Quest Resource - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered mixed results: revenue of $70.0M (+0.9% YoY, -4.0% QoQ), gross margin compressed to 15.3%, GAAP diluted EPS was $(0.46) due to a $5.5M non-cash impairment tied to exiting the tenant-direct mall business.
• Versus Wall Street, QRHC missed Q4 revenue ($73.6M est.) and EPS (−$0.077 est.), reflecting onboarding delays, industrial end-market softness, and temporary costs from the vendor management rollout; FY24 also fell short vs consensus on revenue, EBITDA, and normalized EPS.*
• Management announced structural changes: CEO transition to Perry Moss, a 15% workforce reduction, and an SG&A run-rate cut of ~$3.0M annually; debt refinanced in Q4 lowering annual interest by ~$1M and extending maturities (PNC to 2029; Monroe to 2030).
• 2025 setup: gross profit expected to increase ~$1M sequentially in Q1; SG&A guided to ~$11.5M in Q1 and ~$9.5M per quarter in 2H 2025; net incremental 2025 revenue of ~$15M from 2024 wins; focus on operational excellence, DSO normalization to mid-60s, and debt paydown.

What Went Well and What Went Wrong

• What Went Well

  • Eight new client wins in 2024 (each ≥ seven figures) and five significant expansions with existing clients; onboarding quality praised by customers and used as references to drive pipeline growth.
  • Debt refinancing completed: reduced blended interest rate by ~150 bps, ~$1M lower annual interest expense, larger revolver ($45M), extended maturities, improved terms.
  • Management actions: CEO appointment (Perry Moss), hiring SVP Operations (Nick Ober), launch of an Operational Excellence Initiative to drive process and technology-enabled efficiencies.

• What Went Wrong

  • Margin pressure from mix shift to newer accounts, delayed onboarding, and temporary vendor management system costs; Q4 gross margin fell to 15.3% from 16.6% YoY.
  • Industrial end-market weakness and client attrition (including the mall sector) pressured volumes; management expects industrial softness to persist for “next couple of quarters”.
  • Non-cash impairment ($5.5M) and historical AP adjustments (~$1.0M non-cash in Q4 tied to 2021–2022 errors) weighed on results; adjusted EBITDA was $1.7M (vs. $3.5M YoY).

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen, and welcome to Quest Resource Holding Corp's fourth quarter and full year 2024 earnings call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If anyone has any difficulties hearing the conference, please press star zero for operator assistance at any time. I would now like to turn the conference call over to Mr. Dave Mossberg, Investor Relations Representative. Please go ahead.

David Mossberg (Head of Investor Relations)

Thank you, Operator, 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 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 research firms and other sources. Although Quest believes these sources are reliable and the data and 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 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 the presentation of these non-GAAP financial measures is useful for investors' understanding of the assessment of the company's ongoing core operations and prospects for the future. Unless it is otherwise stated, it should be assumed that 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 Dan Friedberg, Chairman of the Board.

Daniel Friedberg (Chairman of the Board)

Good afternoon, and thank you for joining us on today's call. I'm Dan Friedberg, Chairman of the Board at Quest. Joining me on the call today is Perry Moss, our newly appointed CEO, and Brett Johnston, our CFO. Today, we would like to discuss what is going well, where we have not performed, what we're doing about it, and where we are headed. First, I am optimistic about the future. Quest is well-positioned in what is a very attractive market. Customers are recognizing the value of an asset-light services model.

Our ability to find solutions for their waste disposal needs and doing so at the lowest possible cost is increasingly important in an industry that is changing how it disposes of waste and is charging higher prices for services. We are adding clients at record rates, many of whom are initiating larger programs than we have seen previously. Moreover, these customers are providing positive referrals, which is helping to fill our increasing pipeline and enhance our reputation in the marketplace. Second, we have not executed at the level or with the consistency that we need.

Our growth is creating opportunities for expanded margins and increasing scale benefits, but we have not converted that top-line momentum into sustained margin and profit growth. The issues we have experienced over the past year—temporary cost increases coming from onboarding new clients, implementing our new vendor management system, the impact of client attrition, and weakness in our industrial clients and markets—have all impacted our results. We have grown quickly over the past few years, and quite frankly, this has exposed weaknesses in our processes and systems.

These are execution issues and are all addressable. While they are improving, we recognize we need to do more faster. Third, we are taking decisive action. We are reducing costs, implementing process improvements, accelerating the integration of technology into our workflow, supporting training and collaboration, increasing accountability, and targeting improved performance across the business. By achieving these objectives, we will increase the value we bring to clients, improve employee satisfaction, increase end-to-end business efficiency, and be a more profitable and scalable business.

We are confident in the future, but we clearly recognize that it is time to deliver on the promise and to convert our growing platform into a consistent source of increasing shareholder value. Before we review last year's performance, I wanted to take a moment to discuss the announcement we made this afternoon that Ray Hatch has retired as CEO and that we have promoted our Chief Revenue Officer, Perry Moss, to CEO. Ray has been a major force at Quest over the past nine years, a key architect in our successful growth.

He's built a strong culture with an organization committed to adding value to our clients. We are pleased that Ray will remain on the board of directors, and I wholeheartedly want to thank him on behalf of the board and management for all his contributions. Over the last number of months, the board has been working to find the best CEO for the company. After considering the skills needed, we determined that driving operating efficiencies and generating continued growth are the two critical elements that we need to achieve our objectives. Given that, it was clear to us that Perry is the perfect candidate.

Throughout his career, he has consistently delivered disciplined, process-driven successes in business development, operational, and general management roles. Perry joined Quest in July 2023 and has served as our Chief Revenue Officer since June 2024. He has more than 30 years of operating experience in our industry. Prior to joining us, Perry consistently succeeded in general management roles at Rubicon Technologies, Oakleaf Holdings, and at Smurfit-Stone Waste Reduction Services. Since joining Quest, Perry has fundamentally changed our sales approach by introducing metric-driven, results-oriented discipline to our sales function, achieving in a short time records for client wins, new revenue, and pipeline growth.

We are excited for him to work with our great team to implement the same performance culture and metrics across the company. Before passing the call to Brett, I'd like to ask Perry to introduce himself.

Perry Moss (CEO)

Thank you, Dan. Today, I'd like to give you a bit of background on myself, why I joined Quest, and why I am confident in the direction we are heading. I'll be brief today, but I look forward to meeting you and to providing more details on our plans in the coming weeks and months. While I have led sales as Chief Revenue Officer since joining Quest 18 months ago, I've enjoyed a very successful 30-plus-year career with many years in revenue-generating roles, but with even more years spent in operating roles. Most recently, I helped grow Rubicon Technologies into a $700 million revenue waste services company.

Prior to that, I had operating roles, leadership roles at Oakleaf Holdings and at Smurfit-Stone Waste Reduction Services. I firmly believe in establishing processes, setting metrics, and demanding performance. I believe that having served so many clients is a key factor in my success. In fact, earlier in my career, I was able to consistently lead my respective companies in growth because I had operational experience and could directly relate to the client. Quest's unwavering focus on the client is one of the key reasons that I came to work here.

In Quest's asset-light model, where we do not own landfills or trucks or other disposal assets, we must execute quickly, efficiently, consistently, and at low cost. The Quest culture is amazing in that the clients always come first. I firmly believe we can execute on behalf of all our stakeholders to deliver in the most efficient and profitable way possible. I believe in well-defined processes and in measuring everything, applying KPIs, analytics, and technology to every aspect of the business.This is a key to training and motivating employees, key to understanding value to clients, and key to driving performance. Over the next few months, we will share more details on our approach. In summary, we will be relentless in implementing a results-oriented approach and building a performance culture. I will now hand the call over to Brett.

Brett Johnston (CFO)

Thanks, Perry, and good afternoon, everyone. During the fourth quarter, we made progress with onboarding new clients and progress with efficiency gains. This was offset by weakness in the end-market conditions of a select number of larger clients, client attrition, and temporarily elevated expenses. In addition, financial results were also negatively impacted by additional adjustments related to accounts payable during 2021 and 2022. We were aware that this has been an ongoing issue, and I will discuss it in greater detail later in my remarks.

The bottom line is that we do not expect any more adjustments related to this issue going forward. Revenue for the fourth quarter was $70 million, which was up 1% from a year ago and down 4% sequentially from the third quarter. We had strong growth from new and existing clients, which accounted for approximately $12 million of fourth-quarter revenue. This increase was mostly related to a record level of onboarding activity from eight significant new client wins that we secured during the year, as well as significant expansions with five existing clients.

Onboarding activity was slower than we had anticipated during the fourth quarter, as we had delays with rolling out new and expanding client work. These delays were customer-related. Most have begun onboarding activities in the first quarter, and we anticipate all will be onboarded this year. I will note that it is not uncommon for the timing and pace of onboarding activity to change. New clients secured during 2024 generated approximately two-thirds of their anticipated quarterly revenue run rate during the fourth quarter. We expect these wins to provide incremental growth in both revenue and gross profit dollars as we complete the rollout and optimize services.

Year-over-year growth was offset by an approximate $9 million decrease in revenue due to both soft conditions at certain clients in our industrial end markets and from client attrition. Regarding weak market conditions in the industrial end markets, as we said previously, the relationship with these clients continues to be strong, and there are opportunities to add services with them in the long term. However, these clients have slowed production for now, which is likely to continue to impact volumes for at least the next two quarters.

I will also note that revenue comparisons for these clients also decreased sequentially, mostly due to seasonal factors, in addition to this decrease in project work. Attrition has been a factor negatively affecting revenue comparisons. Approximately one-third of the attrition was related to clients in the mall and shopping center sector, a business which we have decided to exit. The remaining client attrition is primarily related to clients that have been acquired. Last year, we said that in 2025, we expect to realize more than $20 million in net incremental revenue from new client wins, less client attrition.

With ongoing changes in the market, we now expect to realize $15 million in net incremental revenue from new client wins achieved during 2024. I will reiterate that this net number is not an overall revenue forecast. It does not include contribution from other new client wins that we expect during 2025, nor does it include the expansion or contraction of business from existing clients or revenue changes due to fluctuations in commodity prices or volumes. During the fourth quarter, gross profit dollars were $10.7 million, a 6.7% decrease from last year, and an 8.3% decrease sequentially from the third quarter.

The decrease in gross profit dollar comparisons was primarily related to three factors: one, a shift in revenue mix; two, higher than anticipated cost of services; and three, $1 million of non-cash adjustments related to unreconciled accounts payable related to 2021 and 2022 payments. Regarding the mix shift, as we discussed on previous calls, we had less revenue than expected from more mature client relationships, where the margin profile has been optimized, and it was replaced by revenue from new clients and expanding engagements, where it typically takes several quarters to optimize the margin profile.

Regarding higher than anticipated cost of sales to ensure a smooth transition to our new automated vendor management system. As we described on the last call, this temporary increase in cost mainly relates to making sure that while we are implementing our new vendor management system, clients do not receive interruption in their level of service. Similar to the third quarter, during the fourth quarter, we temporarily increased spending on client service to make sure there is a smooth transition as we onboard new clients.

We had a record amount of onboarding activity during the second half of the year. New clients place a lot of trust in us to make sure that there are no interruptions in service. Making this temporary incremental investment is well worth the while. We continue to receive great feedback across the board from new clients about how smooth their onboarding process has gone. In addition, gross profit dollars were affected by an additional $1 million of non-cash adjustments related to unreconciled accounts payable related to 2021 and 2022 payments.

As we discussed, when we reported 2023 financial results, we estimated and took adjustments of $1.2 million in accounts payable that were not properly expensed during 2021 and 2022. As we were completing a review of these estimates for 2024 results, we determined that we required an additional $1 million of adjustments for these accounts for these errors made in 2021 and 2022. We have made full reserves for these accounts payable, and the audit of these accounts has been concluded. Excluding this non-cash cost of revenue adjustment of approximately $1 million and a $500,000 bad debt adjustment for receivables related to the business exit, adjusted EBITDA during the fourth quarter of 2024 would have been approximately $3.2 million.

As you look at your models, we expect gross profit dollars to increase approximately $1 million sequentially during the fourth quarter, which reflects relatively flat sequential comparisons with the fourth quarter in the absence of the $1 million adjustment we took during the fourth quarter. Thereafter, we expect sequential improvements in gross profit dollars beginning in the second quarter as we benefit from efficiency initiatives and growth. Moving on to SG&A, which was $10.1 million during the fourth quarter, an increase of $700,000 from a year ago and a decrease of $200,000 sequentially from the third quarter.

I will make a couple of notes about SG&A for the fourth quarter. SG&A included approximately $500,000 in bad debt reserves for certain clients related to the mall business portion of RWS, which is held for sale. In addition, I will note that there were approximately $1 million in lower accruals related to management bonuses for 2024. For the fourth quarter, we expect SG&A to be approximately $11.5 million. The sequential increase is primarily related to separation costs and the resumption of bonus accruals. We expect the actions that we have taken to increase efficiencies and lower costs will begin to show up during the second quarter.

Beginning in the second half of the year, we expect SG&A to be approximately $9.5 million per quarter, which reflects fully realizing the more than $3 million of annual run rate cost savings and efficiency initiatives we will have taken. These initiatives included a 15% reduction in workforce and G&A costs, which includes the portion of the RWS business held for sale. That said, we are going to continue to drive operating leverage and expand margins. Before I move on, I want to mention that in Q4, we recognized an impairment loss of $5.5 million or $0.26 per diluted share related to the sale of client contracts for the mall and shopping center portion of RWS.

This was a non-cash charge related to a reduction in a portion of the intangible assets we recorded when we made the acquisition. Dan will discuss the rationale for this sale in his remarks. Moving on to a review of the cash flows and balance sheets. Our liquidity is in good shape. After an exhaustive process, which included discussions and proposals from multiple financing sources, we refinanced with our current lenders, Monroe and PNC. The new financing decreased our blended interest rate margin by approximately 150 basis points, reducing our interest expense by approximately $1 million annually.

In addition, we extended our maturity dates with Monroe from October of 2026 to June of 2030, and with PNC from April of 2026 to December of 2029. With PNC, we were also able to increase the revolver from $35 million to $45 million. With both lenders, we have improved terms and flexibility. We are grateful for their continued support, which is a testament to the strength of our team and platform. At the end of the fourth quarter, we had $21.9 million of available borrowing capacity on our $45 million operating borrowing line and the full $3 million available on our new equipment facility.

For the fourth quarter, we used approximately $4.8 million in cash to fund operations, which was related to an increase in working capital at the end of the year. In particular, our accounts receivable balances were elevated at the end of the year. We still have room to make improvements in this area. I will note that we have great relationships with clients, and slower than expected payment is not related to collectibility. DSOs have been impacted by the timing of collections from a few of our largest customers, and we are working with them to accelerate the pace of collections.

In addition, with the implementation of our automated AP system, we will be able to bill at a faster pace, further accelerating our cash cycle and lowering DSOs. Finally, the sale of the non-core mall-related business of RWS, which has been a slow-pay business, will also improve our blended DSO rate. At the end of the quarter, we had $80.4 million in notes payable versus $67.8 million at the beginning of the year. The increase primarily reflects growth in borrowing on our lines with PNC to fund working capital. At this time, I'll turn the call back over to Dan.

Daniel Friedberg (Chairman of the Board)

Thank you, Brett. Now let's discuss 2024 operational performance. I want to reiterate that our performance over the last couple of years has been unacceptable. Here are some positive highlights on which we will build from and the negatives which we are addressing. I'll start with the positives. We won more new clients in any year in the history of the company, adding more revenue per client than ever before. Our pipeline is robust, and our sales force is executing a structured, disciplined plan. Through our land and expand strategy, clients continue to reward us with more business.

Last year, we added eight new customers and expanded agreements with five of our largest customers. Adding value and expanding share of wallet will be an even greater area of focus going forward. In December, we completed the refinancing of our debt, which Brett discussed in detail. Our new lending package has lowered our blended interest rate margin by about 150 basis points, reducing interest expense by approximately $1 million annually. We continue to make progress with our vendor invoice system as we increasingly move to zero-touch processing capabilities.

The efficiency gains from this automation are currently being realized, and we expect to achieve greater efficiency gains going forward. Now the negatives. Despite the progress, several factors contributed to a very disappointing year. While we continue to execute on behalf of our clients, we have not executed operationally at the levels expected, and much more is required. On our last call, we spoke about the transition to our new vendor management system, which caused greater costs on a temporary basis. However, while still generating improvements, this transition has taken longer than expected.

Regarding client onboarding, as Brett mentioned, we temporarily incurred costs to successfully onboard our record number of new customers in an efficient and seamless manner. To do that, we had to incur these added costs. It is important to note the onboarding has proceeded well. Many of new clients are referring potential new clients to us. In addition, we had conditions that certain clients in our industrial end market impacted the fourth quarter. Finally, as mentioned earlier, we experienced uncharacteristic client attrition, in part due to acquisition activity in the mall-based sector.

Going forward, we have made very solid strides in building organizational capabilities, developing systems, and are seeing results, but not quickly enough or consistently enough. We are committed to achieving operational excellence. While our acquisitions have provided scale and scope, it has been clear for a while that the non-core tenant direct mall business within RWS was creating issues and was not contributing to the bottom line. To address this situation, we conducted a sale process, have entered into a preliminary agreement to sell the client contracts for this portion of the business.

We expect the transaction to close in the next few months. We are implementing cost reduction actions, reducing headcount by 15% and eliminating other G&A expenses, thereby reducing SG&A by $3 million on an annualized basis. This will include the temporary costs incurred in 2024, the efficiency efforts to date, and the cost savings from exiting the tenant direct business line. This is being implemented currently, and the full effects will be realized by the end of the year. In addition, today we announced that we have made a significant addition to our operational leadership team.

Nick Ober has joined Quest as SVP of Operations. Nick most recently served as VP of Freight Brokerage Solutions and Strategy for RXO, where he led carrier operations for the $3 billion asset-light business unit spun off from XPO. Nick also has deep industry experience, having been director of operations for a $400 million region for Republic Services. Nick will work closely with Dave Schweitzer, our Chief Operating Officer, and Nick will oversee our vendor management group and will also lead our newly created operations excellence initiative.

This newly established operational excellence initiative will benchmark, measure, and target improvement levels across the entire workflow and then develop and implement processes and systems that accelerate and increase operating financial performance and maximize the realization of scale benefits. In closing, I want to reiterate my commitment along with the rest of the board and management team to aggressively drive change, increase consistency, improve operations, and generate significant shareholder value. We've made good progress in gaining scale through acquisitions and more recently through organic growth.

The market for our asset-light model remains robust. We are gaining share. Clients are providing us with strong referrals. We have opportunities to increase our share of wallet, and our cost-oriented value proposition is resonating loudly. In addition, we are committed to maintaining a solid balance sheet, and our priority for capital allocation is on the repayment of debt. Now is the time for execution, plain and simple. We know what we need to do. Our focus is on accelerating performance, creating a performance-based culture, increasing client satisfaction, driving technology-enabled and process efficiencies, and growing operating margins and bottom-line performance.

Regarding our outlook, we expect the temporary costs incurred in 2024 to be completed in early 2025 and expect the second half to show improvements as we fully ramp new clients, benefit from the cost reductions that we are currently implementing, and from ongoing operating improvements. Overall, for 2025, we expect to show both top and bottom-line growth and expect to resume more meaningful growth as we exit the year. We greatly appreciate all the contributions of the Quest team and thank all of you for all of your support. In the coming weeks and months, Perry, Brett, and I look forward to providing updates on our progress.

We would like the operator to provide instructions on how listeners can queue up for questions. Operator?

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press the star followed by the one on your touch-tone phone. Should you wish to cancel your request, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Once again, that is star one. Should you wish to ask a question? Your first question is from Aaron Spychalla from Craig-Hallum. Your line is now open.

Aaron Spychalla (Senior Research Analyst)

Yeah, good afternoon. Thanks for taking the questions. First, for me, can you talk a little bit more about the vendor management system and kind of the rollout there, where we're at, some of the costs that you've seen that have been a little bit increased, and kind of the timing for when that'll be resolved?

Brett Johnston (CFO)

If you could just touch on, it sounds like the attrition is stabilizing, was mostly due to some M&A. I just want to confirm that. On the industrial weakness as well, that sounds like something that should be a couple more quarters is your thoughts today. Just wanted to make sure I understood those correctly. Hey, Aaron. It's Dan Friedberg. Good to speak to you. First of all, for everyone, I'm here with Perry Moss, as mentioned, and with Brett. We'll tackle your questions. Brett, do you want to dive in? Sure. The first question was on the vendor management program and the progress on that.

We're very excited about the program overall. Aaron, we have continued to tweak and make improvements. I would say it's substantially complete at this time. This will be something that we'll always look to find opportunities to refine. Our zero-touch goals, we are achieving those and continue to see improvement month over month. Very satisfied with that. We have seen some of the savings that we had previously announced flow through into Q4, but largely those are still to come, especially ramping up through Q2. The costs that related to those is temporary.

Those did dwindle into the quarter a little bit more. We'll see a little bit more of that into Q1 and certainly have much better visibility into those right now with all of the KPI tracking that we're doing and extra initiatives we do to really get very disciplined with data going forward. We feel very confident about that. I do expect to see a little bit of additional costs into Q1, but very positive about the outlook coming out of Q1 and into Q2, especially.

Daniel Friedberg (Chairman of the Board)

Hey, Aaron. I would just follow. Look, the vendor management system, which, as Brett mentioned, is showing real progress. The zero-touch capabilities is a clear testament. We were starting from a place where our invoices were being handled multiple times. We were layering on new systems into old. That process isn't a smooth one. The progress has been clear. As we go forward, and part of the reason why we're excited to add Perry and Nick, across the organization, we already had a number of initiatives driving efficiencies, which we've all spoken to before, consolidating them all into one initiative focused on driving efficiency gains, lowering process time and cost, increasing efficiencies is really what we're focused on.

Vendor management is a good example of it, but we expect to see a lot more of it across the organization.

Brett Johnston (CFO)

Aaron, on your, I got your third question was on the industrials. Just to confirm, we did say that and reinforce the fact that we expect those to be challenged for the next couple of quarters, but are seeing some signs of optimism that we may see some pickup in the second half of the year and get back to normalized volumes, or at least the run rate start getting back to that from what we experienced prior to the first half of or the second half of last year. I'm sorry, what was your second question?

Aaron Spychalla (Senior Research Analyst)

Yeah, sorry. I know there's a few in there. Just on the attrition, I mean, it sounds like it was mostly on the mall side plus M&A with some select clients. Just wanted to see what you're seeing on churn. Yeah, absolutely. We've talked about this industry in general is very sticky. We feel like our clients are even stickier with the value proposition that we provide and all the services. We were challenged a little bit with that. We've talked about it. Yeah, you're right. A lot of it was from the assets held for sale, the mall business that we've struggled with, and then also with some companies, some clients that ended up getting acquired.

Brett Johnston (CFO)

All right. Thanks for that. On the pipeline, you kind of talked about continuing to see strength there. Can you just give us an update, especially with the macro, if you're seeing any notable changes on timing and just kind of how you're thinking about potential cadence of wins there moving forward?

Perry Moss (CEO)

Yeah. This is Perry Moss. I'm happy to address that. When we first started our efforts developing our sales process, we baselined the old process and workflowed the entire program so we could find the flaws, fill the flaws, and we essentially created an entirely new playbook. We added a sales operations practice. We created a lead generation practice as well. The sales operations group is designed, and when I say group, it's one individual, designed to create KPIs and metrics. We have full visibility not only into the total pipeline but into every phase of the sales cycle for every sales manager and representative that we have.

At any given time, we know the various values of stage one, two, three, and four. Stage four is we've won the deal. I think through this very disciplined process, we've continued to see the pipeline grow. I would just say that the pipeline has grown significantly over the last year, as has the deal flow. The pipeline continues to grow today. I remain very, very bullish on the pipeline, and I think we'll continue to have good things to come.

Aaron Spychalla (Senior Research Analyst)

Okay. Thanks for that. Maybe last for me, just on RWS, it sounds like we'll hear more in the next month or two. Just thoughts on expected proceeds. How much has that drag been on the business? Any further clarity on kind of timing there would be great. Thanks.

Daniel Friedberg (Chairman of the Board)

Two pieces. On the process, Aaron, we have a preliminary agreement in place. So can't really comment about proceeds. Obviously, we'll send out a disclosure once the deal is completed after we've finalized the agreement. That part of the business is really a non-contributor. From a bottom-line perspective, it falling away is not going to have an impact. I can tell you, Brett, the team are very happy about the amount of effort that it took and the disruption it created and the inconsistencies that it caused. It's an extraordinarily small part of our overall business, but it took up an inordinate amount of time.

I'm excited for the ability to not operate. There's no material bottom-line impact that we lose. We'll talk about proceeds shortly.

Aaron Spychalla (Senior Research Analyst)

Understood. Thanks for the color. I'll turn it over.

David Mossberg (Head of Investor Relations)

Yes, sir.

Operator (participant)

Thank you. Your next question is from Gerry Sweeney from ROTH Capital. Your line is now open.

Gerry Sweeney (Md & Senior Research Analyst)

Good afternoon, Dan, Perry, Brett. Thanks for taking my call. Perry, using your explanation on the sales pipeline, building the processes around this, I want to take that and maybe talk about the execution side, right? And we have this vendor management program. There's costs about onboarding. Are a lot of issues that we're seeing on the execution front directly attributable to the vendor management program? Meaning, if you get that fixed, does it make it that much easier for you to implement change and turn the execution side around?

Brett Johnston (CFO)

Yeah. It's a good question, Gerry. I appreciate that. I mean, I certainly think that we stand to benefit from the completion of that project. That really hasn't hampered us as far as sales and business development is concerned. What we intend to do is take the same approach that we did with the sales process and through our operational excellence initiative, take that process of workflowing, discipline, key metrics, analytics, and measure everything that we have in the company. One of the things that we believe is when our employees know that they're performing and they're hitting their KPIs, they become more satisfied.

I would say that the completion of that would certainly be helpful. I don't think it's hampered us as far as growth is concerned, if that is your question.

Gerry Sweeney (Md & Senior Research Analyst)

No, no. Yeah. I didn't want to think it was hampering growth, but I'm just curious if the vendor management system gets in place that helps the execution side, gives you the ability to look at analytics, execution materials, create KPIs, and really gets you over the hump on the execution front, I guess. Yeah.

Daniel Friedberg (Chairman of the Board)

Let me, Gerry. Yeah. What I would add is I don't see going forward the disruptions, the temporary costs that we've seen as a result of it. I think you had a situation where we added a ton of customers all at once while implementing a system that was new to the organization. And quite frankly, before we had a whole set of processes in place which could effectively manage the influx. So what we're doing is, as Perry mentioned, mapping out all our processes. We are going to improve all of them incrementally as we go. It's less of a systems implementation issue as it is a process improvement.

Certainly, there will be opportunities to invest in systems to enable technology to support our processes. That shouldn't create the sort of disruptions that we've seen, but rather will enable us to expand margins and benefit from the scale opportunities that exist. No, I don't see this being a we're already investing in technology. We're going to continue to do so to support the business. I don't think it's going to be as painful going forward as clearly as it has been this year, given everything that sort of happened all at once. Does that answer your question?

Gerry Sweeney (Md & Senior Research Analyst)

No, yeah. I get what you're saying. I was hoping is really, I guess, the point I was saying, get the vendor management system, and that's going to give you the tools to really execute, right? Now that that's happening.

Daniel Friedberg (Chairman of the Board)

Yes. It certainly. Yeah. Yeah. Yeah. Yes. And as Brett said, we're almost complete there. We're seeing that zero-touch benefits are in place, and we're realizing them.

Gerry Sweeney (Md & Senior Research Analyst)

Got it. I'd like to think I know the answer to this question, but it's a question that has gotten quite a bit. I'm going to state it like this. The political environment has certainly changed, maybe more so than some people anticipated. There's been some more aggressive approaches to thoughts on how people would do business or review the environmental world or environmental benefits. Are you seeing any pushback, changes in that pipeline of business that you're executing against?

Brett Johnston (CFO)

Yeah. Very intuitive question. We certainly are seeing a greater focus on process efficiency needs and cost takeout from prospective clients. I would say that sustainability and landfill diversion is still important to these customers. However, there's an added demand for being more efficient and taking out cost, which aligns directly with our model. We see this, frankly, as a wonderful opportunity to create more value for our customers.

Gerry Sweeney (Md & Senior Research Analyst)

Got it. You bring value to the table, savings, not just fuel goods.

Brett Johnston (CFO)

Absolutely. Yes.

Gerry Sweeney (Md & Senior Research Analyst)

Okay. Got it. That's it for me. I appreciate it. Thanks.

Operator (participant)

Thank you. Your next question is from Owen Rickert from Northland Capital Markets. Your line is now open.

Owen Rickert (Vp & Senior Equity Research Analyst)

Hey, guys. One quick one for me. How are you guys thinking about M&A in the near to medium term? Is this even on your mind, given the greater focus on making those operational improvements and paying down debt?

Daniel Friedberg (Chairman of the Board)

Thanks, Owen. First of all, the acquisitions that we did a few years ago, as we mentioned, certainly added scale and scope. They were critical at the time. They've enabled us to attract talented people into the organization. It's given us the ability to get at the table with terrific customers who we've added. They were a huge enabler for us. We still think strategically they're very viable. We've also been extremely successful at adding customers. The percentage of contribution that comes from that is increasingly less. I think we would still review them.

Clearly, our focus is on paying down debt. That's where our cash is going to focus. I think the organization is in a better place than we were before. The issues previously were around the integration of them. Our team and capabilities with Brett and his team have added capabilities that we didn't have then. I'm confident if we did them, we would execute and integrate them effectively. But to your point, I don't see in the immediate future us entertaining acquisitions. I think our focus will be on driving the efficiencies, generating cash, increasing profitability, and then paying down debt.

Owen Rickert (Vp & Senior Equity Research Analyst)

Perfect. Thank you. Thank you.

Operator (participant)

Thank you. Your next question is from Greg Kitt from Pinnacle Family Office. Gerry Sweeney, is that open?

Greg Kitt (General Partner of Investments)

Hi. Thank you for taking my questions. Dan, you said that you—I think if I heard you correctly, you expect top and bottom-line growth in 2025. What do you mean by that? Do you mean returning to growth at some point this year? Or you think 2025 grows over 2024? And is that revenue, gross profit, EBITDA? What do you mean?

Brett Johnston (CFO)

Hey, Greg. This is Brett. I'll go ahead and take that question first. I'm sure Dan will jump in as well. But yeah, we certainly expect to continue to grow. As we talked about earlier, there will be some challenges in the first half of the year, certainly Q1. With these initiatives coming to fruition, with the cost savings and initiatives we have with the vendor management program being fully realized and those capabilities, we also talked about cost savings initiatives that were announced today in the earnings release, which is another $3 million of annualized cost.

There is a lot coming out of Q1 that we are very positive about. We certainly expect to continue to grow in all those facets from top-line revenue, gross profit, and adjusted EBITDA.

Daniel Friedberg (Chairman of the Board)

Greg, I would add to—yes, I agree with everything Brett said. That is accurate. Fourth quarter was clearly disappointing, obviously. Bear in mind, as you're sort of thinking about it, there were add-backs related to non-cash charges, the bad debt expense related to the business that we're selling, and these temporary costs, which we think have primarily run through and will continue at the beginning of the year. That's one. Second, our revenue engine is working like it never has before. We have an industry and a business model that is very sticky, typically notwithstanding the unusual attrition that we've experienced this year that Brett touched on.

In fact, a portion of it, a third, is, I think, due to the business that we're shedding. We think the revenue engine is there. We think we're already seeing the gains, as Brett said, coming through the business. We will see the benefits of the cost reduction. We're going to start implementing all these initiatives and continue to build upon that Perry and Nick and Dave and his team are already driving towards. Yeah, we do feel good about where we're headed and do think that will show growth both top and bottom line.

Greg Kitt (General Partner of Investments)

Thank you. Just to make sure I'm thinking about it clearly, because there were those additional charges, and it was like the $1.5 million for this quarter. When I look at EBITDA—but that wasn't added back to adjusted EBITDA. Is that right?

Brett Johnston (CFO)

That's correct. Okay. When you talk about growing year over year, you reported $14.5 million of EBITDA. Are you talking about growing over that $14.5 million? Or are you talking about growing over the $16 million if I add back $1.5 million from this quarter?

Yeah. We looked at those $1.5 million worth of charges as being kind of one-timers and not normalized going forward. We would certainly expect the comparison to be against $16 million.

Greg Kitt (General Partner of Investments)

Okay. Thank you. I liked hearing the focus on debt paydown. I think the most concerning thing right now, and probably what has happened over the last six months with the stock performance being pretty underwhelming, has been just having been able to generate cash has largely been working capital. Maybe I just quickly go through EBITDA to free cash flow conversion. If you do round, let's say, $16 million of EBITDA, it looks like interest, if your debt balance is not reduced, is in the range of $7.5 million for 2025. Is that right?

Brett Johnston (CFO)

Yes.

Greg Kitt (General Partner of Investments)

Okay. That would leave you with $8.5 million of free cash flow before CapEx. How should we think about CapEx this year?

Brett Johnston (CFO)

I think it'll be certainly at probably around the same rate, especially with our IT spend. As Dan mentioned earlier, we'll continue to invest in that. We've got a lot of opportunities to enhance our systems and provide additional efficiencies through additional capital investment on the IT side. On the equipment side, last year was a little higher because we did have kind of a platform purchase of compactors at the beginning of the year. Normalized going forward, that's been more of about $500,000 run rate. And so assuming that.