Heritage-Crystal Clean, Inc (NASDAQ:HCCI) Q1 2023 Earnings Call Transcript May 10, 2023

Heritage-Crystal Clean, Inc beats earnings expectations. Reported EPS is $0.7, expectations were $0.6.

Operator: Good morning, ladies and gentleman, and welcome to the 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 your questions. [Operator Instructions] With us today from the company are the President and Chief Executive Officer, Mr. Brian Recatto; 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.

Mark DeVita: Thank you, Jerald 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 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. However, 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 Recatto to start.

Brian Recatto: 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 our financial reporting changes Mark mentioned earlier. On a total company basis, we perform 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’d 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 the 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 than 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 unplanned. Let’s now move on to the Oil Business segment. Before we discuss the financial performance, I want to highlight 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. The 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 expected 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 into 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’ll 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.

Mark DeVita: Thanks, Brian. As Brian mentioned earlier, during the first quarter of 2023, we set our revenue record for a three-month quarter. The increase in revenue was mainly driven by revenue from the Patriot Environmental acquisition made during the second half of 2022, as well as higher demand and increased prices for our products and services in our Environmental Services and Industrial and Field Services segments. Net income was $16.6 million or $0.70 per diluted share for the first quarter of 2023. This compares the net income of $12.9 million or $0.55 per diluted share in the year earlier quarter, which represents a basic earnings per share increase of 27.3% compared to the first quarter of 2022. If you adjust out the four additional working days, we estimate basic earnings per share would’ve increased by 19.8%.

Let’s move on to the details of our Environmental Services segment results. The revenue increase Brian spoke of during the first quarter was mainly due to the continued increase in both the demand for our services and higher pricing for said [ph] services compared to the prior year quarter. In the parts cleaning, wastewater vacuum and antifreeze businesses, our revenue growth was roughly split evenly between price and volume. In the containerized waste business, while we did deliver higher prices, increased volume was the main driver of our revenue growth during the first quarter compared to the first quarter of 2022. Environmental Services profit before corporate selling, general, 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 was mainly driven by increased leverage on our labor and benefits costs as a result of rising revenue. Disposal cost as a percentage of revenue was also lower than a year ago quarter when disposal costs were increasing rapidly. Now, let’s discuss Industrial and Field Services. Brian already discussed the significant increase in segment revenues during the quarter. So let’s discuss our operating margin in this segment. Industrial and Field Services profit before corporate SG&A expense as a percentage of revenue increased to 16.3% compared to the recast percentage of 9.8% in the year ago quarter. Our first quarter operating margin is reflective of a permanent change we made during the quarter to reclassify certain labor and benefit costs for field-based employees of the former Patriot Environmental business from corporate SG&A expense to operating expense.

For the first quarter, these expenses amounted to approximately $1.5 million. If we had not made this change, our operating margin percentage for the first quarter in this segment would have been 19.5%. The increase in operating margin was mainly driven by increased revenues in comparison with the increase in operating costs as a result of the Patriot Environmental acquisition made during the second half of 2022. Before I move on to the Oil Business segment, I want to point out that the operating margin percentage of the combined Environmental Services and Industrial and Field Services segments would have been 22.5% or 130 basis points higher than the operating margin percentage when the two segments were still combined in Q4 2022. If we would not have moved the labor and benefit costs described earlier from corporate SG&A expense to operating expense.

Let’s now discuss the Oil Business segment. Since Brian already discussed our overall revenue and operating market performance and the drivers for it. I will jump into the detail. During the first quarter, we increased the volume of used oil we collected by 12% compared to the year ago quarter after adjusting for four additional working days during the first quarter of 2023 compared to the first quarter of fiscal 2022. Our net pay for oil during the first quarter of 2023 increased $0.13 per gallon compared to the first quarter of 2022. However, sequentially our pay for oil decreased by $0.04 per gallon from the fourth quarter of fiscal 2022 to the first quarter of 2023. This marks the first time in the last 10 quarters that our net pay for oil decreased.

The cost of third-party used oil feedstock increased by $0.05 per gallon from the fourth quarter of 2022 to the first quarter of 2023. On the positive side, we decreased our volume of third-party feedstock purchases by 52% compared to the first quarter of fiscal 2022. After adjusting for the four extra working days in the first quarter of 2023, compared to the first quarter of fiscal 2022. From an operations perspective, we ran our re-refinery at 97.1% of nameplate base oil capacity during the first quarter. The below 100% run rate was driven by our decision to run the facility as slower rate due to the soft base oil demand, Brian mentioned earlier. For the quarter, we produced 12.1 million gallons of base oil compared to 11.9 million gallons during the first quarter of 2022.

After adjusting for the longer first quarter during 2023, base oil production was approximately 5% lower than the first quarter of 2022. From a sales perspective, we sold 10.2 million gallons of base oil during the first quarter of 2023. This represents a decrease of 19% compared to the year ago quarter after adjusting for the longer first quarter of 2023 compared to the first quarter of fiscal 2022. Our total company operating costs as a percentage of revenue decreased to 72.4% during the first quarter of 2023 compared to 73% in the first quarter of 2022. The decrease is mainly due to lower oil inventory costs of goods sold in lower transportation expenses. Overall, corporate SG&A expense of $20.7 million represents an increase of $5.4 million or 35.5% compared to the year ago quarter.

Driven by an increase in compensation and benefits expense, interest expense, legal fees and higher permit and intangible amortization expense. We estimate that the four additional working days and 2023 increased corporate SG&A expense by 8.5% compared to the first quarter of 2022. Approximately 26% of this increase was driven by the acquisition of Patriot Environmental. As a percentage of revenue corporate SG&A expense during the first quarter decreased to 10.7% compared to a 11% during the first quarter of last year. The decrease in corporate SG&A expenses, a percentage of revenue is mainly due to lower share based compensation expense and lower professional fees. EBITDA of $36.2 million was a first quarter record and up 50.4% compared to $24.1 million in a year ago quarter.

Test [ph] out the four additional working days, we estimate EBITDA would’ve increased by 41%. The company’s effective income tax rate for the first quarter of fiscal 2023 was 25.3% compared to 25.7% in the first quarter of fiscal 2022. The rate decreased is principally attributable to the decreased impact of certain adjustments to financial reporting income due to increased levels of profitability as compared to the first quarter of fiscal 2022. Looking at the balance sheet, we had an increase of $13.3 million in cash during the first quarter compared to year end, which resulted in a balance of $35.3 million of cash on hand at the end of the quarter. The beginning of the second quarter, we made a $5 million payment on our revolving loan.

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 $25.7 million in cash flow from operations during the quarter. We also generated free cash flow of $15.7 million during the first quarter of 2023 compared to $15.4 million during the first quarter of 2022. We continue to pursue various tuck-in acquisitions and we are prepared to go after more transformational opportunities as they arise. Now, I’ll turn the call back over to Brian for some closing remarks.

Brian Recatto: Thank you, Mark. To recap, we’re excited with the strong organic top-line growth we’re experiencing in our Environmental Services segment, and we’re pleased with the sequential improvement of our operating margin during the quarter. We’re also very happy with the progress we’re making in our Industrial and Field Services segment, and we’re also excited about the opportunities we continue to see related to our integrated PFAS solution. Finally, we continue to be pleased with the execution of the Oil Business segment, despite the volume and price declines we’ve seen in the base oil market. This concludes our prepared remarks. I will now turn control of the call over to the operator to take your questions.

Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Tobey Sommer of Truist Securities. Please go ahead.

Operator: Thank you. [Operator Instructions] Your next question comes from the line of Quinn Fredrickson of Baird. Please go ahead.

Operator: Your next question comes from the line of Michael Hoffman of Stifel. Go ahead please.

Operator: Thank you. Your next question comes from the line of Kevin Steinke of Barrington Research. Please go ahead.

Operator: Thank you. You have another question from the line of Michael Hoffman of Stifel. Please go ahead.

Operator: Thank you.

Operator: There are no further questions at this time. This concludes today’s conference call. You may now disconnect.