bunch of questions here, but I may jump around, but I, you know, talking of revenue, right? So, you know, when Quest first got started, and I was there, it was, you know, does the business proposition work? So you got margins up, then, you know, you had a couple of key customers, and you landed, expanded, and, you know, revenue was a little bit more challenging. And, you know, revenue's grown significantly over the last couple of years, some organic, some inorganic. But just in the last quarter, you know, things of... the pipeline of sales is starting to crack open, obviously, in a positive way, obviously. So maybe just touch upon what's happening there.
Is that a little bit of, you know, regression to the mean in terms of projects just coming through at the same time, or have you made any changes internally to speed up the sales process, and, you know-
All the above.
All the above.
All the above. You know, what I didn't mention, Gerry, is, we had a run rate back then of about $180 million in revenue, and we got it down to about $80 million because it was, a lot of nonprofit revenue and a lot of G&A dedicated to it. And we wanted to understand what we do well and focus on that instead of the things that everybody else can do, that commoditized services. And it's really, it's really been great for us. And then recently, as Gerry just mentioned, we've been bringing on new customers at, actually at a, at a record rate, in Q1. So I think it's a couple of things. I think it's culmination.
There's a very long sales cycle here, and so coincidentally, several of those customers that we just signed are at the end of that very long sales cycle, so it happened at the same time. We also added a new sales resource. Our sales leadership, Perry Moss, is been a tremendous addition for us, and Perry's got a long history of being very successful in this exact space. And with his relationships and some of his skill sets, that helped accelerate it as well. And so the best thing about that is we are hopeful that that's gonna continue, like that, so.
Do some of these bigger wins make it easier to win contracts, right? I mean, you have-
Oh, yeah
... some big boys on, you know, on the slide deck, right? A lot of labels, et cetera. But, just curious, the more... I think you announced a Fortune 200 win.
Yeah.
You didn't have to say who it was, but more larger companies, does that sort of validate your presence in the market and help with that sales process?
You know, it really does, Gerry. We've got—I look at that blue chip list of clients on our, on our deck, which I encourage everybody to go online and pull down our investor deck. There's a lot of really good data in there. I just pinch myself. These are companies that are brands that you really admire and know. They're large, they've been around forever, they're gonna be around forever. And when they choose you as their partner, there's kind of an instant validation for us there. And so when our sales reps go out to market to find new clients, which they do every day, they're able to reference these that we have now.
So when we bring, for example, that new one is an entry into an end market that we weren't in before, really, which is food distribution. So when you go in with one of the top players in the space, it's a lot easier to get meetings, you know, at that point.
Speaking of food, I'm gonna preempt a probably a question from Greg, but maybe you could talk about the Proganics platform and the opportunity there.
Yeah, Proganics is actually, and it's patented, but Proganics is a, is a process that's underneath the bigger umbrella, which is, our organic materials waste program. Different clients have different wants and needs on how to dispose of this. So we have a generic program, which is- or a traditional program, we call it, which is, you know, the clients are, mostly grocers, are taking the, the food waste, putting it in a bin that's designated, and a vendor is picking up that bin and taking it to whatever the end use is. Proganics is, a more detailed piece, and Proganics involves, we have special containers that are designed that are stackable and sealable. It involves reverse logistics from the grocers, 'cause most everybody has a DC and then a hub-and-spoke type of distribution.
Well, as they offload the food to these different stores, they can onload these containers. That's what's happening. And then it comes back, and we consolidate it at the DC, and we take straight truckloads to the composter or wherever it happens to be going. And one of the key ingredients there is, and one of the biggest, is the depackaging capability. Depackaging is huge because, out of the organic waste, a grocer, for example, is disposing of, about 65%-70% of it is actually packaged. And even if it's organic waste, if it's packaged, it's going to landfill. You know, so the Proganics enables, one, a reverse logistics process, which lowers cost dramatically. And then secondly, the depackaging, which allows them to double or triple the amount of, product they're able to divert from the landfill organically.
Got it. Is this still third party on the Proganics side?
Absolutely.
Yep.
Yep. Yeah.
This is a little bit, I think, greenfield build up, at the DC level, a little bit different than some of your other business lines. A little- it's gonna take a little bit of time to get built-
Yeah
... built out, and maybe a little discussion on, you know, how we look at that business and where it goes in the next 6, 12, 18 months.
Yeah, it starts with, anytime you're selling... Well, it's a paradigm shift because I will tell you that it's not, it's not a natural movement for a grocer to put trash on their trucks. I mean, I'm simplifying a little bit. Even though it's sealed and it's highly efficient, it's still a paradigm shift. So the sell is more complex because you don't- aren't just going in in a traditional sell, you're selling on cost or diversion %, and then they make decisions based on that. We're asking them in Proganics to do something, you know, and, and, and take an issue. So they have to get a lot of buy-in through the organization. You can imagine that's a little more challenging. So we've had some success, and I think we're gonna have a lot more over the coming, 12 months.
We've got a nice pipeline of good brands that are trying to push that concept through their organization. But as you can imagine, there's resistance, like, for the guy that's managing logistics in DCs, you know? The biggest problem, in my opinion, is that he doesn't have upside. You know, somebody else does. So they need to, they need to find a way to, to get some buy-in there, but it's, it's inevitable.
Advise them.
Yeah.
Yeah.
Yeah, it's inevitable that this is gonna move forward because the initiative to not have organic waste go to landfill is never going backwards, it's going forward. So we've got to continue to find more and more creative ways to enable these guys to divert more times.
Got it. Maybe, I don't want Brett to be left out, so maybe I'll jump over-
Yeah
... balance sheet, right? So a year ago, two years ago, everything was SOFR plus X, right? But that's no big deal when SOFR is 50 basis points, or when SOFR is 550 basis points. You know, interest costs are up and, you know, you are growing, working capital expanding, probably still looking at M&A opportunities. Clearly, you stated that you're looking at reworking the balance sheet or reworking, you know, your debt facility. Maybe an update on how that's coming along and what you're hoping to sort of structure.
So through kind of the second half of last year, we talked about potentially getting some commercial, going down the commercial banking route. And, you know, as we explored that path more, it was pretty clear that you were giving up a lot for a little bit of interest savings. I don't want to minimize the interest savings at all, but certainly it comes with a lot more restrictions. And being a quickly growing company, we wanted to make sure that we weren't going to limit availability to us to fund that. So we've really taken a step back. We're working through. We've got a great relationship with our current partners, with both Monroe and PNC for our revolver.
So we're looking at a shorter-term extension to buy us a little bit more time to find the right option for us. We're hoping there's some middle ground there, where it comes with... We certainly want lower, lower cost of debt is important, but so is keeping some optionality as well. So that's what we're hoping to get, and we think we're gonna be in a better position by the end of this year. Certainly, with the growth we've already talked about, with the new customers and the organic and the operating leverage we're expecting to push through the business, we think we're gonna be a lot more attractive in the market and be in a stronger position to do a longer-term refinance.
Speaking about pushing through some leverage, this year, SG&A spend up, feels like the first two quarters maybe ticks down second half. But, you know, how much leverage is there and how much growth does some of that investment the next two quarters give you in terms of, you know, will SG&A grow at half the pace of revenue type of-
Yeah, it better-
Situation.
Yeah, half is a good starting point-
Yeah
for us. We think that's really the bare minimum. We expect to drive a lot more gross profit down into EBITDA, and that's gonna come with a lot of the investments we've been making on IT, and in our systems, in our platform, in our processes. We're starting to go live with some meaningful pieces of those that I think will get to a critical mass by the midpoint of the year, and by the second half, we'll be able to have some dollars coming out. Hopefully, that gets somewhat offset by dollars to support additional growth, additional sales and marketing, and then to support the new revenue we're bringing on.
Speaking of spend, next, Ray, when you look at the opportunity at Quest, you know, obviously, you know, I think there's investment in the company, technology, sales, and marketing, and even some organic, inorganic opportunities. You know, what are your top priorities? What are you thinking about on that front, and-
Yeah.
You're still in the M&A game, or would you rather just invest internally?
I think the best way to describe it, I'll start with the M&A, is we always have a pipeline. You have to. And, I'm happy to say there's a lot of good opportunities out there, but we've become, we've become much more selective, is the word. And, and the criteria on some of the metrics and some of the elements that we judge them on is, is much higher. But I, I don't think you should ever say you're out of it, but 'cause there's good opportunities to come along that just make sense. But being highly selective means we're focused a lot internally. And I think really one of the...
And Brett just spoke to it, the technology investments, and I know that word is so overutilized, but the biggest expense is the difference between gross profit and EBITDA, and having it drop down is G&A, and the G&A is driven in our business primarily by, I don't want to say inefficiencies, but less efficient than it should be. We're handling invoices, thousands and thousands of invoices. They're inbound, they're being touched numerous times. It also has much more error possibilities, which creates more touches. And what you end up having when you step back without a plan is you got a significant investment in something that drives no value, you know?
And so what Brett was talking about, when you look at the overall SG&A line, I'm less concerned with the dollars than I am about how we're spending the money. I wanna make sure that the money we're spending there is more toward value add to the clients, that enhances our ability to grow market share, enhances our ability to develop margins, grow capabilities, and less on the things that aren't bringing value add. So I would say, I love new customers, love all that, we wanna stay focused on that, but I think the silent thing that's really gonna enable our success more quickly and larger is our ability to be best in class relative to how we handle the mechanics of our business, and then the rest is gonna take care of itself.
I think you brought up, you used the term touchless-
Yeah, I did.
in the last conference call. How close are you to getting touchless, and...?
Let Brett address that one there. Yeah, 'cause it, we talked about the no-touch environment.
Yeah.
Brett's been... He and Will Reynolds have been driving this project. So, Brett.
Yeah, the biggest driver to that is on the AP side, so the invoices with the vendors. We've got a lot of vendors. There's a lot of vendors, a lot of invoices that roll through our system. So we're really working on that, and that's where we've started to bring some vendors onto our new platform. Early on, you know, we're getting first run through the system 30%-50% touch-free, which is great because I think we were at around zero-
Yeah
to start with.
Exactly.
Yeah. So that's a pretty good improvement. I think we've got pretty easy runway to get to about maybe 70%-80%.
Okay. Yep.
Then that next 20%-30% is gonna get really challenging. That comes with more, more, investments in some systems and some processes and those types of things. But some of it is, I heard somebody say the other day, you know, creating complexity is the easy part. It's simplifying things that's really hard. And I think it's easy for us in our business, especially with how many different types of vendors we have and how many different types of verticals we play in, that you can overly create a lot of complexity-
Yep
... into your processes and systems so that they handle every scenario, every single exception that runs through. And I think really what we're trying to do is simplify things across our organization right now.
Got it. Talk internal investment, acquisitions. You always said the pipeline is always there, as it should be. What are you looking for? Or if you had a, you know, blank canvas, what would you go after?
The type of customer?
Uh, acquisition.
Oh, acquisition.
Sorry.
You know, I think there's two buckets for that for us. One is the continued asset-light. I hate using the word simple, because one, it's never simple, and two, we've proven it's not. But the concept of taking somebody who's an asset-light entity that has client contracts, and then being able to identify through the automated systems and everything Brett's been talking about, just basically bringing them on our platform creates inherent synergies and creates value. So that's always right there. We've also been looking at, as a side note, like, compactor rentals and opportunities that are very complementary, great economics, you know, those type of things.
We've talked about compact-
Yeah.
-compactors for a long time.
Yeah, and we're in that business a little bit through acquisition, and opportunistically on a handful of purchases, but we really think the economics are great. It's very complementary. It makes customers more sticky, it creates more opportunities. So we're kind of... We haven't really-- we've done some of that, and we may look at more, but those are the two buckets of distinctly different types.
What's stopping you from getting bigger in the, with the compactors?
Right now it's just opportunities to find opportunities. But we're putting them out there today. We actually have some great stuff going, relative to that. So I think you'll see some acceleration-
Yeah
... through the year.
That business margin enhancing?
Yeah, it is. It's probably close to 80% EBITDA margin, or it operates at roughly about 70% EBITDA.
I'll start one and fill in, you can buy.
Yeah, yeah, that's the retirement program, Gerry.
Yeah. We have 5, 10 minutes. I do have some other questions, but I want to open it up, see if anyone want to ask a question.
They know everything, Gerry.
Yeah.
Yeah.
Like, they write very good reports, very thorough. I'm only kidding. I'm kidding. You can't laugh at yourself, who can you laugh at?
Yeah.
Okay, maybe RWS, right? One of your bigger acquisitions.
Yeah.
I think you're happy with it, with what you-
Yeah, yeah.
- purchased. Integration was an issue, kind of the little bit of the gift that kept on giving.
Yeah, they-
What are your thoughts on... I mean, is everything behind you?
Well, let's start with, anytime the word RWS comes up right away, it's loaded with negatives, you know, and the fact of the matter is, it's a good business.
Yeah.
We acquired some good clients and capabilities, more importantly, that they did that we did not do, that we can cross-sell. You know, the problem was... And by the way, and I use was the past tense, it's really important to leave that, right? That the issues we've been talking about are 22 and 21.
Yes.
The mistake we made, I made, was integrating too late. I was trying to tiptoe and not create less friction for customers, you know?
Mm.
Like, they don't know there was a change, maybe they won't be concerned. So I foolishly went that route, and we got bit by it. Brett's been cleaning it, and we've had third parties working with it. I'd like to say it's behind us, you know. I really do. Well, I know the errors are behind us. The question is, have we found everything that came? I think we have.
Yeah. The errors aside, extremely happy with the acquisition.
Yeah.
Yeah.
No, it's, you know what? It's, it took us in places where we, if we tried to go without an acquisition, it would have been a long road. So, when we look at acquisitions in that space, Gerry, if we can—we want it to do one of two things or more, but we want to make sure that it either brings us, an additional end market where we didn't have presence or a big presence or a big space, or additional capabilities, which means materials that they, that they re—they handle regularly that we really don't have a vendor network for. So you, you acquire a vendor network too when you make these acquisitions, which is great.
We did the same thing with InStream on, we picked up 30-something, I think, vendors, in the metals market that we didn't have, and we thought we were doing great in metals, and we had a chance to do a lot better when we made that acquisition. So it's more than just the revenue and the gross profit that you get. It's the capabilities as well.
Got it. Data technology, that's part of the future of Quest. Maybe a quick update of where we go with that.
You want to do that one, Brett?
Yeah, I mean, I think we've pretty well covered it.
Yeah.
We've spent a lot of time over the last two years, especially building out a new platform that's administrative, you know, being able to process transactions, but it's also to support our operations, how we contract with our clients.
Yep.
Streamlining that process, how we procure the business, our ability to build efficiencies so that when we are going out to the market and looking at proposals, we're able to pull in a lot more data, more quickly, analyze more quickly. So I think it's all exciting. It's really across the board. We want to be a solution-driven company, not just for our clients, but internally on how do we get better about how we go to market or how we transact.
I apologize. I didn't mean data, like back office. I meant data, client data-
Okay.
- you know, taking that data.
Yeah, I'll take that.
Sorry.
It just starts with... Yeah, I understand what you mean. We really think of technology in two totally distinct directions. One is the internal, one is the external. They're very different. The first thing is we do collect a lot of great data. Every time we pick up or have a service at a client, we know when, what the material was, how much was it, you know, where it's going, which is really comprehensive, and it goes into a data warehouse that Will has rebuilt over the last couple of years, so it's more accessible. So the portals that we use, that clients can access, is better now. It's more timely, the data is better.
And so as the ESG initiatives grows, and just in general, as clients want to know more about what's happening in the field, these portals, the portal that we created for them is, is infinitely better today than it was five years ago, and it'll be infinitely better in five years than it is today. And that's important because when we go out to, for example, when we go out to get business and we're, we're talking to prospects, and they're looking at other companies, they want to know now: what is available to me as far as data? You know, do I, what am I going to be able to see? How live is it? How complete is it? How accurate is it? And when, when we're talking to them about that, we're head and shoulders above our competition today.
So we want to. We'll continue to grow that. Now, the data itself, we're not charging separately for it. I know that's one of the questions, and could we? Very possibly. Right now, we're using it, and I think we're getting value from it and additional margin because we have a capability our competitors don't have. But, we are charging separately in one case, and we'll probably do that in some others. But the main thing is if you have all that data, then you have the ability to have the optionality on what you do with it, which is where we are today.
Okay, well, I want to thank Ray and Brett. Thanks for making the trip out here.
Sure.
Oh, sorry. Yeah, yeah, I was getting-
Yeah. Thanks, Greg. I wrote that down for you, didn't I? Yeah. I think the first—the last question is the most important is the why. Because it validates our model, our proposition, and the performance of our great team, you know, back at the office. You don't renew with somebody, especially one of these large customers who have lots of choices. You don't renew with somebody, a large service provider, unless you're really happy with what they're doing for you. You know, and I'm happy to say these renewals came without even any concessions. And many times in our industry, you can just count on concessions for renewals. So typically, it's three years. We had a couple of slides. The ability to expand exists in all of our clients to different degrees.
One of our largest clients, which was one of these new renewals, has got unbelievable expansion capabilities as far as additional lines. But I think the main thing is, I wanted to highlight in the call that we have high-quality customers who've been with us a long time, and they're re-upping because they're happy with what they're doing, and that should make us all feel good about what we're doing every day, you know, at Quest. But the expansion capabilities, Greg, are really significant, and we're definitely working that hard.
I was getting the wrap it up signal, but I want to thank you guys.