Quest Resource Holding Corp (QRHC) 2023 Q4 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Quest Resource Holding Corp, fourth quarter and full year 2023 earnings call. (Operator Instructions) And the conference is being recorded. (Operator Instructions) 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, project, 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 involve significant risks and uncertainties.

Actual events or Quest's results could differ materially from those discussed in the forward-looking statements, as a result of various factors which are discussed in greater detail in Quest's 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's forward looking statements are presented as of the date made, and we disclaim any duty to update such statements unless required by law to do so.

In addition, in this call, we may include industry and market data and other statistical information as well as Quest's observations and views about industry conditions and developments. The data and information are based on Quest's estimates, independent publications, government publications and reports by market research firms and other sources.

All those Quest believes these sources are reliable and the data and other information are accurate. We caution that Quest is 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.

Most of this 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 all that said, I'll now turn the call over to Ray Hatch, President, 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 today, 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 increased operating profits. All these have positioned us incredibly well, given our robust pipeline, customer focus.

Efficiency program at [Flotek] implantation and strong competitive position. We expect this momentum to continue into 2024. Simply our growth focus 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 Quest 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 Quest Director and former Chief Financial Officer 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 underlying strength of our business. This statement was more bullish than any other have made in recent years, just a few months later, evidence to enthisiasm has born 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 and look forward to share more details at 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 nonrecyclable materials 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, a 6.9% increase year-over-year. Fourth quarter gross profit includes the effect of a $1.2 million noncash 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 that 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 in 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 had 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 of 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 initiative, 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 and 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 long-term financial position, Quest's 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 adviser 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 $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 base line 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. 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 of 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 our seven digit and another one is an eight digit win. In addition, we've expanded a smaller customers 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.

They figure when is for the fortune 200 company, that's one of the largest food distributors in the US. 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. We will begin servicing this client during the second quarter and anticipate the 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 won it based on our reputation, cost effectiveness, aligned 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 began 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 in the industrial client, we have the opportunity to grow these to eight figures in annual revenue over time. In addition, we had two smaller wins, including one with the new automotive service client, with our initial engagement will begin servicing a dozen of their local -- 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 in not only the number, but the size of opportunities in our pipeline. With excess 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.

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 turnaround 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. That these investments in sales are helping us grow our pipeline, shorten the sales cycle and create a better yield and 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 awarded 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 and 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 is consistently delivered solid growth from our existing client base in 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 platforms 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 costs to process invoices, provide major enhancements to our ability to scale and to expand our margins. A good example is a new vendor source until I discussed earlier, which is helping us accelerate our quoting and onboarding process.

And in addition, we're rolling out a technology enhancement that will allow us to further automate the processing of vendor invoices and achieve 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 7 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 lost our vendor portal, which allows an automated self-service type of completion documentation and onboarding for 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 end in recent months, we continued to see stable activity levels across our end markets. We manage cost pressures and fluctuation in the price of recycled materials as well.

The waste business is generally resistant 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 to landfills, continue a 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 on our platform, we've proven our ability to optimize cost and 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 is 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 initiatives 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 the 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 provide instructions on how listeners can queue up questions.

Operator?

(Operator Instructions) Aaron Spychalla, Craig-Hallum.

Yeah, good afternoon, Ray and Brett. Thanks for taking the questions.

Hi, Aaron.

Hi. Maybe first -- thanks for the color on the wins and definitely good to see. Can you just talk about the, you starting to see improvement in pipeline conversion or still kind of status quo just given the macro and then 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 has continued to accelerate, I really want to congratulate the sales team for being very aggressive and getting the message out and getting them in.

So as far as conversion rate goes, it's obviously picked up Aaron, ofcourse the number of signed deals that we have in, just in 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 is bringing us really top of clients, we're looking for.

And your second comment, I believe, is about land and expand all of these clients, some of them with huge amounts of upside. These are relatively large clients with, that are generating a lot of waste and have a lot of need for what Quest is bringing on.

So I'm really excited about the ability to continue to ramp those things up and [mine] continuous new revenue and profit -- profitable exercises to those new clients we're bringing on board and the ones that we already have on. And what was the -- you had another part there and I kind of forget, oh, it was about ramp-up time, I believe.

Yeah.

Some of -- 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 get us through the ramp on that client. Others are 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. Just, it sounds like are you thinking that that improves as we kind of move throughout the 2024?

Yeah, absolutely Aaron. We've talked about that as a timing, we expect to finish the quarter strong, especially on AR and collect a lot of that the pushed forward. So 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 could just sneak one more. Just on the RWS kind of revenue adjustment in the quarter. Can you just kind of talk about, are we kind of complete with those integration initiatives and hopefully, 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 or 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.

Gerry Sweeney, Roth Capital.

Mr. Sweeney your line is open, please go ahead sir.

Hi sorry about that. I was on mute. Thanks, 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 proganics program? And if it does, is this maybe an update, Fortune 200 company this sort of a foothold plan for proganics 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 that's because -- 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 a infinite number of penetration opportunities there, and we're excited about proganics being part of that.

And yes, this is our first food 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 in that vertical going forward.

So suffice to say $10 million, well, eight digits, I'm saying $10 million. Hopefully, maybe a little more that's even without proganics. So I mean that's -- I mean because that's a big win with a lot of runway in front of it.

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

Got it. A couple of 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, 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 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 certainly if it's higher, how much technology versus 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, I would look at our operating leverage to continue and be keep -- 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 more funding that and excited about the accelerated growth around new customers.

So 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 as a percentage of sales probably comes down in the second half, or is that a fair way we're looking at it?

Yeah, obsolutely. Very fair way to look at it.

Ray, little open-ended question here, with through RWS spent a lot on technology. Sounds like the sales pipeline is and conversions picking up. There's still a lot on the plate there, I don't want to get the cart before the horse. What in your mind, what is the biggest goal for 2024 with some of that I just laid out? Or is it other is it other items?

Well, it's a at a macro level, Gerry. We're really excited about new revenue and don't forget I think the ops team is doing 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 used the word technology that I was noticing when I was reading this, 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 toward zero-touch environment on invoicing and all the paperwork internally here I can tell you, I used that is.

So as you look at Quest larger scale of 2024, you should see lower SG&A through this -- 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, Gerry, it's -- a lot of companies I've been with them 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 a growth and efficiency. Got it. Very much appreciated, I'll see you in a few days, so we look forward to connecting.

You bet. Thanks Gerry.

Greg Kitt, Pinnacle Fund.

Hi, Ray and Brett.

Hi Greg.

Could you -- on the Q three 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 two distributor customer was one of those opportunities and that funnel of several late stage opportunities. Is that right?

Yeah. A couple of those were ones we were talking about in Q3. So yeah, for sure.

Thank you. Okay. So you had a couple of close. Do you have when you look at your pipeline now and obviously congratulations, this is a great quarter, I'm really excited to see six wins in the quarter several years ago, it could be that they weren't had 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 there's still other stuff out there that we're excited about for? Or did you see a lot of the opportunities in your pipeline kind of come through and close already.

And now we've got we're excited about what's in that pipeline. Now what we're talking about, obviously, the six we've mentioned are there. There are some more that are closer than further away, I guess I'm trying to describe it, I figure it how to describe it. But now 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 think that might be emptied downtick, if that's what you're asking. But no, we're very encouraged about what remains in there.

and we mentioned in the remarks, I just want to reemphasize it, we talked about investment in 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 of folks, to allow and get more out of that existing sales force so there's been a more time closing in 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 Sales Operations in, that person is a veteran in the industry that knows how to implement a large new client and implementing large new clients is what we're doing now and what we hope to continue to do.

The worst thing could happen, Greg, as you do a great job selling, but then you can 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 go and say, flawlessly and put pressure on and implement there's 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 of weeks. Did I hear that right?

Yes. Yeah, we're not quite in a position we'll 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 on that customer really proud of them. So we'll see what we can share with you in a few weeks, Greg.

Thanks. Thanks, Ray. And then I always think the eight figure commentary is really funny because $10 million to $99 million of revenue is like a bit more. And so is there any way to think about how that can ramp -- 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 of that. If a large customer and it's somewhere it's probably closer to $10 million to $99 million, Greg just to give you (inaudible) the 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, I 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 you, but it's that's probably as much or more than what we're getting on the front side.

Thank you. On that Monroe piece and 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 in 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.

Since and you were doing $4.5 million of EBITDA. And so now you're doing $16 million probably quite a bit more in this year because you had some RWS specific stuff you had one customer thing last year, there was a charge in 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 the business in terms of EBITDA is up almost 5x probably. Is there something that you can do that gives you flexibility, but still brings the rate down from like $11.5 million 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, thank you. You nailed it, for us you pretty much answered the question for us, that's exactly why we formed the Board and management have 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. We're really confident we're going to continue to grow. We want to be able to support that.

At the same time, we'd like cheaper interest rates on. It's a higher rate environment right now, and we think we're going to be in a better position in the future as we demonstrate -- better demonstrate the value, right with 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 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. We will probably have some room for it to push a little bit more if we need it too. So it's hard to set a time line right now. We need to start, we need to find it pick an advisor and start meeting and work through the options that we've got.

Okay. Okay. Thank you. And then on SG&A little bit of a step up in Q1 and to some of that, it sounds like tech, but probably also maybe some of these integrations, I'm not sure is there is there way to -- in the past when we first invest in, we would see 50% of incremental gross profit dollars fall to EBITDA. And so if you were investing in SG and obviously business change a lot, because you're investing to scale it much better, which we're excited about.

But in the first quarter and foreseeing 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? And I'm trying to think through this increase in SG&A and the implications to profitability from the first part of the year?

Yeah, 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. 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 had $3.5 million of adjusted EBITDA for the December quarter, and that included about $1.2 million charge. So you would have been more like I think the release said $4.6 million of adjusted EBITDA. (multiple speaker)

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 the EBITDA? Or 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, on some investments going on. But I think it's fair to assume we'll see -- we expect a 50% operating leverage going forward.

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

Thanks Greg.

Thanks Greg.

George Melas, MKH Management.

Thank you. Good morning guys. Thanks for going with, congratulations. Quick question on the sales operation where you mentioned that you hired a Director of Sales Operation. Was this sales force previously partly responsible for that being at the customer and now they are feed up and they can focus more on selling and closing, is that kind of what you said?

YeH, it's kind of a bridge, George. First of all, the salespeople will add a lot more to do than that, they now they can focus on sales and closing, but it also helps our operations team with implementation be much smoother. And I mean the plans are laid out. He does a great job. There's a full matrix of everybody's responsibility. The timing on every little thing.

Implementing a large customer is really hard and there's so many things that can go wrong George, when you're rolling out a customer with 1,000 or 2000 locations, and we were 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 that's it's kind of a bridge type role that takes away from both sides. So it's very beneficial.

Great. That's interesting. Thanks. Brett $1.7 million in savings related to RWS, what is that? And where does it flow through? What's the components of that, is it mostly, so it is technology? Or is it also some people that RWS?

Yeah, it's purely one, from a 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're being clear about the $1.7 million, that's a hard cost savings that's purely while payroll.

Yeah, and most of that was baked in already in Q4 as it was partially in place for Q3.

Okay. So almost like a quarter of the ones have any baked into December quarter?

Yeah, exactly.

Yeah. Okay, Great. Okay, good. And then Ray one the large, on your large declines on the food distribution site, how is that related to proganics? Because proganics is really dealing with food waste, where that's food distributor. I'm not exactly sure, what they do, but they mostly brew the goods to the store. So how could that lead to a proganics deal? And maybe also talk 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 charge surprisingly.

Okay.

You get into especially -- I do want to speak like a food distributor for 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 there a bit of a hybrid. So you've also got retail stores evolve. So it's really a great fit for proganics in the future. We're excited about that.

And the pipeline for proganics has almost mispronounced it's got a -- I'm going through it in my head as I'm talking, there's a couple of really nice grocery store chains that are in that pipeline, that are in active conversations with right now, I think I've mentioned before, proganics is not an easy sale. It's a good product, but 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 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 to move faster, but the 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.

Nelson Obus, Wynnefield Capital.

Yeah, I just had an accounting minutia. I mean, obviously RWS was a difficult integration. I appreciate you being clear here as to what the problem was and that it antidated the current fiscal year, just 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 as 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 is an RWS issue error, is it 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 add-backs, one is kind of non-cash, but then can be a piece of that. But because it was missed expense in prior periods, we just didn't feel like it was appropriate to fully added back.

Okay. But anyway, it's behind us now and that's for sure, right?

Yeah, obsolutely.

And my other question. Simply, I mean, obviously, you look at the as you pointed out, very clearly, if you look at the debt is gone up exactly 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 just as the anecdote one customer paid on January 2, instead of December 31. So that's what we -- those are the timing issues. The team is 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 their efforts and the value that they're bringing, 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 is 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 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 participating, and have a pleasant day.