Quest Resource Holding Corporation

As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star, then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and 0. I would now like to turn the conference over to Dave Mossberg, Investor Relations Representative. Please go ahead, sir.

Thank you, Carl, and thank you everyone for joining us on the call. Before we begin, I'd like to remind everyone that this conference call may contain predictions, estimates, and other forward-looking statements regarding future events or future performance of Quest. Use of words like anticipate, protect, estimate, expect, intend, believe, and other similar expressions are intended to identify those forward-looking statements. Such forward-looking statements are based on Quest's current expectations, estimates, projections, beliefs, and assumptions. and involves significant risk and uncertainties. Actual events or Quest results could differ materially from those discussed in the forward-looking statements as a result of various factors which are discussed in greater detail in Quest filings with the Securities and Exchange Commission. You are cautioned not to place undue reliance on such statements and to consult our SEC filings for additional risks and uncertainties. Quest 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 may include industry and market data and other statistical information, as well as Quest observations and views about industry conditions and developments. The data and information are based on Quest 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 of or the accuracy of this information. 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 that the presentation of these non-GAAP financial measures is useful to investors understanding and assessment of the company's ongoing core operations and prospects for the future. Unless it is otherwise stated, it should be assumed that any financials discussed in this call will be on a non-GAAP basis. Full reconciliations of non-gap-to-gap 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 thank you for those joining us on today's call. We made considerable progress at Quest in 2023 and have begun to see the results of the significant investments we've made in the business, both in sales and operations. The actions we've taken to date adding to our sales team, broadening our efforts in a number of verticals, investing in our technology and processes, improving our ability to serve clients, improving our ability to scale the business, and increase operating profits. All these have positioned us incredibly well, given our robust pipeline, customer focus, efficiency program implementation, and strong competitive position We expect this momentum to continue into 2024. Simply, our growth-focused strategies are working. We are extremely encouraged by what we're seeing in the business, both on the top and the bottom line. During the year, we made strides across nearly all facets of our business. We experienced notable customer renewals, growing quality and volume of opportunities in our pipeline, and new business wins, as well as meaningful operational efficiency improvement. We've completed the integration of acquired businesses, including RWS, fully incorporating them into the QIST platform. As we mentioned previously, we expect that efficiency initiatives related to RWS will deliver $1.7 million in annual cost savings and expect to generate additional operating efficiencies and expand our margins in 2024. I also want to point out that Glenn Culpepper, our current QIST director and former Chief Financial Officer of Republic Services, will join the audit committee as chairman. Glenn will provide new leadership and perspective within the critical function, and we're grateful he's assuming this new role. Last quarter, I said I'm more excited than ever about the foundation and underlying strength of our business. This statement was more bullish than any other I've made in recent years. Just a few months later, evidence of this enthusiasm has borne out. We've renewed two of our largest accounts. We've signed six new customers in 2024 alone. And as such, I'm even more confident in our outlook. I look forward to sharing more details after the financial review. I'll turn the call over to our CFO, Brett Johnston.

Thanks, Ray, and good afternoon, everyone. We had strong fundamental performance during the fourth quarter with year-over-year improvement in revenue, gross profit dollars, and profitability. Revenue increased 11.4% during the fourth quarter to $69.3 million. The revenue increase was primarily related to strong demand for recyclables and non-recyclable material services from both new and existing customers. The revenue increase was partially offset by lower commodity prices realized from certain recyclable materials. While prices for recyclable materials did somewhat offset growth in revenue during the fourth quarter, it did not affect gross profit dollars. Our customer agreements produce consistent gross profit dollars from recyclable materials based on volumes that are not tied to commodity price fluctuations. For those of you who may be new to our story, this is the reason we use gross profit dollars as a key metric to measure financial performance. Moving on to gross profit dollar comparisons, during the fourth quarter, we reported $11.5 million of gross profit dollars, a 6.9% increase year over year. Fourth quarter gross profit includes the effect of a $1.2 million non-cash adjustment to the cost of revenue related to the RWS business during prior year periods. In the process of reconciling RWS accounts payable for periods prior to 2023, we found some items at RWS that were not properly expensed in 2021 and 2022. While the integration of RWS had been slower than we would have liked, Given the systems that we inherited and the volume of invoices that needed to be worked through, it is important to keep in mind that substantially all of the adjustments made were related to 2022 and earlier. Any acquisitions will be integrated quickly to avoid this in the future. I also want to point out that with the integration of RWS and all other acquisitions complete, All our clients acquired organically or through acquisitions are running on the same platform with the same processes and controls. Additionally, through our work to become an accelerated filer at the end of 2023, we at an outside firm test and evaluate our controls and processes. We are confident that our systems that handle tens of thousands of transactions across hundreds of vendors can process all our current and growing business. We have not had these types of adjustments in the past with our core operations. Excluding adjustments, we had strong growth in gross profit dollars year over year. It was a really strong performance in the fourth quarter and a good end to the year. Looking to the first quarter in 2024, we are encouraged by the record number of new customer wins Ray mentioned earlier. and expect strong year-over-year growth and sequential growth in gross profit dollars, and expect that to continue through the year. Moving on to SG&A expenses, which were $9.4 million during the fourth quarter, down from $9.8 million during the same period last year, and in line with our expectations. Looking forward, we expect lower integration costs and to gain efficiencies from the investments we made in our platform. We plan to continue to grow the bottom line, continue to pay down debt, and reinvest savings into growth and efficiency initiatives, continuing to increase our ability to bring value to our clients. As a result, we expect SG&A expenses will be about $10 million in the first quarter. As efficiency gains are offset by expenses to support new growth and other initiatives, We expect margins to continue to expand from efficiencies and to deliver improving operating leverage in the quarters to come. During the fourth quarter, depreciation and amortization was $2.5 million, which was relatively flat compared with the prior year. Moving on to a review of the cash flow and balance sheet. Our liquidity is in good shape. In this high interest rate environment, we have been actively looking to reduce interest expense by optimizing cash management, carrying less cash, and minimizing borrowings on the line of credit. As part of our working capital management and in light of increasing interest rates, we paid $7 million in voluntary prepayments toward our term debt in 2023, utilizing excess cash. Our cash balance was $324,000 at the end of the fourth quarter, and we had 13.2 million drawn on our 25 million operating borrowing line. This compares to 12.2 million at the beginning of the year. Our adjusted EBITDA to senior debt leverage ratio has dropped from 4.3 times in Q4 2022 to 3.6 times in Q4 2023, excluding adjustments. To that end, to further strengthen Quest's long-term financial position, Quest Board of Directors has formed a committee that, along with management, will evaluate alternative long-term debt structures to ensure the company can lower its cost of capital and preserve its ability to maximize growth. The committee is in the process of retaining an independent financial advisor to assist in the process. We look forward to discussing this with you over the course of the year. For the year, we used 1.3 million to fund operations, which was primarily to fund working capital demands at the end of this year. During the fourth quarter, we had slow payments from several of our largest customers, resulting in a 7.8 million increase in accounts receivable. This is a temporary increase in AR, and it is not uncommon for our largest customers to slow pay towards the end of the year. which was the case at the end of 2023. ARDSOs were 75 days at the end of the quarter, but we expect they will return to their average in the low 60s that we have experienced during the last several years. At the end of the year, we had 67.8 million in notes payable versus 74.9 million at the beginning of the year. The reduction reflects normal principal payments and voluntary term loan prepayments. partially offset by an increase in borrowing on our asset baseline with PNC. Through our cash management efforts and the reduction in borrowings, we continue to expect to reduce interest expense by more than $1 million on an annualized basis. At this time, I'll turn the call back to Ray.

Thank you, Brett. I have a lot of positive highlights to share with you today. the most exciting of which is the momentum of our organic growth initiatives. So I'll start off there. The pace of signing new business coming out at the end of the year has picked up significantly, and we have continued to gain momentum in the beginning of 2024. We have more new client wins to talk about on this call than ever in recent history. We're seeing the results of the hard work by many of the team over the last two years to develop our go-to-market sales efforts. We're producing record customer wins and meaningfully expanding existing client relationships at an accelerated pace. We've recorded six new client wins, three of them are seven-digit, and another one is an eight-digit win. In addition, we've expanded a smaller customer to seven digits and renewed and expanded services with two of our largest customers. The rate of this new customer growth is unprecedented for Quest, and we're excited for the future. The eight-figure win is with a Fortune 200 company that's one of the largest food distributors in the U.S. This is a new end market vertical for us in the food sector, one that I know well from my food distribution days. We believe we'll be able to say more about this over the next few weeks, and we'll begin servicing this client during the second quarter and anticipate they'll ramp quickly over a three-month period. Previously, this client was handling their solid waste through a vertically integrated national provider. This was a competitive process, and we want it based on our reputation, cost effectiveness, a line commitment to diverting greater portion of waste from the landfills, and the ability for us to provide added visibility from our data portal and platform. The three seven-figure wins were with one industrial company and two large retailers. All three of these clients are large companies with national footprints. We'll begin servicing all of them at the beginning of the second quarter, and the opportunity exists to significantly expand the lines of service with all three of these customers. With one of the retailers and the industrial client, we had the opportunity to grow these to eight figures in annual revenue over time. In addition, we had two smaller wins, including one with a new automotive service client. With our initial engagement, we'll begin servicing a dozen of their several hundred locations and are actively working to secure their entire footprint. In addition to closing several deals in recent months, we've continued to see a noticeable uptick and not only the number but the size of opportunities in our pipeline. With the success we're having with new client wins, we plan to accelerate our investment in organic growth initiatives, including investments in marketing and sales during 2024. On our last call, we spoke about the new sales leadership and investments in sales operations that will allow our sales folks to spend more time on closing and less time on the more administrative functions such as proposals and lead generation. In addition, we're shortening the sales cycle by simplifying our contracts and using our new sourcing tool to turn around proposals more quickly. Our sourcing tool allows our staff to look across our entire footprint of vendors for qualification and pricing data. The tool reduces the time it takes for our staff to find optimal solutions from days to minutes. These investments in sales are helping us grow our pipeline, shorten the sales cycle, and create a better yield in converting proposals into agreements going forward. Regarding client renewals, we have recently signed multi-year renewals and expanded our engagement with two of our largest clients. It says a lot about our value add when clients award you additional business. It comes as a direct result of our focus on long-term strategic relationships and not having relationships that are transactional in nature. Importantly, our success is also driven by our people. We have an outstanding team of operations folks that go above and beyond to help our clients, cost-effectively meet or exceed their sustainability goals, and I really want to recognize them for their hard work. Because of our strategic client relationship focus and our great people, the average engagement of our top 20 clients is nine years. Our land and expand strategy has consistently delivered solid growth from our existing client base in the last five years, and we feel there are ample opportunities for continued growth from our existing clients for multiple years to come. I will now review the investments we're making in technology. Over the years, we've built a technology platform that will be able to scale to the size of a much larger enterprise. The technology platform has been a key deciding factor for several competitive wins and has helped us maintain enduring client relationships due to the incremental value that we provide. In recent years, we've stepped up investments in our technology platform so that we can stay ahead and continuously improve client value, efficiency, and scalability. We're actively introducing additional technology improvements in 2024. These improvements will enable us to further automate, lower the cost to process invoices, provide major enhancements to our ability to scale, and to expand our margins. A good example is a new vendor source and tool that I discussed earlier, which is helping us accelerate our quoting and onboarding process. In addition, we're rolling out a technology enhancement that will allow us to further automate the processing of vendor invoices, and achieves significant cost savings and margin improvements. Our technology investments are aimed at improving customer experience, increasing efficiency, and lowering our cost to serve. A great example is vendor management. We've added more than 400 new vendors to our platform while adding seven new service lines, all of which have great revenue potential across our customer base. Our technology is enabling us to do this faster, more efficiently, and at a lower cost. Over the past year, we've launched our vendor portal, which allows an automated self-service type of completion documentation and onboarding for a vendor. This is saving hours of work, increasing accuracy, and lowering our costs. Before I move on to our outlook, let me make a brief comment about the macro environment and our views on inflation and broader economic uncertainty. During the fourth quarter and in recent months, we continue to see stable activity levels across our end market. We manage cost pressures and fluctuation in the price of the recycled materials as well. The waste business is generally resistant to recession, and our clients continue to generate waste during the top and the bottom of the cycle. We also have compelling and differentiated value propositions, which creates strong client relationships that endure during periods of economic weakness. Regarding our outlook, I want to emphasize the conviction on our trajectory and on the overall outlook for the company. We've made tremendous progress during the last several years and are as confident as ever about our outlook for continued double-digit growth for 2024 and beyond. I feel very good about the organic growth we have in front of us. Pressure to improve sustainability, increasing regulation, increasing cost of landfills continue to lower bar for adoption of our recycling services. We have multiple sources of organic growth from expanding with our existing clients, ramping up recent wins, and growing the pipeline of new business. I also want to reiterate that we have a large opportunity to grow gross profit dollar growth on the cost side by optimizing the business we have in hand. As we bring revenue onto our platform, we've proven our ability to optimize cost of services through vendor relations and procurement management that drives our continued growth in gross profit dollars. Similarly, we have multiple ways of improving efficiency by utilizing the technology investments we've made over the last several years. With the integration of RWS complete, it has transitioned from being a distraction to a value-added part of our overall business. While the cleanup adjustments for RWS have been very frustrating, we're now running all of our business on a common platform. Through our integration efforts and other actions, we expect to recognize approximately $1.7 million in annualized savings from RWS, a portion of which began during the fourth quarter of 23. We also expect additional savings from other niches as well. Finally, we have reduced our leverage, will continue to pay down debt, and plan to lower our cost of capital while preserving our ability to grow. With fiscal 24 now underway, we look ahead with great confidence. The work we've done is centered on building a consistent and sustainable business focused on providing valued services to our clients. The foundation is set for continued success and to build value for our shareholders. We expect our momentum to carry through this year and beyond. I couldn't be more excited about what's to come. I look forward to keeping you updated on our progress. We now like the operator to provide instructions on how listeners can queue up for questions. Operator.

Thank you. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone while using your request. If you're using a speakerphone, Please pick up your handset before pressing any keys. To draw your question, please press stars and two. We will pause for a moment as callers join the queue.

The first question comes from Aaron Spihala of Craig Hallam.

Please go ahead. Yeah, good afternoon, Ray and Brad. Thanks for taking the questions.

Hi, Aaron.

Hi. You know, maybe first, you know, thanks for the color on the wins and definitely good to see. Can you just talk about, are you starting to see, you know, improvement in pipeline conversion or, you know, is it still kind of status quo, you know, just given the macro? And then, you know, maybe not customer by customer, but it sounds like there's still some good potential for land and expand there. And then just also on the onboarding times, you kind of mentioned a handful of months Can you just kind of talk about where that stands today and some of the efforts there to kind of shorten those onboarding times?

Yeah, I'll go to the question about the pipeline. We're really focused on growing that with quality clients or prospects, I guess, at that point. And it's really, it's accelerated and it's continued to accelerate. I really want to congratulate the sales team for being very aggressive in getting the message out and getting them in. So as far as conversion rate goes, it's obviously picked up, Aaron, because the number of signed deals that we have in just the last several months have exceeded anything we've done for several years, frankly, as far as new clients go. So we're excited about that. So I guess you can say the pipeline is moving more quickly and it's bringing us really the type of clients we're looking for. And your second comment, I believe, was about land and expand. All of these clients, some of them with huge amounts of upside, these are relatively large clients that are generating a lot of waste and have a lot of need for what Quest is bringing them. So I'm really excited about the ability to continue to ramp those things up and mine continuous new revenue and profit, profitable exercises through those new clients we're bringing on board and the ones that we already have on. And you had another part there, Aaron. Oh, it was about ramp-up time, I believe. And it depends on the type of client, Aaron. I mean, some of them are 30 to 60 days. Some of them are a couple of quarters. Industrial ones take a little longer. But I think we mentioned specifically on the largest one we just mentioned, we're looking at a 90 days or less window of ramp. So as we move through Q2, that should That should get us through the ramp on that client. Others will just come as they come.

Understood. Thanks. And then just maybe on free cash flow, you touched on it a little bit, but it sounds like that was mostly kind of working capital related to end the year. It sounds like, are you thinking that that improves as we kind of move throughout 2024? Sure.

Yeah, absolutely, Aaron. We talked about that as a timing. We expect to finish the quarter strong, especially on AR, and collect a lot of that that push forward. So, you know, you back that out, and we certainly would have finished the year as a generator of cash, operating cash. So we feel really confident about going forward.

All right. And then if I can just sneak one more in, just on the RWS kind of revenue adjustment in the quarter, can you just kind of talk about, you know, are we kind of complete with those, you know, integration initiatives and, you know, hopefully, you know, shouldn't hear too much more there moving forward?

Absolutely. And just to be clear, it was a cost of revenue, not a revenue adjustment. So it was on the cost side. And absolutely, we knew we needed to get them on our platform, our processes, first and foremost, and then it was just about going back and doing some cleanup work. So we feel very confident going forward.

All right. Thanks for taking the questions, and congrats on all the progress. I'll turn it over.

Thanks, Aaron. The next question comes from Jerry Sweeney of Ross Capital. Please go ahead. Mr. Sweeney, your line is open.

Please go ahead, sir.

Hey, sorry about that. I was on mute. Ray, Brett, thanks for taking my call. Question on the food side or the food distributor win. I was curious if this has to deal with the Proganix program, and if it does, is this maybe an Fortune 200 company? Is this sort of a foothold win with Proganix? and potentially into the rest of the industry.

So that's one of the great things about all the multiple services that Quest has to offer. Initially, it doesn't have it, but it's expanding to that over time. So that's all upside for us as we move through the next few months with them. And then also there's things like fleets and other stuff too. So there's an infinite number of penetration opportunities there. And we're excited about Proganix being part of that. And yes, this is our first food service distributor. And I'm obviously, from my background, pretty excited about that. And we think that this is going to hopefully yield us a lot of penetration of that vertical going forward.

So suffice to say, 10 million, well, eight digits, so I'm saying 10 million. Hopefully, it may be a little more, but that's even without Proganix. So, I mean, that's a big win with a lot of runway in front of it.

Yeah, the revenue piece there is without all the penetration pieces that we expect to be bringing in in the relative near future.

Got it. A couple questions, SG&A, $10 million, I think, on Q1. You talked about spending a little bit on tech, but also ramping up, I think, sales and marketing. If memory serves correct, I'm getting a little older. I was under the impression technology spending may be coming down a little bit, but I'm just curious as to where, you know, spending on sales and marketing is great, especially if you can get a return on it. I understand that. Just curious as to where SG&A will come out in the future and, you know, certainly for Tire, you know, how much technology versus, you know, increase in sales and marketing.

Yeah, so I'll take that one. As we mentioned, we feel really confident with the efficiency initiatives we've got going on, continue to build out the platform. So, you know, I would look at our operating leverage to continue and we should be able to maintain relatively flat operating expenses over the year. despite a little bit of initial, maybe a little bit of pickup in some additional spending, as you said, to support the growth. We want to make sure we're funding that and excited about the accelerated growth around new customers. So I do feel we'll have a little bit of spend continue. We're still building out some of those operating platforms as we get closer to the Back half of the year, we'll start seeing those efficiencies come through and start, so you'll start offsetting some of that need on the customer to support the new customer revenues.

Got it. So SG&A's percentage of sales probably comes down in the second half, or is that a fair way of looking at it?

Yeah, absolutely. That's a very fair way to look at it.

Ray, a little open-ended question here. You know, we're through RWS. It's been a lot on technology. It sounds like the sales pipeline and conversions picking up. There's still a lot on the plate there. I don't want to get the carpet for the horse. But in your mind, what is the biggest goal for 2024 with some of that I just laid out, or is it other items?

Well, at a macro level, Jerry, we're really excited about the new revenue. And don't forget, I think The ops team is doing a fantastic job of penetrating and driving new revenue from the existing clients as well. When you put those together, we see some really nice top-line momentum. And combined with, I can't say enough about, we use the word technology. I was noticing when I was reading this that it's in there so many times, but it is an area of emphasis. And the technology is enabling us to scale and drive EBITDA margins So I think it's a perfect storm. We've been investing with that team for almost two years, I guess, and driving a platform and driving towards zero-touch environment on invoicing and all the paperwork internally here. I can't tell you how huge that is. So as you look at Quest's larger scale 2024, you should see lower SG&A as we move into the back half and really get implementation on this stuff. Nice margins and revenue growth. which is going to yield us, I think, some improving EBITDA margins, Jerry. A lot of companies, I've been with them, you know, you're either really touting your growth and that's it, or you're touting your cost savings and that's it. But I really think we have both levers going right now. So that's pretty exciting for us in 24.

Got it. Growth and efficiency. Got it.

All right.

Yeah.

Bruce? Very much appreciate it. I'll see you in a few days, so I look forward to connecting.

You bet. Thanks, Jerry.

The next question comes from Greg Kitt of Pinnacle Fund. Please go ahead.

Hi, Ray and Brett. Hi, Greg. Hi, Greg.

Robert Marlayson, Could you on the Q3 earnings call you said there were several very large opportunities that have progressed to the final stages of approval, and so I would assume that this one food distributor customer was one of those opportunities and and that. Robert Marlayson, funnel of several. Robert Marlayson, Age opportunities is that right.

Robert Marlayson, yeah a couple of those. Robert Marlayson, Were ones we were talking about in Q3. Robert Marlayson, So yeah.

For sure. Thank you. Okay. So you had a, you had a couple closed. Do you have, when you look at your pipeline now and obviously congratulations, this was a great quarter. I'm really excited to see six wins in a quarter several years ago. There were not six wins in a year, I think.

No, you're right. You're right.

Start for the year. Are there still other customers when you're looking at your pipeline today that you say, hey, there's still other stuff out there that we're excited about? Or did you see a lot of the opportunities in your pipeline kind of come through and close already?

No, we're excited about what's in that pipeline now. What we're talking about, obviously, the six we mentioned are there. There are some more that are closer than further away, I guess. I'm trying to describe it. I forget how to describe it. But no, the pipeline is very healthy and strong. It's as good as I've seen it. And you would think after signing six clients, considering our track record in the past, I guess, you'd think that might have emptied it out, I guess, if that's what you're asking. But no, we're very encouraged about what remains in there. And, you know, we mentioned in the remarks, I just want to reemphasize it. You know, we talked about investment and sales and marketing. But Part of the investment in sales is a bit of a structural change, and I mentioned that in the sales operations folks, to allow and get more out of that existing sales force where they're spending more time closing and less time doing, I mean, proposals take forever. So what a lot of our investment has to do with enabling these folks to be able to be more focused on driving that pipeline and building it forward And one of the roles that we've added is a director of sales operations, and that person is a veteran in the industry that knows how to implement large new clients. And implementing large new clients is what we're doing now and what we hope to continue to do. The worst thing that could happen, Greg, is you do a great job selling, but then you can't onboard them in a reasonable period of time. And trust me, there's an art to that. So we foresaw that and really have the right talent in place to be able to make sure that we can, I'll go ahead and say flawlessly and put pressure on them, implement these new accounts that we're bringing on.

Thank you. That was helpful. On the large food distributor customer, I think if I heard you correctly, I think it sounded like, I think I heard you say that you can talk more about that in a couple weeks. Did I hear that right?

Yes. Yeah, we're not quite in a position to be able to do that, but we anticipate being able to be more forthcoming on it in a few weeks.

Okay, great. Thank you. And so is there the potential that you might be able to tell everybody who that customer is, or it sounds like there's more information to come?

Yeah, that's what we're talking about. We're hopeful that we'll be able to share more information with that customer. We're really proud of them. So we'll see what we can share with you in a few weeks, Greg.

Thanks, Ray. And then I always think that eight-figure commentary is really funny because $10 million to $99 million of revenue is like a big range. And so is there any way to think about how that can – obviously you're going to start ramping, I think you said, in the second quarter. Is there any way to think about how that customer could progress over several years, especially as you talked about fleet and you talked about proganics at one point becoming an opportunity.

We hope to have all that. You know, it's a large customer and it's somewhere, it's probably closer to 10 than 99, Greg, just to give you a little correction. As with a lot of these larger customers, they've got huge amounts of potential spend. And that's just where we're starting. I mean, we're going to earn our way to the rest of it, but I can't really give you a share of wallet number. I know that's what I'd be looking for if I were you. But it's probably as much or more than what we're getting on the front side.

Thank you. On the debt 35 piece, so you're winning all these customers. You want to make sure that you're in a position to service them well. And I'm sure that you want, it's like this balance between flexibility and cost. And you could probably get, you know, when you put the Monroe facility in place, I think this current facility was like coming out of COVID. I think it was the fall of 2020, something like that. And you were doing four and a half million of EBITDA. And so now you're doing 16, probably quite a bit more this year because you had some some RWS specific stuff. You had one customer thing last year that was a charge in the third quarter. And so all that should go away this year. Like it's not unreasonable to say you could do 20 million of EBITDA this year. So, you know, the business in terms of EBITDA is up almost five X probably. Is there something that you can do that gives you flexibility, but still brings the rate down from like, you know, 11 and a half to, on that Monroe piece while you're winning all this business so that you're making sure you have the flexibility to execute well.

Yeah, Greg, I think you nailed it for us. You pretty much answered the question for us. That's exactly why we formed the board and management and formed this committee. is to make sure that we're able to do exactly that. We don't want to handicap the growth that we've got. Um, we're really confident we're going to continue to grow. Um, we want to be able to support that. Um, at the same time, we, we'd like cheaper interest rates. Um, it's, it's a higher rate environment right now. And we think we're going to be in a better position, uh, in the future as we demonstrate, uh, better demonstrate the, the value, right. With, um, enhanced margins and better flow through rate. So we're really excited about where we're going to end up.

Thank you. Do you think that that process, is there some way to think about how, you know, when that could conclude? Is that something that you expect to finish in 2024 by the end of the year? Or do you think that could be sooner?

I think that's probably a fair starting point from a deliverable, you know, we've we'll probably have some room for it to push a little bit more if we need it to. Um, you know, so it's, it's hard to set a timeline right now. Um, we need to start, we need to find the pick an advisor and start meeting and, and work through, uh, the options that we've got.

Okay. Okay. Thank you. And then on SG&A, um, that a little bit of a step up in q1 and some of that sounds like tech but probably also maybe some of these integrations um i'm not sure is there is there a way to you know in the past when we first invested we would see 50 of incremental gross profit dollars fall to ebitda and so If you were investing in SG, and obviously business changed a lot because you're investing to scale it much better, which we're excited about. But in the first quarter, if we're seeing SG&A increase by $500,000 or $600,000 sequentially, should we think that there may not be a $500,000 or $600,000 sequential increase in gross profit to offset that increase in SG&A? I'm trying to think through, trying to think through this increase in SG&A and the implications to profitability in the first part of the year.

Yeah, you know, it's hard to talk through quarter to quarter future, but what we, you asked the question, can we expect 50% plus operating leverage going forward? We certainly believe We're in a position to do that now and improve as we roll these new automation platforms into our processes. So, again, we're really excited about that operating leverage continuing throughout the year.

Okay. Thank you. I'll hop off after this last question to give other people a chance. So, if you... If you had $3.5 million of adjusted EBITDA for the December quarter, and that included that $1.2 million charge, so you would have been more like, I think the release said $4.6 million of adjusted EBITDA? Okay. And so if... SG&A goes up by $600,000 sequentially, should gross profit go up by $1.2 million sequentially so that you're seeing 50% of that incremental gross profit fall through to EBITDA? Or are there investments in the first quarter that are kind of outside of that 50% flow through?

That's why it's hard to talk because there is some other stuff Some investments going on, but I think it's fair to assume that we'll see. We expect a 50% operating leverage going forward.

Okay. Yes. Okay. Thank you very much. I'll hop back in the queue if I have anything else.

Thanks, Greg. Thanks, Greg.

The next question comes from George Mellis of MKH Management. Please go ahead.

Thank you. Good morning, guys. Hey, George. Thanks for going. Congratulations. Quick question on the sales operation. You mentioned that you hired a director of sales operation. Was the sales force previously partly responsible for wrapping up the customer and now they are freed up and they can focus more on selling and closing? Is that kind of what you said earlier?

Yeah, it's kind of a bridge, George. First of all, the salespeople had a lot more to do then. Now they can focus on sales and closing. But it also helps our operations team with implementation be much smoother. I mean, the plans are laid out. He does a great job. There's a full matrix with everybody's responsibility, the timing on every little thing. You know, implementing a large customer is really hard, right? And there's so many things that can go wrong, George, when you're rolling out a customer of the 1,000 or 2,000 locations. And we're so much, we're infinitely better prepared to do that, execute on that better than before, and also freeing up both sides of that equation, sales and operations, to focus more on their core strength. So it's kind of a bridge-type role that takes away from both sides, so it's very beneficial. Great.

That's interesting. Thanks. Greg, the $1.7 million in savings related to RWS, what is that, and where does it flow to? What's the components of that? Is it mostly, so is it technology, or is it also some people that were at RWS?

Yeah, it's just purely the moment.

Well, people, George. And there's additional, I think we mentioned in the comments, we expect the technology to continue to give us additional yield. But we were being clear about the 1.7. That's a hard cost savings that's purely, well, payroll.

Yeah. And most of that was baked in already in Q4 as it was partially in place for Q3. Yep. Okay.

Thanks. So, almost like a quarter of the 1.7 is baked in into the December quarter.

Yeah, exactly.

Yeah. Okay, great. Okay, good. And then, Ray, on the large, on the large decline on the food distribution side, how is that related to Progamics? Because Progamics is really dealing with food waste, whereas that food distributor is I'm not exactly sure what they do, but they mostly bring the goods to the store. So how could that lead to a Proganics deal? And maybe also take that opportunity to talk a bit about the pipeline for Proganics and what does that look like?

Yeah. And actually, food distributors do generate quite a bit of organic waste, George, surprisingly. You get into, especially in the, I don't want to speak like a food distributor, but the cooler stuff, which is dairy and produce and things like that. So there's quite a bit of shrink at the distributor DC level as well. But in addition, this company also has retail stores on top of that. So they're a bit of a hybrid. So you've also got retail stores involved. So it's really a great fit for Proganics in the future. Um, we're excited about that. And the pipeline for progenic progenics has almost mispronounced. It's got, um, I'm going through it in my head as I'm talking. There's, there's a couple of really nice, uh, grocery store chains that, that are in that pipeline that are in active conversations with right now. You know, I think I've mentioned before progenics is, is, is not an easy sale. It's a good product, but it's, uh, It involves, it's intrusive in a way, it involves operational changes in the client. And anytime you're looking at large, stabilized clients and you're asking them to change their operation, regardless of how valuable the outcome would be, it slows the process down, as you can imagine. So we all wish it would move faster, but definitely the product, Proganics itself, is compelling. It's more of a how do we get this implemented kind of thing. for the clients. So we have an active pipeline and also within our existing clients, like the one we mentioned earlier, we hope for that.

Okay, great.

Okay, thank you very much. Thank you, George. Thanks, George.

The next question comes from Nelson Alves of Winfield Capital. Please go ahead.

Yeah, I just had an accounting minutia. I mean, obviously, IWS was a a difficult integration. I appreciate you being clear here as to what the problem was and that it antedated the current fiscal year. You have an adjusted number of 3.5 million. Just from an accounting perspective, is there a problem with that 1.2 million? The way it reads here, it's an adjustment to an adjustment. I guess the question for Brett, why wouldn't you immediately make it $4.6 million and just point out that there was an RWS issue there? Is there something in the accounting realm that makes it difficult to do that?

Yeah, Nelson, I mean, it was missed expense in prior periods. So when I think about ad backs, one is kind of non-cash, but then it can be a piece of that. But But because it was missed expense in prior periods, we just didn't feel like it was appropriate to fully add it back.

Okay, but anyway, it's behind us now. That's for sure, right? Yeah, absolutely. And my other question, simply, I mean, obviously, you look at the, as you pointed out very clearly, if you look at the debt, it's gone up exactly, you know, as much as accounts receivable. And that's because your DOS with slow pay and all that other issue. My question is, do you think you'll have that cleared up in Q1 and get the DOS back down into the low 60s as opposed to 75 where we are now?

Yeah, absolutely, Nelson. We've been focused. Even, you know, just as an anecdote, one customer paid on January 2nd instead of December 31st. So... That's why we, you know, those are the timing issues. The team's very focused. I'm excited about the energy I've seen on the collection side, and I feel really confident how we're going to end the quarter.

Great. Okay. Thanks, guys.

Thanks, Nelson.

Thank you. This concludes the question and answer session. I would like to turn the conference back over to Ray Hatch for any closing remarks.

Thank you, operator. I appreciate that, and I appreciate all of you. I want to reiterate our positive outlook. We're really excited about new customers coming on to Quest, and we're also extremely excited about our existing customers re-upping with us and extending. I think that's a real commentary on the work this team does to keep these clients happy. I'm so excited about that. I do want to thank that team for all the efforts and the value that they're bringing. You know, we have a lot of initiatives, and this team has been working really hard over the last year or so, and they're really starting to reach fruition. It's exciting for me to watch that happening, and I couldn't be more proud of these guys having long-term vision, staying focused on execution, and seeing these things come to fruition. So we're looking forward to keeping you updated on quarters to come. And lastly, I want to thank all of you for your continued support of Quest. And we're excited about telling you about future things. So that's it. Thank you very much.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.