Heritage-Crystal Clean, Inc.

Good morning, ladies and gentlemen, and welcome to the Heritage Crystal Clean Incorporated second 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 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 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 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 it over to Brian Riccardo. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining us today. On behalf of the entire CrystalClean team, we're very happy to report our record second quarter earnings yesterday. We're 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 budget from a revenue, net income, and EBITDA standpoint. Mark will provide additional detail, but total second quarter revenue exceeded expectations at $156.6 million, which helped produce record second quarter EBITDA of $35.9 million, which was up 37% compared to EBITDA in the second quarter of 2021. Now I would like to discuss the results in both of our reporting segments. Let's start with the oil business segment. During the second quarter of fiscal 2022, oil business revenue was a record high for a 12-week quarter at $64.8 million, an increase of $20.2 million, or 45.3%, compared to $44.6 million in the second quarter of fiscal 2021. The increase in revenue was mainly due to an increase in our base oil net back of $1.51 per gallon compared to the second quarter of 2021. Oil business segment operating margin increased sharply to 41.4% in the second quarter of fiscal 2022, compared to 34.2% in the second quarter of fiscal 2021. The higher operating margin compared to the second 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 motor oil. From an operations perspective, our re-refinery team continued to execute well during the second quarter. We produced 11.8 million gallons of base oil, which was slightly higher than the year-ago quarter. I would also like to highlight that our re-refinery team has operated the location for seven consecutive years without a recordable injury driven by continually improving operating culture. Let's now move on to the environmental services segment. In the environmental services segment, revenue for the second quarter of 2022 was $91.9 million compared to $72.7 million for the same quarter of 2021. This represents a record high for a 12-week quarter and an increase of $19.2 million or 26.4%. 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 the segment when compared to the second quarter of 2021. Environmental services profit for corporate selling general and administrative expenses was $19.8 million or 21.5% of revenue compared to $19.2 million or 26.4% of revenue and the year-ago quarter. The decline in operating margin percentage is mainly due to higher disposal and transportation expenses caused by extraordinarily high inflation. The end disposal markets remain in an oversupplied position, and we expect the condition will not improve for the balance of 2022. Now I would like to look forward and discuss our outlook for the future. In our environmental services segment, the second quarter produced a great result from a revenue perspective. We generated double-digit revenue growth on a year-over-year basis for the fifth straight quarter. Assuming the overall U.S. economy remains steady, we expect to continue to achieve double-digit revenue growth during the second half of 2022. From an operating margin percentage standpoint, we continue to deal with inflationary pressure from many inputs to our service compared to the prior years, such as third-party waste disposal, transportation, fuel, containers, and other items. Given that we do not own and operate disposal assets in certain parts of the country or for certain types of wastes, we continue to experience increased costs and surcharges from many of our disposal vendors. We are working hard to counteract the negative impacts of these by internalizing more industrial non-haz waste processing. From a pricing standpoint, we implemented increases toward the end of the second quarter. Customer acceptance of the price increases we've implemented over the past nine months has been relatively high, and we expect we will experience a similar level of acceptance as we continue to roll out the Q2 price increases. As a result, we expect stable to slightly improving operating margin performance during the third quarter. From an oil business segment perspective, we expect base oil supply will continue to be tight to balance for most of the remainder of the year. As a result, base oil prices will continue to remain relatively high throughout the third quarter and early fourth quarter until normal seasonal headwinds arrive toward the end of the year. On the used oil feedstock side of the business, as expected, we saw our costs increase with the bullish move upward in crude oil pricing during the second quarter. With crude prices moderating more recently, we expect our pay for oil to begin to flatten during the third quarter. From a broad perspective, we expect to continue to acquire used oil feedstock at a much lower cost relative to crude oil price than we have in years past due to the structural improvements which occurred in the industry as a result of the IMO 2020 regulation. We also expect our operating costs and our re-refinery to remain elevated on a year-over-year basis due to the higher cost of items such as natural gas and hydrogen. From a profitability perspective, we expect operating margins in the oil business segment to be in the mid-30% range for the third quarter and the high 20% range for the fourth quarter. This outlook assumes we will take the annual extended shutdown in our re-refinery during the fourth quarter. The outlook I've just provided assumes inflation does not worsen in the near term and that general economic conditions are relatively stable. It also assumes we'll receive at least some minor relief from the supply chain disruptions, which have hampered various parts of our business on and off for the past nine months. Should these assumptions not hold true, this could negatively impact our outlook. Now I want to discuss an exciting new opportunity for Crystal Clean. At the end of June, we announced our entrance into a defensive agreement to acquire Patriot Environmental Services. Patriot is a leading provider of environmental services across the western United States, specializing in a wide variety of waste services, including emergency response, industrial services, and OSRO spill response. Patriot provides full-service environmental solutions to a wide variety of end markets, serving customers within manufacturing, agriculture, construction, healthcare, mining, oil and gas, transportation, and utility markets. From custom on-site services to industrial waste disposal, as well as wastewater treatment, Patriot operates at 18 locations, primarily in the western United States. This acquisition should provide us several positives. First, it will increase our presence in the western U.S., which has been a goal of ours since I became CEO over five years ago. Second, it helps us further our initiative to vertically integrate our business from a non-haz-waste standpoint, with the addition of Patriot's two wastewater treatment facilities and one non-hazardous solids processing site. Along with a tuck-in acquisition we made over 11 months ago, we now have several waste processing sites in the western U.S., which should help us grow revenue in this geography, as well as lower our overall cost to process non-hazardous waste collected in the area. Lastly, the acquisition will provide us an industrial services platform in the western U.S. Having this platform should help us build out an industrial service platform in the remainder of our service areas in the years to come. We expect to close the Patriot Environmental Acquisition this quarter. On the Governor's front, I'm thrilled to report we have entered into an agreement to have Mary Pat Thompson join our Board of Directors and serve on our Audit Committee. Mary Pat comes to Crystal Clean with over 30 years' experience in accounting and advisory leadership roles. She currently serves as director on both public and private company boards and will be an asset to the company as we push forward with our growth and ESG strategy. We will issue a separate press release with more details on Mary Pat's background. Before I turn Nicole over to Mark, I would like to provide an update on our PFAS strategy. As we disclosed earlier this year, we are partnering with Battelle to be their sole service provider for commercial applications of their technology. to treat and destroy PFAS in wastewater. Patel's approach adapts supercritical water oxidation technology to destroy PFAS at the molecular level. They call this technology the Annihilator. I'm happy to report we're on schedule to complete and take ownership of the first commercial version of the Annihilator by the end of this year. We expect to deploy this first unit at our Grand Rapids, Michigan area wastewater treatment facility to support commercial processing of spent firefighting foam, and concentrated PFAS contaminated solutions. With that, Mark will take us through our second quarter financial results.

Thank you, Brian. I want to wish everyone a great morning. It's a pleasure to be with you today. In the second quarter of 2022, we generated $156.6 million in revenue, compared to $117.3 million in the same quarter of 2021. an increase of $39.4 million, or 33.6%. This 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 $21.1 million, or $0.89 per diluted share for the second quarter of 2022. This compares to net income of $15.1 million, or $0.64 per diluted share in the year earlier quarter, which represents a diluted earnings per share increase of 39% compared to the second quarter of 2021. I'd like to begin our segment results discussion with our oil business segment. Oil business segment second quarter revenues of $64.8 million were a record for a 12-week quarter and represent an increase of $20.2 million, or 45.3%, compared to the second quarter fiscal 2021. As Brian mentioned, the increase in net back, which is our sales price net of freight charges, was the catalyst for higher revenues. On a sequential basis, our base oil net back increased by 82 cents per gallon compared to the first quarter of 2022. Our volume of base oil sold was flat compared to the second quarter of 2021 at 11.5 million gallons. From a used oil collection perspective, our road truck loading efficiency increased by 1.5% in the second quarter of 2022 compared to the second quarter of 2021. This increase was achieved in spite of the fact that we increased the number of used oil sales and service representatives by approximately 7% during the quarter compared to the second quarter of 2021. The increased efficiency combined with more reps led to an 11% increase in internally collected used oil volume during the quarter compared to the second quarter of 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 53 cents per gallon from the second quarter of 2021 to the second quarter of 2022. The increase may have been more had we not decreased the volume of our third-party feedstock purchases by 18% compared to the second quarter of fiscal 2021. This decrease was made possible by the increase in internal used oil collection volume I mentioned earlier. The increase between our net pay for oil during the second quarter of fiscal 2021 to the net pay for oil during the second quarter of fiscal 2022 was $0.34 per gallon. Sequentially, our pay for oil increased by $0.11 per gallon from the first quarter of 2022 to the second quarter of 2022. As Brian mentioned, Our re-refinery continues to run well. During the second quarter, we produced base oil at a rate of 102.4% of our nameplate capacity. While our production volume was up slightly, operating costs per gallon of base oil produced increased by approximately 18%. This increase was driven in part by higher natural gas and hydrogen pricing from our suppliers. From a profitability standpoint, oil business segment profits before corporate SG&A expenses increased by 11.6 million or 75.8% to 26.8 million, which represents an all-time record. The operating margin was 41.4% in the second quarter of 2022 compared to 34.2% in the second quarter of fiscal 2021. The operating margin compared to the second quarter of 2021 was mainly due to the increase in the spread between our net back and our base oil sales price. and the price paid or charged for our customers for the removal of the used oil. This spread was up by $1.17 per gallon compared to the second quarter of 2021 and up by 71 cents per gallon compared to the first quarter of 2022. Now let's discuss the environmental services segment. The environmental services segment reported revenue of 91.9 million, an increase of 19.2 million or 26.4% compared to the year ago quarter. The 26.4% increase in revenue was mainly due to an increase in demand for our services compared to the prior 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 8.3% of the year-over-year growth during the second quarter of fiscal 2022. We experienced volume as well as price increases across all service lines in the segment. when compared to the second quarter of 2021. A majority of the revenue growth was volume driven, led by our containerized waste and wastewater vacuum businesses. Environmental services profit before corporate selling general and administrative expenses was a 12-week quarter record of $19.8 million, or 21.5% of revenue, compared to $19.2 million, or 26.4% 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 container 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 26.4 million or 33.7% during the second quarter of 2022. compared to the second quarter of fiscal 2021. Our overall corporate SG&A expense of $16.5 million represents an increase of $2 million, or 15.2%, compared to the year-over-quarter, driven by an increase in salaries and benefits, as well as depreciation and amortization. As a percentage of revenue, corporate SG&A expense during the second quarter decreased to 10.5% compared to 12% during the second quarter last year. If you remove the cost incurred related to our pending acquisition of Patriot Environmental, our co-pedestrian expenses would have been $14.2 million, which would have represented an increase of only 8.9% compared to the second quarter of 2021. EBITDA of $35.9 million was an all-time record and up 37% compared to $26.2 million in the year-ago quarter, and our adjusted EBITDA of $39.9 million in the second quarter was also a record. The company's effective income tax rate for the second quarter of fiscal 2022 was 27% compared to 26.1% in the second quarter of fiscal 2021. The rate increase is principally attributable to the increased impact of certain adjustments to the federal income tax, the federal taxable income, excuse me, as compared to the first half of fiscal 2021. Looking at the balance sheet, we had an increase of $2.7 million in cash during the second quarter of fiscal 2022, which resulted in a balance of 73.8 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 a revolving bank credit facility. We generated 14.6 million in cash flow from operations during the quarter. We also generated free cash flow of 7.8 million during the second quarter of 2022. compared to $19.6 million during the second quarter of 2021. As Brian mentioned, we hope to close on our acquisition of Patriot Environmental in early August. Our $156 million purchase price represents a multiple of approximately 5.5 times 2021 EBITDA, which included a portion of a large spill cleanup project. If you adjust the results for this larger-than-normal project on a pro forma, pre-synergy basis, The purchase price represents a multiple of approximately nine times the trailing 12-month EBITDA. We expect to generate approximately $7 million in cost synergies on an annualized basis from the acquisition. We anticipate most, if not all, of these synergies will be generated during the first 12 months post-acquisition. To recap, we're excited with the strong top-line growth we're experiencing in our environmental services segment. We're working hard to combat the negative impacts inflation is having on our business in order to restore our margins 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 historical economics of that business. This concludes our prepared remarks. I'll now turn control of the call over to the operator to take your questions.