Quest Resource Holding Corporation

Good day, and welcome to Quest Resources' first quarter of 2026 earnings conference call. All participants will be in a listen-only mode for the duration of the call. And should you need any assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. And to withdraw a question, please press star, then two. Also, please be aware that today's call is being recorded. I would now like to turn the call over to Ryan Coleman with Investor Relations. Please go ahead.

Thank you, Operator, and thank you, everyone, for joining us for Quest Resources' first quarter 2026 earnings call. Before we begin, I'd like to remind everyone that this conference call may include predictions, estimates, and other forward looking statements regarding future events or future performance of the company. Use of words like anticipate, project, estimate, expect, intend, believe, and other similar expressions are intended to identify those forward looking statements. Such forward-looking statements are based on the company's current expectations, estimates, projections, beliefs, and assumptions, and involve significant risks and uncertainties. Actual events or the company's 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 the company's filings with the Securities and Exchange Commission. You are cautioned not to place undue reliance on such statements and to consult SEC filings for additional risks and uncertainties. The company's forward-looking statements are presented as of the date made, and the company undertakes no obligation to update such statements unless required to do so by law. In addition, this call may include industry and market data and other statistical information, as well as the company's observations and views about industry conditions and developments. The data and information are based on the company's estimates, independent publications, government publications, and reports by market research firms and other sources. Although Quest believes these sources are reliable and the data and other information are accurate, we caution that Quest has not independently verified the reliability of the sources or the accuracy of the information. Certain non-GAAP financial measures will also be disclosed during this call. These non-GAAP measures are used by management to make strategic decisions, forecast future results, and evaluate the company's current performance. Management believes the presentation of these non-GAAP financial measures is useful to investors' understanding and 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-GAAP to GAAP financial measures are included in today's earnings release. With that, I'd like to turn the call over to Perry Moss, Chief Executive Officer.

Thanks, Ryan, and thanks, everyone, for joining this afternoon. Our first quarter marked a steady monthly sequential improvement in the business from the fourth quarter, which was consistent with the seasonal trend we typically observe, though slightly better than the prior year. Revenue from our industrial customers increased primarily due to seasonality, though we did see some incremental revenue from certain customers above the usual seasonal acceleration. However, The industrial portfolio as a whole remains challenged as a result of the softer manufacturing environment. Meanwhile, non-industrial parts of the business perform largely in line or better than anticipated as our focus to diversify the business into sectors like restaurants, hospitality, and retail help to partially offset the lower industrial volumes. Notably, our performance improved from month to month throughout the quarter and we ended the quarter with an encouraging trend. While it is far too early to determine the durability of this trend, we are cautiously optimistic given the exit rate of the quarter. This is tempered in part by recent geopolitical events as well as the risk of extended period of elevated fuel prices. As we continue to communicate, we are acutely focused on what we can control. We continue to demonstrate a firm grasp on the operations of the company as our operational excellence initiatives are delivering improved performance across the business from exception management, wallet share expansions, billing and collections, and overall productivity and cost containment efforts. We're controlling cost very well and taking proactive measures to give ourselves incremental financial flexibility as macroeconomic conditions improve. We're very encouraged by our progress on each front and expect these initiatives to drive additional efficiencies going forward. These efforts also began to deliver important sales momentum during the second half of 2025, which included the launch of a significant expansion of an existing retail customer, the onboarding of a new full-service restaurant customer, an expanded share of wallet wins with two major customers. While each of these wins were delivering incremental revenue since shortly after their announcement, the one-time costs associating with onboarding these clients had been masking their profitability contributions. I am pleased to report that each of these recent wins finished the first quarter as full contributors to our financial results. as we have completed the onboarding period of one-time cost to execute the service change-outs to serve these new or expanded programs. Our new sales pipeline remains active, and we continue to engage with several exciting opportunities to add large national companies to our portfolio. While the overall macroeconomic environment continues to slow the overall decision-making process for many of these prospective customers, we are encouraged by the discussions we are having as the Quest value proposition continues to resonate with key prospective customers. We ended 2025 with better momentum, though saw opportunities get pushed into 2026. We remain very engaged with these prospects, and believe that we will be able to successfully win and onboard our share of these potential customers as the macro backdrop improves and confidence returns. Just recently, we won a new contract with one of the largest franchisees in the quick service restaurant industry. This customer is a large national operator that carries plenty of white space for wallet share expansion as we execute effectively. It also marks another important win to diversify the business and will help to offset the seasonal fluctuations of our larger industrial customers. We onboarded this new customer on May 1st with minimal service change-outs. We also remain encouraged by the number and size of share wallet opportunities with existing customers, which remains a central focus of ours. Last year, we heightened our focus on this sales channel and structured a more robust internal systems and processes to track, evaluate, and pursue these opportunities. We are very happy with the early successes we've had, and we have broadened the number of waste streams that we're handling for some clients, adding new value-added services, or have captured larger share of customer locations. Our growing pipeline of opportunities across both new sales and wallet share expansions leaves us confident that these initiatives will contribute to greater levels of organic growth for us going forward and be strong contributors to gross profit dollar growth as we continue to execute our land and expand strategy and optimize service levels. We also continue to diversify the portfolio as we grow in non-industrial end markets like retail, hospitality, grocery stores, and expand into new markets like healthcare and more. Our technology and capabilities continue to be key differentiators for us and are driving improved customer service levels and vendor management practices. Our technology platform's ability to identify exceptions in vendor invoices is central to our value proposition of cost avoidance, cost reduction, and improved service levels. The platform's ability to identify these exceptions continues to improve, and importantly, we have invested in automated no-touch capabilities to enable our team to effectively rectify these exceptions. Customer and vendor-facing advancements like these create real value and make it easier to do business with Quest, but also help to optimize our internal processes and overall profitability. Overall, macroeconomic conditions and a softer industrial environment continue to flow through to reduce volumes from our large industrial customers. However, we continue to make very encouraging progress streamlining our overall operations and growing in non-industrial end markets. we remain as confident as ever that we are on very solid footing for when conditions improve and as our softer year-over-year revenue is a function of volume and not one of customer attrition. The operational improvements we've implemented over the past year will drive higher leverage when conditions normalize, and we are encouraged by the trend we finished the first quarter on, and cautiously optimistic as we look out to Q2 and the rest of 2026. Looking ahead, our key priorities remain unchanged in 2026. We remain focused on growing the business with new and existing customers, driving margin improvements as we execute our operational excellence initiatives, continuing the development of our operating platform, improving cash generation, and reducing our debt balance. With that, I'd like to turn the call over to Brett to review our first quarter financial results in greater detail. Brett? Thanks, Perry, and good afternoon, everyone. Revenue for the first quarter was $61.7 million, a 10 percent decrease from one year ago, but a sequential increase of 5 percent compared to the fourth quarter. The year-over-year decline was primarily driven by ongoing headwinds from certain clients in the industrial end market, which reduced revenue by approximately $4 million compared to the prior year. These headwinds are mostly confined to a few clients and are primarily related to lower waste volumes and services which are directly tied to the client's lower production volumes. Notably, The year-ago period also included $3 million of revenue from our mall-related business, which was divested in the first quarter of 2025. Excluding these specific headwinds, the business continued to grow by approximately $2 million, mostly related to new clients in the expansion of client business, or wallet share, during the fourth quarter of 2025. This growth in business was partially offset by client attrition of 1.7 million, primarily related to a single client lost in the first quarter of 2025. While this growth was modest, it speaks to the efforts of the entire team to offset the impact of the industrial headlands. It also speaks to what should be less noisy comparables year over year, as we have now sunsetted the higher than normal attrition experienced in Q4 of 2024 and Q1 of 2025. As a reminder, this attrition was isolated and mostly related to customers that were acquired and absorbed into the incumbent's waste solution. Since then, we have returned to normalized customer retention rates, which have been very sticky historically. On a sequential basis, The improvement was driven by higher seasonal volumes from our industrial customers and continued growth across much of our non-industrial portfolio, with performance strengthening across the quarter. Moving on to gross profit. In the first quarter, gross profit dollars totaled $9.7 million, a decline of almost 12% compared to the prior year, but a sequential increase of 6%. This resulted in a gross margin of 15.7%. The declines in both gross profit and gross margin compared to the prior year were primarily isolated to the headwinds from the select industrial clients, which contributed to lower volumes as well as isolated margin pressure. These declines were slightly offset by both improved gross profit and gross margins across the remainder of the business. as operating initiatives, maturing margins from new clients, and wallet share expansions continued to take hold. The sequential improvement was in line with our expectations provided last quarter and representative of the seasonal improvement from industrial customers, as well as the contribution of recently onboarded customer wins and share of wallet expansions as we have cleared the one-time costs associated with those launches. As we look ahead to Q2, we expect sequential growth in gross profit dollars as recent new business wins and wallet share expansions finish Q1 as full contributors to our financial results. Additionally, the new quick service restaurant customer will launch in Q2 and is expected to begin ramping fairly quickly as it requires fewer associated service provider change-outs which means minimal startup costs and thus should contribute gross profit dollars more quickly than a typical new client would. While we expect to continue to experience some margin pressure in 2026, both in a challenged industrial volume environment as well as from the mixed impact of our land and expand strategy, we anticipate we will be able to help offset these pressures through optimizing service levels growing our share of wallet with existing clients, optimizing the client wins from the previous years, and continuing to drive operational improvements across the business. Moving on to SG&A, which was $8.4 million and better than our estimate for the quarter that we provided on the last call. Sequentially, SG&A grew 9% driven mainly by the resumption of our bonus expense. Our operational excellence initiatives continue to deliver strong productivity and cost containment results, and we remain focused on maintaining this discipline going forward. To that, compared to the prior year, SG&A has decreased by $3 million, a 26% reduction year over year. Moving on to a review of the cash flows and balance sheet. we ended the quarter with $1.1 million in cash and approximately $63.4 million in net notes payable. As a reminder, in March, we refinanced our ABL with Texas Capital Bank to replace the prior ABL with PNC. Concurrently, we negotiated with Monroe Capital, who holds our term debt, to provide both fixed charge and leverage covenant easements across 2026 and into 2027. Those combined efforts will provide ample cushion to operate in this challenging operating environment while we continue to focus on the execution and completion of our initiatives to drive additional efficiencies and operating leverage across the business, while also investing in driving growth through new clients and wallet share. Additionally, the new arrangement with Texas Capital Bank gives us more flexibility to use the excess availability on our ABL to make voluntary early payments on our high-interest term debt, which is currently about a 500 basis point spread between the two credit facilities. Accordingly, during the first quarter, we made a $2 million early payment on the Monroe term debt, which will reduce interest expense and should free up additional cash to allocate toward debt paydown. We anticipate executing similar early payments as appropriate throughout the year as we work to reduce our overall cost of debt and strengthen our balance sheet. Our operating cash flow in the quarter was slightly positive, roughly $200,000. This was a sharp improvement compared to the prior year, despite lower revenue and gross profit dollars, and was driven by the ongoing optimization of our billing and collections processes and our improved vendor payment processes. which both continue to drive improvements in our cash cycle. This progress was partially offset by some of the moving pieces of the APL refinancing, which used a modest amount of cash at the time of the transaction. Our DSOs finished the quarter in the mid-'70s, which was largely unchanged from the fourth quarter. Accounts receivable was up $3 million and in line with the sequential increase in revenues. but the overall trend in DSOs remains downward, falling from the 80s one year ago, and we continue to implement measures to improve our cash cycle. We remain committed to reducing DSOs going forward and believe we have incremental initiatives in our control to drive improvement. During the first quarter, we also reduced the number of working capital days to 11.5, roughly an 11-day improvement from a year ago. Our financial strategy remains focused on managing our cost structure, leveraging our operational excellence initiatives to drive cash flow, and paying down debt. We also continue to seek ways to elevate our billing and collection practices and further optimize working capital. We expect these measures, along with our focus on continuous improvement, to improve our cash cycle, strengthen our balance sheet, and provide incremental financial flexibility as the operating landscape improves. With that, I'll turn the call back over to Perry for some closing comments before we open it up for Q&A. Perry? Perry Williams Great. Thank you, Brett. Our first quarter saw improved performance from the fourth quarter with results getting better throughout the quarter. Some of this was the typical seasonal acceleration but it was modestly better than the prior year. It is also clear that the business is benefiting from the team's strong execution, and it is evident in the numbers driven by the now fully onboarded recent new wins and wallet share expansions. It remains a difficult operating environment, but we are confident that we are better positioned to drive improved financial performance. We believe that with continued execution, We will be well on our way to delivering improved shareholder returns and achieving a valuation that is more reflective of inherent value of the business. With that, I'd like to turn the call over to our operator to move us to Q&A. Operator?