Heritage-Crystal Clean, Inc.

Good morning ladies and gentlemen and welcome to the Heritage Crystal Clean Incorporated third 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 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 Riccato, and the Chief Financial Officer, Mr. Mark DeVita. At this time, I would like to turn the call over to Brian Riccato.

Please go ahead, sir.

Thank you, Brent. Good morning, everyone, and thank you for joining us today. On behalf of the entire Crystal Clean team, we're very happy to report our record third quarter earnings yesterday, driven by outstanding performances in both business segments. 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 third quarter revenue exceeded expectations at $172.2 million, which helped produce a record adjusted EBITDA of $43.5 million, which was up 37% compared to EBITDA in the third quarter of 2021. Now I'd like to discuss the results in both of our reporting segments. Let's start with the oil business segment. During the third quarter of fiscal 2022, oil business revenue was a record high for a 12-week quarter at $65.5 million, an increase of $14.7 million, or 28.9%, compared to $50.8 million in the third quarter of fiscal 2021. The increase in revenue was mainly due to an increase in our base oil net back of $1.57 per gallon compared to the third quarter of 2021. Oil business segment operating margin decreased slightly to 40.6% in the third quarter of fiscal 2022, compared to a record high of 42.8% in the third quarter of fiscal 2021. The lower operating margin compared to the third quarter of 2021 was mainly due to an increase in transportation-related expenses, increased downtime at the re-refinery, and other inflationary pressures across the segment, which offset an improvement 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. From an operations perspective, we incurred more downtime at the re-refinery during the quarter compared to the third quarter of last year. This led to a decrease in production of approximately 2 million gallons of base oil compared to the third quarter last year. Despite some challenges, we continued to operate the re-refinery in a safe manner as we extended our record of having no recordable injuries during the past seven consecutive years. Let's now move on to the environmental services segment. As you're aware, we closed the acquisition of Patriot Environmental in the second half of the third quarter. We're very enthusiastic about the employees we've added from Patriot, and we're excited to welcome them to the Crystal Clean team. We continue to have high hopes for the performance of the legacy Patriot business and platform it provides us to grow our industrial and field services business in the central and eastern U.S., The results for the Patriot business are included in our environmental services segment. In the environmental services segment, revenue for the third quarter of 2022 was $106.7 million compared to $72.3 million for the same quarter of 2021. This represents a record high compared to all previous quarters and an increase of $34.3 million or 47.5%. The increase in revenue was due to the increase in demand for our services compared to the prior year quarter and by revenue from acquisitions made during the second half of 2021, as well as the recent Patriot acquisition. Excluding the Patriot acquisition, third quarter revenue grew by 35.3% as we experienced revenue increases across all service lines in the segment when compared to the third quarter of 2021. Environmental services profit before corporate selling general and administrative expenses was $24.8 million, or 23.2% of revenue, compared to $17.3 million, or 23.9% of revenue in the year-ago quarter. The decline in operating margin percentage was mainly driven by higher transportation costs, costs for extraordinarily high inflation and increased rental costs, primarily for rolling stock. The end disposal markets remain in an oversupplied position, and we expect the condition will not improve until mid-July. Now I would like to look forward and discuss our outlook for the future. In our environmental services segment, the third quarter produced a great result from a revenue perspective. We generated double-digit organic revenue growth on a year-over-year basis for the sixth straight quarter. Assuming the overall U.S. economy remains steady, we expect to continue to achieve double-digit revenue growth during the fourth quarter and the legacy crystal clean business. As we move deeper into fiscal 2023, barring a recession, we expect organic revenue growth to moderate our legacy crystal clean business and eventually get back to high single digits. From an operating margin standpoint, we continue to deal with inflationary pressure for 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 waste, 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 items by internalizing more industrial, non-hazardous waste processing. While fuel costs have come off their recent highs from earlier in the year, costs remain stubbornly elevated. We are continuing to monitor the impact inflationary factors are having on our margins, and at this point we expect our operating margin during the fourth quarter to be similar to our third quarter performance. We still believe we can get our operating margin in the environmental services segment back up to the 27% level once inflationary and supply chain conditions subside. From an oil business segment perspective, we have already seen base oil prices soften during the early part of the fourth quarter. Specifically, spot prices for the type of Group 2 base oil we sell are down almost 60 cents per gallon compared to the average during the third quarter. This is partially the result of softening demand. As we get closer to the end of the fourth quarter and into the first quarter of 2023, we expect base oil prices to stay lower compared to the past couple of quarters. On the used oil feedstock side of the business, we have very recently begun to see a slight decline in pay for oil with a dip in the price of crude oil. However, given the recent increase in the price of crude and the typical lag between when the price of crude oil changes and when we're able to decrease our pay for oil, we're expecting pay for oil to be relatively flat during Q4. From a longer-term perspective, we expect to continue to acquire used oil feedstock at a much lower cost relative to crude oil price, as we did for the first three quarters of this year compared to before the IMO 2020 regulation went into effect. We also expect our operating costs and our re-refined rate to remain elevated on a year-over-year basis due to the higher cost of items such as natural gas, hydrogen, nitrogen, and caustic materials. As planned, we are having our longest shutdown of the year along with another shorter planned outage during Q4. These shutdowns should total approximately 15 days. From a profitability perspective, due to all the factors previously mentioned, we expect our old business operating margin to be in the 20% range for the fourth quarter. The outlook I just provided assumes the economy does not fall under recession. Should these assumptions not hold true, this could negatively impact our outlook. Before I turn the call over to Mark, I would like to provide an update on our PFAS strategy. We recently finalized an exclusivity agreement with two of our partners to utilize their foam fractionation technology to remove and concentrate PFAS from high-volume leachate and groundwater streams. The concentrated PFAS waste can then be processed by Patel's Annihilator Unit, which uses heat and pressure to destroy the PFAS in the concentrated waste stream. The combination of these technologies will allow us to provide a turnkey, economically viable solution to treat large-volume PFAS-contaminated wastewater streams. This foam fractionation technology is already being used successfully in Europe, and we're currently operating a unit at our Michigan wastewater plant to successfully treat landfill leachate. With that, Mark will take us through our third quarter financial results. Thanks, Brian.