Heritage-Crystal Clean, Inc (HCCI) on Q2 2021 Results - Earnings Call Transcript
Operator: Good morning, ladies and gentlemen, and welcome to the Heritage-Crystal Clean, Inc Second Quarter 2021 Earnings Conference Call. Today's call is being recorded. . 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 risk 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.
Brian Recatto: Thank you. 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 how pleased we are with the record-setting second quarter results we released last night. We produced several records during the second quarter, including total revenue, net income, earnings per share and EBITDA. In several cases, our second quarter results were significantly higher than our previous record performance. Mark will provide additional detail. The total second quarter revenue exceeded expectations at $117.3 million, which helped produce record EBITDA of $26.2 million. Now I would like to discuss the results of both of our reporting segments. Typically, I cover our Environmental Services segment first, but given the outstanding results in our Oil Business, I feel compelled to discuss this segment first. During the second quarter of fiscal 2021 Oil Business revenues more than doubled compared the second quarter of fiscal 2020 for $44.6 million. The increase in revenue was mainly due to an increase in our netback for base oil of $1.62 per gallon compared to the second quarter of 2020, and by $0.81 per gallon compared to the first quarter of 2021. Additionally, our base oil sales volume of 11.5 million gallons during the quarter was 61% higher than the volume of base oil sold during the second quarter of 2020 and further contributed to our record revenue performance.
Mark DeVita: Thanks, Brian. It's great to be with everyone this morning. In the second quarter of 2021, we generated $117.3 million of revenue compared to $79.5 million in the same quarter of 2020, an increase of $37.8 million or 47.5%. $37.8 million increase in revenue was mainly driven by continued growth in recovery from the impact of the COVID-19 pandemic, which negatively impacted 2020 revenue. Net income was a record $15.1 million or $0.64 per diluted share for the second quarter of 2021. This compares to a net loss of $2.7 million or $0.11 per diluted share in the year-earlier quarter. This past quarter was not only the second quarter in a row in which we had a record high net income. But net income for the quarter was 64% higher in the first quarter of this year, which was our previous record for 12-week quarter. Now let's talk oil. Oil Business segment revenues for the second quarter of fiscal 2021 were a 12-week quarter record of $44.6 million, an increase of $24.8 million or 126% compared to the second quarter of fiscal 2020 and an increase of 28% compared to the second quarter of fiscal 2019. The increase in revenues compared to the prior year quarter was mainly due to an increase in our selling price for base oil and an increase in the volume of base oil sold, minimally offset by a decline in charge-for-oil revenue. Our base oil netback, which is our selling price net of freight costs, increased significantly compared to the first quarter and second quarter of last year, but it was also up by approximately $1 per gallon compared to the second quarter of fiscal 2019. Brian mentioned our increase in base oil sales volume compared to the first quarter and second quarter of 2020, but base oil sales volume was also 5.2% higher in the second quarter compared to the same quarter of 2019.
Operator: Your first question comes from David Manthey from Baird.
David Manthey: Yes. First question. In 2018 and 2019, your ES segment average daily sales were down slightly from the second quarter to the third quarter. Would you expect that to be the case this year as well? Or as the business gains momentum, could we actually see a higher sequential rate of daily sales?
Mark DeVita: I think the main standpoint, is Mark, we do have an extra holiday in Q3 typically, I don't know why that wasn't the case back in '18 and in prior years. So I don't think we expect any material steps backwards, but it's typically something where you have continued growth on a year-over-year basis. Sequential growth you are not going to see anything because of the pandemic and recovering from that, but we still expect to get whether at low single or getting into that mid- single-digit growth rate versus '19, that's kind of what we expect for Q3.
Brian Recatto: Yes. I would agree with that. David, we are obviously worried about inflationary pressure, which you heard in our prepared remarks in terms of margins, which is why we're guiding more towards the back end of the year after we get our price increase out there for the 27% run rate. We're going to work hard as well as we can in Q3, but there's a lot of pressure out there right now. Fuel supplies, rolling stocks, maintenance costs, labor, I mean, third-party logistics, it's all over the place now.
David Manthey: And when from a timing standpoint, when does your price increase go into effect? And when should it start benefiting you? Did you say the fourth quarter?
Brian Recatto: Yes. We expect it to happen, be attractive in October. We're going to speed it up a little bit this year because of the pressure that we're feeling.
David Manthey: Yes. Understandable. And then finally, when you look at the Oil Business, what would you consider a good level of profitability before corporate expenses there? It's been wildly volatile. And I know when you started this project, you ran some Monte Carlo simulations and you're sort of thinking about what that should look like. I mean is 10% sort of a line in the sand? Or where would you consider sort of an acceptable rate to be at?
Brian Recatto: I mean, my personal opinion is, I'd like to see it a little bit of north of 10%. We're seeing some fundamental shift in the overall market. And as we talked about in our prepared remarks, we've got to see the ultimate outcome of IMO 2020. But we're certainly seeing less pressure on used motor oil supply, which we think is going to give us a little more pricing power than we historically have seen, which should help us bump those margins up a little bit. Obviously, we expect base oil supply to return to some level of normalcy by the end of the year given that refineries are now back at normal utilization. There's a shortage of distillates, I mean, they're now going to produce as much as they can now, which is going to increase the base oil supply just as a function of refinery utilization. So we think that will normalize. We hope structurally, we'll see the change in used motor oil, and David, we are seeing some positives in terms of the view of our product out in the marketplace as it relates to ESG. I mean, more people care about our product and having interested in because of our ESG requirements, and we hope as we look into 2022, that may give us a bit of a bump on price. So structurally, I'm feeling better about it, certainly north of 10%, between 10% and 15%. I'd like to see it up in that 15% range personally. And we're working the costs out hard. You've seen what we've done over the 4 years. We've driven our costs from mid-80s, CPG down into the 60s consistently. So that's helped as well.
Mark DeVita: Yes, it’s all about uptime there. So I mean, there are a couple of years in a row plus of not having an unplanned downtime, makes all the difference.
Operator: Your next question comes from Jim Ricchiuti from Needham & Company.
Jim Ricchiuti: Just a question on price hikes that you alluded to that you will be putting through a little earlier. It sounds like in October, how do these compare with some of the pricing actions you've taken in the past? Lastly, remind me, I don't think there were any just in light of what we're seeing. But how does this compare with prior years?
Brian Recatto: It's going to be a little bit higher than prior years, driven by the fact that we're seeing a bit more inflationary pressure. And we didn't do a lot in 2020 because of the pandemic. So we feel like we're going to shoot for a mid-to-high single-digit number across the board with all of our customers.
Mark DeVita: I think it would probably end up being in that 200 to 300 basis points above what might be the long-term average, what we would probably expect to see. Again, there's that, we go out with a prescribed number, Jim, and you're probably familiar with, I already said before. But then there's usually a slightly lower realization rate as we get into specific situations, we like to have flexibility. But it's not as if completely the same approach for every single customer. So that's kind of the effective rate of realization rate is really what you want to focus on. And I think what I said earlier is how it contrast with prior years.
Brian Recatto: But we are going to push it for discipline with this price increase.
Mark DeVita: We are doing things systems wise, Brian mentioned cost control. That's another area, system wise to make sure when we are making exceptions, I guess, I'll use that phrase, that it's something that everyone has eyes on, at least the people that need to have eyes on, and it's not something that everyone is not on board with.
Jim Ricchiuti: And just with respect to some of the cost pressures you're seeing, I think a lot of the folks talking about this being transitory. But are you seeing any evidence of that, that gives you comfort that this some of these pricing pressures we're seeing could end up being longer lasting?
Mark DeVita: Go ahead.
Brian Recatto: Yes, we're not expecting to see this, and drag into 2022, but the problem we're seeing out in the field, even with our current customer base is they're having trouble with the supply chain. They're having trouble getting staffed up, which is causing overall logistics issues and supply chain problems, which are driving up the price. So we really believe internally that this is going to be a problem and we'll deal with for the balance of the year, and it will start to normalize as we get into the back end of the year. And get more back to normal next year. We're even seeing it on the disposal front because a lot of our end disposal sites are struggling to staff up and get back to pre-pandemic levels of operating multiple shifts. But we'll see how that improve as people begin to go back to work in September. We think that our ability to attract employees and certainly our customers and vendors, we will be able to get more employees as we get into the back end of the year.
Jim Ricchiuti: Okay. And just on the M&A pipeline, it's pretty healthy. Is there any color you can give to expand geographic footprint? Is that still part of the -- a key part of this?
Brian Recatto: I think you were talking about acquisitions, you broke up, but sorry.
Jim Ricchiuti : Yes, I'm sorry. That's exactly what I was talking about.
Brian Recatto: Yes, no problem. And certainly, our focus, as we talk about on every quarterly conference call is invest in our ES business and geographic expansion is a major component. 2 of the deals that we’re looking at are West of the Mississippi River because of our lack of density in the Western half of the U.S. So that has been a focus area, not to suggest that we’re going to pass up on any opportunities in the Midwest, Southeast, South, where we already have good density, especially as it relates to us adding some treatment capabilities to our network. I think that’s been an important component of the work that we’re doing on the cost of goods services side to minimize our exposure to third-party and get a handle on our internal processing. Last period, we processed almost 6,000 drums internally, which historically we’ve never done. So we’re going to focus on waste processing, and we’re going to focus on geographic expansion, most of which will happen out West.
Operator: Your next question comes from Brian Butler of Stifel.
Brian Butler: Just kind of first one. Can you talk a little bit where you think utilization will be in the back half third quarter, fourth quarter and when the scheduled downtime is going to occur?
Brian Recatto: Yes. We've got 13 days, I think, left on our turnaround schedule. We've got a big turnaround, which is normally, we do it in the spring. We're going to -- we obviously pushed it back because the opportunities we're seeing currently with pricing. So that will be an 8-day turnaround. And then we may have one more pigging, which will take 4 or 5 days that will get done in the back half of the year. So 13 to 14 days on the balance of the year. We're projecting in Q3 that will produce similar numbers that we did in Q2. And then in Q4, our current forecast suggests we'll be in the 14,300,000 gallon range for the fourth quarter.
Mark DeVita: Yes. So most of those days are Q4. Well, first of all, it's a large shutdown, but as you remember, it's a 16-week quarter. So we're going to see most of those down days in that. And that's why we mentioned and Brian said in his earlier remarks, operating more at basis our nameplate capacity because if you look at the last 4 quarters or the TTM, it's a 50-million-plus number. And people need to remember, Q2 last year is when we still can extend the shutdown. Most of that is driven by the lack of demand. So we weren't going to be busy anyway, but you don't really have once a year extended shutdown in the TTM right now. So you've got to remember that.
Brian Recatto: And we expect and we continue to be strong through the end of the year. Base oil demand.
Brian Butler: That's helpful. And then on the ES part, can you give some color on kind of what the average weekly branch revenue was exiting the second quarter and how that compares maybe to second quarter 2019?
Mark DeVita: Yes. Looking at that, and it's probably up on a weekly basis, probably $0.25 million a week to maybe $0.5 million somewhere in between, that depends on the wage and depends on your sample size. But it's definitely on top of the pre-COVID numbers and roughly along the same rates that we exceeded revenue in Q2 2021 versus Q2 2019. So it's in that low to mid single-digit range.
Brian Butler: Okay. Above 2019 levels, that's right. That right.
Mark DeVita: Yes.
Brian Recatto: Yes.
Brian Butler: Okay. And then you think we're seeing enough recovery in the industrial economy to see a rebound kind of in the field services sales on the volume?
Brian Recatto: Yes. I mean, we're feeling pretty good about it. I mean we had, I think the number was close to 20% growth in field services. With GDP tracking at 6.5% every quarter, I mean, I feel like we're certainly seeing lots of opportunities. We haven't landed any really big projects this year. And that's partly because they're tough to manage. We like the small to mid-sized projects. So we certainly think that business is going to continue to recover this year.
Mark DeVita: What Brian said, we're on top of 2019 already with field services. So...
Brian Butler: That's helpful. And then last one, just circle back on the M&A. Can you give any color on maybe the size of the deals you're looking at, magnitude wise? I mean, are these really big, really small in the middle?
Brian Recatto: Yes, they're kind of small to in the middle. I mean they're tuck-in acquisitions, but they're important because they offer treatment capabilities that we don't currently have in some of these regional marketplaces.
Brian Butler: Are these really more service kind of -- more service-based as opposed to assets?
Brian Recatto: I think it's a mix. Yes. No, definitely. 2 contain nice assets, the other service based, they're all industrial waste and hazardous waste focused. So right in our wheelhouse.
Mark DeVita: And in addition to those that are further in process, so to speak, before that we mentioned in our prepared remarks, we continue to chase that are in process and beyond the first stage at much larger ones as well. So it’s like any similar to any sales process, right? You look at enough and you hope to close a certain percentage of them. So there’s no shortage of opportunities. That’s for sure. The market, as I’m sure you and everybody knows, is pretty hot as far as number of opportunities. It’s also fairly expensive. So that’s really where the hard work comes in is to make sure if we’re going to spend money, we’re doing it on the right deals.
Operator: Your next question is from Kevin Steinke from Barrington Research.
Kevin Steinke: So I think you mentioned in the prepared comments that you see the ES segment moving from a recovery mode to more of a growth mode, given you're now up versus 2019 levels. Does that imply or are there any planned increases in investments to drive growth going forward, now that you're mostly past the recovery phase?
Brian Recatto: Yes. I think we mentioned that we were going to get -- I think Mark said in his prepared remarks, 2 acquisitions closed by the end of the year. I think it's going to be 3, personally. And we've got 4 of the pipeline. The other one will probably take -- we will get it done early 2022. And we're certainly spending capital in our ES business. Yes. I mean, on organic growth, we have expanded some of our plant treatment capabilities. We've certainly invested in rolling stock. The shot that we're going to have is just getting the feet going forward. We think that will begin to improve as we get deeper into the year.
Mark DeVita: Yes, that's the real investment from an organic side and head count. And we, even before the pandemic in a growth company, it's not unusual to always be kind of waiting to add that next first and be a little stretch, but we're stretched a little more than normally are. If you look back vis-a-vis before the pandemic. So that's the biggest challenge. And we hope some of the conditions that are keeping people on the sidelines are going to subside here based on when government programs and other factors, people get more comfortable, the COVID thing starts to fade away. When all those factors hopefully come together, personnel won't be as big of an issue. And then we really -- that kind of removes the governor on organic growth.
Kevin Steinke: Yes, understood. You also mentioned the potential for improved base oil pricing perhaps in the future just based on the ESG and the attractive nature of your base oil product in terms of it being a recycled product. I mean, is that something you're actually seeing in the market or hearing from buyers that could materialize or that is actually materializing now?
Brian Recatto: Yes. I think I said it was our hope in 2022 that we would continue to see opportunities because of ESG. We're certainly going to see improved base oil pricing in Q3, just driven by the supply issues that we mentioned in our prepared remarks and the overall high demand that we're experiencing, we're still seeing tremendous demand for our product. We think that will certainly continue through Q3 and into Q4. We don't know how long it's going to last into Q4. But structurally, we believe that the market dynamics are changing a bit. I can't tell you that could result in higher base oil pricing, but that's our hope at this point.
Mark DeVita: Yes. I mean that's pretty powerful. If you look at the discounts that we typically and mostly refine ourselves are the base oil for, we've talked about it, Kevin, as well as whether it's spot or whether it's posted price for the moment custody group 2 stuff, it's meaningful. So you can get on far much lesser premium, you could potentially completely replace the factors that are increasing base oil price now that we believe are transitory and we don't have a set number, but you talked about that dollar per gallon difference from a couple of years ago, the discount that most refiners are selling at merchant posted is way more than that. So there's a heck of an opportunity elsewhere in brands as in 2022, that will become more apparent how real that is. And if we can get to on par or in theory, you would think there might even be a premium because of the scarcity of re-refined base oil. There's much lesser than the total market demand there. Even if you get a little better, re-refine every single used oil gallon then that still puts you on a shortage. So long-term, there could be something there.
Kevin Steinke: All right. Great. Lastly, I wanted to ask about, I think you had a pilot going, targeting some of the larger quick lube chains with your used oil collection service. Any update on that or color around progress there?
Brian Recatto: Yes. We’re pretty excited about it. We rolled it out into 2 regions so far this year. We have seen some success already. We closed a few larger corporate account deals. Certainly, go take a look at it on our website. We’re pretty proud of the marketing campaign that we pulled together. We’re very excited about it. In the spirit of trying to, you’ve heard us talk about controlling our own density on used motor oil and obviously increasing our route density and our structure on the largest antifreeze recyclers. We think it’s important for us to have a direct retail offering to the automotive accounts, and this is the way we’re going to approach it. And we’re seeing success already. So pretty excited about it.
Operator: There are no questions at this time. Again, we thank you and appreciate your interest and participation on today's call. This concludes today's conference. You may now disconnect.
Brian Recatto: Thank you.
Mark DeVita: Thank you.
