Heritage-Crystal Clean, Inc.

Good morning, ladies and gentlemen, and welcome to the Heritage Crystal Clean Incorporated third 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 that time for you to queue up for your question. We ask that all callers limit themselves to one or two questions. Some of the comments we will make today are forward-looking. Generally the words aim, anticipate, believe, could, estimate, expect, intend, may, plan, project, should, will be, will continue, will likely result, would, and similar expressions identify forward-looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward-looking statements. These risks and uncertainties include a variety of factors, some of which are beyond our control. These forward-looking statements speak as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. Please refer to our SEC filings including our annual report on Form 10-K as well as our earnings release posted on our website for a more detailed description of the risk factors that may affect our results. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website. Also, please note that certain financial measures we may use on this call, such as earnings before interest, taxes, depreciation, and amortization, or EBITDA and adjusted EBITDA, are non-GAAP measures. Please see our website for reconciliations of these non-GAAP financial measures to GAAP. For more information about our company, please visit our website at www.crystal-clean.com. With us today from the company are the President and Chief Executive Officer, Mr. Brian Riccardo, and the Chief Financial Officer, Mr. Mark DeVita. At this time, I would like to turn the call over to Brian Riccardo. Please go ahead, sir.

Thank you, Julie. 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 third quarter results we released last night. We produced several records during the third quarter, including total revenue, net income, earnings per share, and EBITDA. In several cases, our third quarter results were significantly higher than our previous record performance. Mark will provide additional detail, but total third quarter revenue exceeded expectations at $123.2 million, which helped produce record EBITDA of $30.6 million. Now I would like to discuss the results in both of our reporting segments. As I did last quarter, I will start with our oil business segment. During the third quarter of fiscal 2021, oil business revenues more than doubled compared to the third quarter of fiscal 2020 to $50.8 million. The increase in revenue was mainly due to an increase in our base oil net back, about $2.17 per gallon compared to the third quarter of 2020, and by 63 cents per gallon compared to the second quarter of 2021. Additionally, our base oil sales volume of 11.2 million gallons during the quarter was 12.9% higher than the volume of base oil sold during the third quarter of 2020 and further contributed to our record revenue performance. Oil business segment operating margin increased sharply to a record 42.8% in the third quarter of 2021 compared to 3.4% in the third quarter of fiscal 2020. The higher operating margin compared to the third quarter of 2020 was mainly due to an increase in the spread between the net back on our base oil sales and the price paid or charged to our customers for the removal of their used oil. Our re-refinery team continued to execute well during the third quarter. It has been more than two years since we've had significant unplanned downtime in our re-refinery. We produced a 12-week quarterly record of 12.5 million gallons of base oil, which was approximately 10% more than the third quarter of 2020. We're very pleased with the consistency our re-refining operation has demonstrated over the past two years. Let's now move on to the environmental services segment. In the environmental services segment, revenue for the third quarter of 2021 was $72.3 million, compared to $62.4 million for the same quarter of 2020, an increase of $9.9 million, or 15.9%. The increase in revenue was mainly due to our continuing recovery from the negative impacts of the COVID-19 pandemic. We experienced volume increases across all service lines in this segment when compared to the third quarter of 2020. While it was great to see our improvement relative to the pandemic-impacted results from 2020, we were even more pleased to see that our revenue for the third quarter exceeded revenue from the third quarter of 2019 by 4.9% in this segment. Environmental services profit before corporate, selling, general, and administrative expenses was $17.3 million, or 23.9% of revenue, compared to 14.6% or 23.4% of revenue in the year-ago quarter. The improvement in operating margin would have been greater if not for inflationary headwinds caused in part by supply chain challenges which are affecting many industries today. Before we look ahead, I want to provide an update relative to our M&A activities. I'm happy to report we closed on three acquisitions in the past two months. One transaction closed at the end of the third quarter, and the other two transactions closed at the beginning of our fourth quarter. These transactions are providing several benefits to us. First, two of the businesses operate in the western U.S., which helps build our density in these important growth markets. These acquisitions have also provided additional wastewater treatment and non-hazardous containerized waste processing capabilities, as well as expanding our internal technical field services offering. We can now internalize more projects, such as lab-packed field work, which should increase our win rate and profitability for these projects. Most importantly, we're very excited about the new additions to the Crystal Cane Clean family as a result of these acquisitions. Now I would look forward and discuss our outlook for the future. In our environmental services segment, our growth compared to 2019 is an indication that we are working hard to put the impacts of the COVID-19 pandemic behind us. We achieved the growth compared to 2019, even though our manpower lost time hours were up approximately 27% during the third quarter compared to the third quarter of 2020. While there are still risks relative to the Delta variant of COVID-19, we are confident that we can operate effectively and continue to drive revenue growth in the current environment. During the fourth quarter, we expect to continue to grow our environmental services segment revenue at a mid-single digit rate compared to the fourth quarter of 2019. From an operating margin percentage standpoint, we have been facing and expect to continue to face supply chain issues, and inflationary pressure for containers, fuel, third-party logistics, waste disposal, and other items. We are working hard to counteract the negative impacts of these items by internalizing more non-hazardous waste processing and by implementing our annual price increase at the beginning of the fourth quarter. We have early indications that the rate of customer acceptance of the price increase is higher than what we might expect in a typical year. Despite the cost pressures we're experiencing, we believe our price increase, along with increased internalization of customer waste streams, will allow us to improve operating margin in Q4 compared to our Q3 results. From an oil business segment perspective, we're beginning to see more balanced supply and demand with mid- to light-grade Group II base oils as we move further into our fourth quarter. While our current base oil netbacks are slightly higher than our average during the third quarter, we expect seasonally reduced demand and higher feedstock prices as offsetting factors, which should keep our product pricing stable through year-end. As we look forward to 2022, there are several base oil refinery outages planned for the fourth quarter of this year and the first quarter of 2022. This will reduce available supply and should provide support for base oil prices in the early next year. On the used oil feedstock side of the business, we saw our cost increase with the bullish move upward in crude oil pricing during the third quarter. With crude prices still on the rise, we continue to feel upward pressure on used oil feedstock costs. However, the pressure has moderated more recently, and we do not expect significant additional upward pressure on used oil pricing during the remainder of the year. As planned, we completed an extended re-refinerie turnaround during the beginning of the fourth quarter. The turnaround generally went as planned, and we have another shorter turnaround planned for the next month. The two turnarounds will somewhat limit our base oil production during the fourth quarter, which we expect will be approximately 13.3 million gallons. For the year, we are still on pace to produce over 49 million gallons of base oil. From a profitability perspective, we expect fourth quarter operating margin to be in the mid to high 20% range, as continued high base oil pricing is somewhat offset by less production volume caused by a planned downtime, as well as constraints on the availability of hydrogen. In addition, it appears that higher natural gas prices will increase operating costs for the remainder of the year and into the first quarter of 2022. The outlook I just provided assumes the general economy will continue to recover from the COVID-19 pandemic and the supply chain disruptions will gradually subside. Should this not be the case, this could negatively impact our outlook. Before I turn things over to Mark, I want to let everyone know we recently took a significant step forward in our ESG initiative with the release of our first sustainability report. You can find a copy of the report on our website. We believe we have a very compelling ESG story to tell, and the issuance of this sustainability report is the first step in our continual process to communicate the many ways in which we are striving to protect the Earth's resources by helping the business world run cleaner and positively impact the people and communities we interact with on a regular basis. With that, Mark will take us through our third quarter financial results.

Thank you, Brian. Good morning, everyone. It's great to be with you today. In the third quarter of 2021, we generated $123.2 million of revenue compared to $87.1 million in the same quarter of 2020. an increase of $36 million or 41.4%. The increase in revenue was mainly driven by higher base oil prices and continued growth and recovery from the impact of the COVID-19 pandemic in our environmental services segment businesses, which negatively affected 2020 revenues. Net income was a record $18.45 million or 79 cents per diluted share for the third quarter of 2021. This compares to net income of $4 million for 17 cents per diluted share in the year earlier quarter. This past quarter was not only the second quarter in a row in which we had record high net income, but net income for the quarter was 22.5% higher than the second quarter of this year, which represented our previous quarterly record. Let's get into the details of our business segment results. Our business segment revenues for the third quarter of fiscal 2021 were a quarterly record 50.8 million. an increase of $26.1 million, or 105.9%, compared to the third quarter of fiscal 2020, and an increase of 41.9% compared to the third quarter of fiscal 2019. Brian mentioned the increase in net back, so higher revenue, and gave you the change in net back on a year-over-year and sequential basis. But from a pre-pandemic standpoint, our net back increased by $1.56 per gallon compared to the third quarter of 2019. From a profitability standpoint, all business segment profits before corporate SG&A expense increased $20.9 million to a record 42.8% in the third quarter of 2021 compared to 3.4% in the third quarter of fiscal 2020. The increase in operating margins compared to the third quarter of 2020 is mainly due to an increase in the spread between the net back on our base oil sales and the price paid or charged to our customers for the removal of their used oil. This spread was up $1.73 per gallon compared to the third quarter of 2020 and up by $0.50 per gallon compared to the second quarter of 2021. Compared to the third quarter of 2019, profits before corporate SG&A expense was higher by $18 million, given by a spread increase of $1.43 per gallon. From a used oil collection standpoint, on a weighted average basis, during the third quarter, we experienced a net change of $0.44 per gallon compared to the third quarter of 2020, as we moved from a charge-for-oil position in 2020 to a pay-for-oil position this year. Compared to the second quarter of 2021, our pay-for-oil increased by 13 cents per gallon. From a used-oil collection standpoint, despite an 18% increase in the number of oil sales and service reps, we were able to keep our used-oil collection route efficiency essentially flat during the third quarter compared to the five-year quarter. As you might expect, the cost of third-party used oil feedstock also increased during the quarter. However, the cost of this feedstock increased by only 11 cents per gallon from the second quarter to the third quarter. Part of the reason for this model's cost increase was the decline in demand for this material. During the third quarter, we lowered our third-party feedstock purchases by 35% compared to the second quarter. Now let's discuss the environmental services step. The environmental services segment reported revenue of $72.3 million, an increase of $9.9 million, or 15.9% compared to the year-ago quarter. The 15.9% increase in revenue was mainly due to the lessening impacts of the COVID-19 pandemic on our business during the third quarter of 2021 compared to the third quarter of 2020. We saw volume increases in all of our lines of business compared to the third quarter of 2020. As Brian mentioned, compared to the results for the third quarter of 2019, third quarter of 2021 revenues were also higher. This growth was led by our containerized waste business, with our wastewater vacuum, field services, and antifreeze businesses also showing growth. Environmental services profit before corporate SG&A expense increased 2.6 million, or 18%, in the third quarter of fiscal 2021, compared to the third quarter of fiscal 2020. operating margin for the third quarter of 2021 was 23.9% compared to 23.4% in the third quarter of 2020 and 25.7% in the third quarter of 2019. The increase in operating margins from last year was mainly driven by higher revenues due to the waning negative impact of the COVID-19 pandemic, which produced improved leveraging of fixed costs during the third quarter of fiscal 2021. partially offset by increasing costs for items such as containers and disposal services. The increase in operating margin compared to, excuse me, the decrease in operating margin compared to 2019 was primarily due to increasing costs in the areas I just mentioned. Total company operating costs increased $12.4 million, or 18.5%, during the third quarter of 2021 compared to the third quarter of fiscal 2020, which was mainly due to higher labor costs, health and welfare costs, transportation-related expenses, and higher usual and pre-stop costs as a result of more business activity due to the lessening impacts of the COVID-19 pandemic. Our overall corporate SG&A expense of $14.4 million represents an increase of $3.9 million, or 41.4%, compared to the year-over-quarter, driven by an increase in our bonus reserve, as well as the absence of temporary wage reductions and the lack of a suspension of our 401 match, both of which occurred during the third quarter of 2020. EBITDA of $30.6 million was a record, and up $19.6 million compared to the year-ago quarter. This was the fourth consecutive quarter of record EBITDA, and third quarter EBITDA was 16.8% higher than the previous record from the second quarter of 2021. The company's effective income tax rate for the third quarter fiscal 2021 is 25.1%, compared to 22.7% in the third quarter of fiscal 2020. The rate increase is principally attributable to consistent levels of profitability as compared to the same quarter in the previous year. Looking at the balance sheet, we had an increase of $8 million in cash during the third quarter, which resulted in a balance of $75.3 million of cash on hand at the end of the quarter, despite an $11.4 million cash outlay for the acquisition Brian mentioned earlier. Our primary sources of liquidity for the quarter are cash flows from operations and funds available to borrow under our revolving bank credit facility. We generated $24.2 million in cash flows from operations during the quarter, which represents a 384% increase compared to the third quarter of 2020. We also generated free cash flow of $20.7 million during the third quarter of 2021, compared to $1.6 million during the third quarter of 2020. As Brian mentioned earlier, we've recently closed on multiple acquisitions. We expect these businesses will contribute approximately 25 to 30 million in annual revenue. Even as we work to integrate the newly acquired businesses, we continue to identify other potential acquisition targets which we believe can help us improve our business and achieve our mission. To summarize, we are working hard to combat the negative impacts inflation is having on our business in order to restore the margins in our environmental services segment, and we are thrilled with the execution in the oil business segment and our ability to continue to take advantage of the favorable market conditions. This concludes our prepared remarks. I will now turn the call over to Julie to take your questions.