Heritage-Crystal Clean, Inc.

Good morning, ladies and gentlemen, and welcome to the Heritage Crystal Clean Incorporated first quarter 2022 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 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 ameritization, 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, operator. Good morning, everyone, and thank you for joining us today. On behalf of the entire CrystalClean team, we are happy with our record first quarter earnings and are focused on taking steps to fight the unrelenting inflation we and many in our industry continue to experience. On a total company basis, we performed well during the quarter, exceeding our plan from a revenue, net income, and EBITDA standpoint. Mark will provide additional detail, but total first quarter revenue exceeded expectations at $139.4 million, which helped produce record first quarter EBITDA of $24.1 million, which was up 45.5% compared to EBITDA in the first quarter of 2021. Now I would like to discuss the results in both of our reporting segments. Let's start today with the oil business segment. During the first quarter of fiscal 2022, oil business revenue was a record high for a 12-week quarter at $54.7 million, an increase of $18.8 million, or 52.3% compared to $35.9 million in the first quarter of fiscal 2021. The increase in revenue was mainly due to an increase in our base oil net back of $1.50 per gallon compared to the first quarter of 2021. Additionally, our base oil sales volume of 11.8 million gallons during the quarter was slightly higher than the volume of base oil sold during the first quarter of 2021 and further contributed to our record revenue performance. Oil business segment operating margin increased sharply to a first quarter record of 33.7% compared to 28.1% in the first quarter of fiscal 2021. The higher operating margin compared to the first quarter of 2021 was mainly due to an increase in the spread between the net back, which is our sales price net of freight impact, on our base oil sales and the price paid charge to our customers for the removal of their used oil. Our re-refinery team continued to execute well during the first quarter. We produced 11.9 million gallons of base oil, which was 1.5% lower than the year-ago quarter. We continue to demonstrate why we believe the re-refinery operation is now a strength of our oil business segment. Let's now move on to the environmental services segment. In the environmental services segment, revenue for the first quarter of 2022 was $84.7 million compared to $69.5 million for the same quarter of 2021. This represents a record high for a 12-week quarter and an increase of $15.2 million, or 22%. The increase in revenue was mainly due to the increase in demand for our services compared to the prior year quarter, and to a lesser extent, by revenue from acquisitions made during the second half of 2021. We experienced revenue increases across all service lines in this segment when compared to the first quarter of 2021. Environmental services profit before corporate, selling, general, and administrative expenses was 14.1 million, or 16.7% of revenue, compared to 16 million, or 23% of revenue in the year-ago quarter. The decline in operating margin percentage was mainly due to higher transportation and disposal-related expenses, as well as higher container costs caused by extraordinary high inflation. Now I would like to look forward to discuss our outlook for the future. In our environmental services segment, the first quarter produced a great result from a revenue perspective. We generated double-digit revenue growth on a year-over-year basis throughout the first quarter. Assuming the overall U.S. economy remains steady, we expect to continue to achieve double-digit revenue growth during the second quarter and into the third quarter of 2022. with growth potentially moderating toward the end of the year, depending on macroeconomic conditions. From an operating margin standpoint, we have been facing and expect to continue to face inflationary pressure from any inputs to our service, such as third-party logistics, internal fuel costs, third-party waste disposal, and other items. Given that we do not own and operate disposal assets in certain parts of the country or for certain types of waste, We continue to experience increased costs and surcharges for many of our vendors. We are working hard to counteract the negative impacts of these items by internalizing more industrial non-hazardous waste processing. From a pricing standpoint, we implemented price increases toward the end of the first quarter. Given the ongoing cost increases we're experiencing, we will be implementing additional price actions during the second quarter. Customer acceptance of the price increases we've implemented over the past six months has been relatively high, and we anticipate that we will continue to experience a similar level of acceptance with these new pricing actions. Despite the cost pressures we're experiencing, we believe the steps I just mentioned will allow us to improve operating margin throughout the remainder of the year. We expect second quarter operating margin in the environmental services segment to be approximately 20%, We foresee further improvement in the third quarter into the mid-20% range. From an oil business segment perspective, we're excited with the start we've had to fiscal 2022. High distillate pricing along with increased demand has driven crude oil refiners to prioritize the manufacture of gasoline and diesel fuel and de-emphasize the production of base oil, which will help keep base oil supply tight relative to demand. Higher crude oil and BGO prices have also driven base oil prices higher. We believe base oil supply will continue to be tight to balance in the fourth quarter. This will lead to continued elevation of base oil prices throughout the remainder of the year. On the used oil feedstock side of the business, as expected, we saw our cost increases with the bullish move upward in crude oil pricing during the first quarter. With crude prices still on the rise, we continue to feel upward pressure on used oil feedstock costs. Despite the move upward in the acquisition costs for our used oil feedstock, if you compare our pay for oil during the first quarter to the last time crude oil price was at a similar level during 2014, our pay for oil was approximately 60 cents per gallon lower during the first quarter of 2022 compared to that earlier period. We believe this improvement in used oil collection costs is a clear indication of the structural improvement in the used oil re-refining business in the past couple of years. Unfortunately, inflation has also negatively impacted the oil business segment. We expect to experience higher natural gas, diesel fuel, caustic, and hydrogen costs in the second and third quarters. Despite the inflationary pressure, we expect the positive base oil pricing trends to lead to operating margins in the mid to high 20% range for the remainder of the year. The outlook I just provided assumes the general economy will continue to be strong and the supply chain disruptions and inflationary pressures will gradually subside. Should this not be the case, this could negatively impact our outlook. Before I turn it over to Mark, I want to discuss an exciting new opportunity for Crystal Clean. At the beginning of the second quarter, we announced our partnership with Battelle Memorial Institute to help combat the accumulation of PFAS and other forever chemicals, which is one of the largest environmental challenges in our generation. While the environmental benefits of working to destroy PFAS and water are tremendous, we're just as excited about the opportunity this presents for our company, employees, and shareholders. There's much work to be done, but by the end of the year, we expect to go from successful test runs to at one of our facilities for the use of production units, helping us to treat our customers' PFAS water either at their facilities for large generators or at one of our existing wastewater treatment facilities for lower volume customers. We will continue to keep you updated as we make progress with this exciting new venture. With that, Mark will walk us through our first quarter financial results.

Thanks, Brian. Good morning, everyone. It's great to be with you today. In the first quarter of 2022, we generated 139.4 million in revenue compared to 105.4 million in the same quarter of 2021, an increase of 34 million or 32.2%. The increase in revenue was mainly driven by higher base oil selling prices and higher demand for our products and services, and to a lesser extent by revenue from acquisitions made during the second half of 2021. Net income was a record $12.9 million or $0.54 per diluted share for the first quarter of 2022. This compares the net income of $9.2 million or $0.39 per diluted share in the year earlier quarter, which represents a basics earnings per share increase of 41% compared to the first quarter of 2021. To start, let's get into the details of the oil business segment results. Oil business segment first quarter revenues of $54.7 million were a record for a 12-week quarter and represent an increase of $18.8 million or 52.3% compared to the first quarter of fiscal 2021. As Brian mentioned, the increase in net back was the catalyst for higher revenue. On a sequential basis, our base oil net back decreased by 3 cents per gallon compared to the fourth quarter of 2021. From a profitability standpoint, Oil business segment profit before corporate SG&A expense increased by 8.4 million, or 83.1%, to 18.5 million, which represents a record for a first quarter. The operating margin was 33.7% in the first quarter of 2022, compared to 28.1% in the first quarter of fiscal 2021. The higher operating margin compared to the first quarter of 2021 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. The spread was up by $1.11 per gallon compared to the first quarter of 2021, but down 7 cents per gallon compared to the fourth quarter of 2021. From a used oil collection perspective, our road truck loading efficiency also increased by 1.5% in the first quarter of 2022 compared to the first quarter of 2021. This increase was achieved in spite of the fact that we increased the number of used oil collection sales and service representatives by approximately 12% during the quarter compared to the first quarter of 2021. The increased efficiency combined with more reps led to a 16% increase in internally collected used oil volume during the quarter compared to the first quarter last year. As you might expect, the cost of third-party used oil feedstock also increased during the quarter. The cost of this feedstock increased by 27 cents per gallon from the fourth quarter of 2021 to the first quarter of 2022. The increase would likely have been more if we not decreased our volume of third-party feedstock purchases by 42% compared to the first quarter of fiscal 2021. This decrease was made possible by the increase in internal used oil collection volume I mentioned earlier. The change between our net charge for used oil during the first quarter of fiscal 2021 to a net pay for oil during the first quarter of fiscal 2022 was $0.39 per gallon. Sequentially, our pay for oil increased by $0.04 per gallon from the fourth quarter of fiscal 2021 to the first quarter of fiscal 2022. Now let's discuss environmental services. The environmental services segment reported revenue of $84.7 million, an increase of $15.2 million or 21.9% compared to the year-ago quarter. The 21.9% increase in revenue was mainly due to the continued increase in demand for our services compared to the prior year quarter, and to a lesser extent, by revenue from acquisitions made during the second half of 2021. Revenue from acquisitions closed during the second half of fiscal 2021 accounted for 6.8% of the year-over-year revenue growth during the first quarter of fiscal 2022. We experienced volume increases across all service lines in the segment other than any freeze when compared to the first quarter of 2021. The volume growth was led by our containerized waste business and wastewater vacuum businesses. Most of our lines of business in this segment also had a positive impact in pricing and mix compared to the first quarter of 2021. Environmental services profit before corporate selling general and administrative expenses was 14.1 million, or 16.7% of revenue compared to 16 million or 23% of revenue in the year-ago quarter. In addition to the factors Brian mentioned earlier, the decrease in operating margin was also negatively impacted by higher parts cleaning machine costs and equipment rental expenses, partially offset by improved labor efficiency. As a result of these factors and the inflationary impacts Brian mentioned earlier in both segments, our total company operating costs increased by 25 million or 32.6% during the first quarter of 2022 compared to the first quarter of fiscal 2021. Our overall corporate SG&A expense of $15.3 million represents an increase of $1.8 million, or 13.6% compared to the year-ago quarter, driven by an increase in software expense, compensation benefits expense, legal fees, and higher amortization expense. as the percentage of revenue in corporate SG&A expense during the first quarter decreased to 11%, compared to 12.8% during the first quarter last year. EBITDA of $24.1 million was a first quarter record, and up 45.5% compared to $16.5 million in the year-ago quarter. The company's effective income tax rate for the first quarter of fiscal 2022 was 25.7%, compared to 25.9%, in the first quarter of fiscal 2021. The rate decrease is principally attributable to the reduced impact of certain adjustments to financial reporting income due to increased levels of profitability as compared to the first quarter of fiscal 2021. Looking at the balance sheet, we had an increase of $14.8 million in cash during the first quarter compared to year end, which resulted in a balance of $71.1 million of cash on hand at the end of the quarter. Our primary sources of liquidity for the quarter were cash flows from operations and funds available to borrow under our revolving bank credit facility. We generated 24.6 million in cash flow from operations during the quarter, which represents a 51.8% increase compared to the first quarter of 2021. We also generated free cash flow of 15.4 million during the first quarter of 2022, compared to 10.9 million during the first quarter of 2021. for an increase of 43%. To recap, we're excited with the strong top line growth we're experiencing in our environmental services segment, and we're working hard to combat the negative impacts inflation is having on our business in order to restore our margin in this segment. We continue to be pleased with the execution in the oil business segment and our ability to capitalize on the structural changes in the used oil collection industry which are allowing us to improve upon the historical economics of that business. This concludes our prepared remarks. I will now turn control of the call over to the operator to take your questions.