Q1 2021 Heritage-Crystal Clean Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to Heritage Crystal Clean incorporated first quarter 2021 earnings Conference call.
Today's call is being recorded at.
At this time all for all colors microphones are muted the age we'll have an opportunity at the end of the presentation to ask questions.
Structures will be provided at that time for you to queue up for your questions.
We ask that all callers limit themselves to one or two questions.
Okay.
Some of the comments, we'll make today are forward looking generally the words aim anticipate believe could estimate expect intend may plan project should will be will continue will likely result would and similar expressions identify forward looking statements. These.
These statements involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward looking statements. These.
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 views in the future.
Take no obligation to update these statements after this call.
Refer to our SEC filings, including our annual report on form 10-K, as well as our earnings release posted on our website for a more detailed description of the risk factors that may affect our results copies of these documents may be obtained from the S E C or by visiting the Investor Relations section of our website.
Also please note that certain financial measures. We may use on this call such as earnings before interest taxes, depreciation and amortization or EBITDA and adjusted EBITDA are non-GAAP measures. Please see our website for reconciliations 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 are the President and Chief Executive Officer, Mr. Brian Macondo, and the Chief Financial Officer, Mr. Mark Devita at this time I would like to turn the call over to Brian Mercado. Please go ahead Sir.
Okay.
Thank you Mike Good morning, everyone and thank you for joining us today.
Before discussing our first quarter results for the longer term outlook.
I would like to briefly talk about the impact of the pandemic on our business.
During the first quarter, we continued to execute in the company's pandemic response plan and remain focused on ensuring the health and safety of all our employees and their families as well as those customers would came in contact with.
Total loss time from employees all of the job due to COVID-19 related health issues and potential exposures was almost 5400 hours companywide during the first quarter.
This result was relatively flat on a normalized basis.
Compared to our experience during the fourth quarter of fiscal 2020.
Despite the prevalence of highly contagious strains of the of ours, we were able to successfully implement our preventive measures program and avoid any meaningful increase in downtime as a result of the borrowers during this past quarter.
From a financial standpoint, the company performed extremely well during the quarter with both segments exceeding plan from a revenue and adjusted EBITDA standpoint.
In fact, our Q1 adjusted EBITDA performance was the first quarter record for the company.
Total first quarter revenue exceeded expectations and finished at $105 4 million.
For the adjusted EBITDA of $17 7 million.
The 33, 6% compared for the first quarter of 2020.
Yes.
In the environmental services segment, while our revenue was down compared to record the results in the first quarter of 2020, we experienced relatively flat sequential revenues compared with the for quarter of fiscal 2020 on the normalized basis.
We achieved this result, despite elevated loss time hours due to COVID-19.
While the significant downtime towards the end of February as the winter storms wreaked havoc across various parts of the southern U S.
On the cumulative basis, our branches were closed for almost 70 days during the quarter as a result of the dangerous weather.
Even with these challenges our containerized waste and antifreeze businesses achieved year over year growth during the first quarter.
Our profitability in the segment was down only 1.2% during the quarter on a year over year basis. Despite the comparison of pre pandemic of record results.
Lower labor efficiency was the driver of this underperformance when considering the weather and the remaining pandemic related challenges, we're very pleased with this outcome.
Let me now focus on the oil business.
During the first quarter of fiscal 2021 oil business revenues increased 25% the <unk>.
$35 9 million compared to the first quarter of fiscal 2020.
This represents a first quarter revenue record.
The increase of revenue was mainly due the higher base oil revenue. Those the result of both higher sales volume and higher average netback.
Higher charge for oil in our used oil collection business also contributed to the increase in revenue.
Oil business segment operating margin was a record 28, 1% during the first quarter.
The increase in margin was primarily due to an increase in our base oil the charge for oil spread of 34 cents per gallon compared to the first quarter of 2020.
In the prior year quarter, we were in a slight pay for oil position on the weighted average basis, but during the first quarter of 2021, where we are in the net charge for oil position.
We also continued to attract used oil feedstock from third parties at fair prices, which helped improve our operating margin during the quarter.
Mark will provide more detail regarding cost of drill bits of a few minutes.
During the first quarter, our re refinery team picked up where they left off of at the end of 2020.
As you remember outside of our planned shutdown of the re refinery due to supply and demand issues. As a result of of pandemic in many ways 2020 was our best year in terms of execution of the re refinery.
We continue to reap the benefits of the mechanical integrity and other programs, which have helped create a more proactive approach of the overall operation of the re refinery.
As a result, we produced $12 1 million gallons of base oil during the during the first quarter.
We continue to demonstrate why we believe the re refinery operations now of strength of our oil business segment.
In our environmental services segment from a revenue perspective, we expect to outperform our pandemic impact of 2020 results for the remainder of 2021.
More importantly, we now expect to produce revenue growth compared to 2019 for the remainder of this year.
Initially we expect the growth percentage will be in the low single digits compared to 2019.
The level of growth building throughout the year.
We expect to exit the year at a mid single digit growth rate or higher.
From an operating margin percentage standpoint, while we should benefit from improved labor efficiency as a result of higher revenue.
We also anticipate inflationary headwinds for at least the next few quarters.
Despite the cost pressure, we expect to see our operating margin continued to grow throughout the remainder of 2021.
And our goal remains to have our operating margin approach, 27% in the segment by the end of the year.
From an oil business segment perspective, we continue the suit tight supply in the base oil market, which has continued to push prices higher end of the second quarter.
While we believe the factors driving much of the supply tightness of temporary we expect to see continued strong pricing in oil pricing through the second and into the third quarter.
Although our charge for oil was improved on a year over year basis during the first quarter.
Our used oil collection charges were lower compared to the fourth quarter of 2020.
This downward pressure on used oil collection charges was due in part to an increase on the price of crude oil over 35%.
We have continued to see downward pressure on our charge for oil at the beginning of the second quarter and we expect that we will move into a slight pay for oil position at some point during the quarter.
Overall, we expect the operating margin of over 20% during the second quarter, we expect spreads will remain elevated compared to recent years during the second half of 2021.
With the increase in the percentage of the U S population of a fully vaccinated against the COVID-19 virus, we continue to see evidence of a broad reopening of the academy.
As a result, we're optimistic this positive momentum will continue on both of our reporting segments for the remainder of 2021.
Before I turn things over to Mark I want to remind our investors that we remain focused on promoting the ESG here of the company.
We continue to work on a formal sustainability program, we launched earlier this year.
While the foundation of our company was built on sustainability with activities such as turning to use the oil waste antifreeze and waste solvent in the reusable products, we realize the need to create a formal program to better the better inform our stakeholders and the general public about the sustainability aspects of our business.
We remain on track to reach our goal of issuing our first sustainability report during the second half of this year.
We believe we have a great story to tell and look forward to sharing with everyone.
Mark will take us through our first quarter financial results.
Thanks, Brian it's great to be with everyone. This morning.
In the first quarter of 2021, we generated $105 for millions of revenue compared to $107 3 million in the same quarter of 2020, the decrease of $1 9 million of one 8%.
The decrease in revenue was primarily driven by the non recurrence of the large field services project.
And the negative impacts of the COVID-19, pandemic, partially offset by higher revenues in our oil business segment.
Net income was a record $9 2 million of 39 per diluted share for the first quarter of 2021. This compares to net income of $5 3 million or <unk> 23 per diluted share in the year earlier quarter.
From a reporting segment standpoint, the environmental services segment reported revenue of $69 5 million, a decrease of $8 million or 10, 3% compared to a year ago quarter.
As I just mentioned the decrease in revenue was mainly due to a large field services project, which occurred during the first quarter of 2020, but did not reoccur during the first quarter of 2021. This accounted for $5 8 million of the $8 million decrease if you exclude the impact of the project from last year's revenue the decline of revenue.
During the first quarter of 2021 would've been on only three 1%.
And Brian mentioned, the remaining shortfall was due to lingering impacts of the COVID-19, pandemic and weather related disruptions.
During the first quarter, we experienced volume declines in our parts cleaning and wastewater and vacuum services businesses, but saw increases due to pricing and mix in the businesses.
And the containerized waste and antifreeze businesses, we experienced increased sales volume, but declines driven by pricing and mix.
Our environmental services profit before corporate selling general and administrative expenses was $16 million or 23% of revenue compared to $18 8 million of 24, 2% of revenue in the year ago quarter.
The decrease in operating margin was mainly driven by lower revenue higher disposal, and health and welfare costs as well as lower labor cost efficiency.
During the first quarter of fiscal 2021 oil business revenues were first quarter record of $35 9 million, an increase of $6 1 million of 21% compared to $29 8 million in the first quarter of fiscal 2020 of.
A 20% increase in lubricating base oil revenue was the main driver of this improvement along with an increase of used oil collection revenue compared to the prior year quarter.
Based on oil sales volume was up $1 2 million gallons to $11 7 million and our paid for our netback increased by 16 per gallon compared to the first quarter of 2020.
From a profitability standpoint oil business segment operating margin increased sharply to a record 28, 1% in the first quarter of 2021 compared to three 1% in the first quarter of fiscal 2020.
The higher operating margin compared to the first quarter of 2020 was due to several factors.
In addition to the previously mentioned improvement in base oil selling price, we experienced an 18 per gallon improvement from the change from pay for oil during the first quarter last year to charge for oil in the first quarter. This year.
A 21 cent per gallon decrease in the cost of third party of used oil feedstock compared to the year ago quarter also helped push operating margin higher.
Our transportation costs were lower on the first quarter of 2021 on a year over year basis due to more feedstock being received from third party sources for which we do not pay for it.
Finally during the first quarter.
Quarter on an entry to correct excess depreciation expense taken during the fiscal 2020, the impact of the correcting entry was approximately of 4% improvement in our operating margin during the first quarter.
Our overall corporate SG&A expense of $13 4 million increased by $1 million compared for the year ago quarter.
Corporate SG&A expense as a percentage of revenue was 12, 8% compared to 11, 6% in the year ago quarter, driven primarily or primarily by higher amortization expense bad debt expense and bank fees associated with our amended credit agreement.
EBITDA of $16 $5 million was a record of 35, 3% compared to the year ago quarter.
Was the second consecutive quarter of record EBITDA.
The company's effective income tax rate for the first quarter of fiscal 2021 was 25, 9% compared to 21, 5% in the first quarter of fiscal 2020.
The rate increase is principally attributable to the opposing effect of non deductible expenses and projected last year as compared to a projected income here.
Looking at the balance sheet, we had $46 7 million of cash on hand at the end of the quarter.
Our cash balance decreased by $20 9 million compared to the end of fiscal 2020, but only because we paid off of our $30 million term loan during the first quarter.
During the quarter, we amended our credit agreement, which no longer contains the term loan, but it made up only about $100 million revolving loan debt.
There were no amounts outstanding on the revolving loan as of the end of the first quarter.
However, we did generate $16 2 million in cash flow from operations during the quarter, which represents a 54, 7% increase compared to the first quarter of 2020.
We continued to pursue multiple acquisition opportunities as we look to utilize our strong balance sheet to capitalize on inorganic growth opportunities during the remainder of 2021.
To summarize we're very pleased with the continued improvement we're seeing in our environmental services segment as we look to move past the negative impacts of the COVID-19 pandemic. We are also happy with the continued execution on our oil business and our ability to take advantage of favorable market conditions.
This concludes our prepared remarks, I will now turn the call over to Mike to take your questions.
At this time I would like to inform everyone in order to ask a question press star one on your telephone to.
To withdraw your question press the pound key.
We will pause for a moment to compile the Q&A roster.
Your first question comes from Jim Ricchiuti from Needham <unk> Company.
Alright, thank you.
Just with respect to the the oil business sounds like things are tracking better than than you were expecting.
Exiting.
2020, and you had given some color about operating margins I guess during the first half of 'twenty, one and Mark I think you were saying in the mid teens and I'm. Just wondering I may have missed it are you are you updating that outlook. It sounds like you're also anticipating.
On the strength of that business continuing into Q3 and I Wonder if you could just maybe elaborate on that yes.
Yes.
The clear we're definitely updating we based on what we had at <unk>.
On what we knew back then when we announced Q4 earnings we had guided to that mid teens.
And you heard Brian in his prepared remarks guide to hire and we have clarity at least for Q2 and into Q3, we don't know how far into it so it really.
We arent, giving much clarity beyond that we do think we're going to continue to see favorable conditions relative to the historical performance of net business. We just don't have a ton of clarity beyond kind of the summer.
And Jim.
And that's dependent on us where we're forecasting right now for the five days of downtime for the quarter, which is normal for us that's absolutely. The issue we're guiding at the 20% margin level of you listen to our prepared remarks kind of.
<unk> said, we are we are bullish on the business.
Base oil supply still has been restricted because of the refineries are not yet back up the full capacity they are and of the 80% range, probably 84% on utilization now versus mid Seventy's last quarter. So we are seeing more supply, but the demand is still strong of the prices are still good.
Obviously worried about the other side of the equation as Mark mentioned in his prepared remarks used motor oil.
Where we're seeing a change on the street, we think we will move on.
Unfortunately, a slight pay in the quarter.
But we're still bullish.
And you alluded to inflationary pressures and I'm just wondering if that extends.
Each other parts of the business and Mark if you could also.
Talk a little bit of doubt, what how we might think about corporate SG&A over the balance of 'twenty one.
Yeah, I'll touch on maybe some broad macro on on what we're seeing from of deflationary standpoint, we are seeing commodity prices way up on the Mark talked about.
Hydrocarbon crude prices be it up we're seeing the chemical prices up we're seeing supply shortages too I'm worried about supply chain issues.
No.
If we continue to see inflationary pressure, we may even think about mid third quarter price increase typically we do it late third quarter early fourth quarter. We may have to do it earlier. This year. If we continue to see inflationary pressure. We're also worried about labor we've got a.
Quite a few vacancies today until the.
The inflated unemployment.
Runs runs out September we're going to struggle to get.
The people in to run the servicer al for work, we're working hard to recruit.
So certainly worried about inflation of labor cost from an SG&A standpoint, Jim.
We're looking at a pretty flat environment at least that's what we're forecasting for the remainder of the year of flat to what we had on our again for Q4 as you know.
Longer duration than the other quarters, but in line I guess with what we experienced in.
In the first quarter.
There are certain things like writing off of some of the bank fees that when we did our amended our credit agreement that were.
Kind of one time because of this.
We changed out of our bank groups slightly you can't carryover of some of those costs you just got to write them off. So yes, there is some of that but in general.
There'll be probably other figures that would replace debt. So we think of flattish forecast is probably a good way to model it.
Got it thanks, thanks very much folks.
Thank you.
Your next question comes from Brian Butler from Stifel.
Hi, Brian.
Good morning. Thanks. Good morning, Thanks for taking my question welcome.
Welcome.
Could you just maybe you said there is 45 days built into two two I think for maintenance can you talk just kind of utilization targets for <unk> and then what other maintenance you have planned for for <unk> and <unk> on what the Utilizations might look like.
I think on the fourth quarter call, we signaled roughly 28 days of maintenance, we're still on the 28 of <unk>.
Maybe a couple of extra days, because we're running pretty hard right now from a production standpoint, we expect to see.
Base oil production in the it I'll just give you a range of 11 to 12 million gallons not debt.
The different from Q1 because of our maintenance schedule was very similar to.
Two Q1, we're expecting 4% to five days this quarter like we had in the first quarter.
We did push out our larger charter around the Q4 driven.
Driven by the fact of we've like base oil will be weaker by the fourth quarter, and we certainly want to and don't need to do it until the back end of the year. So we're going to push that off.
So we're still projecting 48 49 million gallons of base oil production for the year.
Okay.
Helpful and when you think I guess, the spread and the margin volatility I mean do you expect the strength of kind of continuing the three Q.
But what is maybe the right way to think about this business longer term with the spreads I mean, obviously you had a very nice move to the spread but when you get back to a normal let's say a more normalized spread is this still on mid teens kind of margin operating margin business.
Yes, I mean, obviously, Brian wed like to think it is we certainly don't think it's going to be of mid to high Twenty's business.
But we do think we'll begin to see some impact from IMO 2020, we're not seeing the large aggregations of used motor oil matter of fact, we draw on to sell you.
Used motor oil that one of our <unk> plans.
We had excess supply, where we're going to put a barge load together not of lot of interest out there for large supplies of used motor oil. So we think we're going to see some impact from volume O 2020, we think it's the mid teens operating business. That's our ultimate goal, we've got the cost structure at.
In much better shape today of it our operating costs for the quarter were <unk>.
64 cents per gallon when you compare it to a run rate in 'twenty 'twenty in 2019, and the 70. So we're continuing to make progress of the player at.
And our goal in.
Pitch to our board of directors. So that we are going to get it into the teams on the consistent basis.
Okay, and then I guess you touched on M&A in your prepared remarks, but could you give maybe a little bit more color on kind of.
What's kind of your capacity or desire for for size and what what.
Types of once Youre kind of looking at I guess would be the best way to say.
Well I mean, obviously, we're being very aggressive we're seeing a significant increase of our pipeline driven by the potential for the capital gains taxes the change.
So not a shortage of potential targets most of them are unfortunately smaller in nature tuck ins, but great companies for us for it because it continues to expand our footprint on our processing capabilities.
We will get a few deals closed this year deals that we are very far along with the <unk>.
Smaller, but very strategic for us.
Obviously, we.
Wed love to do a larger deal of the self and Pops up you see our balance sheet, we have quite of bit of free cash flow of generation significant EBITDA low leverage.
The ability to finance a larger deal.
<unk> of shareholders. So we certainly are going to get aggressive, but we see the opportunity.
We've been in some form of processes as well as you know allow the ones that Brian speaks to our.
Kind of more homegrown, our guests had cost yes.
<unk>, formerly banked, but were in on some of those processes and some of them are pretty big but the bigger you get there there's a lot of fish in that pond, so to speak so.
The chances of obviously low of that any one bidder is going to win it and.
We're just trying to play the numbers game, we had on fatter pipeline and more of it is going to come out the the.
Back and if we put more through the front of it but continually focused on acquisitions in the environmental business, we like where we stand today in the oil great.
Great complement of our overall environmental business because of the cross selling potential we're going to launch of new automotive program here over the next month or two to get more aggressive in that area. So pleased with the oil business water girl of the us business by acquisitions of most of our capital will go into the the Es business.
Obviously.
Alright, and then you mentioned the kind of the balance sheet and the leverage or your debt going to zero can you give maybe a little thoughts just high level.
Out of the targets for kind of leverage I mean is the goal to be at zero debt or.
Is there a right amount of debt debt.
Heritage team can carry.
I'll give a little bit of color no no. We're not happy that we'd love to have some levers that means we've been able to do a deal or two.
Don't like the fact that we're we've got zero net debt and cash in the bank and.
We haven't been able to pull off of larger deals. So that's priority number one in terms of leverage.
Thank you.
I personally could get comfortable in the the.
The 30 plus range.
Especially if we pull off of deal that has meaningful synergies, which we think we would have synergies with the larger deal.
That's just my first of all perspective, Mark can add color if he wants.
<unk>.
Right on where we are thinking and then aligned way so.
We don't want to be where I guess I'll just reiterate what Brian said, we want to be more levered and we will be it just a matter of finding and not just finding the closing on the right opportunity or opportunities.
Alright.
Yes.
Youre welcome. Thank you Brian.
As a reminder to ask a question press Star One. Your next question comes from Kevin Spanky from Barrington Research.
Hi, Kevin Let me Kevin good good good morning, how are you.
No we're good.
Much better the where we were last may.
Absolutely yeah yeah.
The nice results.
Thank you so <unk>.
<unk>.
You called out the.
Impact on EPS growth from.
The large field services projects in the year ago quarter did did you take a crack at.
Kind of trying to figure out what the impact of weather was on.
On Es growth in the in the first quarter.
And we had about 70 days I think Brian mentioned debt that we were down Brian total branch day again.
Your average branches.
A couple of million Bucks a year you can do the math on on what that means but.
That's kind of the only detail that we've done we haven't on any deeper than that but our guys. Whenever we have weather issues of pretty resilient and by the way to go out and get the cut the customer service, but certainly.
On your manufacturer of near shutdown for three days, you are going to generate less waste. So it affected them on affected us.
As Mark said, we can't put of accurate dollar figure on it but it was.
Half of millions of millions of for sure.
Yeah No no that's helpful. That's good color.
I think in your prepared comments Mark correct me, if I'm wrong, you've talked about the containerized waste.
The negative pricing product mix dynamics, there might've been more on our business there too, but can you just kind of talk about what you're referring to there.
Some of that is.
I mean overall there's.
Great story of probably one of our businesses. We're most optimistic about along with our wastewater and vacuum business, but really good growth. We mentioned for probably a couple of years now you've been covering us long enough to remember about our push to in one of the areas. In addition to acquisitions, but areas, where we're going to invest is in <unk>.
Vertical integration, specifically in doing more processing and specifically as it relates to non hazardous waste. So a lot of that waste on like on average.
Per gallon per pound whatever your unit of measure is is less expensive, but where we're driving towards.
Some of that so thats more of a mix issue. It's not so much debt, we're not getting a great price for that but.
From a pure revenue standpoint that the.
That was the negative.
Okay, Alright got it.
The new.
I think you said also that you have.
Border and more third party use the oil this quarter, maybe versus the year ago.
Is that was out of function of maybe lower collection volume due to the weather.
Kind of what drove that.
Okay.
I think of lot of it was.
I just wanted to be prepared again, you've been covering us long enough you know that those winter months can be most challenging in the collection part of the business. Yes. There are challenges in running the plant when it was cold weather everyone on pension widens the experience of that and we have managed to get through that really well because we are.
Used to deal with it in Indianapolis, but not having feedstock and even not so much just from an absolute standpoint, the even getting real low on a larger fee tank gets you into layers of oil if I don't want to get too technical here, but layers of oil that don't run as well that you have a little less pure oil and so we just wanted to be overly prepared and.
While we did take in more third party of bringing more third party debt. We did in the glass Q1 for Rob more prepared and as a result, now we're bringing in less so.
We just we're worried vehicle miles driven.
Down because of the pandemic of I've been here for for years I don't think we've ever made it through of water, where the full oil tanking.
We were committed as Mark said, the keep oil at our feet.
On the low this year the wake opposite.
The increase in our third party supply during the quarter lots of it it has helped us.
Okay, great Yeah that makes sense over the longer term is the goal still too.
Continue to increase your internal used oil collection volumes at the.
The expense of third buying and third party used oil.
Yeah, I mean, I think that's the ultimate goal for US, we certainly value of our third party customers and we will continue to support them, but it's critical for us from a cost standpoint, the increase the rail virtually of our oil trucks.
I think I mentioned earlier that we're launching in automotive programs, specifically the help us support the needs of our plant internally. So we can reduce our overall collections in the logistics cost so.
Absolutely that is the goal and.
Remember that there's a reason why we've invested $100 million in pet plant. It's really the main goal is to extend our reach and allow us to have more customer contact. So then we can sell more environmental services to them.
So we've never operated it never will of the loss leader, but this is of <unk>.
Way to get in the door and sell other services. So that's really on top of the route density in all of the great things, Brian just mentioned.
The real motivator of there is one step down the line, which is if you are in there doing used oil probably need something else and we're going to hopefully go out for that business. When we have the direct relationship as opposed to when we don't get caught on.
Brian.
Yeah, absolutely alright that makes sense.
How much.
Of the margin lift is still available from improve.
The improving used oil route collection density and you kind of need to improve that meaningfully to get to that mid teens, yes, Brian in Ob margin on.
More sustainable basis.
We don't need meaningful improvement on where we're at we're already running.
The better efficiency than we had.
Endemic and we've been able to.
Certainly the pandemic has been terrible for basically everybody on the planet, but we have grown stronger through some of it and we have a more efficient rock collection network, even now and while incremental gains will help solidify the consistency of producing mid single piece of the result, we certainly.
We don't need a sizable improvement to reached in route density of the reach that goal.
Okay got it and then the.
Lastly, I did you give the.
Re refinery utilization number.
On the call and all we did there was the $107 one zone.
Okay, Great Alright, alright. Thanks.
Thank you.
That was our last question at this time I will turn the call back over to the presenters.
Thank you, yes, that's the only have today. Thank you everybody.
This concludes today's conference call. Thank you for participating you may now disconnect.
[music].
Yes.
On that.
Yes.
Sure.
Sure.