Q3 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
Good morning, ladies and gentlemen, and welcome to the Heritage Crystal Clean incorporated third quarter 2019 earnings Conference call.
Today's call is being recorded at this time all coach microphones are muted and you will have an opportunity at the end of the presentation to ask questions.
Structures will be provided at that time for you to chew up your question, we ask that all callers limit themselves to one or two questions.
Some of the comments, we will make today are forward looking generally the words aim anticipate belief could estimate expect intend may plan project should will be well continue will likely result would and similar expressions identify forward looking statements. These statements involve.
Number of risk and uncertainties.
Could cause actual results to differ materially from those anticipated by these forward looking statements. These risks and uncertainties include a variety of factors some of which are beyond our control.
These forward looking statements speak as of today, and you should not rely on them as representing our fuse in the future.
We undertake no obligation to update these statements after this call.
Please refer to our FCC finally, including our annual report on Form 10-K , as well as our earnings release posted on our website for more detailed description of the risk factors that may affect our results.
Copies of these documents may be obtained from the FCC or by visiting the Investor Relations section of our website.
Also please note that certain financial measures, we may choose on this call such as earnings before interest taxes, depreciation and amortization or EBITDA and adjusted EBITDA. Our non-GAAP measures. Please see our website for field.
So.
Reconciliation of these non-GAAP financial measures to GAAP.
For more information about our company. Please visit our website at Www Dot Crystal Dash clean Dot com.
With us today from the company or the President and Chief Executive Officer, Mr., Brian Ricardo and Chief Financial Officer, Mr., Mark Davita at this time I'd like to turn the call over to Brian Ricardo. Please go ahead Sir.
Mark will provide more details regarding our financial results.
<unk> presentation, we will open up the lives and take your questions.
I'm pleased to share with either we reported third quarter revenue of 104.8 million, which compares to 99.7 million in the third quarter of 2018.
Net income was $6 million.
From an earnings per share standpoint were recorded diluted income per share during the quarter of 25 cents.
Her to diluted income per share of 27 cents from the third quarter 2018.
Turning to our environmental services segment performance.
I'm pleased that we delivered 8.9% revenue growth compared to the third quarter 2018.
This marks the seventh consecutive quarter of at least high single digit revenue growth from the segment.
Overall environmental services revenue growth was 12.4%.
After adjusting our third quarter 2018 result.
For a large field services broad drug.
One of the contributors to our revenue growth has been the addition of new sales resources and branches.
Through the first three quarters in 2019, we generated 6.2 million to revenue.
Incurred 5.2 million, an operating costs related to investments in new field sales and service resources and new branches opened during 2018.
If we continue on our current pace, we would expect new sales and service resources.
New branches added during 2019, the collectively at 8.7 million in revenue that's six point megaton calls for the full year 2019.
Our environmental services operating margin the third quarter 2019 was flat.
25.7% compared to the same quarter a year ago.
While we were able to achieve cost improvement in a few operating areas, which mark will explain in a minute.
These improvements were primarily offset by unusually high health care costs incurred during the quarter.
Now moving on to our little business.
In the third quarter fiscal 2019 oil business revenues were down 25 million, a 1.4 person that compared to the third quarter fiscal 2018.
The decrease in revenue was driven by decreasing the selling price of our base oil.
Partially offset by an increase in the volume of base all gallon sold.
Are they sold that back decreased by 22 cents per gallon during the third quarter compared to last year, but increased eight cents per gallon compared to the second quarter of 2019.
Our re refinery capacity to operating effectively at 108.3% the base oil capacity as we produced 11.7 million gallons of base oil compared to 11.2 billion gallons during the third quarter fiscal 2018.
An increase of almost 4.5%.
On a weighted average basis, we were still in a pay for oil position for the third quarter as a whole.
Our average pay for oil increased two cents during the third quarter compared to the second quarter of 2019.
<unk> decreased 17 cents per gallon compared to the third quarter last year.
Currently the base oil market is oversupplied and all signs point to the situation continuing for the remainder of the year.
Driven by the seasonal oversupply, we expect downward pressure on pricing by the end of 2019.
The beginning of the fourth quarters, not provided any meaningful improvement and used oil collection costs.
Even though the price of HSN FFO has been as low as 73%.
I'll be T.I. crude recently there have also been times in the past bought one eight yourself on pricing has been above the price of WD.
As of yet we've not seen any build up of used all inventories in the marketplace.
DHS ROFO price volatility does not supported lower feedstock cost relative the crude pricing.
However, we do expect used motor oil to lengthen as we get the latter stages of the fourth quarter.
Murray refinery perspective, we continue to focus on improving our programs.
In the areas of mechanical integrity and the in the door at key spare parts of equipment.
The recent improvements we made at the re refinery should once again allow us to increase our nameplate base oil capacity.
Approximately 49 million gallons annually beginning in 2020.
In regard to IMO 2020, we continue to believe this initiative will improve both the feedstock and finished product portions of our spread.
Well, we anticipate seeing somebody a factual mimo 2020 prior to the end of 2019 were not certain as to the exact timing or magnitude of these impacts.
Now we will continue working diligently to operate the re refinery efficiently and manage our spreads as effectively as possible.
However, we do not see positive impacts from Mimo 2020, before the end of 2019.
We could see some spread compression during the fourth quarter and our oil business segment.
The spread compression coupled with our schedule fall truck and rail good increased pressure on operating margins in the quarter.
From an environmental services segment perspective, we continue to see momentum that we believe will support high single digit organic growth during the fourth quarter.
From an operating margin perspective, while we do not expect in car multiple high dollar medical claims during the fourth quarter as we did in the third quarter, we still need to walk to overcome our property and casualty premiums to restore our margins back to the 27% level.
As we look toward 2020 , we believe implementation of a price increase as well as capitalizing on cost improvement opportunities such as expanded our internal waste management capabilities and improved management of our internal fleet will help us produce annual operating margin the 27% range for the year.
Despite expected higher health care premiums and other inflationary pressure.
With that Mark will now walk us through our third quarter financial results in more detail.
Thanks, Brian and good morning, everyone I'd like to begin with our environmental services segment.
In the third quarter, we posted segment revenues of 69 million compared to 63.3 million in the third quarter of 2018, the 9% increase in revenue was driven by growth in most of our product and service line when vacuum containerized waste parts cleaning endangering businesses, all contributing talk though.
Broken our purchasing decisions when due to improved pricing compared to the year earlier quarter the growth in our Bakken business was Boston present with both in our containerized waste and 83 lines of business. The result of both volume increases and price improvement overall antifreeze business growth was primarily due to an acquisition we made during the first.
Quarter point lumpy.
From this acquisition was approximately 1.2 million during the third quarter.
Our overall same branch revenues grew approximately 8.9% on a year over year basis during the third quarter organic growth after adjusting for the field services project by mentioned earlier was 10.5% during the quarter.
Moving on profit before corporate us United stuff to me Environmental services segment was 17.8 million compared to 16.2 million in a year ago quarter.
Operating margin came in flat compared to last year at 25.7%.
Segment operating margin fell short of expectations, primarily due to higher than expected health care costs during the quarter routing almost 1% of our operating margin. We also experienced an increase in non healthcare insurance related claims costs compared to the third quarter last year.
Offset some improvements we realized that disposal call and fleet related costs during the quarter.
In the oil business segment, we sold approximately 11.1 million gallons a big so during the third quarter of 2019 compared to 10.5 million gallons in the third quarter 2018, an increase of almost 6%.
Profit before corporate after you may access in the oil business segment decreased 1.6 million in the third quarter as our operating margin percentage fell from 12% in the third quarter last year to 10.5% this year.
Decline was due in part to our base all netback falling further than our pay for oil during the third quarter, which led to a component of our spread.
Additionally, we experienced higher transportation in catalyst call during the third quarter compared to the third quarter of 2018.
Moving on to corporate S. Phoenix that.
Overall, corporate Escreen expense as a percentage of revenue came in at 11.5 per cent compared to 11.4% you're going quarter, mainly driven by higher bad debt expense salaries and employee benefits, partially offset by lower legal.
The company's effective income tax rate for the first three quarters in fiscal 2019 was 24% compared to 24.3% for the first three quarters into fiscal 2018.
Third quarter, EBITDA was 12.5 million compared to 12.7 million in a year ago corner.
Adjusted EBITDA for the third quarter was 14.6 million compared to 14.1 billion in the third quarter 2018.
As Brian mentioned earlier.
After share on a diluted basis was 25 cents during the third quarter.
On an adjusted basis, excluding the impact of asset write off another site closing costs, primarily related to former FCC environmental locations. We acquired back in late 2014 income per share on a diluted basis would've been 28. So.
From a balance you perspective cash on hand at the end of the quarter was 59 million.
We generated 11 million in cash flow from operations during the quarter compared to 10.2, and the third quarter 20 aging.
Total debt remained steady at 29 million year over year.
We continue to work on identifying opportunities to deploy our excess cash focusing on potential acquisition targets and organic growth initiatives, we feel will improve our business no drug value for shareholders.
Before the end of a third quarter, we heard of new director of M&A and I'm confident that filling this role will help us achieve our goal of producing more meaningful acquisitions in the future.
In conclusion, we're pleased with the solid third quarter results in our own all business segments and look to continue our strong revenue growth the environmental services segment for the remainder of 2019.
Thank you for joining us today I will now turn the call back to catch them to take your questions.
Thank you to ask a question you need to press star one on your telephone to withdraw your question press the pound key.
Please standby, while we come compiled the Q and a roster.
Our first question comes from Michael Hoffman with Stifel. Your line is open.
Hi, Brian Mark Thanks for letting me ask some questions I bottle and Mike how are you.
Can't complain was point anyway.
The.
On the on the US business subway that you can you help us understand what is it was really confined to the third quarter. Because you had I'm assuming claimed spaced incidences in your self insured like lots of people and so that's which drove that up.
Related so we see where are your operating leverage was and then help us understand the point, you're making Brian about you still got some work to do on property and casualty rates. So we we.
Figure out how to balance the south.
That's question, one and then I'll come back and asking oil question.
Well from a as we alluded to in a little bit of detail, but the big I would say miss versus getting in the 27% range as far as operating margin performance was mainly due to we had multiple cases that appears to all the way up into our stop loss. So that's not something we're used to seeing.
That was in the third quarter. So we don't think a leading market can you can you get closer to the speaker, you're you're really hard to here Oh I'm sorry, how this all right.
Right.
Better good so.
We had multiple claims in one quarter that got up to our stop loss coverage and peers that which is not typical for us at all and we don't expect that to recur based on our historical experience.
We will see not so much until 2020, we will see higher premiums as a result of that but there's somewhat of a bubble there as far as that portion of higher cost the actual experience there and.
And then we had other insurance claims nothing do with health care or just for different recurring spills and other things that when you look at what the headwinds were live, albeit much more are much smaller than the health care was probably the next biggest discernible piece of the headwind there so.
We got to continue to have occasional sales in this business, yes, you're going to have that so that's.
Something that well words on a year over year basis in Q3.
Is there improvements to be made there probably but it wasn't a big driver here as it was mostly the health care costs.
We look okay. As we look out into 2020, Michael you, you're well aware the health care costs, all going up so our comment around 20 Twond. He was just too does that impact we do expect premiums will increase.
2020, we could drive some of the jar employees, but it's a tough our end market.
Probably will not elected to do a lot of that in 2020. So we will have our health care to Austin will overcome that within the normal way that we do it won't will pass those costs, all and our customers I mean, we're gonna see you'll see inflationary pressures, we put our budgets together for 40 to one yeah I mean in health care, you're probably aware that most people on the call our but the.
Look back as opposed to other types of claims other types of insurance is not that bar. So when you have some of the recent experience we had its going to hit you when your renewal and were calendar year renewal.
Okay, and just to be clear have you quantified the the stop loss.
Impacts and a basis point basis at 100 basis points 150 basis points that just related to the stop loss issue.
Yeah. It was about it was about 1% yep okay.
I wondered basements, Okay and then they used oil question. So Michael we would have been right on track with our margin performance. So from an operating standpoint, I'm extremely pleased with the quarter.
Yeah that was the point I was trying to get out as you hit your numbers from an operating leverage standpoint. This is unbolt unusual incidents and therefore.
Okay, so used oil.
The.
Interesting challenges and said you had exceptional productivity.
Actually produced in a couple basis to Two Q1 9, you know a lot of things are similar as far as volumes sold in them.
And volume produced and yet you gave up margin sequentially help us understand how were to try and predictable because youve overcome some of your performance right and things that you're getting utilization, but we're on where do we get.
To some comfort I want a baseline level of margin is to be out I understand what the operating leverage of the business might be.
I feel like Michael you're well aware the Hs So HSN FFO was extremely volatile in the quarter, we really didn't.
Yet the IMO 2020 bump that we expected them HFO you saw it go from anywhere from 73% of WD or all the way to be in price to over dwt I enough I'm a collector out in the marketplace.
Absolutely going to empty mile tags over the course of the quarter prepping for IMO 2020, knowing that use Motorola is going to lengthen as we get to the back ended the year as we implement IMO 2020, you're gonna have 60% less demand for Hs AFFO as you look out into 2020 that's.
A significant amount.
One molecule, that's not going to be needed anymore. So if I'm out there running trucks I'm going to make sure. The facts are empty and what we're seeing in the marketplace is that the tax you're beginning to fill up we expect will begin to see the empaque and the latter half of this quarter you heard that in our prepared remarks are we still believe that then in order to drive the spread.
Expansion, we're gonna have to do that with used motor oil, we expect base oil to.
Continue to be solved seasonally soft in the fourth quarter.
We do expect biggio pricing crude oil pricing the change in the early part of 20 to one is the result of the need to produce.
A lot of additional distillate, that's going to drive the price of the feedstock up we were fairly comfortable that base oil pricing will go up in 2020, but certainly not going to happen at the end of this year. So we expect the drive expansion in our spread through controlling use Motorola as result of IMO 20 twond either.
Getting a little bit of a Bob and base oil pricing as we look out into Twentys wanted.
Okay. Thank you.
Welcome.
Thank you and our next question comes from Jerry Sweeney with Roth Capital. Your line is open.
Hi, Good morning, guys. Thanks for taking my call I'm wondering how you doing.
Yes.
I wanted to talk a little bit about the gross side on the environmental services. I think you were talking about five branches this year and.
Moving into the fourth quarter.
What do you see in terms of gross or branch wise next year as well as I think you had some opportunity to layer on additional services at different branches, maybe could you parse that out a little bit. Thanks.
Yes.
We've been looking again, the probably do four or five in 2020, we probably you know we've only did one through the first half of a one new brands. The first half of this year and quite honestly, we've had this history or cadence of doing additions in the second half right at the end of year, that's timing sizing.
Going to change, but realistically, we're probably only going to probably add one more at the end of year. So we'll be a down year versus what we originally thought for 19, but going into 2020, when looking at four to five more and from the head count standpoint.
We certainly have already outstripped the headcount additions in 2018 were not anywhere near what 2017, so when the middle there we would expect again.
Count standpoint to get in that same range that we're going to be in for 19 and 2020. So you know another probably 15 to 20 ads.
Got it and the down here I know you.
Yep.
We do expect at all but that growth as mark talked about in his prepared remarks with acquisitions. We now have a full time.
On a person on board.
Lots of active targeted should that fit with our desire to continue to expand in areas, where we don't have a current route density and concentration that would be in the western half of the U.S. and we're actively pursuing a few now so.
Yeah, I like the thought of balance you now if the organic branches with the addition of acquisitions to help build our density of that's going to be our plan. We've got plenty of cash as you can see on the balance sheet.
And we do think thats become more favorable as the market slows down for us to do acquisitions that are the right multiple.
Got it yeah.
I mean, we've talked about acquisitions, and I think a great opportunity I would ask about it but I know you can't talk about it much then more and more than a.
Just to hit your targets, we got him in the back in the backlog we're looking at them. So and then just Steve quick question on that you mentioned that down your out to get talking to five branches and it looks like there's gonna be too is the driver behind that finding people to expand its branches or was it just.
Are there other.
Workload internally that's preventative.
Yes, it has been a difficult hard market, we still have quite a few vacancies in our existing more mature branches that we would like to fill those positions before we go out and do another greenfield, we see more opportunities.
Quicker more profitable growth if we can.
Fill out our roster in the in the more mature branches that that's the main reason why we didn't speed up the organic growth.
We do think the job market is loosening up when we were beginning to see some success is placing people and that'll allow us as mark said to get back on the trail of opening some organic branches with the addition of the acquisitions to speed up the the density we really want to speeded up versus.
The two two and a half years it takes to get a branch on some level of profitability and quite frankly, something that again as secondary and tertiary but the fact that we're able to just get more production out of our existing people whether they were adds in 17 or 18 or a position maybe not the exact person, but a position that's been in place for 10 years.
We're able to still drive the high single digit growth on a branch the same branch sales basis or.
Adjusting for some of the episodic stuff, we had last year technically double digit growth. So if we weren't in that range I would venture to say, we would probably be pushing a little harder, but why make that suspect higher if you're still getting to growth that we think is acceptable.
Got it and one more just maybe follow up with that and then I'll jump back in line, but we've always talked I think a 90 or so branches. How many of the branches are at save full capacity on time with available services.
Well have the full menu is probably maybe 25% other branches of the full menu, but I've got a day and again you you.
Clarified your question to answer your last comment, but none of them are at full capacity, but I'd be crystal clear.
Got it got I met full menu of services.
Yep Yep, Okay, perfect. Thanks, I'll jump back and.
Thank you.
Thank you. Our next question comes from Ken.
Listen from Baird. Your line is open.
Hey, good morning.
Hey, good morning.
So maybe just starting off on the he asked business you mentioned the the planned price increase for 2020 can you give us just a sense for maybe the timing of implementing that I know last year. You said, you guys implemented that a little bit earlier than normal.
Would that be the case this year and then also just a sense of magnitude you might expect that to contribute just given some of the inflationary pressures you're seeing.
Yeah, our plans are to implement the price increase in period 12, this year consistent with our prior year history.
Yeah, we're certainly going to see I mean, we're coming off of a very robust market conditions are certainly going to be inflationary pressure, we haven't seen it and certainly our fuel cost because commodity prices in general have gone down, but we've seen.
When you when you have vacancies and everybody else has vacancies you've got a shortage of drivers you certainly have seen some wage pressure.
Yeah.
We'll see other inflationary pressures, but we certainly think we'd get a buck with our price increase that we've done a very good job on disposal and as we talked about in our prepared remarks, we're gonna do more internalization of some of our waste streams utilizing our wastewater treatment operations, we've been working on promotion.
For a year and a half will will begin to see some of the the efforts of our labor pay off and 2020, and then that will enhance our margins, we take and help us overcome the.
The inflationary pressures that we're going to we're going to see out there with a goal of maintaining this this margin rate that we've been on Inspite of the fact that we continue to add resources I mean, that's been.
And.
To set a fresh off of a board meeting I mean, there their challenge enough to grow faster because we have.
Our topic are shown on the books in the acquisitions have been difficult because of multiple so it's the best use of our money at this point, even if we give up a point or two on margins.
Preparing for the future.
It's a good good use of capital.
Thanks, that's helpful.
And then maybe near term here just for the oil business expectations for utilization rate said at the refinery and then just remind US I know you said you did you did your normal fall shut down.
Any other you know shutdowns plant in the fourth quarter, either normal or more expect more extended.
Our comment was around our normal fall turnaround, it's typically are longer turnaround, but it's in our plan.
No 910 days of a mechanical work that we'll do our normal cleaning operation, we do expect production to be up year over year, because if you remember we had a major construction project in Q4 of last year. So we had a larger larger turnaround this will be a more like our normal turnaround.
So the gallons will definitely be up.
You know absent any issues and right now knock on wood the plants running right.
Gotcha. Thank you.
Thank you welcome. Thank you.
Thank you.
Just to ask the question you will need to press star one on your telephone.
Our next question comes from Kevin Steinke with Barrington Research. Your line is open.
Hi, Carolyn.
Hi, good morning.
So your commentary around oil business margins heading into the fourth quarter I mean, I mean, I think it sounds like it's safer to assume.
Perhaps sequential contraction in oil business margin from the third quarter.
Given a you know some of the pressures on base oil pricing that you expect and.
The uncertainty of or the timing of a benefit from IMO 2020. So I mean is that a good and dr. reasonable way to think about no yep absolutely on track I mean, it's every year we see.
Seasonal declines in base oil prices, it's no different this year you know the difference for us as we expect to see a more positive impact for Mimo 2020 on feedstock cost.
But everybody in the industry did the right thing, but at the end their tanks in preparation for the.
The lack of demand for use Motorola outside of asphalt plants, and we came off of a pretty good construction season. So everybody had a place to send the U.S Motorola thats going to change now the asphalt plants are going to longer operating in the news and use motor also the tax you're going to fill up these models going to like the.
We're going to fight hard to get some spread back on used motor oil and then we'll begin to see the change again and facial after the first of the year, that's our expectation so yes.
As we mentioned in our prepared remarks, we'll see some compression and.
Thank you for.
Okay got it yeah, that's helpful and.
So in regards to two.
Hiring a that director of a M&A it seems like obviously you're targeting.
More acquisition opportunities on the environmental services side would there be any areas of interest on the oil business side, you know, perhaps something to do you get used more into the <unk> branded lubricant space or is that.
Not anything that you would really consider.
No. We're certainly going to go to focus our acquisition capital on the US opportunities, we're happy with where we are.
Although on the oil fraud, I mean, obviously is a key component of our environmental business because of the collection aspect of used motor oil, but we certainly don't feel the need we've got some great wholesale partners that we should all base oil to we're very comfortable with where we are in the marketplace. Our focus is gonna be on growing Ralph services business.
And expanding our environmental clients.
Which all generate used motor oil.
Yeah, I mean burn rate on telling you might see a.
If we run across an opportunity where they had a part of their whole mainstream.
Oil collection, certainly not going to shied away from those some of those are some of the best opportunity.
But.
It's certainly not going to be a square foot oil quote from yeah. Good point I mean, almost every acquisition we looked good they collect use mobile.
Right Okay.
And just.
Maybe expand on your.
Increasing the capacity.
The production capacity, a I mean, I guess your confidence in increasing that production capacity to a 49 million is simply a matter of.
The effectiveness of how well the refi refinery, it's been running and you know so therefore, you feel like the the baseline capacity is no higher than it was in the past.
Yeah, Yeah, I mean right.
Sorry about that I talk with you and most of that probably investor certainly the analysts on this call.
On Gil beginning of last year end of life right.
Beginning of this year end of last year about doing that.
We said we need to put together a few quarters of good performance. We obviously had some more rough patches in Q1, this year and we're ready to do it because we need to demonstrate because of some of the improvements. We made in Q4 last year that we really could do it.
And we have our again scheduled and nowhere near as long as last year, but we do have as Brian mentioned are somewhat longer quarter.
Somewhat longer shutdown in Q4. This year. So beginning Q1, we will start to rate it at that higher output based on a 49 million.
So Kevin.
You're bumping obviously, we made the changes in Q4 and we proved out.
The run rate and the middle two quarter and so we're comfortable.
As we move into 2020 changing the nameplate.
Okay, Great. That's all I had the thanks for taking my questions.
Thank you.
Thank you.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now all disconnect have a great day.
[noise].