Q4 2022 Heritage-Crystal Clean Inc Earnings Call
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Thank you for standing by.
Today's conference call will begin momentarily.
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Good morning, ladies and gentlemen, and welcome to the Heritage Crystal Clean incorporated fourth 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 your 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 bill.
Please could estimate expect intend.
Okay.
Plan project.
Good.
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.
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 FCC 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 Crystle hyphen clean dotcom.
With us today from the company are the President and Chief Executive Officer, Mr. Brian Ricardo and the Executive Vice President and Chief Financial Officer, Mr. Mark Devita.
At this time I would like to turn the call over to Brian Ricotta.
Please go ahead Sir.
Thank you Colby good morning, everyone and thank you for joining us today.
On behalf of the entire Crystal clean team I want to let our investors know that we're very pleased with our record setting.
Fourth quarter and full year performance.
We produced record revenue net income and EBITDA during the fourth quarter.
Mark will provide additional detail with total fourth quarter revenue exceeded expectations.
241.1 million, which all produced record EBITDA of 52 point odd billion.
Now I would like to discuss our results in both of our reporting segments, Let me start with our oil business segment.
During the fourth quarter of fiscal 2022 oil business revenues increased 14, 3% to $75 3 million compared to the fourth quarter.
First of all 2021.
The increase in revenue was mainly due to an increase in our base oil netback.
67, <unk> per gallon compared to the fourth quarter of 2021.
Oil business segment operating margin performed better than expected for the fourth quarter of 2022, but decreased seven three percentage points to 26, 4%.
Paired with 33.7% during the same period of 2021.
The better than expected operating margin was mainly attributable to a higher spread.
Join the netback on our base oil sales.
The price paid charged to our customers for the removal of their used oil.
In comparison with the fourth quarter of 2021, the decrease in operating margin was mainly due to increased cost related to transportation and hydrogen expense.
As well as lower leverage fixed cost due to lower production.
Partially offset by an increase in the spread.
Our re refinery team produced 13 million gallons of base oil during the quarter, which was approximately eight 1% less than the fourth quarter of 2021.
Our lower production was caused by an increase in unplanned downtime when compared to the fourth quarter of 2021.
Let's now move on to the environmental services segment.
In the environmental services segment revenue for the fourth quarter of 2022 was $165 8 million compared to $103 7 million for the same quarter of 2021 and.
An increase of $62 2 million or 60%.
The increase in revenue was mainly due to the continued reopening of the U S economy post the COVID-19 pandemic as well as revenue from our acquisition of Patriot environmental during the third quarter of fiscal 2022.
We experienced volume increases across all of our service lines in this segment during the fourth quarter of fiscal 2022, when compared to the fourth quarter of 2021.
Our revenue growth was achieved despite the negative impact of winter storms in parts of the Midwest and Eastern U S near the end of the fourth quarter.
Environmental services segment profit before corporate selling general and administrative expenses was $35 1 billion or 21, 2% of revenue compared to $22 $8 million or 22% of revenue in the year ago quarter.
The decline in margin on a percentage basis was due in part to increased equipment rental expense and solvent cost.
While we are disappointed with our operating margin in this segment during the fourth quarter we.
We have a plan to improve our performance in upcoming quarters.
One of the areas, which impacted our legacy branch business during the fourth quarter and throughout 2022, while supply chain issues related to third party waste disposal.
For example, our main outlet for incineration waste disposal was down and could not process waste, where a majority of 2022.
We also encountered multiple situations throughout last year, what other third party disposal outlets at operational challenges and could not accept waste. These.
These outages caused us to redirect hazardous waste secondary outlets at a higher overall transportation and disposal costs.
Looking forward our main incineration outlet has been back online and processing waste for a few months.
We're also hopeful that between our efforts to vertically integrate from a waste processing standpoint and.
And receiving more reliable service from other.
Hazardous waste processing partners at 2023 will bring improved efficiencies related to waste disposal.
We successfully processed approximately 88000 waste containers that are non hazardous waste processing facilities.
And expect to increase our throughput by 30000 containers during 2020.
We're also beginning to see tailwind and other commodities supporting our drop transportation and disposal business.
Adams, such as containers fuel treatment chemicals at parts washer solvent have all stabilized or decrease in price over the past few months.
From a revenue perspective in our environmental services segment, we're expecting to continue to have top line revenue growth.
We're not seeing any measurable decrease in demand during the early part of the first quarter.
We expect to have strong double digit revenue growth in early 2023, but moderating growth as we progress through the remainder of the year due to an expected slowdown in macroeconomic conditions.
We expect strong revenue growth is particularly exciting given the strong jobs will be facing throughout 2023.
From an operating margin percentage standpoint, despite our fourth quarter results. We still believe we can increase profitability to the mid 20% range, even though it is taking longer than expected.
Due to continued inflation inflationary in hazardous waste supply chain issues.
Yeah.
We initiated another price increase at the end of the fourth quarter and we expect to realize most of the benefits of this increase in the first quarter of 2023.
This should translate into an improvement in operating margin as we move forward.
On a run rate basis, we expect to exit 23 in the mid 20% range from an operating margin perspective.
In the oil business segment towards towards the end of the fourth quarter of 2022, we saw base oil demand softening.
In line with seasonal expectations, we have continued to experience soft demand at the beginning of 2023.
During the first half of this year, we expect spreads to continue to be strong.
We're forecasting spreads to moderate in the second half of the year to what we think will be the new long term norm.
Which we believe will be above pre pandemic levels.
From an operating margin standpoint, we expect full year 2023 to be in the mid 20% range.
With higher margins in the first half of the year and then moving slightly lower in the second half of the year.
Finally, I want to take a minute to discuss one of our more exciting opportunities in early 'twenty. Three we introduced our four never branded solution for management of P fast contaminated waste.
Whenever as a first to market program, which utilizes both.
<unk> concentration and construction technology.
Provide landfills and industrial business.
This is a single solution to the complex and potentially costly problem of management of <unk> waste streams.
We're very excited about this opportunity and we've received a lot of interest in this new servers from the marketplace.
Our current focus is on ramping up our ability to provide the service to meet the demands of the market.
While we are in the infancy of the program. We believe this business has the potential to deliver approximately $25 million in revenue on a run rate basis by the end of 'twenty three.
With that Mark will take us through our fourth quarter financial results.
Thanks, Brian .
It's a pleasure to speak with everyone today.
In 2022, we generated $709 3 million of revenue compared to prior year revenue of $515 3 million incur.
An increase of $194 million or 37, 6%.
The company's 2022 fiscal year was comprised of 254 working days compared to 253 working days in fiscal 2021.
On a sales per working day basis revenue increased approximately 37, 1%.
Fiscal 2022 compared to the prior year.
Curious in revenue was due to improvement in base oil pricing in our oil business segment, along with increased demand and higher selling prices for the products and services in our environmental services segment as well as by revenue from our acquisition of Patriot environmental near the end of the.
Third quarter of 2022.
Net income was $27 6 million or $1 16 per diluted share for the fourth quarter of 2022.
This compares to net income of $18 1 million or <unk> 77 per diluted share in the year earlier quarter.
Adjusted net earnings for the quarter were $18 8 million with the largest adjustment compared to GAAP net income being a $12 2 million unrealized gain recorded in the fourth quarter of 2022.
As a result of a remeasurement of our investment and retrieve Holdco LLC, which was initially made earlier in 2022.
Our fourth quarter 2022, adjusted diluted earnings per share were <unk> 81.
Compared to <unk> 79 in the fourth quarter of 2021.
Let's get into the details and discuss our business segment results.
As Brian mentioned, our oil business segment revenue increased 14, 3% to $75 3 million compared to the fourth quarter of fiscal 2021.
An increase in base oil prices was the main driver of the increase in revenue on a year over year basis.
Brian mentioned that the base oil market softened during the fourth quarter compared to the third quarter of fiscal 2022.
This softening resulted in our base oil netback decreasing by 80 per gallon during the fourth quarter compared to the third quarter of 2022.
From a volume perspective, we sold $13 7 million gallons of base oil during the fourth quarter, which represents a two 2% decline compared to the fourth quarter of fiscal 2021.
From a profitability.
Stability standpoint, all business segment operating margin was $19 9 million or 26, 4% of segment revenue during the fourth quarter compared to $22 2 million or 33, 7% in a year ago quarter.
In addition to the factors Brian already mentioned segment profitability was also negatively impacted by higher natural gas costs.
And the used oil collection side of the business our weighted average pay for oil increased by 22 per gallon in the fourth quarter of 2022 compared to the fourth quarter of 2021.
Compared to the third quarter, our pay for oil decreased by <unk> <unk> per gallon during the fourth quarter.
Fourth quarter was the first quarter since Q2, 2020 that our pay for oil declined on a sequential basis.
From a volume perspective, we collected 13, 7% more used oil during the fourth quarter of 2022 compared to the fourth quarter of 2021.
On the re refinery perspective, we produced $47 2 million gallons of base oil during fiscal 2022, which represents 94, 4% of nameplate base oil capacity.
This represents a slight decline from record production in 2021.
The decrease in base oil production was primarily due to the increase in unplanned downtime at the re refinery during the fourth quarter, which Brian mentioned earlier.
Now, let's discuss environmental services.
The environmental services segment reported revenue of $165 8 million, an increase of $62 2 million or 60%.
During the quarter compared to the fourth quarter of fiscal 2021. The increase in revenue was mainly due to the continued reopening of the U S economy post the COVID-19 pandemic as well as revenue from our acquisition of Patriot Environmental made during the third quarter of fiscal 2022.
The organic revenue increased during the fourth quarter compared to the prior year quarter was driven by both volume and pricing in our parts cleaning wastewater vacuum and antifreeze businesses and primarily volume in the containerized waste and field services businesses.
Revenue from the Patriot Environmental acquisition during the fourth quarter was $36 6 million, which represented 35, 3% of revenue growth for this segment compared to the fourth quarter of fiscal 2021.
On a sales per working day basis overall environmental services segment revenue increased approximately 57, 9% compared to the prior year quarter.
Our profit before corporate SG&A expense as a percentage of revenue decreased to 21, 2% compared to 22% in the year ago quarter.
The decline in margin percentage was primarily driven by higher fuel costs sovereign expenses and equipment rental expense.
Our overall corporate SG&A expense of $28 7 million increased by $8 2 million compared to the year ago quarter.
The increase was mainly driven by higher salaries and benefits as well as higher amortization of intangibles related to acquisitions.
Corporate SG&A expense as a percentage of revenue decreased slightly to 11, 9% from 12, 1% in the year ago quarter, mainly due to higher revenue and lower share based compensation expense.
EBITDA for the fourth quarter was $52 9 million and up 60% or $19 7 million compared to the year ago quarter. This represents the third consecutive quarter of record EBITDA adjusted.
Adjusted EBITDA of $42 1 million was 17, 5% of revenue and represents a 17, 9% increase compared to the prior year quarter.
The company's effective income tax rate for fiscal 2022 was 26, 5% compared to 25, 8% in fiscal 2021.
The difference in the effective tax rate is principally attributable to the diminished impact of certain required adjustments to financial reporting income determining taxable income in fiscal 2022 as compared to the impact of those adjustments in fiscal 2021.
Looking at the balance sheet, we had $22 1 million of cash on hand at the end of the quarter.
This balance is reflective of a $10 million payment on our revolving loan made during the fourth quarter.
Our primary sources of liquidity for the quarter, our cash flows from operations and funds available to borrow under our revolving bank credit facility.
We generated $34 $2 million in cash flow from operations during the quarter, which represents a 22, 6% increase compared to the fourth quarter of 2021.
We generated free cash flow of $10 7 million during the fourth quarter of 2022 compared to $15 9 million during the fourth quarter of 2021.
From an M&A perspective, we have a robust pipeline of opportunities and we continue to look for targeted companies, which we believe will fit well with our strategy.
Regarding our recent acquisition of Patriot environmental as at the end of fiscal 2022 on an annualized basis, we effectively achieved our cost synergy goal and we continue to look for more synergy opportunities as a result of this transaction.
I wanted to let everyone know that we intend to begin reporting our results in three segments beginning in the first quarter of 2023.
Our oil business segment will continue to reflect the same activities reflected in the oil business segment in the past. However, we will begin to report the results from the former Patriot environmental business.
The HCC legacy field services business.
And the operations of our non hazardous waste processing facilities, and our new industrial and field services segment.
For clarity, our non hazardous waste processing facilities include our wastewater treatment and containerized waste processing operations.
We believe the new industrial and field services segment will represent approximately one third of the revenue previously included in the environmental services segment.
<unk> of the activity historically reported in the environmental services segment will continue to be reported in the new environmental services segment.
As it relates to Brian's forward looking comments about the environmental services segment, we expect the new environmental services and the new industrial and field services segments to have similar revenue growth rates.
<unk> operating margin the guidance, Brian just provided was based on if we were to continue to report environmental services on a combined basis.
As we begin to strip out industrial and field services and reported separately, we would expect the new environmental services segment to have an operating margin, which is a couple of percentage points higher than what Bryan alluded to earlier on a combined basis.
And we would expect the new industrial and field services segment to have an operating margin percentage, which is a few percentage points lower than what the operating margin percentage would have been on a combined basis.
In addition to the reporting segment changes I, just mentioned I want to remind everyone that effective January one 2023, we are reporting our results on a calendar quarter and calendar year basis.
To summarize we are excited with the strong top line growth we've experienced in our environmental services segment, and we're focused on finding ways to improve our operating margin in this segment.
<unk> to be pleased with our ability to capitalize on the new fundamentals in our oil business segment and to produce improved profitability compared to pre 2020 results.
This concludes our prepared remarks, I will now turn the call over to Colby to take your questions.
At this time in order to ask a question Press Star then the number one on your telephone keypad will pause just for a moment to compile the Q&A roster.
Your first question comes from the line of Quinn Ferric <unk> from Baird. Your line is open.
Hey, good morning, guys.
Yeah.
First just on the.
The new segment reporting structure.
Will we be getting historical pro forma as well not just be provided.
First quarter when we get that ahead of time just wondering.
And what will be done for that.
Yeah that'll be at with the quarter, yes.
Yes, we'd like to send it out ahead of time, but.
We want to make sure. It's right. Obviously, there is a lot of minoshe to.
The re forecast of recasting I should say of the business. So that's when you should expect to see it.
Okay. Thank you.
And then secondly, I was wondering if you could break down.
Some of the factors that.
<unk> 2023.
Organic growth outlook for Es in terms of what you might be assuming for market growth.
Any rollover pricing, new pricing and share gains.
Well I'll start off Bryan can contribute but just from a pricing breakdown. We've seen in most of the lines of business that I mentioned I called a few of them out.
The last quarter and probably for the last couple of quarters, we've seen roughly a 50, 50% or 50 50 breakdown, maybe a little more skewed towards volume in one quarter and 2022 and price the other but pretty close to 50 50 as far as price and volume that's driving the increase.
Containerized waste has been more skewed to volume, but the rest of them have been in that range and we would expect to see roughly that same amount I mean volume should be coming you know, we're not Brian alluded to we're not going to be growing at the same rate that we've been growing at and a lot of businesses sands.
The inorganic growth, but from a pricing standpoint also if there is a softening of the economy, which we believe is inevitable here and that starts to add headwinds to volume, we're probably not going to be able to take as much price as we've been able to do in the last 18 months I mean, we've had roughly four price increases in that timeframe.
And it's going to probably get harder and harder even though our realization has still been pretty good.
Don't expect to see that so we see both of them coming down together, but there should be a mix of both I don't know Brian .
I do think Colin for both hazardous waste standpoint, we'll do some additional price increases throughout the year.
More rifle shot approach to just because the.
The demand is still very very strong in our es business and the hazardous waste treatment facilities are still a bit backed up with <unk>.
Waste that's sitting at the customer location. So we will see another opportunity to.
To raise prices on the hazardous waste and and obviously you know the work.
Building our own treatment capabilities.
Non us market.
Which has given us some nice tail winds in terms of growth, we were able to go out and chase some some larger industrial business.
We're still as we've talked about in our prepared remarks, we were pretty excited about the P fast growth opportunities we already have.
Equipment working at our Michigan location. So we are treating <unk> contaminated water and it's going to be a nice tailwind towards the back of the year to help us with EPS growth. So we still feel very good about overall prospects in the us.
Okay. That's helpful and then if I could just sneak.
One more in you mentioned the mid twenties operating margin for oil business is that still kind of the right way to think about that business as a normalized margin rate going forward, even beyond 'twenty three.
Yeah, that's that's really the way we're looking at it we're really pleased with our overall performance of the oil and I want to give a shell.
Shout out to our re refinery team, we completed another year without a recordable and lost time injuries. So great operating performance for the plant, but we're still very bullish on it.
Lots of interest in our base oil from <unk>.
Large integrated oil companies because of the ESG properties of our base oil.
We'll have an opportunity over the course of this year to term up even more of our supply given given the attractive nature of our base oil.
So we're bullish on and we think the mid twenties makes sense for us on a go forward basis.
Okay. Thank you guys.
Thank you thanks.
Your next question comes from the line of Brian Butler from Stifel. Your line is open.
Good morning, Thank you for taking questions.
I guess I'll just start maybe on the PFS that you talked about that kind of run rate exiting 2023, and $25 million can you give some color maybe on what percent of capacity does that represent and thoughts maybe longer term on the.
The size of the opportunity.
Yes, I mean as you know the opportunity is extremely large we need some regulatory cooperation.
Obviously, the EPA has yet to settle in on treatment standards for P. Fast waste the activity has been driven for us by states that have been a bit more aggressive.
The federal EPA.
But we think it's a tremendous opportunity to it's based a lot on delivery of equipment for us if you.
Our four never press release, we have a concentration technology that we have the exclusive right to market in the U S, which takes the large volume wastewater concentrates of P fast contamination.
Then one of our other partners is the ability to destroy the the resulting concentrates and will offer a turnkey package utilizing.
Utilizing our <unk>, our wastewater treatment plants, the ability to concentrate in the ability to destroy it is a function of us being able to get the equipment.
Expecting delivery of quite a few units of the concentration equipment this year, which as you know.
Given us some comfort around the run rate of $25 million in revenue full year effect of that equipment in.
And then 'twenty four should put us at a double that number in 'twenty four.
And then beyond.
It can continue to grow as the stage regulated so we're very excited about it.
Alright, that's helpful color and then I guess going back on the margins in the Es business and you think kind of exiting again and in the mid twenties and the price increase from December I actually think that paces through the through the quarters I mean, <unk> seen most of that improvement.
And in the first quarter as that price becomes realized or is it going to kind of really slowly build up.
To get to kind of aggregate the mid twenties.
Yeah. That's good it's going to slowly build up obviously, we're beginning to see the impact of it already in Q1, we did the price increase.
In December the encouraging thing from my perspective is we're not seeing.
Additional price increases from our hazardous waste vendors.
You know the market is beginning to stabilize.
The waste treatment facilities are beginning to catch up on the backlog. So I think we will get a bit of a reprieve for.
See in price increases for March 3rd party hazardous waste suppliers.
As Mark mentioned, we did three <unk>.
Comprehensive price increases over the course of <unk>.
2022, which we've never done in the history of the company.
We felt like we were chasing our tail. All years is staying ahead of our third party vendors, that's something where we're fixing with the development of our own in house treatment capabilities, because we wanted to get control of our own destiny.
So we do think where we're getting a break now we've raised our prices we are going to look at rifle shot approach on hazardous waste because the market has changed so much over the last two years in terms of supply demand as you've heard from our competitors in there.
Quarterly conference calls, but we're confident that by the.
Second third quarter will begin to see the mid twenties range.
Okay, and then maybe just one last quick bookkeeping can you give some thoughts on just tax rate and interest expense for 2023 on how we should be kind of thinking of modeling that.
Yes tax rates I think we're going to be in that 26% range, where we've been the last couple of years, we have some permanent items that pop up here, and there, which which get us to that I don't want to deep dive, but we can go into more detail later on that issue and from an interest expense standpoint.
We do plan to it and this is all signs any.
Material acquisition that would cause us to.
Dip into or borrow money to increase our revolver and restructure our debt whatever but given the current situation. If we just consider that to be that status quo to be in place for the year, you're probably looking in that $6 million range and that would include some pay downs, because obviously, we're going to be generating cash.
We believe anyway, or we expect to and we will be using some of that to pay down our balances as up to year end.
Great. Thank you.
Thank you Brian .
Your next question comes from the line of Jim Ricchiuti from Needham <unk> Company. Your line is open.
Alright. Thank you you have to do that.
Good morning. So in addition to.
Through pricing, which should benefit.
Margins.
Over the balance of the year you talked about.
Our plan to improve in the upcoming quarters and I'm wondering if you can elaborate on.
I think you've touched on a few of them, but if you could just elaborate on some of the measures you're taking that gives you the confidence that that margin uplift.
Yeah, one of the things that will help us with the margin uplift is going to be.
The full year effective.
Having the ability to process more of our waste containers internally.
I think you heard in our prepared remarks that we're going to increase that by roughly 30000 containers and.
In 2023, a lot of these sites were permitted and built over the last 18 months as the full year effect of being able to use our our internal network and there are other costs. We had lots of other inflationary issues that we dealt with outside of third party price increases which.
We are beginning to moderate as the economy cools off.
A lot of the input cost into our drum business, assuming simple things like containers fuel chemicals.
Treatment chemicals solvents for our parts washer program all of that starting to stabilize towards the end of the year.
Which gives us more comfort on our ability to improve margins and then I think we're not done with price, especially as it relates to retro hazardous waste, we feel really good about where non as price. It is the complex has changed a lot over the last couple of years.
Tweak our hazardous waste pricing.
As Brian mentioned, you layer on top of all of that you layer not having to go through extra trans costs and extra costs, we incur not having any regret a permitted part be permitted facilities to terminate manifests we're having to move waste to make sure we're compliant and that is.
Adding a lot of cost into his earlier point about some of these outlets opening up as they have been opening up and as they work through their backlog, that's naturally going to even if they didnt change any of our prices those costs are naturally going to go away because we won't be taken a trailer waste here and we have to transfer to another site.
To make sure we're compliant.
Over the course of this year will move back to our primary third party disposal vendors versus having to use some secondary outlets, which are a bit more expensive.
Got it thank you.
The piece that's.
Opportunity.
So we think of that.
The ramp in that business over the course of the year and your expectations.
Looking out to 'twenty four.
A way to think about.
Where we're going to see this equipment is geographically talk to us a little bit about how you see this playing out just in light of the fact that theres still a lot of confusion around the regulatory situation.
Yes, that's a good question, what's driving the demand currently is.
You have a lot of municipal wastewater treatment plants, which are taking.
For example, leachate promo municipal landfill that may be located near the tw. They are beginning to become reluctant to take.
Leachate, that's contaminated with P fast contamination, so that's creating the.
The drive for the market opportunity. So the way we're approaching it is we're sticking to the equipment.
At the landfill location to do the concentration steps and if for some reason.
Landfill is close to one of our wastewater treatment plants, we can put the equipment in our wastewater treatment plant.
But the way the model's going to work over the long haul. This will put the reduction of equipment at the generating source, whether that be a landfill or industrial application.
And I think it's going to be driven by the states that are being aggressive states like Michigan, Maine. They are the ones that are pushing the hardest we've done a couple of small projects in Florida, we're seeing a little bit of activity at least call in activity from California. Some of the more progressive stage, that's where we'll see the early geographic.
<unk> and our approach to the market is to take the treatment system to the generating location concentrate the waste use our backdrops to pick it up bring it back to one of our wastewater treatment plants for the ultimate destruction component of our.
Complete turnkey package to Illumina and eliminate P fast contaminated waste.
And Jim if I can add I know it wasn't part of your question.
To add clarity.
It wasn't clear enough so that our strategy that Brian outlined the reduction the destruction technology.
A lot of that sometimes it would be on site at a very high volume generated but a lot of times, it's going to be at our plants. So those results from a reporting standpoint will be manifest themselves are being included in the industrial and field services segment. The new one we talked about.
Got it.
Helpful. Mark appreciate that is there I know it's early days with this but is there a way to.
Just to give her arms around the profitability.
Metrics that this business should show.
Yeah, we're not expecting it to be much different.
And our current margin percentage in the US early returns are positive.
So <unk> is our expectation.
Okay.
Got it thank you.
Youre welcome. Thank you.
Your next question comes from the line of Kevin Stankey from Barrington Research. Your line is open.
Hey, good morning, good morning, Kevin.
I wanted to ask about the.
The new segment structure.
And just.
Maybe more of the reasoning or rationale behind that in terms of what you'd like to.
Highlight to investors with that new alignment and also does that better beer or how the business is currently operating or is there some change going on.
The operating structure that.
Also is driving that that new segment reporting.
Yeah, we really think and this is kind of this year.
Good.
Accounting Geek out you really have to look at exactly what you mentioned when you're talking about reporting segments or at least you should.
And we really.
When we approach <unk>.
Utilizing our plants more we want to direct a lot more of our field services and this includes our legacy business not just patriot.
Patriot business, but we want to direct a lot of that work some of its labor of course, but theres a lot of disposal and treatment that is related to that work. So we want to tie that in with our extent, our new processing capabilities and growing processing capabilities. We hope. So we think that makes a lot more sense.
A lot of times, that's not that doesn't involve a lot of our branch sales and service people. Those people that are on a regular route. This is more project oriented so from a management and just the type of work even to a lot of cases. The training you are probably going to have to have enhanced training. If you are at some of these people doing some of the work on these field.
Services, our industrial services projects than you would if you're on our sales and service routes are part of that legacy branch network. So it really makes sense not just how we go to market, but what the work is and how it aligns with the vertical integration that we structure environmental and field services, which.
Again, the name of the new segment to gather and strip that out from in layman's terms or even slang term the environmental services business will be more reflective of just the HCC legacy branch operations.
Alright understood. Thanks, and then.
In terms of the.
Cadence of margins.
Typically you see that seasonal downtick in <unk>.
Environmental services.
Origin in the first quarter is that something we should expect to continue to see orders.
<unk> price increase helped mute that or offset it.
What's your kind of expectation there.
I don't think it's going to be much different obviously time will tell the wildcard always is whether that's one of the things and it's not like we've been we've avoided any weather in the quarter. We have for a lot of the country Theres talk even coming up here in the next 24 hours of some major storm so.
No.
Clearly they don't have our results yet, but I still think there's reason to believe that that seasonality will still rear its head it might be a little less so or a little less negative on a seasonal basis than you would normally expect only because there has been overall a little more mild winter in a lot of other places.
That might normally get hit harder, but I don't think its going to be much different Brian do you have a different no up nargery Q1 will be consistent to slightly better than Q4, and we expect to ramp up to begin in Q2, because we'll have the full effect of the.
The price increase and that will obviously continue to work the rifle shot approach on <unk>.
<unk> prices in the record hazardous waste market that we participate in so the ramp up will begin to happen in Q2 and three because when you think about the historical even from a price increase we used to again 18 months ago, We got out of whack as we did it in beginning of our period 10. So mid September of 2021, and we did.
An increase but typically we're doing it at the beginning of November or halfway through our Q4 and at least it used to be structured. So Q1 is normally getting that.
That boost from a price increase so I don't think one why the timing was slightly different as to when we started to implement it and it might not be exactly. The same you still have the same general effect as you would in versus historical years and will continue to base load. These.
These non hazardous waste processing facilities, which over time as you increase the volume going into these sites you're going to naturally improve margins.
It's a whole new endeavor for us obviously, historically, we've never processed anyways and we processed 88000 containers. This year with the same footprint will process. Another 30000 containers in 2023 and that will continue to grow we're adding some.
Mechanical processing capabilities of one of our facilities, which will greatly enhance the throughput. So we're.
That will begin to drive the cost structure down as we base load the facilities.
Alright. Thanks, Thanks for the insight that's all I had thanks.
Thanks, Kevin.
Yeah.
Your final question comes from the line of Gerry Sweeney from Roth Capital. Your line is open.
And Mark can probably generic.
Jerry.
I got dropped for a few minutes. So if I repeat a question just let me know and I'll walk through the transcript but.
Just following on a little bit on the wafers.
Disposal side.
You mentioned 88000 barrels this year, adding 30000.
How much how much.
Do you want to internalize in terms of maybe percentage of business.
And at some point some of these waste streams or potentially could be inconsistent in certain areas would you actually take some work.
<unk> from third parties.
And is there an opportunity from that perspective.
Yeah. Good question, we are taking some waste already from third parties. So that's certainly going to be.
An avenue that we pursue but in terms of.
The number of containers last year 280000 containers, we touched over the course of 2022.
As we build out this network I'd like to see the internal processing get to 70% level, which I think is doable based on the type of waste streams that we're currently picking up.
And as you know and I've mentioned on other calls were permitting some part b facilities.
Because we think it's important.
As we pursue long term growth and creating shareholder value, we want to be able to take title to waste, we want to be able to enhance the.
The cost structure.
And the physical state consolidate and shipping it out and bulk versus shipping containers. Those are all things that we're going to work on but the near term with our current capabilities and as we add plants geographically, we have a goal of getting to 70% internal processing.
Got it thanks.
And then this question may have been asked but.
On the split of the <unk> field services over time to those same two businesses have I know you gave a little guidance on where margins will be but over the long term.
Those similar margin businesses or.
Is one a little better than that.
Our legacy business.
Higher margins, especially as we base load the waste treatment plants.
Be it more project, driven but very important in our field services business performed well.
Over the long haul come in a couple of percentage points lower than our traditional branch business.
And on that branch business.
Historically, well I should I believe historically you were talking around 27%.
Is that still the case or has that changed a little bit with the with this.
Split out or.
We are going to we are going to get it back in 27%.
Got it no doubt it's been up I've been in this business for 35 years. The last couple of years have been.
Unbelievably difficult from a supply chain standpoint understand even a lot of our waste has to be there.
Third party too.
A competitor.
Most of these competitors have been overloaded with waste and backed up.
We have tons of pricing power of you've heard from from their conference calls.
As negatively impacted us our goal is to continue to capture market share we've got to be competitive.
So that's why we worked really hard over the last couple of years to build out our own capabilities, we're going to keep doing that because we want to be a full service environmental company that compete with anybody.
Yes, we'd like to get there this year, but Bryan stated and you might it might not have heard it but.
We're probably not going to over and are forecasting to get there this year.
But that's certainly where this business belongs I mean, especially if you get out of it and this would be maybe three to five to even more out but if you got to a point, where you werent growing anymore, you know that over half of our branches are not at what we consider a fully loaded yes, yes, Rob Brown.
Our optimized routing so not routing from a transportation standpoint, but but loaded from our route efficiency standpoint. So this this business because we see it in individual branches.
The.
New environmental services business without industrial and field services in it that could be a 30% margin business over the long term.
Got it great. Thanks I appreciate it.
Thank you thanks Gerry.
There are no further questions at this time this.
This concludes today's conference call you may now disconnect.
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Okay.
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