Up next, we have Quest Resource Holding Corporation, traded under the symbol QRHC on the NASDAQ. Quest is a leading provider of waste and recycling services in the U.S. In attendance with the company is the CEO, Ray Hatch, and the CFO, Brett Johnston. Ray will be giving the presentation today. Thank you.
Good morning, everybody. I'm Ray Hatch with Quest Resource Holding Company. With me is Brett Johnston, our CFO. Appreciate the interest in Quest today. I want to start off by saying that I had two brand new granddaughters born this week. So the rest of this, you know, yeah. All right, yeah, you can come. The proud granddad thing is a great card to play. And yeah, you know that play. So I get the privilege, as best part of my job, is to get a chance to represent all the Questers who work so hard in creating what we do as a company. And I'm the one that gets to come up and talk about it. But it's good to see all of you. And thanks for your interest.
So let's talk about Quest a little bit, because I'm sure there's people that know the story very well and some that maybe don't. We're a national provider of waste and recycling solutions to typically large businesses. Most of our targets and our clients are Fortune 500, Fortune 1000. We help them meet their efficiency, sustainability, ESG goals. We serve a really large, it says $200 billion. I think it's larger than that as far as our addressable market goes. We handle over 100 waste streams. And the more waste streams that these businesses are generating, the more we'll start to handle. Because the waste streams we handle, the service lines we provide are totally driven by client need. We're an asset-light entity, and we'll talk about that. That allows us to have a national footprint, which in essence are one-floor elevator speeches.
We can handle any waste generated by business in any zip code in the U.S., and our business model is what allows us to do that, so that's what we do. Here's a little of the clients that we have. I mean, it's obviously a lot more than that, but we thought we pulled these together because I think what this shows us, it shows you a couple of things. One is, these are blue-chip brands that you know, most of them. They've been around forever. They'll be around forever. They're very selective in who they choose to be essential service providers, and we're blessed to be one of those, so we're thankful for that.
The second thing I think you need to take away from this is the massive diversity in what these people do, from auto collision service to big grocers to auto services to restaurants of different types to different manufacturers, different retail. So we're really not limited by sector because we handle all these waste streams. So that allows us a couple of things. It makes the target-rich environment broader because we're able to sell diversely at a business. And secondly, I think from a diversifying standpoint of where our revenue comes from, if you look at the different types of customers, one economic tsunami isn't going to wipe out all of them. So we're not single-sector focused where we have that much risk. Our business transformation, I'll just kind of jump through that. We really started, we took over our business in 2016. We made a big change.
We ended up cutting out through the course of a year almost half, if not half, of our revenue. And we chose to do that because we were losing a lot of money. We had no margins. And we really didn't have any hope based on what we had of becoming profitable. So we made some pretty drastic changes above what we sell and who we sell to. We identify where we can be profitable, where we actually bring value add to the market. And we put our resources in focusing on that. So what kind of problems do we solve? Because at our core, what we are is a B2B problem solver. The problem happens to be focused around waste. Improving sustainability is more important than ever.
I don't think that's going to change with the recent administration because companies by and large are doing this not because they have to, but because they believe it's the right thing to do. I will tell you, because I get that question a lot since the election, is there a concern that sustainability is going to cease to be a factor? And it's really not. First of all, most of our diversion, or excuse me, most of our services involve diversion from landfills. Landfills aren't governed federally. They're local and state governed. So we really feel it's going to continue to grow. And speaking of landfills, there's less of them today than there was yesterday. And there'll be less tomorrow than there are today. Landfills are filling up. And permitting for them is really, really difficult.
There are situations where a lot of states, I'll pick New Hampshire, for example, is having to load up their waste on rail cars and ship it to Pennsylvania, who apparently doesn't mind getting a lot of waste from these other states. But it's becoming more and more difficult, so as that happens, landfill costs are going to go up. Increasing state and local regulation, that's typically around the landfills. More and more, particularly around organic waste and some other materials, they don't want going into the landfills. And that creates a regulatory issue, which creates opportunity for us to help them be able to comply with regulatory issues. Decentralized waste and recycling services and data reporting. The net effect is that we're able to take most companies have hundreds of providers, large companies, to take care of their waste and take it wherever it needs to go.
With us, they have one. And we manage all those other pieces. We take care of all that. All those subcontractors are contracted to us, not to the client. So obviously, that allows that one throat-to-choke type of analogy. But then beyond that, our data reporting becomes comprehensive for them. You can't report on data that you don't have. And when we're handling all of the waste streams, we have all of the data. So we're able to give a comprehensive singular report back to the client through their portal, by the way, which they can access and see exactly what's happening at each location, each waste stream. We collect, and we'll talk about it again in a moment. But in our data warehouse, we collect what was picked up, what material, how much of it, when was it picked up, and where does it go.
So that's all in our data warehouse. And then we've built a portal that allows customers to go in and access that and pull out, frankly, whatever's most important to them. Oh, I think I skipped one. Oh, measuring the E in the ESG report. That's really what I was just talking about. We don't affect the S and the G, but we definitely have a lot of impact on the E on the environmental side. And by the way, ESG reporting is a broad-based piece. The biggest challenge with it is getting accurate and timely data. And we've won a number of clients strictly because we're able to, hopefully, there's other reasons too. But one of the big pushovers was we're able to provide that to them. And so that's a key differentiator for us. What do we do?
I mean, basically, the clients on that left-hand bucket generate all these different types of waste streams. And the sectors are like manufacturing, industrial, are big for us: retail, grocery, automotive, fleets, transports, restaurants, and to a certain degree, property management. But there's more than that as well. But those are big business sectors for us. And we have the platform both from a technology and a network and an expertise standpoint to deploy several thousand of our subcontractors against the needs of these clients. This is the vendor network I was just talking about. Basically, there's 30,000 people. They have 25,000. But the net takeaway is the magnitude. Our vendor network is really, really important to us. We are as concerned about them as we are about our clients.
And the reason why, since we don't self-perform, we're only as good as that vendor network that we're able to coordinate and pull together. So I get asked this question all the time, which I'll go ahead and answer it. So why don't these vendors just cut you out and go direct to the clients? Well, there's a number of reasons why. But the majority of our vendors are local, regional haulers and suppliers. Those folks do not sell national accounts. Typically, they don't have that skill set. They don't have the ability. They don't know where PetSmart's headquarters is to go over there and sell them on a national program. And they don't have the ability to fulfill it. But we provide that to them. We sell the national accounts, and we're able to bring them to really important things, I believe, for them.
That's asset utilization and route optimization. We enhance the efficiency greatly of the vendors that we do business with. Our relationship isn't adversarial or competitive. It's very complementary. I think that's hugely important in how we do what we do. The differentiation, I think it's important. I'm going to just differentiate between the ones that you're thinking of, the big asset-based guys, because that's the other question I get. Why would somebody buy from you instead of Waste Management? I think it's a really good question. My first suggestion in a smart-alecky way is call Waste Management like you're a customer and see how that goes. You'll understand why we have a lot of these customers that don't buy from these large waste providers. Our industry, the DNA of our industry, waste services is as a utility. It goes back generations.
It's like calling the cable guy. And he's going to come out sometime between next Monday and first of the year. I mean, that's the kind of utility type of mindset. We didn't come from that. We weren't haulers to begin with. We're B2B service providers. We're national account management companies. So we really have a higher level of customer service. But another really important thing, the difference is we don't own landfills. We don't own those capital assets that have to be fed with waste. So why is that advantageous? It's advantageous because we have customer alignment. And we have the customer alignment with them because there's no economic incentive that we have to push their waste in any certain direction. Our only need is meeting the client's needs. And that involves not just cost, but sustainability goals, whatever it is they feel they need.
So if I owned a bunch of landfills, every ton of waste would look like landfill waste because that's the most profitable asset that our asset-heavy competitors have. So they're also limited in scope. Typically, in most cases, if you want anything picked up at your locations besides solid waste and cardboard, you have to hire other vendors to do it because the big guys don't do that. They don't make money at it. It's not their core. There are isolated situations where they do, of course. But it's not what they push to do. So if you're really looking to optimize your waste streams, find the right homes for what you're generating in waste, they aren't a good choice. And we believe we are. So it's really about customer alignment and flexibility and nimbleness is a huge advantage that we have.
I talked to Ray about this quite a bit on the cloud-based portal. We really are heavily focused on two types of technology. I'll draw a line in between the two. There's the customer-facing, and there's the internal pieces. Both of them are hugely important. On the customer-facing, and that's kind of what this shows here, some screenshots, having validated data that's timely, that can feed their reports is hugely important to them. One of the real goals, sorry, one of the real goals of the data is to, excuse me, is to have it not just be trash data, waste data. One of my real goals in that is that when the data you're able to get as a customer and you look in your portal, it actually becomes operational data. We've had that situation happen numerous times.
For example, you can look at a customer at corporate headquarters. You can look and see what each location is doing. More importantly, the trends are the important ones. Why do I have this one location that's roughly the same size, same volume, and this location over here? Why are their waste streams so different? Why is their tonnage, for example, in a food waste program? Why are they so different? They should be roughly the same. We can't answer that question. We can just tell them that it is different. And then it's up to management to understand, is there a compliance issue? Is there an issue possibly in the grocery segment with the coolers being a couple of degrees off, which is really increasing their spoilage compared to this other one? There's any number of important operational data points that you learn from trash data.
And we've found, and it's also, by the way, when customers get addicted to having that data to operate their business, it makes you pretty sticky with them too. So we really appreciate that. That's really the prime reason we've invested so much in our technology platform. Our land and expand strategy driving organic growth. Over the years, we've consistently had mid-single digits growth with our existing clients. I think our client tenure on most of our large clients is somewhere around eight or nine years. And they've been around a long time, but they continue to grow with us. And there's two ways to expand with clients. One is more geography, more locations. And the other is more lines of business, which is typically where we're able to grow.
We love looking at whatever their existing spend is and finding ways to capture more and more of that into our platform by developing new services or getting them onto services that we have. The easiest sell in the world is something that somebody's already spending money on, and we focus on trying to get that done with our existing clients, so the expansion really has been working for us consistently, and I used to think that when you grow with a customer over the course of a year, that's probably it, but in many cases, we've seen year over year over year consistent growth. And that's a great thing. Their M&A strategy, we actually haven't bought anything in two and a half years, but we haven't decided we're not going to. We've just continued to stay quite opportunistic.
Our formula for M&A really is where our success is. It is typically founder-owned companies that have started out of their trunk, really hardworking guys and gals that have built a business up to $10 million, $20 million, whatever annualized revenue. But their business outgrows their infrastructure. And they're trying to figure out what to do. Do they sell it? Do they invest in whatever it takes to grow? Which many times, a guy that starts a business, an entrepreneur, is great at getting it started, but not really good at growing it out past, pick a number, $20 million, $30 million, $40 million, $50 million. So they need a home for that. And we've had some good success with those types of scenarios. And we'll continue to always look for those. So the summary is stable, scalable, attractive industry dynamics.
I don't think anybody thinks that we're going to be generating less trash tomorrow than we do today. It's going to continue to be a great place to be. And the financial characteristics, we think talk about tailwinds for a moment. It's not like we sell VCRs for a living. We're selling a service that's highly needed, and it's growing every day. Regulatory compliance is one of our tailwinds. That may grow or not grow at varying levels, but it's definitely not shrinking. Regulatory compliance, I've never seen regulations like landfills and that type of thing go backwards. And then also, there's basically, excuse me, the desire to increase your sustainability. Because all of you know companies that have professed a goal to be at zero waste to landfill by 20-something, 2020-something.
It's usually like the year after the CEO that says it's going to retire because it's really hard to do. But there are a lot of goals out there. And none of those has changed through numerous administrations. So I would assume that that's going to continue. And I think it is the right thing to do. So our financial profile is attractive. We're able to not invest capital and hopefully, as we grow, generate more cash. So with that, I'll go to the appendix, which basically just shows some client results and things. I probably want to go ahead and open it up to Q&A. Yes, sir, Mr. Kidd. Ray Hatch, you had a lot of customer wins this year. Yes. Can you narrate that number? How does that compare to the norm? Why is that? Yeah, I appreciate the question.
We need to put that in the deck, Joe, because we've always added customers, but at a much reduced rate. We've added nine customers this year. And that doesn't sound like a lot to you guys, but in our industry, that's a whole lot. That's more than we've ever done. It's much more than we've ever done. And the good news is that's not one-time stuff. The pipeline is indicative of that going forward. Because I think the process now is what's driving it as opposed to just opportunity. And that's a good thing. So I think it's going to be more sustainable. And I would attribute it to we've revamped our sales force. I think it's a couple of things. One is this business model we represent, this every zip code, all waste streams, is a bit of a paradigm for a lot of companies.
They're used to, okay, we have this plant in Paducah, pick up the phone, call Waste Management or Republic or whoever that is, and then focus. But now our paradigm, the paradigm is starting to shift. There's a lot of large companies that are approaching their waste streams differently today. And we have a lot of them as referenceable clients, frankly, too. And they're helping us spread the gospel, if you will, of doing waste differently. And we hired a new Chief Revenue Officer a year ago. Perry's an icon in the industry has been around for a long time. I've worked with him in the past. We've always looked for an opportunity to work together again, and we found that opportunity. And I give him the credit. He and his team have really revamped that. So we have a whole new approach to new account growth.
And I believe it's sustainable, and it will continue to grow over time. Yes, sir. Let's take your relationship with Kroger. What kind of waste streams do you work on with them? But then how do you get paid by them? How do you build that? And then how do your subcontractors get paid? And what shows up on your revenue model? Yeah. And it's the same model across the board, so I can use that. In that particular case, most of it's food waste and meat rendering and stuff like that. But the way it works is clients, even if you ask them how much waste they have, they'll tell you, and they're always wrong because they don't include; they go, "Oh yeah, oh yeah, oh yeah, oh yeah." And there's so many more. And so we approach that way.
So we solve the problem of how you deal with that. So we present a program for each one of those waste streams because they're all different of what we can do for you, Mr. Kroger, Mr. whoever you happen to be. And we go out to market to understand what our subcontractors can do. And that's how we create that proposal. So our subcontractors are anxious for us to get that account so we can bring that business to them. And then the order is placed. The sales order is on a regular basis on each one of those line items of waste, whether it's food waste, meat rendering, solid waste, cardboard, all of those things. And we have different vendors for each of those. And the vendors process the material, pick it up.
We bill Kroger accordingly, and we pay the vendor, and there's a spread in between the two. That's typically how that is. Our relationship is, as far as the client is concerned, those are our trucks and drivers. They don't know or care. We're the ones. When they have an issue, and that happens when you got tens of thousands of locations, we have a call center. They call us. They don't call the service provider at the local level. We dispatch those people. The nature of the third-party stuff is relatively invisible to the client. As far as the way they look at the business, we're doing it at every location personally, and we bill accordingly. Yes, sir.
You said before about profitability. You said there's been a nice turnaround in gross margins. You talked about the 2016 time period.
But how is that translating into net profit and free cash flow? Yeah, and I forgot to repeat the questions like you told me to do. So the question was, how is our margin growth translating into net profit and free cash flow? There's a lot of things that are consistent in that it's improving. But for example, we have a lot of debt that our financing is definitely going to be improved in the near term. How would you answer that question on the rest of that as far as gross margin to free cash flow, Brett? I'll let you.
Yeah, I think we've bounced around positive operating cash flow a bit over the last couple of years. We're doing a refinancing now. So with that, we're expecting to complete that by the end of this quarter.
Part of that will help, obviously, with the reduction, pretty strong rate of reduction in interest expense, especially on our more expensive term loan. We've had some working capital usage. If you look at operating cash flow before working capital, we have been more consistently providing positive cash flow there. But it's the working capital, which you would expect, right, as we're growing, adding new customers, you are seeing some usage of cash related to the ramping of that business as well. So I think the business model is set up to generate a lot of cash flow. I think we're at that scale now to where we start. As we continue to grow, you'll see that improve quite a bit. Yes, sir.
Does adding nine new customers in a year impact your free cash flow? Maybe they're more profitable, but you get online and start to see them.
And I'll let you answer that one too. But yeah, there's a, let me start with that. When you bring on, in most businesses I've run, when you bring on a client, you have an agreement. The gross margin is as good as it's ever going to get on day one. That's not the case here at all. The margin continues to enhance, not by price raising, but by leveraging books of business and costs and all that kind of stuff. So optimizing the gross margin can take anywhere from 6-18 months. Is that a fair assessment for it to grow from where it is? So initially, it's not optimized, but it's definitely moving in that direction when we bring on these new clients. So yes, if you have a heavy new account period, it's going to have downward pressure on the gross margin %, for sure.
But it also is a good problem to have because we have a lot of revenue that we can optimize and hire GP moving down the line. Yes, sir.
I guess just kind of in the same light, looking forward, I mean, how far can gross margins go? And then from a free cash flow conversion perspective, maybe to your point, the AR has been quite a drag. If you are just trying to pursue acquisitions in the future, what is like three years out? What is the margin profile? What kind of free cash flow?
Well, I'll start with saying, as far as margin percent goes, we typically don't focus on that. I know it's an area of interest, and the reason why is we focus on GP dollars. And the reason why, again, is because we're not a manufacturer.
We can manage a low gross margin percentage with a. It's really we make decisions on accounts we take on and don't take on based on gross profit dollar contribution beginning and future and how much G&A do we have to support it with, although there is an element of working capital in there too. So I'm hesitant to answer GP percentage questions. The reason why is it may make me make a bad decision about a business because it may have a negative impact on GP percent, but a positive impact on EBITDA. You see what I mean? So I'm not dodging the question much to explain in the answer. So I don't know where it can go. It depends on what type of business we're able to bring on down the line. But as far as free cash flow future, you want to talk to that?
Yeah. I just think one of the questions was operating leverage, right? And that's one thing we're really excited about. We've invested a lot over the last two to three years in building a scalable platform. One of the more important pieces of that was our vendor management platform that we went fully live on with our solid waste vendors as of August. And what that relates to is trying to drive zero-touch automation on AP processing and vendor processing. Right now, we're at about 60%-70% of everything we—all invoices that come through, we can generate; we can pass through the system without touching at all. We've got pretty good visibility to get to 80%-90%. The next 10% may not have the ROI that we needed to solution for 100 different root causes.
But what that does is, to your question about operating leverage, significant operating leverage, that's a scalable platform that doesn't require a lot of SG&A investment. There's a very small flat rate to process that cost process through. So we're really excited about that. We're also able to procure more now, more quickly. For new proposals, we're able to generate proposals faster. We're able to get through more. Historically, we may have been at, to turn around a proposal in 30 days, we may have only been able to get 40%-50% solid bids in, and then the rest was kind of guesstimates, estimates based on market knowledge. We've done some large ones now where we're getting 80%-90%, sometimes even 100% of that book of business procured prior to going to a proposal, which is huge from a margin and certainty perspective.
It allows you to get a little more aggressive in some areas. So there's a lot of opportunity from an operating leverage standpoint and our ability to onboard new clients much more quickly and take on more. So we're really excited about that operating. I think near-term, mid to near-term, expect maybe 75% flow-through rates from GP to EBITDA, where we've been historically probably around 50%.
That's the key metric right there. And I want to pull a perspective on that sourcing thing because if you haven't been in this business, it probably doesn't make a lot of sense. But if we're looking at putting a proposal in front of a client with 500 locations, for example, to be able to price that and be able to put our proposal together, there's 500 locations. You may be using 300 vendors to do that.
That's a lot of phone calls. What ends up happening in our industry, and we were no different, we're no different, is you make as many as you can because a customer's not going to wait a month for a proposal back, which is, in essence, what it would take if you try to do it all the way through. We would get 10% or 15% and then kind of estimate through the rest to get the proposal in and then hope we were right. When I say we, it's not just Quest. It was everybody because of the nature of this. With the automation and the technology, Brett said, there's times when we even have 100% of that, which is unheard of. What does that give us? It gives us speed to the client proposal, which puts us ahead of our competitors.
It makes us much more certain of what our margin structure is going to be with that client, with that proposal. Every proposal we make, it's one of the nice things about not having a business where you have 50,000 customers. Every proposal we make, our pricing committee, which is myself, Brett, our chief operating officer, our chief revenue officer, have to sign off on the proposal. It has to fit our strategic direction. So that way, we don't end up getting pulled off in other areas that could easily happen. Okay. Yes, sir. Who are the competitors that you run into most often when you're bidding on national accounts? Mostly, it's the guys that you would think, Waste Management, Republic, those kind of guys. And that's on the solid waste side.
Safety-Kleen, Clean Harbors, even HCC and some of those on the used motor oil and other fronts, but we run into other folks that look like us every now and then, but most of the time, it's not nearly as often. The prospects that we're going after are typically self-serving, meaning they have their own people managing all of their waste haulers, and our value proposition resonates really well with them, so somebody that's already on a broker platform is a little harder to get than somebody that's not, so it's typically the big guys that you see on the street. Yes, sir,
so you're picking up steel, let's say, as an example, and the steel prices are high and the steel prices are low. That impacts your revenues. Does it impact your gross profit dollars?
I think you asked that earlier. I didn't answer.
Yes, it doesn't affect our gross profit dollars. I'm glad you brought it.
Should I look at you on a revenue basis? They should look at you on a revenue
. Gross profit dollars. Right. So Barry just brought a great point up. The value of the commodity that we manage flows through our income statement. But we get paid, for example, per ton or per gallon or per whatever the unit of measure is, as a service fee. So that can make your revenue pretty jerky. But the GP dollars is really more representative of what we do and the value we're bringing. So yeah, that can have, so for example, if steel, as an example, soars in value, our GP% will look worse because it's the same fee against a larger dollar amount, but it really doesn't affect our real financials at all.
And conversely, if it goes in the floor, it makes our GP look better. But again, it doesn't really finance, which is why the gross profit measure, thanks for that, Barry, is the way to go. Any other questions? Yes, sir.
You said one more. I don't quite remember who it was, but I feel like there's a couple of private equity players in this space who are rolling out a lot of similar businesses. Have you seen those competing at all? And they have a lot of access to capital. How about maybe they can roll up?
Yeah, they're messing up the M&A environment. Now, I'm kind of kidding. Not totally. But it does impact multiples.
Yeah, I think private equity appears to have discovered our space over the last couple of years and slightly enamored with it, which is reflective of some of the multiples that they paid. So yeah, on that side, on the M&A side, it's competitive. But I haven't seen it on the. It's not affecting our baseline market business, though. But yes, multiples have been pushed up with that interest level. And I think the interest level is well-deserved. This model is attractive in numerous ways. Anything else? On behalf of everybody at Quest, I want to thank you guys for the interest and the time. Three Part Advisors is our IR firm. And Joe knows this business probably as well as Brett and I do. Feel free to reach out to Three Part, and they'll set up another call if you'd like to have it with us.
Thank you all very much. I appreciate it.