Heritage-Crystal Clean, Inc (HCCI) on Q1 2021 Results - Earnings Call Transcript
Operator:
Operator: Good morning, ladies and gentlemen, and welcome to Heritage-Crystal Clean Incorporated First Quarter 2021 Earnings Conference Call. Some of the comments we will make today are forward-looking. Generally, the words aim, anticipates, 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.
Brian Recatto: Thank you, Mike. Good morning, everyone, and thank you for joining us today. Before discussing our first quarter results and longer-term outlook, I would like to briefly talk about the impact of the pandemic on our business. During the first quarter, we continued executing the company’s pandemic response plan and remain focused on ensuring the health and safety of all our employees and their families, as well as those customers we came in contact with. Total lost time from employees off the job due to COVID-19 related health issues and potential exposure was almost 5,400 hours companywide during the first quarter. This result was relatively flat on a normalized basis compared to our experience during the fourth quarter of fiscal 2020. Despite the prevalence of highly contagious strains of the virus, we were able to successfully implement our preventive measures program and avoid any meaningful increase in downtime as a result of the virus during this past quarter. From a financial standpoint, the company performed extremely well during the quarter with both segments exceeding plan from a revenue and adjusted EBITDA standpoint. In fact, our Q1 adjusted EBITDA performance was a first quarter record for the company. Total first quarter revenue exceeded expectations and finished at $105.4 million, with adjusted EBITDA of $17.7 million, up 33.6% compared to the first quarter of 2020. In the Environmental Services segment, while our revenue was down compared to record results in the first quarter of 2020, we experienced relatively flat sequential revenues compared to the fourth quarter of fiscal 2020 on a normalized basis. We achieved this result despite elevated lost time hours due to COVID-19, as well as significant downtime toward the end of February as winter storms wreaked havoc across various parts of the southern U.S.
Mark DeVita: Thanks, Brian. It’s great to be with everyone this morning. In the first quarter of 2021, we generated $105.4 million of revenue compared to $107.3 million in the same quarter of 2020, a decrease of $1.9 million or 1.8%. The decrease in revenue was primarily driven by the non-recurrence of a large field services project and the negative impacts of the COVID-19 pandemic, partially offset by higher revenues in our Oil Business segment. Net income was a record $9.2 million or $0.39 per diluted share for the first quarter of 2021. This compares to net income of $5.3 million or $0.23 per diluted share in the year earlier quarter. From a reporting segment standpoint, the Environmental Services segment reported revenue of $69.5 million, a decrease of $8 million or 10.3% compared to a year ago quarter.
Operator: Your first question comes from Jim Ricchiuti from Needham and Company.
Jim Ricchiuti: Hi. Thank you.
Brian Recatto: Hi Jim.
Jim Ricchiuti: Question just with respect to the Oil Business. It sounds like things are tracking better than you were expecting exiting 2020. And you had given some color about operating margins, I guess, during the first half of 2021. And Mark, I think you were saying in the mid-teens. And I’m just wondering – I may have missed it – are you updating that outlook? It sounds like you’re also anticipating the strength in that business continuing into Q3. And I wonder if you could just maybe elaborate on that?
Mark DeVita: Yes, to be clear, we’re definitely updating. We – based on what we had at, or what we knew back then when we announced Q4 earnings, we had guided to that mid-teens. And you heard Brian in his prepared remarks, guide to higher. And we have clarity, at least for Q2 and into Q3. We don’t know how far into it. So it really, we aren’t giving much clarity beyond that. We do think we’re going to continue to see favorable conditions relative to the historical performance in that business. We just don’t have a ton of clarity beyond kind of the summer.
Jim Ricchiuti: Okay...
Brian Recatto: And that’s dependent on us where we’re forecasting right now four to five days of downtime for the quarter, which is normal for us. That’s absent any issue. We’re guiding at that 20% margin level if you listened to our prepared remarks. And as Mark said, we are bullish on the business. Base oil supply still has been restricted because the refineries are not yet back at full capacity. They are into the 80% range, probably 80% on utilization now versus mid-70s last quarter. So we are seeing more supply, but the demand is still strong and the prices are still good. We obviously worry about the other side of the equation as Mark mentioned in his prepared remarks, used motor oil, we’re seeing a change on the street. We think we’ll move to unfortunately a slight pay in the quarter. But we’re still bullish.
Jim Ricchiuti: And you alluded to inflationary pressures, and I’m just wondering if that extends into other parts of the business. And Mark if you could also talk a little bit about what –- how we might think about corporate SG-and-A over the balance of 2021?
Brian Recatto: Yes, I’ll touch on maybe some broad macro on what we’re seeing from an inflationary standpoint. We are seeing commodity prices way up. I mean, Mark talked about hydrocarbon crude prices being up. We’re seeing chemical prices up. We’re seeing supply shortages too. I am worried about supply chain issues. If we continue to see inflationary pressure, we may even think about mid-third quarter price increase. Typically, we do it late third quarter, early fourth quarter. We may have to do it earlier this year if we continue to see inflationary pressure. We are also worried about labor. We’ve got a quite a few vacancies today. Until the inflated unemployment runs out by September, we’re going to struggle to get people in to run the service route for work. We are working hard to recruit. So certainly, worried about inflation and labor cost.
Mark DeVita: From an SG-and-A standpoint, Jim, we’re looking at a pretty flat environment, at least that’s what we’re forecasting for the remainder of the year, flat to what we had on again – Q4, as you know it’s longer duration than the other quarters, but in line, I guess, that is what we experienced in the first quarter. There are certain things like writing off some of the bank fees that when we did our, amended our credit agreement that were – that’s kind of one-time because we changed up our bank group slightly. We can’t carry over some of those costs. You just got to write them off. So, yes, there is some of that. But in general, there will be probably other figures that would replace that. So we think a flattish forecast is probably a good way to model it.
Jim Ricchiuti: Got it. Thanks – thanks very much though.
Brian Recatto: Thank you.
Mark DeVita: Thanks.
Operator: Your next question comes from Brian Butler from Stifel.
Brian Recatto: Hi Brian.
Mark DeVita: Hi. Good morning Brian.
Brian Butler: Good morning. Thanks for taking my question.
Brian Recatto: Welcome.
Mark DeVita: Yes. No worries.
Brian Butler: Could you just maybe, you said there are 45 days built into 2Q, I think, for maintenance. Can you talk just kind of utilization targets for 2Q? And then what other maintenance you have planned for 3Q and 4Q and what the utilizations might look like?
Brian Recatto: Yes, I think on the fourth quarter call, we signaled over roughly 28 days of maintenance. We’re still in that 28, maybe a couple of extra days, because we are running at pretty hard right now. From a production standpoint, we expect to see base oil production in the – I’ll just give you a range, 11 million to 12 million gallons. Not that different from Q1, because our maintenance schedule is very similar to Q1. We’re expecting four days to five days this quarter, like we had in the first quarter. We did push out a larger turnaround to Q4, driven by the fact that we think base oil will be weaker by the fourth quarter, and we certainly want to – and don’t need to do it until back end of the year. So we’re going to push that off. So we’re still projecting 48 million gallons, 49 million gallons of base oil production for the year.
Brian Butler: Okay. That’s helpful. And when you think, I guess, the spread and the margin volatility, I mean, you expect the strength to kind of continue into 3Q. What maybe the right way to think about this business longer term with the spread? I mean, obviously, you had a very nice move to the spread. But when you get back to a normal, let’s say, a more normalized spread, is this still a mid-teens kind of margin, operating margin business?
Brian Recatto: Yes, I mean, obviously, Brian, we’d like to think it is. We certainly don’t think it’s going to be a mid to high-20s business. But we do think we’ll begin to see some impact from IMO 2020. We’re not seeing the large aggregations of used motor oil. Matter of fact, we tried to sell used motor oil at one of our RFO plants, because we had excess supply where we’re going to put a barge load together. Not a lot of interest out there for large supplies of used motor oil. So we think we’re going to see some impact from IMO 2020. We think it’s a mid-teens operating business, that’s our ultimate goal. We’ve got the cost structure in much better shape today, I mean, our operating cost for the quarter were $0.64 per gallon, when you compare it to a run rate in 2020 and 2019 in the 70s. So we’re continuing to make progress at the plant, and our goal and pitched to our Board of Directors is that we are going to get into the teens on a consistent basis.
Brian Butler: Okay. And then I guess you touched on M-and-A in your prepared remarks. But could you give maybe a little bit more color on kind of – what’s kind of your capacity or desire for size in what – what types of – what you’re kind of looking at, I guess would be the best way to say?
Brian Recatto: Well, I mean obviously, we’re being very aggressive. We’re seeing a significant increase in our pipeline, driven by the potential for the capital gains taxes to change. So not a shortage of potential targets. Most of them are unfortunately smaller in nature and tuck-ins, but great companies for us, because it continues to expand our footprint in our processing capabilities. We will get a few deals closed this year, deals that we are very far along with. They’re smaller, but very strategic for us. Obviously, we’d love to do a larger deal if something pops up. If you see our balance sheet, we have quite a bit of free cash flow generation, significant EBITDA, a low leverage, the ability to finance a larger deal, cooperative shareholders. So we certainly are going to get aggressive when we see the opportunity.
Mark DeVita: And we’ve been in some formal processes as well as a lot of the ones Brian speaks to are kind of more home grown, I guess, head cost.
Brian Recatto: Yes.
Mark DeVita: And not formally bank. But we’re in on some of those processes and some of them are pretty big. But the bigger you get there is a lot of fish in that pond so to speak. So the chances are obviously low that any one bidder is going to win it. And we’re just trying to play the numbers game. We had a better pipeline and more of it is going to come out at the back end if we put more through the front end.
Brian Recatto: But continually focused on acquisitions in the environmental business. We like where we stand today in oil. Great complement to our overall environmental business, because of the cross-selling potential. We are going to launch a new automotive program here over the next month or two to get more aggressive in that area. So pleased with the Oil Business. We want to grow the ES business via acquisitions and most of our capital will go into the ES business, obviously.
Brian Butler: All right. And then you mentioned the kind of the balance sheet and the leverage, all of your debt going to 0. Can you give maybe a little thoughts, just high level, what are the targets for kind of leverage? I mean, is the goal to be at 0 debt or is there a right amount of debt that you think Heritage can carry?
Brian Recatto: I’ll give a little bit of color. No, we’re not happy. We would have loved to have some leverage. That means we’ve been able to do a deal or two. I don’t like the fact that we’re, again, 0 net debt and cash in the bank and we haven’t been able to pull off a larger deal. So that’s priority number one. In terms of leverage, I mean, I think I personally could get comfortable in the three-plus range. I mean, especially if we pull off a deal that has meaningful synergies, which we think we would have synergies with a larger deal. That’s just my personal perspective. And Mark can add color if he wants.
Mark DeVita: Yes, that’s right on where we’re thinking in an aligned way. So we don’t want to be where, I guess, I’ll just reiterate what Brian said. We want to be more levered and we will be, it’s just a matter of finding, and not just finding but closing on the right opportunity or opportunities.
Brian Butler: All right. Great. Thanks.
Brian Recatto: Your welcome.
Mark DeVita: Thanks Brian.
Operator: Your next question comes from Kevin Steinke from Barrington Research.
Brian Recatto: Hi Kevin. How are you?
Mark DeVita: Good morning Kevin.
Kevin Steinke: Good – good. Good morning.
Brian Recatto: We’re good...
Mark DeVita: Good.
Brian Recatto: A lot better than what we were last night.
Q –Kevin Steinke: Yes. Absolutely yes. Really nice results.
Brian Recatto: Yes. Thank you.
Kevin Steinke: So you – you called out the impact on ES growth from the large field services project in the year ago quarter. Did you take a crack at kind of trying to figure out what the impact of weather was on ES growth in the first quarter?
Mark DeVita: We had about 70 days. I think Brian mentioned that, that we were down total branch days and again your average branches couple of million bucks a year. You can do the math on what that means. But that’s kind of the only detail that we’ve done. We haven’t gone any deeper than that.
Brian Recatto: But our guess, whenever we have weather issues, we are pretty resilient and find a way to go out and get the customer serviced. But certainly, when you are manufacturer and you are shut down for three days, you’re going to generate less waste. So it affected them and it affected us. As Mark said, we can’t put an accurate dollar figure on it, but it was $0.5 million to $1 million for sure.
Kevin Steinke: Yes. No, no, that’s helpful. That’s good color. I think in your prepared comments – Mark, correct me if I’m wrong. You talked about containerized waste, a negative pricing product mix dynamic. There might have been one other business there too. But can you just kind of talk about what you’re referring to there?
Brian Recatto: Yes, some of that is – I mean, overall, there’s a great story of probably one of our businesses were most optimistic about along with our wastewater and vacuum business, but really good growth. We mentioned for probably a couple of years now, and you’ve been covering us long enough to remember about our push to – in one of the areas in addition acquisition, but areas where we’re going to invest is in vertical integration, specifically in doing more processing and specifically as it relates to non-hazardous waste. So a lot of that waste, like an average per gallon per pound, whatever your unit of measure is, is less expensive. But we’re driving toward some of that. So that’s more of a mix issue. It’s not so much that we’re not getting a great price for that. But from a pure revenue standpoint, that was a negative.
Kevin Steinke: Okay. All right, got it. – And you – I think you said also that you brought in more third-party used oil this quarter and maybe versus a year ago. I mean, is that – was that a function of maybe lower collection volumes due to the weather or kind of what drove that?
Brian Recatto: I think a lot of it was – I was wanting to be prepared.
Mark DeVita: Yes.
Brian Recatto: Again, you’ve been covering us long enough. You know that those winter months can be most challenging in that collection part of the business. Yes, there are challenges in running a plant when – if there’s cold weather. Everyone nationwide has experienced that. And we have managed to get through that really well, because we are used to dealing with it in Indianapolis. But not having feedstock and even not so much just from an absolute standpoint, but we have been getting real low on a larger feed tank gets you into layers of oil, I don’t want to get too technical here, but layers of oil that don’t run as well, that you have a little less pure oil in. So we just wanted to be overly prepared. And while we had taken more third-party or bring in more third-party than we did in the last Q1, we were a lot more prepared. And as a result, now, we’re bringing in less. So I think –
Mark DeVita: We just were worried. Vehicle miles driven, obviously, down because of the pandemic. I have been here for four years. I don’t think we’ve ever made it through a winter with a full oil tank and we were committed, as Mark said, to keep oil in our feed tank, not run low this year regardless it, but an increase in our third-party supply during the winter months and it has helped us.
Kevin Steinke: Okay, great. Yes, that makes sense. Over the longer term, is the goal still to continue to increase your internal used oil collection volumes at the expense of third – buying in third-party used oil?
Brian Recatto: Yes, I mean I think that’s the ultimate goal for us. We certainly value our third-party customers and we’ll continue to support them. But it’s critical for us from a cost standpoint to increase the route density of our oil trucks. I think I mentioned earlier that we’re launching an automotive program specifically to help us support the needs of our plant internally, so we can reduce our overall collections and logistics cost. So, absolutely, that is the goal.
Mark DeVita: So we’re – and remember that there is a reason why we’ve invested $100 million in that plant. It’s really – the main goal is to extend our reach and allow us to have more customer contact, so then we can sell more environmental services to them. So we’ve never operated it, never will. This is a way to get in the door and sell other services. So that’s really on top of the route density and all the great things Brian just mentioned that real motivator there is one step down the line, which is if you’re in there doing used oil, it probably needs something else. And we’re going to hopefully go after that business. When we have the direct relationship as opposed to when we don’t, it is really a lot harder.
Kevin Steinke: Yes, absolutely, you are right. That makes sense. How much of a margin lift is still available from improving used oil route collection density? And you kind of need to improve that meaningfully to get to that mid-teens, yes, Brian, in OB margin on a more sustainable basis?
Brian Recatto: Yes, we don’t need meaningful improvement on where we’re at. We are already running at better efficiencies than we had pre-pandemic and we’ve been able to – it’s certainly the pandemic has been terrible for basically everybody on the planet. But we have grown stronger through some of it. And we have a more efficient route collection network even now. And while incremental gains will help solidify the consistency of producing that mid-single teens result, we certainly don’t need a sizable improvement to reach in route density to reach that goal.
Kevin Steinke: Okay, got it. And then just lastly, did you give the rerefinery utilization number on the call?
Brian Recatto: No. We didn’t. It was 107.1%.
Kevin Steinke: Okay. Great. All right – thanks.
Brian Recatto: Thank you.
Operator: And that was our last question. At this time, I will turn the call back over to the presenters.
Brian Recatto: Thank you.
Mark DeVita: Yes, that’s all we have today. Thank you, everybody.
Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.
