Q2 2019 Earnings Call
Once again, ladies and gentlemen, thank you for calling fishermen are your lines. Your conference call, we'll begin with Charlie Thank you.
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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 and welcome to everyone joining us this morning.
I'm thrilled to share with the strong second quarter results that demonstrate the talent dedication of our team.
We reported second quarter record revenue of 105 million, which compares to 100.3 million in the second quarter of 2018.
We improved our margins in both segments and this performance allowed us to report net income.
7.1 million, which is a record for a 12 week quarter.
From an earnings per share standpoint were recorded diluted income per share during the quarter of 30 cents.
Compared to diluted income per share of 26 cents in the second quarter of 2018.
I will begin discussing our environmental services segment performance.
From a revenue standpoint, I'm excited that we delivered 8.9% growth in the segment compared to the second quarter of 2018.
This level of growth is even more impressive when you consider the unusually large field service projects.
It was part of our second third quarter results last year.
Our second quarter revenue performance represents the second consecutive record for 12 weeks.
I want to comment on the impact of the investments in organic revenue growth, which we made during 2018.
The cost incurred during 2019 associated with the new branches in resources added during 2018.
It was approximately 2.9 billion.
During the second quarter, which we generated approximately 3.1 million in revenue.
As previously mentioned our plan for this year it would be more aggressive with the addition of new sales and service resources compared to last year.
Our 2019 plan also includes the addition of approximately five new branches during 2019.
During the first half of 2019, we had one branch.
For the full year 2019, we expect new sales and service resources and new branches to collectively a 4.1 million in cost and 4.8 million in revenue.
In the second quarter of 2019, we incurred approximately 2.1 billion and operating costs.
While generating approximately 2.7 million in revenue for the resources added this year.
Our environmental services operating margin in the second quarter of 2019 was 27% up from 25.6% in the same quarter a year ago.
Better management of our disposal costs helped drive the improvement compared to last year and we plan to build on this progress in the future.
We expect some of the cost improvement could be driven by expanding our internal waste management capabilities, including consolidation at some of our signs of nonhazardous waste generated by our customers.
Moving on to our oil business.
In the second quarter of fiscal 2019 oil business revenues were down 1.1 million or 2.9% compared to the record results. We posted in the second quarter of fiscal 2018.
The decrease in revenue was driven by a decrease in the selling price of our base oil.
Partially offset by an increase in the volume of base oil gallons sold.
Our base all net bag.
Decreased by 30 cents per gallon during the second quarter compared to last year, but increased 23 cents per gallon compared to the first quarter of 2019.
While we improved our discipline and began charging our customers for used oil collection service during the first half of the quarter.
During the second half of the quarter, we moved back into our pay for oil position.
On a weighted average basis, we're still in a slight pay for oil position for the second quarter as a whole.
Our average pay for oil increased two cents during the second quarter compared to the first quarter of 2019.
And decreased 12 cents per gallon compared to the second quarter last year.
I'm happy to report that our re refinery operated at 109% of base oil capacity during the second quarter.
During the quarter, we increased base oil production by almost 3.6% compared to the same quarter a year ago.
Which resulted in record production.
That helped deliver double digit operating margin.
Looking forward base oil prices have been steady early in the third quarter in part due to higher crude oil prices.
Used motor oil collection markets continue to be competitive with no noticeable impact from IMO 2020 as of yet.
From a re refinery perspective, we continue to work to improve the reliability of our operation.
To support this goal weve enhanced our mechanical integrity programs.
Utilizing third party expertise and have also hard to do reliability engineer.
As discussed last quarter, we will continue to improve metallurgy, Cologne limit unplanned downtime in the future.
In regard to IMO 2020, we continue to believe this initiative will improve both the feedstock and finished product portions of our spread.
While we anticipate seeing some of the effects from IMO 2020 prior to the end of 2019, we are not certain as to the exact timing or magnitude of these impacts.
For now we will continue to work hard to operate the re refinery efficiently and manage our spreads effectively.
From an environmental services segment perspective, we continue to see momentum that we believe will support high single digit organic growth during 2019.
Despite tougher comparisons to 2018.
We look to supplement our organic growth by closing on additional acquisition opportunities.
Also.
We expect our operating margin percentage for 2019.
The remainder of 2019 will be in the same range as our second quarter figures.
Mark will now walk us through our second quarter financial results in more detail.
Thanks, Brian .
Beginning with our environmental services segment second quarter revenues were 12 week record of $70.2 million.
The $64.4 million in the year ago quarter.
8.9% increase in revenue was driven by continued growth in most of our product and service lines would be any pre vacuum and containerized waste business is being the largest contributor.
The majority of growth in these three lines of business is due to volume increases.
And the parts cleaning business, our growth was primarily price driven during the quarter.
The increase in any free business was primarily due to gains from the acquisitions, we made in 2018 and the first quarter 29.
Revenue from these acquisitions was approximately $1.5 million during the second quarter.
It's important to note that our total environmental services revenue growth was 14.7% if you exclude a $3.2 million from our second quarter 2018 results, which was generated from an unusually large field services project.
Excluding the impact of the same project from our second quarter 2018 results, our organic growth during the quarter would have been 11.3%.
Our same branch revenues grew approximately 9% on a year over year basis during the second quarter or approximately 13% excluding the impact of the previously mentioned field services projects.
Profit before corporate SGN expense in the environmental services segment was 19 million compared to $16.5 million in the year ago quarter.
Operating margin came in at 27% or 140 basis points better than last year. The 2.5 million increase in margin was mainly driven by higher revenue along with lower disposal costs.
Partially offset by higher labor and employee benefit costs.
In the oil business segment, we produced a record 11.8 million gallons of base oil compared to 11.4 million gallons during the second quarter fiscal 2018.
From a sales standpoint, we sold approximately 10.9 million gallons of base oil during the second quarter 2019, compared to 10.7 million gallon during the second quarter and 2018.
Profit before corporate asking the expense in the oil business segment decreased 8.8 million in the second quarter as our operating margin percentage fell from a record high 13% in the second quarter last year to 11.2% this year.
The decline was mainly driven by the steep drop in base oil pricing and the resulting decrease in the spread between our feedstock costs and the selling price per base oil.
Our overall corporate Esterline expressed as a percentage of revenue came in at 11.2%.
Compared to 12.3% from the year ago quarter, mainly driven by higher revenue lower severance costs and lower share based compensation expense.
Partially offset by higher bad debt expense.
The company's effective income tax rate for the second quarter fiscal 2019 was 23.1% compared to 26% in the second quarter fiscal 2018.
The rate difference is principally attributable to windfall tax benefits associated with stock compensation, having a greater effect on the tax rate in the second quarter. This year compared to the second quarter of 2018.
Second quarter, EBITDA was 13.6 million compared to 12.2 million a year ago quarter.
Adjusted EBITDA for the second quarter with a record 15.9 million compared to $13.9 million in the second quarter of 2018.
As Brian mentioned income per share on a diluted basis was 30 cents during the second quarter.
If you exclude the impact of Cenkos your call.
Primarily related to a former FCC environmental location, we acquired back in late 2014, our adjusted income per share on a diluted basis would have been 35 cents.
From a balance sheet perspective cash on hand at the end of the quarter stood at a record 52.2 million.
We generated 16.2 million in cash flow from operations during the quarter compared to 12.3 million in the second quarter of 2018.
Total debt remained steady at 29 million year over year.
We continue to work on identifying opportunities to deploy our excess cash focusing on potential acquisition targets and organic growth initiatives.
Phil will improve our business helped drive value for our shareholders.
In summary, we're very pleased with the hard work of the Crystal clean team is delivering strong second quarter results and we remain focused on executing our strategy of growth and profitability for the remainder of 2019.
Thank you for joining us today I will now turn the call over to the operator to take your questions.
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Our first question or comment comes from the line of Quinn Fredrickson from Baird. Your line is open.
Hey, good morning, guys.
Good morning.
Good.
So I think you mentioned.
Segment margins and he asks for the rest of the year being frame pretty steady with QQ I'm curious how you guys are thinking about in the back half the year for the for the oil business the segment margins there.
Until the oil business, we're probably thinking about the same.
Direction that we gave you at this time last quarter, which is high single digits. We obviously have the potential to over perform and everything really depend on spreads and how we manage that in the near term here, but that's what we're targeting assuming we get decent production from our re refinery I don't know that we can always expect the record performance, we had in Q2, but thats, where we see it at this point.
Yeah, I would I would agree that the.
Gotcha.
And then you guys talked about you're not yet seeing I'm seeing the benefits from IMO 2020, but just curious has there been an uptick in awareness from other collectors that you're perceiving at this point or how would you kind of characterize awareness in the market both from collectors and end customers at this point.
Well, there's is no deltas that people are aware of it because of the impact of.
Pricing relative to number six I mean, we fully expect a as you as you look at futures that number six value will go down by the end of the year, There's certainly some I actually among the collectors that or not.
Affiliated with the re refinery, we've yet to see it but goes.
It's not going to become a.
On impact of the field until January but they're certainly actually over it we haven't seen the softening of the use mobile market that we thought would see what we fully expected to develop over the back half of the year.
Gotcha, Okay. Thank you very much.
Thank you. Our next question or comment comes from the line of Kevin Spanky from Barrington Research. Your line is open.
Good morning so.
Hi, Kevin.
Yes, I was curious about.
Following up on that yes.
Operating margin you cited.
Better management of a disposal cost as a driver there I'm just wondering about if you could elaborate on that a little bit more in what the.
Opportunity is for that going forward to continue a helping the margin.
Yeah, Kevin, though from an operating standpoint, we kind of split the responsibility of the launch.
Our product managers that really know each of these service lines and they're responsible for helping us manage.
And disposal costs, and obviously, we worked hard to internalize as much as a waste as we can and you've heard.
On our conference calls that we're developing some of our in our own in house wastewater treatment capabilities the ability to add some value to these waste streams and that's really the initiative that we focused on also.
Better logistics costs, we've upgraded our.
Transportation team significantly over the past couple of years.
Enhance our ability to move his ways through our branches and hubs.
Cheaper cost structure, so I think a little bit of internalization better management of some of our hazardous waste vendors and logistics or the or the focus items for us, but help us maintain or Morse engine.
As we want to continue to invest organically, we're going to continue to add resources is the best use of our money into the base of that.
Well, obviously, but a little bit of pressure on margins on the flip side, we've got to get it back, but we're working hard on the operating so we like the organic openings of branches and adding people.
Okay got it and I thought.
It was interesting that you expect yes margin to remain at the similar level to the second quarter, even as it sounds like the new branch openings in the second half of 19 will be higher than the first half to I believe you said one branch was opened in the first half and you plan five for the year. So I guess, we should expect for in the second half, but you'll be able to offset.
Cost pressure from those those openings with other initiatives.
Just so I understand is as in past years, most of our branch additions are typically in the.
The latter half of the fourth quarter, you know it takes time to get the leases does get an organized at the people hard but we've also added a lot of.
Brad's resources same branch resources, which increases our cost.
Now that's important an important initiative for us because we see opportunities that are stable branches to grow revenue organically as well. So most of the additions of the new branches all happened late in the year.
Which is why we're confident that we can maintain margins absent any any issues in the field.
Okay, great and.
So obviously a really strong.
Operating performance utilization.
At the re refinery.
Any anything we should be thinking about thinking about for the second half that.
Right.
Cause a lower utilization I mean in terms of plant shutdowns or.
You know anything else that you anticipate in the second half.
No no no out of the ordinary planned shutdown of the plant, we're not doing any large capital projects in the back half of the year, we have our normal.
Turnarounds that are upcoming mainly from just routine maintenance.
So more of the same and in Q3, we feel pretty good about it I mean, obviously you have a seasonal softness that begins to happen to the base oil market.
Late fall, where we're still seeing strong demand today solid base oil pricing, so feel pretty good near term plans running you're right.
Okay and are you.
How far along are you with the various upgrades that you were making in terms of metallurgy or any other.
Mechanical or other upgrades that you wanted to complete and the reaction rather another round of Oh.
Your age that won't be making those that are large fall turnaround, which is a scheduled turnaround that will be the next phase of our improvement.
What we're working on now is more you know system work to make sure that our mechanical integrity program is as good as exists in the industry and we brought in some help as a comment at all in our prepared remarks to make sure that we.
We build the systems.
We've added a reliability engineered the help on rotating equipment, a mechanical integrity. So there's more of the same.
Yeah. This is Tim.
To reemphasize, what Brian said earlier comment a minute ago.
We have this planned outage that we have for Q4.
We're going to do some of that work.
We're we're not planning anything anywhere near as long as the planned outage at last year's Q4, just a.
I just want to make sure that's clear that one was nearly 20 days of downtime. So well, we usually have one year usually around ended Q3, beginning in Q4 that is longer than a three to five day, one that are typical and the other periods or the other times a year. This isn't going to be one of the loans at least not scheduled to be one of those 20 day type thing correct.
Okay. Okay got it thanks for taking my questions. Thank you John .
Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad.
Our next question or comment comes from the line of Brian Butler from Stifel. Your line is open.
Hi, good morning. Thanks, Thank you for taking my question.
Hi, Brian .
Just first on the environmental service piece, how much of that service or that field service project.
Well, then second quarter now or I mean third quarter 18, so how much should we see how much of a headwind is that going to exit this quarter.
It should be about $2 million and I think it was 1.9 technically in Q3 of last year.
So okay lion's share of that was.
I think we set three and a half million in our view.
Mark the lion's share of it was Q2 last year and that was ramping down in Q3.
Okay, and then when you think about it back but you know the backend weighting of the branch additions. When you think about going into 2020 is that going to be a another headwind to margins for at least the first half if not the full year for for 2020 is that the right way to think about it and and what kind of.
What kind of headwind is that is that another 50 to 100 basis points.
I don't think it does take a headwind when you think about it unless we decide that we're going to ramp up the pace more than what we stated you're talking about these additions being a smaller and smaller smaller additions over offers is larger and larger base number of branches. So we don't anticipate at this point that there would be anything more than our regular seasonality. We always know that Q1 is typically two to 300 basis points potentially lower but that.
Could you know I don't know 15 basis points or less be from maybe some new additions, possibly but it really won't be driving much margin erosion overall and Brian some of those new locations can come from acquisitions as well.
Got a pretty robust pipeline of smaller deals.
Obviously, we look at all those opportunities to expand our footprint.
Right, but I guess from a growth perspective, when you look out at least.
You know kind of the next 12 to 18 months that that expansion that geographic expansion in the branch additions, it's still somewhat of a eliminator of margins really expand into what they can be right until that starts to slow down margins kind of where they are is is a reasonable place to be I guess is another way to look at it.
Yeah, we got this pace, we probably should start to see maybe it's not 12 months, maybe it's 18 24 months.
Let's start to see actually still some incremental expansion, but to get to that 30% or even low thirtys that we talk about that we know based on our mature branches that this segment is capable of printing that that certainly is.
I'm not going to be achieved here in the next 18 months.
Okay got it.
The use of our capital and submitting the acquisitions.
We will continue to invest in organic growth.
Yes, it will have a marginal impact on on a percentage.
Okay, and then on the site closure costs you had this quarter does that is there any of those that roll into third quarter.
19.
For that one size could be very little and that we do have other science I'll be honest. This is probably the largest site one of the largest sites that we acquired in the acquisition you remember from almost five years ago, now and probably the most complicated we're running most of the other side and this is one that we never even operated because it has some issues. So what has happened to put this chapter behind us where we have site closure costs occasionally from time to time, yet they will typically be this magnitude.
And Brian we expect to recover our cash when we sell the property, yeah, and we'll call that out assuming there's no.
If we get what we want that might be a material gain so I like we haven't.
Don't know if you remember we sold a property and southern Florida, a couple of years ago, and I think we Oh, three plus million dollar gain on that one so we called that out.
Okay, and then on the oil business just the.
The spread trend.
Definitely improved first quarter to or yeah first quarter going in the second quarter. What's it look like I guess in the early part of third quarter. Here is it's still I mean, it sounds like pay for it you are still on a pay for oil environment, but as that.
On the pricing side improve.
We're not expecting much of a spread change in Q3. It sounds like you could have picked that up from our prepared remarks, or maybe 20% 20 cents spread improvement quarter over quarter were expected to be relatively flat in Q3.
Okay.
And then just last one on the the scheduled downtime to or what are those in third quarter or in the fourth quarter for your scheduled turnarounds. We've done is yeah.
Short shutdown in Q3, five day shutdown, which is typical for us.
And then nothing in the fourth quarter.
No no no longer one that's like no other more closer to Sundance, one, but thats. Those are again that would be the plan as opposed to last Q4 member we had something like a 20 day around there we did a major capital construction projects last year, we're not doing this year yeah were in low lying are you doing some other things we talked about so we.
We don't have any of those big projects.
Projects within the project. So the one Brian mentioned part of the beefing up our metallurgy and mechanical integrity initiatives that are ongoing and these are ones that you can if you do it right and planning well you have the systems that Brian mentioned in his remarks that we've taken the strides to put in place you should be able to do it in unison with some of this routine work.
Okay, but in the second quarter, you didn't have any down down any turnarounds or downtime so that 109.
No. We had we had some downtime in Q2 and routine maintenance.
Similar to what we're going to have in Q3.
So okay.
If you look going forward and we've talked about this in Q4 last year. Unfortunately, we had unplanned outage in Q1, which you know weve talked about previously but.
If we can show the consistency here, there's a good chance, but we said that nine months or so ago that we're probably rewrite the maximum.
For the plant as far as maximum output on a base a little bit.
And in a normal year absent any mechanical issues. Our goal is 25 to 35 days of planned maintenance downtime.
Well, that's a good still to fill our consistent bought.
Okay, great. Thank you very much for taking my questions.
Thank you Brian .
Thank you I'm showing no additional questions in the queue at this time, ladies and gentlemen that concludes today's presentation I would now like to thank you for your participation. You may now disconnect everyone have a wonderful day.