Heritage-Crystal Clean, Inc.

Ladies and gentlemen, thank you for standing by. Today's conference call will begin momentarily. Until that time, your lines will again be placed on music hold. Thank you for your patience. Good morning ladies and gentlemen and welcome to Heritage Crystal Clean Incorporated first quarter 2023 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 questions. We ask that all callers limit themselves to one or two questions. With us today from the company are the President and Chief Executive Officer, Mr. Brian Riccardo, and the Executive Vice President and Chief Financial Officer, Mr. Mark DeVita. At this time, I would like to turn the call over to Mark DeVita. Please go ahead, sir.

Thank you, JL, and good morning, everyone. Some of the comments we will make today are forward-looking. 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 are non-GAAP measures. Please see our website for reconciliations of these non-GAAP financial measures to GAAP. We want to remind everyone that we have begun reporting our results in three segments beginning in the first quarter of 2023. Our oil business segment will continue to reflect the same activities reflected in the oil business segment in the past. We have begun to report the results from the former Patriot Environmental Business, the HCC Legacy Field Services business, and the operations of our non-hazardous waste processing facilities in our new industrial and field services segment. The remainder of the activity historically reported in the environmental services segment will continue to be reported in the new environmental services segment. In addition to the reporting segment change I just discussed, Beginning with our 2023 fiscal year, we are reporting our results on a calendar quarter and calendar year basis. For more information about our company, please visit our website. Now I would like to turn the call over to Brian Riccato to start.

Thank you, Mark. Good morning, everyone, and thank you for joining us today. On behalf of the entire Crystal Clean team, we're very pleased to report our first quarter earnings yesterday. along with the financial reporting changes Mark mentioned earlier. On a total company basis, we performed well during the quarter, setting records for revenue, net income, earnings per share, and EBITDA when compared to the prior year quarter. Total first quarter revenue was a three-month quarter record at $193.5 million, which helped produce EBITDA of $36.2 million. which was up 50.4% compared to the first quarter of 2022. Now I would like to discuss the results in our reporting segments. Let's start with the environmental services segment first. In the environmental services segment, revenue for the first quarter of 2023 was $94.8 million compared to $73.5 million for the same quarter of 2022. This represents a record high for a three-month quarter and an increase of $21.2 million, or 28.9% from the year-ago quarter. The increase in revenue was mainly due to increased demand and higher prices for our services compared to the prior year quarter. We experienced revenue increases across all service lines in this segment when compared to the first quarter of 2022. Environmental services profit before corporate selling general and administrative expenses was $22.7 million, or 24% of revenue compared to $13.1 million, or 17.7% of revenue in the year-ago quarter. The increase in operating margin percentage was mainly driven by the price increase we initiated in December of 2022. Now let's discuss the industrial and field services segment. Industrial and field services revenue was $45.8 million for the first quarter of 2023, compared to $11.1 million for the first quarter of fiscal 2022. The $34.7 million increase in revenue was mainly driven by revenue from our acquisition of Patriot Environmental Services during the second half of 2022, and to a lesser extent, by higher demand and increased prices in our legacy field services business. Industrial and field services profit before corporate SG&A expense increased 6.4 million or 583.6% in the first quarter of 2023 compared to the first quarter of fiscal 2022. Operating margin for the first quarter of 2023 was 16.3% compared to the recast margin of 9.8% in the first quarter of 2022. The increase in operating margin was mainly driven by increased revenues and better contribution margin from the Patriot environmental acquisition made during the second half of 2022. From an integration standpoint, the Patriot acquisition has performed better than expected and cost reduction synergies are on plan. Let's now move on to the oil business segment. Before we discuss the financial performance, I want to highlight that our re-refinery has worked 1.2 million man hours in almost seven years without a recordable injury. I want to thank our team members for this tremendous accomplishment. During the first quarter of fiscal 2023, oil business revenue was $53 million, a decrease of $1.8 million or 3.2%. compared to $54.7 million in the first quarter of fiscal 2022. A decrease in revenue was mainly due to a decrease in base oil sales volume compared to the prior year quarter, partially offset by an increase in base oil sales price. Oil business segment operating margin decreased to 26.5% compared to 33.8% in the first quarter of fiscal 2022. A lower operating margin compared to the first quarter of 2022 was mainly due to a decrease in revenue from lower base oil sales volume, along with increased labor and transportation expenses. Increased labor costs as a percentage of revenue was due to our decision to intentionally slow the run rate at the re-refinery as a result of softer than expected base oil demand. Despite the slower run rate, our re-refinery team continued to execute well during the first quarter. We produced 12.1 million gallons of base oil during the first quarter, which was 1.8% higher than the year-ago quarter. Now I would like to look forward and discuss our near-term future outlook. In our environmental services segment, we expect revenue growth in the mid-teens during the second quarter as macroeconomic indicators continue to show signs of a softening economy. From an operating margin standpoint, while certain operating costs have moderated, we have been facing and expect to continue to face inflationary pressure in some areas of our business, such as third-party hazardous waste disposal. We will continue to monitor these cost pressures and, if necessary, consider additional pricing actions. We expect second quarter operating margin in the environmental services segment to be relatively flat to the first quarter of 2023. From an industrial and field services segment perspective, we continue to see strong demand and growth. On a year-over-year basis, we expect our revenue increase will be significant. On a sequential basis, we expect at least single-digit and possibly higher revenue growth compared to the first quarter of 2023. From an operating margin percentage standpoint, we expect to be in the mid-teens range. Longer term, we are adding significant drum processing capabilities to our industrial and field services segment, which will begin to lower our reliance on third-party suppliers while increasing margin contribution. For the oil business segment, our base oil pricing has been down sequentially for the past two quarters, and we expect it to continue to move lower during the second quarter. This price decline has been driven by unseasonably soft demand as there has been no sign of the increase in demand we typically experience at the beginning of the second quarter. Due to the soft base oil market and the fact that we built base oil inventory during the first quarter, we plan to take our once per year extended shutdown at the re-refinery during the second quarter. Moving the timing of our extended shutdown in the second quarter will result in more downtime during the quarter and should put downward pressure on our operating margin. From a used motor oil standpoint, we will work to offset the impact of declining base oil pricing by lowering the price we pay for collected oil. As a result, we expect our operating margin percentage for our oil business segment to be in the mid to high teens for the second quarter, and then moving above 20% for the balance of the year. With that, Mark will take us through our first quarter financial results.