Q1 2022 Heritage-Crystal Clean Inc Earnings Call
Ladies and gentlemen, thank you for standing by today's conference call will begin momentarily until that time your lines will again be placed on music hold and thank you for your patience.
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Good morning, ladies and gentlemen, and welcome to the Heritage Crystal Clean incorporated first quarter 2022 earnings conference call.
Today's call is being recorded at.
At this time all colors microphones are muted and you will have an opportunity at the end of the presentation to ask questions.
Instructions will be provided at that time for you to queue 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 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 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 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. We undertake no obligation to update these statements. After this call.
Please 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 SEC 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 hyphen clean dotcom.
With us today from the company are the President and Chief Executive Officer, Mr. Brian Ricardo and the Chief Financial Officer, Mr. Mark Devita at this time I would like to turn the call over to Brian Ricardo. Please go ahead Sir.
Thank you operator, and good morning, everyone and thank you for joining us today.
<unk> for the entire Crystal clean team, we're happy with our record first quarter earnings.
Focus on taking steps to fight the unrelenting inflation, we and many in our industry continues to experience.
On a total company basis, we performed well during the quarter exceeding our plan from a revenue net income and EBITDA standpoint.
Mark will provide additional detail, but total first quarter revenue exceeded expectations at $139 4 million, which helped produce record first quarter EBITDA of $24 1 billion, which was up 45, 5% compared to EBITDA in the first quarter of 2021.
Now I would like to discuss our results in both of our reporting segments, let's start today with the oil business segment.
During the first quarter of fiscal 2022 oil business revenue was a record high for a 12 week quarter.
$4 7 million, an increase of $18 8 million or 52, 3% compared with $35 9 million in the first quarter of fiscal 2021.
The increase in revenue was mainly due to an increase in our base oil netback of $1 50 per gallon compared to the first quarter of 2021.
Additionally, our base oil sales volume of 11 8 million gallons during the quarter was slightly higher than the volume of base oil sold during the first quarter of 2021.
Further contributed to our record revenue performance.
Oil business segment operating margin increased sharply to a first quarter record of 33, 7%.
Compared to 28, 1% in the first quarter of fiscal 2021.
The higher operating margin compared to the first quarter of 2021 was mainly due to an increase in the spread between the netback, which is our sales price net of freight impact on our base oil sales and the price paid charge to our customers for the removal of their used oil.
Our re refinery team continued to execute well during the first quarter. We produced 11 9 million gallons of base oil, which was one 5% lower than the year ago quarter.
We continue to demonstrate why we believe the re refinery operations now a strength of our oil business segment.
Let's now move on to the environmental services segment.
In the environmental services segment revenue for the first quarter of 2022 was $84 7 million compared to $69 5 million for the same quarter of 2021.
This represents a record high for a 12 week quarter, and an increase of $15 2 million or 22%.
The increase in revenue was mainly due to the increase in demand for our services compared to the prior year quarter and to a lesser extent by revenue from acquisitions made during the second half of 2021.
We experienced revenue increases across all service lines in this segment when compared to the first quarter of 2021.
Environmental services profit before corporate selling general and administrative expenses was $14 1 million or 16, 7% of revenue compared to $16 million or 23% of revenue in the year ago quarter.
The decline in operating margin percentage was mainly due to higher transportation and disposal related expenses as well as higher container cost caused by extraordinarily high inflation.
Now I would like to look forward and discuss our outlook for the future.
In our environmental services segment, the first quarter produced a great result from a revenue perspective with.
We generated double digit revenue growth on a year over year basis throughout the first quarter.
Assuming the overall U S economy remained steady we expect to continue to achieve double digit revenue growth during the second quarter into the third quarter of 2022 with drove potentially moderating towards the end of the year dependent on macroeconomic conditions.
From an operating margin standpoint, we have been facing and expect to continue to face inflationary pressure for many inputs to our service such as third party logistics internal fuel cost third party waste disposal and other items.
Given that we do not own and operate disposal assets in certain parts of the country are there certain types of waste we continue.
To experience increased costs in surcharges for many of our vendors.
We are working hard to counteract the negative impacts of these items by internalizing more industrial non non hazardous waste processing.
From a pricing standpoint, we implemented price increases towards the end of the first quarter.
The ongoing cost increases we're experiencing we will be implementing additional price actions during the second quarter.
Customer acceptance of the price increases we've implemented over the past six months has been relatively high.
We anticipate that we will continue to experience a similar level of acceptance with these new pricing actions.
Despite the cost pressures, we are experiencing we believe the steps I just mentioned.
Allow us to improve operating margin throughout the remainder of the year.
We expect second quarter operating margin in the environmental services segment to be approximately 20% and we foresee further improvement in the third quarter into the mid 20% range.
From an oil business segment perspective, we're excited with the start we've had the fiscal 2022.
Hi, distillate pricing along with increased demand has driven crude oil refiners to prioritize the manufacturer of gasoline and diesel fuel and de emphasize a production of base oil what's yourself key base oil supply tight relative to demand.
Higher crude oil and NGL prices have also driven base oil prices higher.
We believe base oil supply will continue to be tied to balance in the fourth quarter. This will lead to continued elevation of base oil prices throughout the remainder of the year.
Yes.
While the used oil feedstock side of the business as expected we saw our cost increases with the bullish move upward in crude oil prices during the first quarter.
With crude prices still on the rise we continue to feel upward pressure on used oil feedstock cost.
Despite the move upward in the acquisition cost for our used oil feedstock if you compare our pay for oil during the first quarter to the last time crude oil price was at a similar level. During 2014, our pay for oil was approximately <unk> 60 per gallon on a lower during the first quarter of 2022 compared to that URL.
Year period.
We believe this improvement in used oil collection costs is a clear indication of the structural improvement in the used oil re refining business in the past couple of years.
Unfortunately inflation is also negatively impacted the oil business segment, we expect to experience higher natural gas diesel fuel caustic and hydrogen costs in the second and third quarters. Despite.
Despite the inflationary pressure, we expect a positive base oil pricing trends to lead to operating margins in the mid to high 20% range for the remainder of the year.
Yes.
The outlook I just provided assumes a general academy will continue to be strong and the supply chain disruptions and inflationary pressures will gradually subside.
This not be the case this could negatively impact our outlook.
Before I turn it over to Mark I want to discuss an exciting new opportunity for crystal clean.
At the beginning of the second quarter, we announced our partnership with Battelle Memorial Institute to help combat the accumulation of <unk> and other forever chemicals, which is one of the largest environmental challenges in our generation.
While the environmental benefits of Oregon, and destroyed pathos and water a tremendous we're just as excited about the opportunity. This presents for our company employees and shareholders.
There's much work to be done by the end of the year. We expect to go from successful test runs at one of our facilities. So the use of production units.
Helping us to treat our customers pathos water either at their facilities for large generators.
One of our existing wastewater treatment facilities for lower volume customers.
We will continue to keep you updated as we make progress with this exciting new venture.
With that Mark will walk us through our first quarter financial results.
Thanks, Brian .
Good morning, everyone, it's great to be with you today and.
In the first quarter of 2022, we generated $139 4 million of revenue compared to $105 4 million in the same quarter of 2021, an increase of $34 million or 32, 2%.
The increase in revenue was mainly driven by higher base oil selling prices and higher demand for our products and services.
And to a lesser extent by revenue from acquisitions made during the second half of 2021.
Net income was a record $12 9 million or <unk> 54 per diluted share for the first quarter of 2022.
This compares to net income of $9 2 million or <unk> 39 per diluted share in the year earlier quarter, which represents a basic earnings per share increase of 41% compared to the first quarter of 2021.
To start let's get into the details of the oil business segment results.
Oil business segment first quarter revenues of $54 7 million were a record for a 12 week quarter and represent an increase of $18 8 million or 52, 3% compared to the first quarter of fiscal 2021 is.
As Brian mentioned the increase in net back was the catalyst for higher revenue on a sequential.
Basis, our base oil netback decreased by <unk> <unk> per gallon compared to the fourth quarter of 2021.
From a profitability standpoint.
Our business segment profit before corporate SG&A expense increased by $8 4 million or 83, 1% to $18 5 million, which represents a record for a first quarter. The operating margin was 33, 7% in the first quarter of 2022 compared to $28. One in the first quarter of fiscal 2021.
The higher operating margin compared to the first quarter of 2021 was mainly due to an increase in the spread between the netback on our base oil sales and the price paid or charged to our customers for the removal of their used oil.
The spread was up by $1 11 per gallon compared to the first quarter of 2021, but down seven per gallon compared to the fourth quarter of 2021.
From our used oil collection perspective, a route truck loading efficiency also increased by one 5% in the first quarter of 2022 compared to the first quarter of 2021.
This increase was achieved in spite of the fact that we increased the number of used oil collection sales and service representatives by approximately 12% during the quarter compared to the first quarter of 2021 the.
The increased efficiency combined with more reps led to a 16% increase in internally collected used oil volume during the quarter compared to the first quarter last year.
As you might expect the cost of third party used oil feedstock also increased during the quarter.
The cost of this feedstock increased by 27 cents per gallon from the fourth quarter of 2021 to the first quarter of 2022.
The increase would likely have been more had we not decreased our volume of third party feedstock purchases by 42% compared to the first quarter of fiscal 2021.
This decrease was made possible by the increase in internal used oil collection volume I mentioned earlier.
The change between our net charge for used oil during the first quarter of fiscal 2021 to a net pay for oil during the first quarter of fiscal 2022 was <unk> 39 per gallon.
<unk>, our pay for oil increased by <unk> <unk> per gallon from the fourth quarter of fiscal 2021 for the first quarter of fiscal 2022.
Now, let's discuss environmental services.
The environmental services segment reported revenue of $84 7 million, an increase of $15 2 million or 21, 9% compared to the year ago quarter and 21, 9% increase in revenue was mainly due to the continued increase in demand for our services compared to the prior year quarter and to a lesser extent by revenue from ACA.
Physicians made during the second half of 2021 revenue from acquisitions closed during the second half of fiscal 2021 accounted for six 8% of the year over year revenue growth during the first quarter of fiscal 2022.
We experienced volume increases across all service lines in this segment other than antifreeze when compared to the first quarter of 2021. The volume growth was led by our containerized waste business and wastewater vacuum businesses.
Most of our lines of business. In this segment also had a positive impact in pricing and mix compared to the first quarter of 2021.
Environmental services profit before corporate selling general and administrative expenses was $14 1 million or 16, 7% of revenue compared to $60 million or 23% of revenue in the year ago quarter.
In addition to the factors Brian mentioned earlier the decrease in operating margin was also negatively impacted by higher parts cleaning machine costs and equipment rental expenses, partially offset by improved labor efficiency.
As a result of these factors and the inflationary impacts Brian mentioned earlier in both segments. Our total company operating costs increased by $25 million or 32, 6% during the first quarter of 2022 compared to the first quarter of fiscal 2021.
Our overall corporate SG&A expense of $15 3 million represents an increase of $1 8 million or 13, 6% compared to the year ago quarter, driven by an increase in software expense compensation benefits expense.
Legal fees and higher amortization expense.
As a percentage of revenue in corporate SG&A expense during the first quarter decreased to 11% compared to 12, 8% during the first quarter last year.
EBITDA of $24 1 million was a first quarter record and up 45, 5% compared to $16 5 million in the year ago quarter.
The company's effective income tax rate for the first quarter of fiscal 2022 was 25, 7% compared to 25, 9% in the first quarter of fiscal 2021.
The rate decrease is principally attributable to the reduced impact of certain adjustments to financial reporting income due to increased levels of profitability as compared to the first quarter of fiscal 2021.
Looking at the balance sheet, we had an increase of $14 8 million in cash during the first quarter compared to year end, which resulted in a balance of $71 1 million of cash on hand at the end of the quarter.
Our primary sources of liquidity for the quarter with cash flows from operations and funds available to borrow under our revolving bank credit facility.
We generated $24 6 million in cash flow from operations during the quarter, which represents a 51, 8% increase compared to the first quarter of 2021.
We also generated free cash flow of $15 4 million during the first quarter of 2022 compared to $10 9 million during the first quarter of 2021 for an increase of 43%.
To recap.
We're excited with the strong top line growth, we're experiencing in our environmental services segment, and we're working hard to combat the negative impacts of inflation is having on our business in order to restore our margin in this segment.
Continue to be pleased with the execution in the oil business segment, and our ability to capitalize on the structural changes in the used oil collection industry, which are allowing us to improve upon the historical economics of that business.
This concludes our prepared remarks, I will now turn control of the call over to the operator to take your questions.
Thank you.
You would like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star one once again and we will pause for just a moment to compile the Q&A roster.
And we will take our first question from Michael Hoffman with Stifel. Your line is open.
Hi, Bryan Mark.
<unk> got two choices.
Alright take the good ones you can we'll give you three Michael.
Alright.
Yes.
Yes, because of your 12 week cycle.
There's a little bit of improvement from one to two but then two and three usually the same then you know you take that divide by 12 and multiplied by 16 and kind of get to four I know thats over simplifying this as and Es.
Is there anything going on from.
Demand mix.
From the growth aspect that that that that.
Pattern doesn't hold up.
Yes.
No no we like that.
Super excited about the organic growth obviously.
The acquisitions are contributing as well we mentioned that.
About a third of the overall growth, but the organic growth is what's really got us excited we have.
A lot of inbound people, calling us maybe due to labor shortages other competitive issues.
I mean, I don't try and can speak for himself, but I'm Super excited about the outlook there.
No very excited.
Michael we've seen a little bit of a mix change just because we are.
Larger industrial waste processor with the addition of the non <expletive> facility. So we are seeing more not as jobs, but as Mark said, we're bullish yourself are.
That segment is increasing dramatically and I do think it is a little bit to do with with service failures of our competitors, but it's allowed us to capture some market share. So we're really excited about growth and it looks strong for the balance of the year and the more the more volume we get there from a inflationary and just cost efficiency standpoint that better.
We're going to be on the initiatives Bryan and I talk about probably AD nauseum here the highest last.
The last four quarters about internal processing and whatnot in and Thats, where youll start to see some of the levers that Brian alluded to in improving margins in the coming quarters. Yes, we have one of our players Michael that's going to be opened it up in three days that actually was.
Finished construction, but we had a waiting period for the state to come out and inspect the facility, but it will be operational here within the next week that side of process 2500 drops a period, which will help us from a cost standpoint, not having the third party of the waste.
And Im mortgage unbelievably excited about the wastewater business to just the <unk> initiative and all the excitement of that Thats created with the fall Dragon for bulb waters.
So that business is going to grow as well it has been growing.
Okay.
So the second one after then used for what I would ask about inflation and plans around how to.
Deal with it in a more expeditious manner, but I'm going to go to used oil and when we.
Came into this year everybody had the perception in the in the used oil marketplace that the spread would normalize between Russia Ukraine.
Producing more jet fuel diesel or supply shortages.
Do you see any risk to this compressing in 'twenty, two and that's more likely if it's going to happen at some time in 'twenty three.
Yes, I don't see a compressing maybe the four quarter, Michael but we're not seeing it I think we made comments in the.
And our first conference call of the year that may be able to moderate a bit by the fourth quarter, but we're not seeing at our feeling it right now.
As we talked about in our prepared remarks were overly excited about the structural changes we're seeing in used motor oil or ability to acquire used motor oil at a cheaper price relative to historical performance. If you compare a $100 crude which is what we're dealing with today versus when we dealt with it before we're paying.
A lot less far you saw in our prepared remarks that number 60 cents, a gallon, which is meaningful for our spread so if we do see some price compression.
And on the base oil fraud, we know we can move the price of used motor oil so work.
We're pretty excited about being able to maintain our spreads.
And then the <unk>.
Follow up on that just to get one as the major maintenance and used oil because you do have to factor that into some of your cadence.
Yeah, we've got our big turnaround what youll be in September that's the 10 day turnaround we have a biggie cycle that will happen in June .
Nothing leads us to believe that we're going to have extraordinary shutdowns. This year the plants running extremely well and what we've been on schedule with our production targets certainly inflation Michael has impacted the re refinery just like it as the other businesses were able to overcome that with pricing a little bit easier.
We will experience of operating cost increases, but we're able to deal with it mostly commodity driven hydrogen caustic anything associated with hydrocarbon production, yes, I mean, it's not realistic, but if you look at it academically. If you didn't have that we would be guidance, even higher margins in that segment.
Those things there are going to be headwinds.
Just to talk about installation, Michael I mean, the way we changed the dynamics. Unfortunately, we have to raise prices is the quickest needle mover and that's what we're going to do.
We're upside down all of our energy surcharge as relative to our competitors they've been hit loss extremely hard the last couple of periods. We've got a we've got to get back on top of that we're doing it we've raised prices twice as you know from our prepared remarks, and we will do it again, we don't want to be predatory with our customers because our board and we do think inflation is.
The slowdown towards the end of the year.
We want to make sure we're good partners with our clients, but we have to do it we have to do with cost creep as we internalize more ways, we can slow down the price increase.
Thank you very much.
Thanks, Michael.
We will take our next question from Jim Ricchiuti with Needham <unk> Company. Your line is open.
Hey, good.
Good morning.
Question I had on that metric you provided and thank you for it just the amount of I think of 40%.
42% reduction.
From third party collected feedstock is that was that better than expected I don't know how you were thinking about that entering the year and half.
We think about that as you think about the business over the balance of this year.
No.
That was not unexpected for us I mean, we've been working toward that for.
Five years, now and we've been steadily increasing our direct generator business for used motor oil supply and then we talked about our one drive initiative, which is more retail focused on larger used Motorola generators. Our focus is continuing to control our feedstock because it does a lot for us from a COO.
<unk> boy with route density and CPG getting the oil to the re refinery. So a major initiative doesn't surprise us and we think we'll be able to maintain or improve on those numbers for the balance of the year yes.
We're getting close to that ability I mean, we'll always have relationships, but that ability to to have the independence that Brian mentioned and part of that one drive program. It certainly is not an afterthought ethane.
Joint I guess result of getting more used oil is also getting able to our being able to more easily sell the es segment business lines specialty lines like antifreeze and whatnot. So we're only starting to experience some of that but we really think that the next couple of quarters in the next year plus.
Are going to prove that that part of the equation is also meaningful.
Got it and just turning to the Es side of the business.
A lot of puts and takes there obviously cost higher and Europe , you've passed along some price increases it sounds like another one but.
Sure.
I'm wondering how we might think of that.
That the operating margins in that business exiting the year relative.
To what you said three months ago and you May have you may have mentioned it I may have missed it I apologize if I did but I think I'm sorry, yes.
Yes, I think you had talked about 27% operating margins exiting.
The year in that part of the business.
Has that changed just in light of everything Youre seeing in the market in terms of cost.
I'll talk a bit from a macro standpoint, mark if he wants to chime in with some additional details he can but we're expecting to exit.
Q2 at around 20%, which are commented on in my prepared remarks, that's because it's going to take us a little bit of time to get the price increase across the finish line during the quarter, we expect Q3 to exit at 25%, obviously, we have seasonality in.
<unk> period in quarter four so we are.
We're going to certainly point to Q3 is our high watermark in terms of exit that the EBITDA margin level and we take the operating margin level and we're projecting 25% at this point.
Got it.
I think we think momentum wise.
Brian's right, especially that back half of it is the core tenet of our Q4 variants, along which youre familiar with by now Jim but.
We could even see continued growth in that it really depends on timing and other increases obviously, we're in a once every 40 plus year situations. So if you go back to our normal cadence we'd have an extra boost in Q4 so.
We don't know, where we're going to be there but.
I'll follow up on something Brian said earlier, even as far as Q2 with Q2.
We implemented a couple of price increases and we've taken more of a rifle shot at some of these increases.
Have gone forward. If you go back to Q4 of last year, we did our normal kind of across the board thing some of the price actions we've taken recently.
Pointed they havent taken full effect, even in Q1, because we did have right at the end of the quarter. So that's extra momentum depending on what we do in Q4, you could see certainly even more upward momentum I think at the beginning of the quarter, how that shakes out with.
End of Q4 seasonality will remain to be seen but I would tell you come. This time 12 weeks from now or probably have even more clarity for you on that.
Got it. Thank you just one quick question on <unk>, if I may on I'll jump back in the queue.
As you think about commercializing that that service.
Youre RDR, but I'm, just curious what kind of it sounds like youre getting good interest out there is.
Is this made this I assume this is mainly your existing client base.
There are some opportunities you think to generate some new relationships as a result of this.
Yes look it's going to be more new relationships in the current relationships are obviously, our client base now is small manufacturing accounts P. Fast generators are going to be deal department.
The Department of Defense complex is you've got landfills around the country that are dealing with P. Fast contaminated leach aged so that'll be another source of revenue for us. So I think it's certainly going to be larger industrial customers that'll be the focus for us on this <unk> initiative.
And as I've said before I don't think the market's really recognize the opportunity for us we're going to be the first mover in.
Destroying P fosco water. So we're really really excited about it it's been recognized as the best technology to produce in our solids for outlet and a clean water that can be discharged all the <unk> in the country don't want to take <unk> contaminated water directly so it's going to create.
I apologize or really ringing off the hook for us from an excitement standpoint, obviously, we have to execute on it.
All he done a pilot plant so far but we're confident that our partner battelle nobody understands supercritical water oxidation better than they do so we're going to build a build a commercial version that we can operate at generator locations R&R plants and then we're working on technologies to reduce the volume that will be generated in <unk>.
Fed into that unit that will be the next step as well. So we expect by the end of the year to do some real treatment and commercial customers. When you when you break down the analysis, Brian just gave you at that dose onsite customers. When you think more broadly beyond just a great PFS opportunity, that's where we can leverage some of the the rest.
The menu and.
That's the new customer that you obviously, we're thinking about hinted at in Brian confirmed so beyond just the obvious.
Gallon engine, just crazy high volumes of <unk> out there and then have another lead in to some of these accounts that typically werent in our target market is just tremendous.
<unk> got stockpiles of eight triple up that are sitting out there that will also have to be treated.
Fair enough to build to do that as well.
Already receiving calls from people that want to ship a drip left to us in containers.
Thanks, very much affiliate.
Hey, good afternoon.
Thank you.
And ladies and gentlemen. This concludes today's conference call. We thank you for your participation and you may now disconnect.
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