Heritage-Crystal Clean, Inc.

Ladies and gentlemen, this is the operator. Today's conference is scheduled to begin shortly. Please continue to standby. Thank you for your patience. Again, today's conference is scheduled to begin shortly. Please continue to standby. Thank you for your patience. Good morning, ladies and gentlemen, and welcome to the Heritage Crystal Queen Incorporated Second Quarter 2021 Earnings Conference Call. Today's call is being recorded. At this time, all callers' microphones are muted and you will have an opportunity at the end of the presentation to ask questions. Instructions will be provided at the time for you to queue up for questions. 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 press release posted on our website for a more detailed description of the risk factors that may affect our results. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website. Also, please note that certain financial measures we may use on this call such as earnings, before interest, taxes, depreciation and amortization or EBITDA and adjusted EBITDA are non-GAAP measures. Please see our website for reconciliations of this non-GAAP financial measures to GAAP. For more information about our company, please visit our website at www.crystal-clean.com. With us today from the company are the President and Chief Executive Officer, Mr. Brian Recato, and the Chief Financial Officer, Mr. Mark Bevita. At this time, I would like to turn the call over to Brian Rattato. Please go ahead, sir.

Thank you. 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 how pleased we are with the record-setting second quarter results we released last night. We produced several records during the second quarter, including total revenue, net income, earnings per share, and EBITDA. In several cases, our second quarter results were significantly higher than our previous record performance. Mark will provide additional detail, but total second quarter revenue exceeded expectations at $117.3 million, which helped produce record EBITDA of $26.2 million. Now I would like to discuss the results of both of our reporting segments. Typically, I cover our environmental services segment first, but given the outstanding results in our oil business, I feel compelled to discuss this segment first. During the second quarter of fiscal 2021, oil business revenues more than doubled compared to the second quarter of fiscal 2020 to $44.6 million. The increase in revenue was mainly due to an increase in our net back for base oil, of $1.62 per gallon compared to the second quarter of 2020, and by 81 cents per gallon compared to the first quarter of 2021. Additionally, our base oil sales volume of 11.5 million gallons during the quarter was 61% higher than the volume of base oil sold during the second quarter of 2020, and further contributed to our record revenue performance. Oil business segment operating margin was a record 34.2% during the second quarter. The higher operating margin compared to the second quarter of 2020 was mainly due to the improvement between the cost of our used oil feedstock and the selling price of our base oil, along with the lack of an extended voluntary shutdown of our re-refinery, which occurred during the second quarter of fiscal 2020. We moved from a charged oil position during the first quarter of 2021 to a slight paid oil position during the second quarter as the price for crude oil continued to rise. We continued to attract used oil feedstock from third parties at fair prices, which helped improve our operating margin during the quarter. Mark will provide more detail in a few minutes. Our re-refinery team continued to execute well during the second quarter. It has been 10 quarters since we've had a significant unplanned downtime at the re-refinery. We produced 11.6 million gallons of base oil during the quarter, which was approximately 80% more than the second quarter of 2020, and we temporarily idled the facility due to the negative demand impact from the pandemic. We continue to demonstrate why we believe the re-refinery operation is now a strength of our oil business. Let's now move on to the environmental services segment. In the environmental services segment, revenue for the second quarter of 2021 was $72.7 million compared to $59.8 million for the same quarter of 2020, an increase of $12.9 million or 21.6%. The increase in revenue was driven by growth in all of our lines of business as compared to the second quarter last year, which was negatively impacted by the effects of the COVID-19 pandemic. While it was great to see our improvement relative to the pandemic impact and results from 2020, we were even more pleased to see that our revenue for the second quarter exceeded revenue from the second quarter of 2019 by 3.6% in this segment. Our profitability in the environmental services segment increased by 130% compared to the second quarter of last year, which was severely impacted by the pandemic. This increase in profitability exceeded our expectations and demonstrates the potential leverage we have in our route-based service model. Now we'd like to look forward and discuss our outlook for the future. In our environmental services segment, our growth compared to 2019 is an indication that we have shifted from recovering from the pandemic to being focused on growth again. While there are still risks related to the Delta variant of COVID-19, We're confident that we can operate effectively and continue to drive revenue growth in the current environment. We still expect to continue to grow compared to 2019 in the second half of fiscal 2021, exiting the year at a mid-single-digit growth rate. From an operating margin percentage standpoint, we have been facing and expect to continue to face supply chain issues and inflationary pressure for containers, transportation, waste disposal, and other items. We are working hard to counteract the negative impacts of these items by internalizing more non-hazardous waste disposal, and we also plan to implement our annual price increase at the beginning of the fourth quarter, which is earlier than we would normally do it in a typical year. We believe at least a portion of the inflationary pressure we are currently experiencing is transitory. However, it's unclear if some of these higher costs will continue through the end of fiscal 2021 or even into 2022. Despite the cost pressure, our goal remains to have our operating margin approach 27% in the segment by the end of the year. From an oil business segment perspective, we continue to see tight supply in the base oil market, which has continued to push prices higher into the third quarter. While we believe the factors driving much of the supply tightness are temporary, we expect strong base oil prices to continue for most of the second half of the year, with some easing as we enter the fourth quarter. For the third quarter, we expect a slight uptick in revenue from our second quarter record based on higher base oil net back, but with production near nameplate capacity and less revenue from charge for oil. From a profitability perspective, we expect third quarter operating margin to be in the 30% range, as higher pricing is offset in some degree by higher pay for oil and inflationary pressures in transportation and the other areas which I mentioned earlier. While the fourth quarter should continue to see operating margin above historical norms, we do expect it to decrease compared to our expectations for the third quarter. From a longer-term perspective, we did not expect the spread between our base oil netback and our cost for feedstock to remain at the level we experienced in the second quarter. Our spread was approximately $1 per gallon higher in the second quarter of 2021 compared to the second quarter of 2019. We cannot say how much of the expansion and spread is due to pandemic-related factors, such as the indirect effects of lower desolate production at burns and refineries, and weather-related outages from earlier in the year, or how much is due to the impact of the new IMO 2020 regulations. However, we believe that all of the factors are playing a meaningful role in creating the spread we are enjoying today. We also believe some of these factors are transitory in nature. As the impacts on demand for distillate driven by the pandemic continue to lessen, and virgin refineries finish rebuilding their base oil inventories, we will have a better idea of what to expect in 2022 as it relates to our oil business. While we are aware of rising COVID-19 infection rates in certain parts of the U.S. due to the Delta variant, our outlook assumes that the general economy will continue to recover as it has over the past year, and that our team will continue to successfully navigate the challenges caused by the pandemic. Should this not be the case, this will negatively impact our outlook. Before I turn things over to Mark, I want to remind our investors that we remain focused on promoting ESG and Heritage Crystal Clean. We continue to work on the formal sustainability program we launched earlier this year. While the foundation of our company was built on sustainability, with activities such as turning used oil, waste antifreeze, and waste solvent into reusable products, we realized the need to create a formal program to better inform our stakeholders and the general public about the sustainability aspects of our business. We remain on track to reach our goal of issuing our first sustainability report near the beginning of our fourth quarter. We believe we have a great story to tell and look forward to sharing it with everyone. With that, Mark will take us through our second quarter of financial results.

Thanks, Brian. It's great to be with everyone this morning. In the second quarter of 2021, we generated $117.3 million of revenue, compared to $79.5 million in the same quarter of 2020, an increase of $37.8 million on 47.5%. This $37.8 million increase in revenue was mainly driven by continued growth and recovery from the impact of the COVID-19 pandemic, which negatively impacted 2020 revenues. Net income was a record $15.1 million, or $0.64, for diluted share for the second quarter of 2021. This compares to a net loss of $2.7 million, or $0.11, for diluted share in the year earlier quarter. This past quarter was not only the second quarter in a row in which we had a record high net income, but net income for the quarter was 64% higher than the first quarter this year, which was our previous record for a 12-week quarter. Now let's talk oil. Oil business segment revenues for the second quarter of fiscal 2021 were a 12-week quarter record of $44.6 million, an increase of $24.8 million, or 126%, compared to the second quarter of fiscal 2020, and an increase of 28% compared to the second quarter of fiscal 2019. The increase in revenue compared to the prior year quarter was mainly due to an increase in our selling price for base oil and an increase in the volume of base oil sold, minimally offset by a decline in charge for oil revenue. Our base oil netback, which is our selling price net of freight costs, increased significantly compared to the first quarter and second quarter of last year, but it was also up by approximately $1 per gallon compared to the second quarter of fiscal 2019. Ryan mentioned our increase in base sale sales volume compared to the first quarter and second quarter of 2020. The base sale sales volume was also 5.2% higher in the second quarter compared to the same quarter of 2019. From a profitability standpoint, oil business segment operating margin increased 20.8 million to a record 34.2% in the second quarter of 2021 compared to negative 28.2% in the second quarter of fiscal 2020. The higher operating margin compared to the second quarter of 2020 was mainly due to the improvement in the spread between the cost of our used oil feedstock and the selling price of our base oil, along with the lack of an extended voluntary shutdown of our re-refinery, which occurred during the second quarter of fiscal 2020. We ran the re-refinery at 102.8% of the namesake base oil capacity during the second quarter. which allowed us to significantly increase the throughput at the refinery during the quarter compared to the year earlier quarter, which provided improved leveraging of our fixed costs. From a used oil collection standpoint, on a weighted average basis, we experienced a net decrease of 47 cents per gallon from a significant charge to oil position during the second quarter of last year to a slight paper oil position in the second quarter of fiscal 2021. Comparing the second quarter to the first quarter, the net change from charge for oil to pay for oil was 16 cents per gallon. Fortunately, we increased our use oil collection efficiency during the quarter by 32% compared to the same quarter last year, and 12% compared to the first quarter of 2021, despite the fact that we continue to add oil service reps. As you might expect, the cost of third-quarter use oil feedstock also increased during the quarter. However, the cost of this feedstock increased by only $0.06 per gallon from the first quarter to the second quarter. Part of the reason for this modest cost increase was the declining demand for this material. During the second quarter, we lowered our first 30 feedstock purchases by 36% compared to the first quarter. On to environmental services. The environmental services segment reported revenue of $72.7 million, an increase of $12.9 million, or 21.6%, compared to the year ago photo. The 21.6% increase in revenue was mainly due to our continuing recovery from the COVID-19 pandemic when compared to the second quarter of 2020. We saw volume increases in all of our lines of business compared to the second quarter of 2020. As Brian mentioned, compared to the results for the second quarter of 2019, second quarter 2021 revenues were also higher. This growth was led by our containerized waste business with our wastewater vacuum, field services, and 83 businesses also showing growth. Our parkland business revenue performance was slightly less in the second quarter of 2019. Our environmental services profit before corporate SGA expense increased 10.8 million, or 129.6% in the second quarter of fiscal 2021, to a record 19.2 million compared to the second quarter of fiscal 2020. The increase is mainly driven by higher revenues due to waning negative impacts of the COVID-19 pandemic, which produced improved leveraging of fixed costs. Operating margin for the second quarter of 2021 was 26.4%, compared to 14% in the second quarter of 2020. Operating margin percentage is only 60 basis points below our results for the second quarter of 2019, 27%, which is also a year-end run rate goal for the segment. Our total company operating costs increased 6 million, or 8.2%, during the second quarter of 2021, compared to the second quarter of fiscal 2020, which was mainly due to higher labor costs, health and welfare costs, transportation-related expenses, and higher use of our food stock costs as a result of more business activity due to the lessening impact of the COVID-19 pandemic. Our overall corporate SG&A expense is $13 million, represents an increase of $1.9 million or 17.1% compared to the year-goal quarter, mainly driven by an increase in share-based compensation as well as software licensing fees and travel expense. EGADAR up $26.2 million with the record and up $23.4 million compared to the year-goal quarter. This was the third consecutive quarter of record EBITDA, and second quarter EBITDA was 59% higher than the previous record from the first quarter of 2021. Company's effective income tax rate for the second quarter of fiscal 2021 was 26.1%, compared to 8.7% on the second quarter of fiscal 2020. The rate increase is principally attributable to the imposing effects of non-adaptable expenses in the projected lost year as compared to the projected income year. Looking at the balance sheet, we have $67.3 million of cash on hand at the end of the quarter, which is relatively flat compared to the end of fiscal 2020, even though we paid off a $30 million turn around in the first quarter of this year. Common resources of liquidity for the quarter are cash flows from operations and funds available to borrow under our revolving bank credit facilities. We generated $25.1 million in cash flow from operations during the quarter, which represents a 246% increase compared to the second quarter of 2020. We also generated free cash flow of $19.6 million during the second quarter. We continue to pursue multiple acquisition opportunities as we look to utilize our strong balance sheets to capitalize on inorganic growth opportunities during the remainder of 2021 and beyond. We currently have four transactions under letters of intent, and we believe we will close at least two of these before year-end. To summarize, we are very pleased with the continued improvement we're seeing in our environmental services segment, and we look to move past the negative impacts of the COVID-19 pandemic. We're also excited about our execution in the oil business segment and our ability to take advantage of favorable market conditions. This concludes our prepared remarks. I will now turn the call over to the operator to take your questions.