Heritage-Crystal Clean, Inc.

Good morning, ladies and gentlemen, and welcome to the Heritage Crystal Clean Incorporated fourth 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 your 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 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 Executive Vice President and 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, Colby. 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 that we're very pleased with our record-setting fourth quarter and full-year performance. We produced record revenue, net income, and EBITDA during the fourth quarter. Mark will provide additional detail, but total fourth quarter revenue exceeded expectations at $241 which helped produce record EBITDA of $52.9 million. Now I would like to discuss the results in both of our reporting segments. Let me start with our oil business segment. During the fourth quarter of fiscal 2022, oil business revenues increased 14.3% to $75.3 million compared to the fourth quarter of fiscal 2021. The increase in revenue was mainly due to an increase in our base oil net back of 67 cents per gallon compared to the fourth quarter of 2021. Oil business segment operating margin performed better than expected for the fourth quarter of 2022, but decreased 7.3 percentage points to 26.4% compared to 33.7% during the same period of 2021. The better than expected operating margin was mainly attributable to a higher spread between the net back on our base oil sales and the price paid charged to our customers for the removal of their used oil. In comparison with the fourth quarter of 2021, the decrease in operating margin was mainly due to increased costs related to transportation and hydrogen expense, as well as lower leveraging of fixed costs due to lower production. partially offset by an increase in the spread. Our re-refinery team produced 13 million gallons of base oil during the quarter, which was approximately 8.1% less than the fourth quarter of 2021. A lower production was caused by an increase in unplanned downtime when compared to the fourth quarter of 2021. Let's now move on to the environmental services segment. In the environmental services segment, revenue for the fourth quarter of 2022 was $165.8 million compared to $103.7 million for the same quarter of 2021, an increase of $62.2 million or 60%. The increase in revenue was mainly due to the continued reopening of the U.S. economy post the COVID-19 pandemic. as well as revenue from our acquisition of Patriot Environmental during the third quarter of fiscal 2022. We experienced volume increases across all of our service lines in this segment during the fourth quarter of fiscal 2022 when compared to the fourth quarter of 2021. Our revenue growth was achieved despite the negative impact of winter storms in parts of the Midwest and eastern U.S. near the end of the fourth quarter. Environmental services segment profit before corporate selling general and administrative expenses was $35.1 million or 21.2% of revenue compared to $22.8 million or 22% of revenue in the year-ago quarter. The decline in margin on a percentage basis was due in part to increased equipment rental expense and solvent cost. While we were disappointing with our operating margin in this segment during the fourth quarter, We have a plan to improve our performance in upcoming quarters. One of the areas which impacted our legacy branch business during the fourth quarter and throughout 2022 was supply chain issues related to third party waste disposal. For example, our main outlet for incineration waste disposal was down and could not process waste for a majority of 2022. We also encountered multiple situations throughout last year, when other third-party disposal outlets had operational challenges and could not accept waste. These outages caused us to redirect hazardous waste to secondary outlets at a higher overall transportation and disposal cost. Looking forward, our main incineration outlet has been back online and processing waste for a few months. We're also hopeful that between our efforts to vertically integrate from a waste processing standpoint, and receiving more reliable service from other hazardous waste processing partners, that 2023 will bring improved efficiencies related to waste disposal. We successfully processed approximately 88,000 waste containers at our non-hazardous waste processing facilities and expect to increase our throughput by 30,000 containers during 2020. We're also beginning to see tailwinds in other commodities supporting our drum transportation and disposal business. Items such as containers, fuel, treatment chemicals, and parts washer solvent have all stabilized our decrease in price over the past few months. From a revenue perspective in our environmental services segment, we're expecting to continue to have top line revenue growth. So we're not seeing any measurable decrease in demand during the early part of the first quarter. We expect to have strong double-digit revenue growth in early 2023, with moderating growth as we progress through the remainder of the year due to an expected slowdown in macroeconomic conditions. The expected strong revenue growth is particularly exciting given the strong comps we'll be facing throughout 2023. From an operating margin percentage standpoint, despite our fourth quarter results, we still believe we can increase profitability to the mid 20% range, even though it is taking longer than expected due to continued inflationary and hazardous waste supply chain issues. We initiated another price increase at the end of the fourth quarter, and we expect to realize most of the benefits of this increase in the first quarter of 2023. This should translate into improvement in operating margins as we move forward. On a run rate basis, we expect to exit 23 in the mid 20% range from an operating margin perspective. In the oil business segment, towards the end of the fourth quarter of 2022, we saw base oil demand softening. In line with seasonal expectations, we have continued to experience soft demand in the beginning of 2023. During the first half of this year, we expect spreads to continue to be strong. We're forecasting spreads to moderate in the second half of the year to what we think will be the new long-term norm, which we believe will be above pre-pandemic levels. From an operating margin standpoint, we expect full year 2023 to be in the mid-20% range, with higher margins in the first half of the year, then moving slightly lower in the second half of the year. Finally, I want to take a minute to discuss one of our more exciting opportunities. In early 23, we introduced our Fornever branded solution for management of PFAS contaminated waste. Fornever is a first-to-market program which utilizes both PFAS concentration and construction technology to provide landfills and industrial business. Business is a single solution to the complex and potentially costly problem of management of PFAS waste streams. We're very excited about this opportunity and we've received a lot of interest in this new service from the marketplace. Our current focus is on ramping up our ability to provide the service to meet the demands of the market. While we're in the infancy of the program, we believe this business has the potential to deliver approximately 25 million in revenue on a run rate basis by the end of 23. With that, Mark will take us through our fourth quarter financial results. Thanks, Brian.

It's a pleasure to speak with everyone today. In 2022, we generated $709.3 million of revenue compared to prior year revenue of $515.3 million, an increase of $194 million, or 37.6%. The company's 2022 fiscal year was comprised of 254 working days compared to 253 working days in fiscal 2021. On a sales per working day basis, Revenue increased approximately 37.1% fiscal 2022 compared to the prior year. The increase in revenue was due to improvement in base oil pricing in our oil business segment, along with increased demand and higher selling prices for the products and services in our environmental services segment, as well as by revenue from our acquisition of Patriot Environmental near the end of the third quarter of 2022. That income was $27.6 million. or $1.16 per diluted share for the fourth quarter of 2022. This compares the net income of $18.1 million, or $0.77 per diluted share in the year earlier quarter. Adjusted net earnings for the quarter were $18.8 million, with the largest adjustment compared to GAAP net income being a $12.2 million unrealized gain recorded in the fourth quarter of 2022 as a result of a remeasurement of our investment in Retrieve Old Co. LLC, which was initially made earlier in 2022. Our fourth quarter 2022 adjusted diluted earnings per share were $0.81 compared to $0.79 in the fourth quarter of 2021. Let's get into the details and discuss our old business segment results. As Brian mentioned, our old business segment revenue increased 14.3% to $75.3 million compared to the fourth quarter of fiscal 2021. An increase in base oil prices was the main driver of the increase in revenue on a year-over-year basis. Brian mentioned that the base oil market softened during the fourth quarter compared to the third quarter of fiscal 2022. This softening resulted in our base oil net back decreasing by 80 cents per gallon during the fourth quarter compared to the third quarter of 2022. From a volume perspective, we sold 13.7 million gallons of base oil during the fourth quarter which represents a 2.2% decline compared to the fourth quarter of fiscal 2021. From a profitability standpoint, oil business segment operating margin was $19.9 million or 26.4% of segment revenue during the fourth quarter compared to $22.2 million or 33.7% in the year-ago quarter. In addition to the factors Brian already mentioned, segment profitability was also negatively impacted by higher natural gas costs. On the used oil collection side of the business, our weighted average pay for oil increased by 22 cents per gallon in the fourth quarter of 2022 compared to the fourth quarter of 2021. Compared to the third quarter, our pay for oil decreased by 3 cents per gallon during the fourth quarter. The fourth quarter was the first quarter since Q2 2020 that our pay for oil declined on a sequential basis. From a volume perspective, we collected 13.7% more used oil during the fourth quarter of 2022 compared to the fourth quarter of 2021. From the re-refinery perspective, we produced 47.2 million gallons of base oil during fiscal 2022, which represents 94.4% of nameplate base oil capacity. This represents a slight decline from record production in 2021. The decrease in base oil production was primarily due to the increase in unplanned downtime at the re-refinery during the fourth quarter, which Brian mentioned earlier. Now let's discuss environmental services. The environmental services segment reported revenue of $165.8 million, an increase of $62.2 million, or 60%, during the quarter compared to the fourth quarter fiscal 2021. The increase in revenue was mainly due to the continued reopening of the U.S. economy post the COVID-19 pandemic, as well as revenue from our acquisition of Patriot Environmental made during the third quarter of fiscal 2022. The organic revenue increase during the fourth quarter compared to the prior year quarter was driven by both volume and pricing in our parts cleaning, wastewater vacuum, and antifreeze businesses, and primarily volume in the containerized waste and field services businesses. Revenue from the Patriot Environmental Acquisition during the fourth quarter was $36.6 million, which represented 35.3% of revenue growth for the segment compared to the fourth quarter of fiscal 2021. On a sales per working day basis, overall environmental services segment revenue increased approximately 57.9% compared to the prior year quarter. Our profit before corporate SG&A expense as a percentage of revenue decreased to 21.2% compared to 22% in the year-ago quarter. The decline in margin percentage was primarily driven by higher fuel costs, solvent expenses, and equipment rental expense. Our overall corporate SG&A expense of $28.7 million increased by $8.2 million compared to the year-ago quarter. The increase was mainly driven by higher salaries and benefits, as well as higher amortization of intangibles related to acquisitions. Corporate SG&A expenses and percentage of revenue decreased slightly to 11.9% from 12.1% in the year-ago quarter, mainly due to higher revenue and lower share-based compensation expense. EBITDA for the fourth quarter was $52.9 million and up 60%. or $19.7 million compared to the year-ago quarter. This represents the third consecutive quarter of record EBITDA. Adjusted EBITDA of $42.1 million was 17.5% of revenue and represents a 17.9% increase compared to the prior year quarter. The company's effective income tax rate for fiscal 2022 was 26.5% compared to 25.8% in fiscal 2021. The difference in the effective tax rate principally attributable to the diminished impact of certain required adjustments to financial reporting income in determining taxable income in fiscal 2022 as compared to the impact of those adjustments in fiscal 2021. Looking at the balance sheet, we had $22.1 million of cash on hand at the end of the quarter. This balance is reflective of a $10 million payment on a revolving loan made during the fourth 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 $34.2 million in cash flow from operations during the quarter, which represents a 22.6% increase compared to the fourth quarter of 2021. We generated free cash flow of $10.7 million during the fourth quarter of 2022 compared to $15.9 million during the fourth quarter of 2021. From an M&A perspective, we have a robust pipeline of opportunities, and we continue to look for target companies which we believe will fit well with our strategy. Regarding our recent acquisition of Patriot Environmental, as at the end of fiscal 2022, on an annualized basis, we effectively achieved our cost synergy goal, and we continue to look for more synergy opportunities as a result of this transaction.