Q2 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 again will be placed on music hold thank you for your patience.
[music].
Good morning, ladies and gentlemen, and welcome to the Heritage Crystal Clean incorporated second quarter 2022 earnings Conference call.
Today's call is being recorded.
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 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.
<unk> 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 Dot com.
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 it over to Brian Ricardo. Please go ahead Sir.
Thank you good morning, everyone and thank you for joining us today.
On behalf of the entire Crystal claim team, we're very happy to report a record.
Second quarter earnings yesterday.
Focus on taking steps to fight the unrelenting inflation, we and many in our industry continue to experience.
On a total company basis, we performed well during the quarter exceeding our budgeted from a revenue net income and EBITDA standpoint.
Mark will provide additional detail, but total second quarter revenue exceeded expectations at $156 6 million, which helped produce record second quarter EBITDA of $35 9 million, which was up 37% compared to EBITDA in the second quarter of 2021.
Now I would like to discuss the results in both of our reporting segments, let's start with the oil business segment during.
During the second quarter of fiscal 2022 oil business revenue was a record high for a 12 week quarter at $64 8 million, an increase of $22 million or 45, 3% compared to 44 6 million in the second quarter of fiscal 2021.
The increase in revenue was mainly due to an increase in our base oil netback of $1 51 per gallon compared to the second quarter of 2021.
Oil business segment operating margin increased sharply to 41, 4% in the second quarter of fiscal 2022 <unk>.
Compared to 34, 2% in the second quarter of fiscal 2021.
The higher operating margin compared to the second 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 charge to our customers for the removal of their used motor oil.
From an operations perspective, our re refinery team continued to execute well during the second quarter.
We produced $11 8 million gallons of base oil, which was slightly higher than the year ago quarter.
I would also like to highlight that our re refinery team has operated the location for seven consecutive years without a recordable injury driven by continually improving operating culture.
Let's now move on to the environmental services segment.
In the environmental services segment revenue for the second quarter of 2022 was $91 9 million compared to $72 7 million for the same quarter of 2021.
This represents a record high for a 12 week quarter, and an increase of $19 2 million or 26, 4%.
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 second quarter of 2021.
Environmental services profit before corporate selling general and administrative expenses was $19 8 million or 21, 5% of revenue compared to $19 2 million or 26, 4% of revenue in the year ago quarter.
The decline in operating margin percentage was mainly due to higher disposal and transportation expenses.
Caused by extraordinarily high inflation.
The end disposal markets remains in an oversupplied position.
We expect the condition will not improve for the balance of 2022.
Now I would like to look forward and discuss our outlook for the future.
In our environmental services segment, the second quarter produced a great result from a revenue perspective.
We generated double digit revenue growth on a year over year basis for the fifth straight quarter.
Ah so many overall U S economy remained steady we expect to continue to achieve double digit revenue growth during the second half of 2022.
From an operating margin percentage standpoint, we continue to deal with inflationary pressure for many inputs to our service compared to the prior years, such as third party waste disposal transportation fuel containers and other items.
Given that we do not own and operated disposal assets in certain parts of the country or for certain types of waste. We continue to experience increased costs in surcharges for many of our disposal vendors.
We are working hard to counteract the negative impacts of these by internalizing more industrial non has waste processing.
From a pricing standpoint, we implemented increases towards the end of the second quarter.
Customer acceptance of the price increases we've implemented over the past nine months has been relatively high and we expect we will experience a similar level of acceptance as we continue to rollout the Qt price increases.
As a result, we expect stable to slightly improving operating margin performance during the third quarter.
From an oil business segment perspective, we expect base oil supply will continue to be tied to balance for most of the remainder of the year. As a result base oil prices will continue to remain relatively high throughout the third quarter and early fourth quarter until normal seasonal headwinds arrive towards the end of the year.
On the used oil feedstock side of the business as expected we saw our cost increase with the bullish move upward in crude oil pricing during the second quarter with.
With crude prices moderated more recently, we expect our pay for oil to begin to flatten during the third quarter.
From a broad perspective, we expect to continue to acquire used oil feedstock at a much lower cost relative to crude oil price than we have in years past due to the structural improvements which occurred in the industry as a result of the IMO 2020 regulation.
We also expect our operating costs at our re refinery demand remain elevated on a year over year basis due to the higher cost of items, such as natural gas and hydrogen.
From a profitability perspective, we expect operating margins in the oil business segment to be in the mid 30% range for the third quarter in the high 20% range for the fourth quarter.
This outlook assumes we will take the annual extended shutdown at our re refinery during the fourth quarter.
The outlook I just provided assumes inflation does not worsen in the near term and that general economic conditions are relatively stable.
It also assumes that we receive at least some moderately from the supply chain disruptions.
Which have hampered various parts of our business on and off for the past nine months.
Should these assumptions not hold true this could negatively impact our outlook.
Now I want to discuss an exciting new opportunity for crystal clean.
At the end of June we announced our entrance into a definitive agreement to acquire Patriot and environmental services.
Patriot is a leading provider of environmental services across the western United States specializing in a wide variety of voice services.
<unk> emergency response industrial.
Industrial services and <unk> Bill responds.
Patriot provides full service environmental solutions to a wide variety of end markets serving customers within manufacturing agriculture construction healthcare.
Mining oil and gas transportation and utility markets.
From custom onside services to industrial waste disposal as well as wastewater treatment Patriot operates at 18 locations, primarily in the Western United States.
This acquisition should provide us several positives.
First it will increase our presence in the Western U S, which has been a goal of ours since I became CEO over five years ago.
Second it helps us further our initiative to vertically integrate our business from a non has way standpoint, with the addition of Patriots to wastewater treatment facilities.
And one non hazardous solids processing side.
Along with a tuck in acquisition, we made over 11 months ago. We now have several waste processing sites in the Western U S, which should help us drove revenue in this geography as well as lower our overall cost of process non hazardous waste collected in the area.
Lastly, the acquisition will provide us an industrial services platform in the Western U S.
Having this platform should help us build out an industrial service platform in the remainder of our service areas in the years to come.
We expect to close the Patriot environmental acquisition this quarter.
On the governance frauds I'm thrilled to report we have entered into an agreement to have Mary Pat Thompson join our board of directors and serve on our audit Committee.
APAC comes to Crystal clean with over 30 years experience in accounting and advisory leadership roles.
She currently serves as a director on both public and private company boards and will be an asset to the company as we push forward with our growth in ESG strategy.
We will issue a separate press release with more details on Mary Pat's background.
Before I turn the call over to Mark I would like to provide an update on our <unk> strategy as we disclosed earlier. This year, we are partnering with battelle to be their sole service provider for commercial applications, though check technology the trading destroy paphos in wastewater.
Hotels approach adapt supercritical water oxidation technology to destroy DFAST at the molecular level. They call. This technology to the Annihilator I'm happy to report we are on schedule to complete and take ownership of the first commercial version of <unk> and highlighted by the end of this year.
We expect to deploy this first unit at our Grand Rapids, Michigan area, a wastewater treatment facility to support commercial processing of spent firefighting foam and concentrated paphos contaminated solutions.
With that Mark will take us through our second quarter financial results.
Thank you, Brian I want to wish everyone, a great morning, and pleasure to be with you today.
In the second quarter of 2022, we generated $156 6 million in revenue compared to $117 3 million in the same quarter of 2021, an increase of $39 4 million or 33, 6%.
This 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 $21 1 million or <unk> 89 per diluted share for the second quarter of 2022.
This compares to net income of $15 1 million or <unk> 64 per diluted share in the year earlier quarter.
Which represents a diluted earnings per share increase of 39% compared to the second quarter of 2021.
I'd like to begin our segment results discussion with our oil business segment.
Oil business segment second quarter revenues of $64 8 million were a record for a 12 week quarter and represent an increase of $20 2 million or <unk> 45, 3% compared to the second quarter of fiscal 2021.
As Brian mentioned the increase in net back which is our sales price net of freight charges with a catalyst for higher revenues.
On a sequential basis, our base oil netback increased by 82 per gallon compared to the first quarter of 2022.
Our volume of base oil sold was flat compared to the second quarter of 2021 at $11 5 million gallon.
Yes.
From our used oil collection perspective, a route truck loading efficiency increased by one 5% in the second quarter of 2022 compared to the second quarter of 2021.
This increase was achieved in spite of the fact that we increased the number of used oil sales and service representatives by approximately 7% during the quarter compared to the second quarter of 2021 <unk>.
The increased efficiency combined with more reps led to an 11% increase in internally collected used oil volume during the quarter compared to the second quarter of last year.
As you might expect the cost of third party used oil feedstock also increased during the quarter.
For this feedstock increased by 53 per gallon from the second quarter of 2021 for the second quarter of 2022.
The increase may have been more had we not decrease the volume of our third party feedstock purchases by.
By 18% compared to the second quarter of fiscal 2021.
This decrease was made possible by the increase in internal used oil collection volume I mentioned earlier.
The increase between our net pay for oil during the second quarter of fiscal 2021, and the net pay for oil during the second quarter of fiscal 2022 with <unk> 34 per gallon.
Sequentially, our pay for oil increased by 11 per gallon from the first quarter of 2022 to the second quarter of 2022.
As Brian mentioned, our re refinery continues to run well during the second quarter, we produced base oil at a rate of 102, 4% of our nameplate capacity, while our production volume was up slightly operating cost per gallon of base oil produced increased by approximately 18%.
This increase was driven in part by higher natural gas and hydrogen pricing from our suppliers.
From a profitability standpoint oil business segment profit before corporate SG&A expense increased by $11 6 million or 75, 8% to $26 8 million, which represents an all time record.
The operating margin was 41, 4% in the second quarter of 2022 compared to 34, 2% in the second quarter of fiscal 2021.
The operating margin compared to the second quarter of 2021.
Was mainly due to the increase in the spread between our netback in our base oil sales price and the price paid or charge to our customers for the removal of the used oil.
This spread was up by $1 17 per gallon compared to the second quarter of 2021 and up by 71 per gallon compared to the first quarter 2022.
Now, let's discuss the environmental services segment.
The environmental services segment reported revenue of $91 9 million, an increase of $19 2 million or 26, 4% compared to the year ago quarter.
The 26, 4% increase in revenue was mainly due to an 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.
Revenue from acquisitions closed during the second half of fiscal 2021 accounted for eight 3% of the year over year growth during the second quarter of fiscal 2022.
We experienced volume as well as price increases across all service lines in the segment when compared to the second quarter of 2021.
A majority of the revenue growth was volume driven.
Led by our containerized waste and wastewater vacuum businesses.
Environmental services profit before corporate selling general and administrative expenses with a 12 week quarter, a record of $19 8 million or 21, 5% of revenue compared to $19 2 million or 26, 4% 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 container 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 $26 4 million.
33, 7% during the second quarter of 2022 compared to the second quarter of fiscal 2021.
Our overall corporate SG&A expense of $16 5 million represents an increase of $2 million or 15, 2% compared to the year ago quarter, driven by an increase in salaries and benefits as well as depreciation and amortization.
As a percentage of revenue corporate SG&A expense during the second quarter decreased to 10, 5% compared to 12% during the second quarter last year.
If you remove the costs incurred related to our pending acquisition of Patriot environmental our corporate SG&A expenses would have been $14 2 million, which would have represented an increase of only eight 9% compared to the second quarter of 2021.
EBITDA of $35 9 million with an all time record and.
And up 37% compared to $26 2 million in the year ago quarter, and our adjusted EBITDA of $39 9 million in the second quarter was also a record.
The company's effective income tax rate for the second quarter of fiscal 2022 was 27% compared to 26, 1% in the second quarter of fiscal 2021.
The rate increase is principally attributable to the increased impact of certain adjustments to the federal income tax of federal taxable income excuse me as compared to the first half of fiscal 2021.
Looking at the balance sheet, we had an increase of $2 7 million in cash during the second quarter of fiscal 2022, which resulted in a balance of $73 8 million of cash on hand at the end of the quarter.
Our primary sources of liquidity for the quarter were cash flows from operations and funds available to borrow under our revolving bank credit facility we.
We generated $14 6 million in cash flow from operations during the quarter. We also generated free cash flow of $7 8 million during the second quarter of 2022 compared to $19 $6 million during the second quarter of 2021.
As Brian mentioned, we hope to close on our acquisition of Patriot Environmental in early August .
Our $156 million purchase price represents a multiple of approximately five five times 2021, EBITDA, which included a portion of a large spill cleanup project.
If you adjust the results for this larger than normal project on a pro forma pre synergy basis.
The purchase price represents a multiple of approximately nine times trailing 12 month EBITDA.
We expect to generate approximately $7 million in cost synergies on an annualized basis from the acquisition.
We anticipate most if not all of these synergies will be generated during the first 12 months post acquisition.
To recap we're excited with the strong top line growth we're experiencing we're.
<unk> 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 margins in this segment.
We 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 historical economics of that business.
This concludes our prepared remarks, I'll now turn control of the call over to the operator to take your questions.
Conference call will be.
At this time I would like to remind everyone in order to.
Ask a question press Star then.
The number one.
On your <unk>.
One key pad, we will pause.
Yes.
Okay.
To compile the Q&A roster.
Comes from the line of David Manthey Your line.
Okay.
Hey, David a lot and appears to be cutting out hopefully we can hear you.
David.
Got it.
Operator.
Operator good years.
Is my line open.
Yes, I can hear you now.
Okay, great. Good morning, guys. Good morning.
Good good. So I was wondering first off if you could discuss the $3 million investment in the battery recycling partner retrieve what's the nature of that investment and how do you see that playing out.
David.
We're very interested in data collecting partner for that.
Group of assets.
A company that's one.
While the heritage group.
And they currently have multiple locations that are processing spent batteries, including lithium batteries.
We think our best role in that JV is the help on the collection front using our.
130 locations branches and operating locations will help retrieved gather up batteries from our core client base, which would be the smaller manufacturing customers. We elected to go that route versus developing our own processing, because we're focusing on other processing tech.
<unk> when we bought our first fit in that JV would be to be the collecting partner and with all the investment made sense. We're very bullish on the long term potential of the battery business as you all know.
Uh-huh Uh-huh.
Okay, and then a couple of questions on oil.
I believe that some of your more formal used oil sourcing contracts as some kind of an index and then whether it's six oil or diesel.
But given the changes that have happened since <unk> 2020 are you, making any changes to how you're approaching those contracts. It would seem like you would be in line too.
To command more favorable terms given the situation in these days.
I think we've commented on previous conference calls it relative to the price of crude oil we are paying less.
For used motor oil feedstock from all of our suppliers than we would in an environment that involved $100 crude prior to our IMO 2020, So youre absolutely correct in that.
Summary, and we obviously changed the index because of that we're not indexing off of crude anymore, and we have ample supply and as Mark said, we've reduced we still value tremendously our third party suppliers, but.
And over the last five years, we've certainly built up our retail business, we have our one drive automotive programs. So we focused more on automotive the last few years to begin building up our internal volume because it <unk>.
As important for us to increase route density and lower our.
Cost to deliver the used motor oil to the re refinery. So we've certainly been able to acquire at a lower price and the structural changes of real yes.
I mean, the quick way of saying some of those changes are already built and we've done that and I'm sure in those few instances where they'll use include we just change that percentage down so.
Rather the metric itself stays the same or that percentage changes the effects youre seeing it in the results.
Okay.
Yes.
And then finally on the back end of that operation are you I can't remember if you've told us that.
You are marketing your your base oils as is.
Now are you receiving a premium over traditional assigned group.
Group two oils.
No I wouldn't say David that we received in our premium, but we're certainly not discounting into the levels that we discounted before.
And there are certainly tremendous interest and are we only produce 50 million gallons of base oil tremendous interest in our base oil driven by the fact that it is much greater than a base oil.
We'll produce from Virgin crude.
Most studies suggests 50% to 60% less energy to produce our base oil versus Virgin base oil so lots of interest and we're not discounting them like we were in Thats, all helped to improve our spread.
But I think as you look forward, we really that that's because a lot of people would look at our results and say well. This is this is hitting on all cylinders and I think operationally and collections wise operations at the plant collection lines I think we're doing a great job, but there is still as another leg to the story because it's still if you look.
At spot prices.
We're still not on par yet sell add the things, Brian mentioned and our VP of base oil our VP of oil are working on we do more with some of the majors and Super majors, we expect that to be a tailwind to the business in the future. It's just those are the very real large ships that turn so.
Sure.
We're on board, we haven't quite grabbed the wheel yet to continue the analogy.
Got it.
It sounds like things are moving in the right direction. So thank you best of luck.
Thank you very much.
Your next question comes from the line of Michael Hoffman of Stifel. Please go ahead.
Hi, Michael Brian and Marc Good morning, Scott.
Thanks for taking the queue. So I want to focus a little bit on environmental services first and I recognize the world facing lots of inflation you do you too.
Initiated price.
Where do you see.
A couple a couple of angles on this do you think the worst of that pressure.
Is behind you and now you just have to keep working steadily through your pricing and your own productivity.
Recover.
Margin.
Or are we still seeing some upward pressure on inflation and so youre still chasing that pop.
It's a little bit of both Michael based on waste streams.
And we're certainly going to have the key you know what's happened to the incineration market.
<unk> very oversupplied in underserved, which makes it difficult for us to move center moves along with a lot of our other competitors. So we think we're going to feel inflationary pressure continuing through the balance of the year for certain waste streams were.
Seeing easing in the landfill markets, we're seeing stability in the fuel blending markets.
So not going to be chasing ourselves on those waste streams were certainly at certain levels and we're going to have to keep watching the price and we're going to have to also continue to look at targeted price increases specific waste streams I think it's going to be a battle for the balance of the year, but we're equipped to handle it.
So on that and yes the.
<unk> story is broadly known.
But that player has been pushing a lot of price to two.
<unk> volume so the disposal market.
Generator market seeing price increases so why can't you.
Get that worked that through faster.
What's preventing that from happening.
I wouldn't say anything we've done three price increases in 11 months.
So we've been pushing the price increase is out and we'll do it again as needed.
But there are other costs.
Our calls on problems of majors.
Logistics cost, Michael which you are well aware of fuel chemicals containers, all of that starting to ease which should help make it a bit easier for us as we look into the balance of the year.
And we want to be careful we're not the lowest cost provider out there we've been able to capture some market share we're already because we deal with the smaller client base considered to be an expensive provider in our space, we want to be careful that we're not predatory with our customers in the face of a potential recession, we know the market is going up.
Again the slowdown.
In my view I can't get too aggressive in forced them to go out and look for other opportunities to fund cheaper vendors and we lose market share. So we're balancing all that out we are prepared to do additional price increases we're going to continue to push to get our margins back into the mid 20% range by the end of this year yes.
Yes, I mean, we still have we still have to let some of this stuff and I think Brian covered it in his earlier remarks.
The work we did the price actions, we took at the end of the quarter end of Q2.
Those worked through there are some customers that haven't even seen yet yes, we don't get to everyone in four weeks so.
That we'll see how that plays out if there is more action needed as Brian said, we'll take.
Okay.
Given your 12 to 12 12 16 quarterly cycle.
Are we looking at <unk> and EES.
About the same on the topline, but slightly better on on the profit line and then <unk> can do.
Do that 12 week thing divided divided by 12 multiply by 16 and improve the margin that's the way to think about it any yes, yes, that's the way we're thinking about it.
Okay, when do I hear what period.
At all in <unk> or is it all in <unk> to add Patriot and how much to add.
Well, we think.
And we can get into the details on any follow up but we hope we think this transaction is going to close early August maybe as soon as next week.
But we don't expect any problems as we said.
When we when we announced the deal but I think you can tell from kind of the metrics I mentioned that well I guess I should clarify at least for now we're going to have all the full patriot results will be in an environmental services segment. We think the margins are roughly the same as what we've been printing and.
The revenue it's in that I think we talked about this.
Year.
Industry intelligence on that kind of 120 ish million dollars revenue.
Annual figures right.
So hopefully that gives you enough normalized you know.
The large <unk>.
Spills.
Yes, and is there any particular seasonality to their book of business that we need to factor in when we're thinking about modeling it.
It's similar to what our Es businesses. So.
Sure.
First quarter is going to be a slower one.
Okay.
<unk> sans any large spills or anything occurring of course.
Right.
You now have a business that you can respond to that but thats not the real reason one it is and then Ryan I think the three revised three those three facilities two in California, and one in Oregon.
Just change your relative position in wastewater in the slides.
Yes, they did and we're also excited about the <unk> opportunities in California in falling while we wanted to have the additional wastewater treatment plants, we love the operating of the employee base for Patriot, we want to expand.
Our field services and industrial services business across the United States is this is going to be the platform that will help us do that.
Certainly other organic opportunities are going to pop up in that marketplace. We now have.
Quite a few operating locations that are going to allow us to internalize a lot of the waste that we have been shifting back to our core group of facilities in the south and Midwest.
That's expensive and doesn't work in today's market. So we wanted the ability to control more of our own waste streams in the western half of the U S.
We don't even have a truly a VAG business out there and we will now because we own and wastewater treatment plants, we're going to forget adding those assets out there.
It will start chasing more industrial waste streams to feed those plants.
Got it okay, great and then on used oil.
Yes.
Unbelievable period Huh.
Who could ever figured we'd still be at this wide of a spread.
What is your industry experienced telling you.
When the at least the supply demand side.
It comes back into some balance I mean is there.
Is there any visibility on that part of it of the equation.
Yes, I mean, we certainly are more focused Michael on the used motor oil and because we can better better control of the asset base oil price is going to be the base oil price when supply demand balances out a little bit better.
We think with the structural changes from <unk> 2020, we're going to build a move the used motor oil price quicker and the of that base oil pricing comes down. So we're bullish that we can make money in any environment.
We prefer a more stable crude environment. So it's not so volatile and I think we're going to get our wish just to understand in the crude markets. The way we do.
We're going to be range bound.
80 to.
110, 75 to 110, which will be good for us that will create stability on feedstock cost for the merger refineries are going to have stable pricing.
If you look at the oil change market I mean, they are up 10%.
A pretty good so far so people are out vehicle miles traveled up so were overall bullish on the whole macro and the oil segment, we loved the green properties of our base oil versus Virgin base oil lots of people have made outreach the charter term up our supply.
Why.
Because they like the properties of it so all in all were bullish yes, we know at some point base oil is going to come down in price. We're convinced that we can move the used motor oil quickly to recover some or all of that spread.
Given your experience.
How much of the base oil price.
The increase in the market.
Is the supply demand imbalance versus the crude oil price move.
No I think it's both legal and mainly the plan for the feedstock VGL cost or high crude oil prices are high that Gov, George a lot forward.
Well, yes, I get it I get crudes, driven it there too but were still out of balance.
So that alone has helped pop, but I'm just curious once that comes back into balance.
My gut is that crude oil prices a bigger piece and if you are right. We range bound at 80 to 100, then there's less downside risk, but theres some for the re <unk>.
Supply rebalancing now no doubt, we're expecting that we're expecting that begin we expect to begin to see the four quarters.
Again to hit the seasonal slowdowns or there is no doubt, but we think we can move used motor oil and the rest of the industry CAD as well.
Not a lot of outlets for used motor oil compared to the old days right and Thats. Your point is do you think you can flex from the PFS back to a charge for oil or a lot less <unk> than you are.
Real tiny relative to the base oil price coming in.
So that's our thought.
And finally, I will let someone else get a question and Michael Yep Yep.
Sorry go ahead.
Thank you very much.
Thank you. Your next question comes from the line of Jim Ricchiuti of Needham <unk> Company. Please go ahead.
Yes, Hi, a couple.
Couple of questions that congratulations by the way on a quarter.
Thank you, let's go on Patriot.
Will you continue to be.
<unk> on the acquisition front or is Patriot. The piece that you were really hoping to secure and Youll just look to integrate that.
Yes.
We're going to focus primarily on integrating Patriot.
I'm not going to suggest that if an asset comes along that we truly.
Like that we're going to pass on and it will have to be a strategic physical asset that allows us to.
More ways to them.
Limited ban was a big acquisition for US we want to focus our time and energy on.
No.
With our new employees and integrating the assets, we just acquired.
Making sure that we expand on the organic opportunities that are going to develop as a result of the.
And the ability to cross sell to their customers and vice versa. So that's going to be our focus near term, but if something comes along and we truly truly ligand. It's a physical plan that gives us some capabilities in the marketplace. We will consider when you do the math Jim.
Yes.
Well.
What Brian went through as is most important in.
Somewhat off if there is a limiting factor the factor that we look at first when we think of another material transaction, but financially we're.
Going to have less than one turn of leverage even I don't know if were officially now in a recession or whatever it is but even if.
<unk>.
Our EBITDA would but I don't think that is going to happen, but take a significant turn down you're still not going to have much leverage.
To get really really bad to even get us above one five times. So we're going to have the capacity and the quicker we are able to recognize those synergies I mentioned and get the.
Get everyone hitting on all cylinders from a patriot and legacy business standpoint, that's just going to give us more dry powder to get the next bigger deal done.
Got it and the follow up question I had.
<unk> is a little bit mark into the comments about a recessionary environment, let's say, it's a who knows.
A mile to recession.
Given your customer base.
How quickly do you begin.
To see some impact from those customers switch obviously tend to be smaller.
Yes. It is.
It really depends not just.
On timing or duration, but it also at least in some of our businesses and it does vary it really depends on how deep.
If you have a more shallow recession as.
As far as magnitude than historically anyway.
Those recessions don't really have much impact on our businesses, especially ones like parts cleaning if it's something used in our maintenance function in fact, if it.
Shallower and shorter you actually do more maintenance, sometimes as a manufacturer because.
Especially in this market the last year, plus <unk> been going full throttle and you haven't had time to maintain anything and if you're doing more maintenance than youll, probably cleaning more things in Pac EBIT on the waste side, you might be generating more ways now in our containerized waste side. The other part of that business, if its production waste and you're producing less that.
Hit a little quicker so it really varies based on the business but.
I'm no economist I don't know what this.
For sure what the next coming quarters will have but I think you usually were not the Canary in the coal mine that's for sure it will be usually a quarter or two impact of delayed for us in our businesses overall than the general economy.
Okay got it thank you.
Sure.
Thank you.
Your next question comes from the line of Kevin Spanky Barrington.
Ken Research. Please go ahead.
Hey, Kevin Good morning, Kevin.
Hey, good morning.
Mark.
So I wanted to just dig into the.
Environmental services growth, a little bit more up 26, 4% year over year I am sorry, if I missed it mark but did you give the contribution from <unk>.
Tuck in acquisitions in the quarter, just trying to get to kind of the organic growth number there yeah.
Yes, yes, it was eight 3% in Es.
For the environmental case.
So it is.
Its not meaningless, but.
We're <unk>.
We think we can get a lot more out of those acquisitions to be honest theyre not theyre not hitting on all cylinders, yet so that not only does that tell you hey that the legacy business, obviously performed well if youre doing 26 plus percent growth, but there is more in the tank so to speak for those businesses.
And the issue that March referring to one.
One is the primarily.
Broker of industrial waste.
Obviously, the third party facilities are back up it's difficult to even move waste directly into some of these end disposal sites. Obviously, we're working on.
Alternative facilities alternative plans repackaging ways. So we can get it into the disposal side. So it is a bit tricky.
That will improve.
Okay, yes, but nonetheless, I mean you had.
18% organic growth in the quarter than in environmental services.
Is there any way.
As referenced increased demand for your services, but is there any way to kind of parse that out in terms of price versus volume and what where do you think is driving the increased demand and market share gains is there still a recovery from the pandemic going on or any other factors.
Behind the organic growth.
I think it is a pull through.
As you alluded to.
<unk> Avenue that where we're working to get there there is certainly some overall.
Increase in demand and that that part of the story is from a market standpoint, if we're getting into a softer overall macroeconomic environment that myself and but there definitely has been this has been a continual story for probably at least six quarters is other providers not being able to provide we get called.
And again this is anecdotal so I can't give you a percentage, but certainly some of it is market share gains because other.
Other companies are having problems.
Problems with labor basically problem servicing their customers. So thats been a piece of it that's probably about 25% to 30% as price as well so as far as the how you break that volume piece up into the first two categories I don't have that data for you thats not something we track, but it certainly both market.
Share gain.
And it's I would my gut would tell you it's more market share gain and just overall recovery, maybe three or four quarters ago. It was more of the latter but I <unk>.
It's more of the market share gains now from the what's driving the volume piece.
Yes.
Helpful commentary that it adds a lot of.
Now kind of detail around what I was getting at there so.
Just housekeeping here he said.
Nine times trailing 12 months EBITDA, excluding cost synergies is what you paid for Patriot is that.
For the trailing 12 months ended June 30th.
No I think it's spring I think it's more like it's shy of that this year.
Okay.
Hi.
And you touched a little bit on the cross selling.
Opportunities.
I guess to bring some of your services to the Patriot branches right.
I understand that they don't really do much in the way of parts cleaning. So you mean can you maybe just kind of be more of them delivering their services to our client base, because we're going to have the opportunity to do more.
General industrial maintenance within our client base, so I was going to be more.
Them selling dark walls.
Together, but we will be selling our customers their services as you know we've been expanding our field services and industrial services business over the last few years and we're going to continue that with the Patriot acquisition.
But that will but we will they don't do parts players will look for opportunities within our client base, but I think the bigger opportunity is going to be for them to serve as our core customers.
Got it okay. So.
So they have.
A pretty significant field services piece I guess, if you look at your Investor presentations.
Field services represent was 62% of the 8 billion market. So I guess is that area you really want to be.
Looking into more significantly going forward.
Yes, I've been in the business I like the business. So that's partly why we went after Patriot I think Gil.
Given some of the industry consolidation is going to create an opportunity for us.
We have 90000 customers that need knees need those types of services, we can provide them.
Our margin thats better than calling on some of the larger.
<unk> opportunities, so I'm pretty excited about expanding that business.
Great.
I guess conceptually that could maybe lead to a little more lumpiness, but certainly.
More revenue and margin dollars flowing.
Yes.
<unk> financials, as well, so I agree or not.
Capex heavy either.
At the bottom of rolling stock or lease rolling stock.
Yes, that's about it so good TNF business that generates good free cash flow.
Okay great.
All I had appreciate you taking the questions.
Thank you. Thank you appreciate it.
Your next question comes from the line of Gerry Sweeney with Roth Capital. Please go ahead.
Hey, good morning, Thanks for taking my call.
Larry how are you.
I know this is getting a little long so.
One sort of bigger picture question, and Brian I think you've touched upon it a little bit, but just with internalization of waste obviously, it sounds like Patriot being some assets just curious as to.
It's a multifaceted question.
Yes.
What is sort of the opportunity and timeline.
And how is it going to impact.
Some savings over the next and how does that sort of roll out over the next couple of quarters, yet Patriot I think they have some services.
Maybe you can roll that through your system, but it also sounds as though you are trying to build out some internalization.
Footprint, but how do we look at that.
What is the opportunity.
I'll talk to the macro the opportunity in <unk>.
Mark may have to put some numbers to it after the call, but the macro aspect of it is we're going to touch.
275000 waste containers this year not counting any of our.
Salt volumes of waste, 70% of that approximately or waste streams that we can internalize if we build out our capabilities.
T bus Jerry from having to rely on third parties, which are already backed up and creating some issues for us. So that's the macro focus for US is building out these wastewater treatment plants for broaden their capabilities with various subcategories the ability to handle containers the ability to do some automated for.
<unk>, so we can speed up production.
Then shovel has many of those 275000 drums and narrow network. So that's a macro of what were pursuing.
Obviously, the bulk of the work that we're doing out west will help us take some of the pressure off of our other facilities. We can begin to feed drops into those patriot assets, we're expanding our Seattle plant, which will have dropped capabilities. So those are all the things that we're working on from a macro standpoint, Gerry It takes time for that to result in.
The improved EBITDA performance, because with any fixed facility.
You have to Baseload, the fixed facility and cover the fixed costs. So we've got to continue to generate the business feed the facilities, it's going to take time, it's a bit of a transition moving from third parties to our own network, but we think in along the long run is the best opportunity for our shareholders.
On the long run front, obviously the market dynamics have changed a lot over the last couple of years. If you were to go back in time.
With this opportunity still be something.
Thank you.
Or you would pursue if this if the pricing environment was similar to a couple of years ago.
Yes, we've been pursuing that we've been talking to Patriot first couple of years out.
Okay life's business.
I'll Love field services and industrial services.
Got it.
And then just wanted to see how we want to we really Jerry won't be a full service environmental company and you have to have those capabilities and frequently you have to play that role right now we're using third parties.
That's.
Not the way we want to go got it youre looking at the portfolio not just.
Not just minimizing costs.
Yes, correct.
Two or one or two other quick ones.
You mentioned you Amo internal collections.
How much of that would.
Would you target to collect internally as opposed to a third party. Obviously I don't think we want to get to a 100% because you want some flex there but.
How much youre targeting.
Close are you to that target.
Well, we want to control.
Their flex capability with parties. So you always want to have them because you.
We could go higher I think it was 21, 8% of what we.
Our third party purchases represented in Q2 about 21, 8% of what we what we said now again theres inventory and other things so it's not a straight.
A straight translation, but it really is about getting in many cases that that generator at the customer right that we can we can get.
Get those out there.
Business service lines sold I mean, we're at a rate if you would.
Run rate over the last 12 months anyway are 13 periods in our case, we've collected about 70 million gallons.
Which it might even might see a record I think it probably is.
And then obviously Q2 seasonally Q2 and three are higher but.
Yes, we talked about our efficiency.
Selling and growing in the last several periods that film us at a $77 million million gallon excuse me run rate, which depending on the quality of oil.
Yes.
We might even be if it was really dry everything we get not that everything is but if it was yes.
You're collecting all of that you need so we're getting close to where we want to be.
Just have yes, we have our third party providers that supplement on a minor basis.
And control of our Destiny, So ideally for me, probably 10% to 15% third parties. Some of this oil is just dislocated may decide not overly.
Economic and our logistics are very difficult to get into our re refinery. So we really made our third party supplier partners sure got that and then did you say Youre still final question still targeting.
Say mid 20% environmental services margins by year end.
Yes, we've said that earlier.
Obviously, Jerry Inflations sure.
Our struggle and we will continue to be a struggle. We know we can move price we will move price, but we also want to be careful as we hit the back end of the year, knowing that a recession is coming in and youre not going to.
I don't want the pressure of our customers feeling I need to go out and we care about our customers.
Service is important and not being predatory with our customers added in the recession I'm more concerned about the long term and short term.
Got it take a holistic approach to absolutely got it right.
About a quarter to quarter performance of concerned about long term stability and people in our client base.
Baird.
Appreciate it.
And I'll talk to you guys. Later this afternoon. Thank you yeah. Thank you Terry.
Thank you there are no further questions at this time. This concludes today's conference call. You may now disconnect your lines.
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