Heritage-Crystal Clean, Inc (HCCI) on Q2 2022 Results - Earnings Call Transcript
Operator: Good morning, ladies and gentlemen, and welcome to the Heritage-Crystal Clean Incorporated Second 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 questions. Instructions will be provided at that time for you queue up your question. We ask that all callers limit themselves to one or two question. 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, 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 Recatto; and the Chief Financial Officer, Mr. Mark DeVita. At this time, I would like to turn it over to Brian Recatto. Please go ahead sir.
Brian Recatto: Thank you. Good morning, everyone, and thank you for joining us today. On behalf of the entire Crystal Clean team, weâre very happy to report our record second quarter earnings yesterday. We are focused on taking steps to fight the underlying inflation we and many in our industry continue to experience. On a total company basis, we performed well during the quarter, exceeding our budget from a revenue, net income and EBITDA standpoint. Mark will provide additional detail, but total second quarter revenue exceeded expectations at $156.6 million, which helped produce record second quarter EBITDA of $35.9 million, which was up 37% compared to EBITDA in the second quarter of 2021. Now, I would like to discuss the results in both of our reporting segments. Let's start with the oil business segment. During the second quarter of fiscal 2022 oil business revenue was a record high for a 12-week quarter at $64.8 million, an increase of $20.2 million or 45.3% compared to $44.6 million in the second quarter of fiscal 2021. The increase in revenue was mainly due to an increase in our base oil netback of $1.51 per gallon compared to the second quarter of 2021. Oil business segment operating margin increased sharply to 41.4% in the second quarter of fiscal 2022, compared to 34.2% in the second quarter of fiscal 2021. The higher operating margin compared to the second quarter of 2021 was mainly due to an increase in the spread between the netback on our base oil sales and the price paid or charged to our customers for the removal of their used motor oil. From an operations perspective, our re-refinery team continued to execute well during the second quarter. We produced 11.8 million gallons of base oil, which was slightly higher than the year ago quarter. I would also like to highlight that our re-refinery team has operated the location for seven consecutive years without a recordable injury, driven by continually improving operating culture. Let's now move on to the environmental services segment. In the environmental services segment, revenue for the second quarter of 2022 was $91.9 million compared to $72.7 million for the same quarter of 2021. This represents a record high for a 12-week quarter and an increase of $19.2 million or 26.4%. The increase in revenue was mainly due to the increase in demand for our services compared to the prior year quarter and to a lesser extent our revenue from acquisitions made during the second half of 2021. We experienced revenue increases across all service lines in this segment when compared to the second quarter of 2021. Environmental services profit before corporate, selling, general and administrative expenses was $19.8 million, or 21.5% of revenue, compared to $19.2 million, or 26.4% of revenue in the year ago quarter. The decline in operating margin percentage was mainly due to higher disposal and transportation expenses caused by extraordinarily high inflation. The end disposal markets remain in an oversupplied position and we expect the condition will not improve for the balance of 2022. Now, I would like to look forward and discuss our outlook for the future. In our Environmental Services segment, the second quarter produced a great result from a revenue perspective. We generated double-digit revenue growth on a year-over-year basis for the fifth straight quarter. Assuming the overall US economy remains steady we expect to continue to achieve double-digit revenue growth during the second half of 2022. From an operating margin percentage standpoint, we continue to deal with inflationary pressure for many inputs to our service compared to the prior year, such as third party waste disposal, transportation fuel, containers and other items. Given that we do not own and operate disposal assets in certain parts of the country or for certain types of wastes, we continue to experience increased costs and surcharges for many of our disposal vendors. We are working hard to counteract the negative impacts of these by internalizing more industrial non-haz waste processing. From a pricing standpoint, we implemented increases toward the end of the second quarter. Customer acceptance of the price increases, we've implemented over the past nine months has been relatively high and we expect we will experience a similar level of acceptance as we continue to roll out the Q2 price increases. As a result, we expect stable to slightly improving operating margin performance during the third quarter. From an Oil Business segment perspective, we expect base oil supply will continue to be tied to balance for most of the remainder of the year. As a result, base oil prices will continue to remain relatively high throughout the third quarter and early fourth quarter until normal seasonal headwinds arrive towards the end of the year. On the used oil feedstock side of the business, as expected, we saw our cost increase with the bullish move upward in crude oil pricing during the second quarter. With crude prices moderating more recently, we expect our pay for oil to begin to flatten during the third quarter. From a broad perspective, we expect to continue to acquire used oil feedstock at a much lower cost relative to crude oil price than we have in years past due to the structural improvements, which occurred in the industry as a result of the IMO 2020 regulation. We also expect our operating costs at our re-refinery to remain elevated on a year-over-year basis due to the higher cost of items, such as natural gas and hydrogen. From a profitability perspective, we expect operating margins in the Oil Business segment to be in the mid-30% range for the third quarter and the high 20% range for the fourth quarter. This outlook assumes we will take the annual extended shutdown in our re-refinery during the fourth quarter. The outlook, I just provided, assumes inflation does not worsen in the near term and that general economic conditions are relatively stable. It also assumes we receive at least some minor relief from the supply chain disruptions, which have happened at various parts of our business on and off for the past nine months. Should these assumptions, not hold true, this could negatively impact our outlook Now I want to discuss an exciting new opportunity for Crystal Clean. At the end of June, we announced our entrance into a definitive agreement to acquire Patriot Environmental Services. Patriot is a leading provider of environmental services across the Western United States, specializing in a wide variety of waste services, including emergency response, industrial services and OSRO spill response. Patriot provides full service environmental solutions to a wide variety of end markets, serving customers within manufacturing, agriculture, construction, healthcare, mining, oil and gas, transportation and utility markets. From custom on-site services to industrial waste disposal as well as wastewater treatment, Patriot operates at 18 locations, primarily in the Western United States. This acquisition should provide us several positives. First, it will increase our presence in the Western US, which has been a goal of ours since I became CEO over five years ago. Second, it helps us further our initiative to vertically integrate our business from a non-haz waste standpoint with the addition of Patriot's two wastewater treatment facilities and one non-hazardous solids processing site. Along with the tuck-in acquisition we made over 11 months ago, we now have several waste processing sites in the Western US, which should help us grow revenue in this geography as well as lower our overall cost to process non-hazardous waste collected in the area. Lastly, the acquisition will provide us an industrial services platform in the Western US. Having this platform, should help us build out an industrial service platform in the remainder of our service areas in the years to come. We expect to close the Patriot Environmental acquisition this quarter. On the governance front, I'm thrilled to report we have entered into an agreement to have Mary Pat Thompson join our Board of Directors and serve on our Audit Committee. Mary Pat comes to Crystal Clean with over 30 years' experience in accounting and advisory leadership roles. She currently serves as a director on both public and private company Boards and will be an asset for the company as we push forward with our growth and ESG strategy. We will issue a separate press release with more details on Mary Pat's background. Before I turn the call over to Mark, I would like to provide an update on our PFAS strategy. As we disclosed earlier this year, we are partnering with Battelle to be their sole service provider for commercial applications of their technology to treat and destroy PFAS and wastewater. Battelle's approach adapts supercritical water oxidation technology and destroy PFAS at the molecular level. They call this technology the Annihilator. I'm happy to report we are on schedule to complete and take ownership of the first commercial version of the Annihilator by the end of this year. We expect to deploy this first unit in our Grand Rapids, Michigan area wastewater treatment facility to support commercial processing of spent firefighting borough and concentrated PFAS contaminated solutions. With that Mark will take us through our second quarter financial results.
Mark DeVita: Thank you, Brian. I want to wish everyone a great morning. It's a pleasure to be with you today. In the second quarter of 2022, we generated $156.6 million in revenue compared to $117.3 million in the same quarter of 2021, an increase of $39.4 million or 33.6%. This increase in revenue was mainly driven by higher base oil selling prices and higher demand for our products and services and to a lesser extent by revenue from acquisitions made during the second half of 2021. Net income was a record $21.1 million or $0.89 per diluted share for the second quarter of 2022. This compares to net income of $15.1 million or $0.64 per diluted share in the year earlier quarter, which represents a diluted earnings per share increase of 39% compared to the second quarter of 2021. I'd like to begin our segment results discussion with our Oil Business segment. Oil Business segment second quarter revenues of $64.8 million were a record for a 12-week quarter and represent an increase of $20.2 million or 45.3% compared to the second quarter of fiscal 2021. As Brian mentioned, the increase in netback, which is our sales price net of freight charges is a catalyst for higher revenue. On a sequential basis, our base oil netback increased by $0.82 per gallon, compared to the first quarter of 2022. Our volume of base oil sold was flat compared to the second quarter of 2021 at 11.5 million gallons. From a used oil collection perspective, our rug truck loading efficiency increased by 1.5% in the second quarter of 2022, compared to the second quarter of 2021. This increase was achieved in spite of the fact that we increased the number of used oil sales and service representatives by approximately 7% during the quarter compared to the second quarter of 2021. The increased efficiency combined with more reps, led to an 11% increase in internally collected used oil volume during the quarter compared to the second quarter of last year. As you might expect, the cost of third-party used oil feedstock also increased during the quarter. The cost of this feedstock increased by $0.53 per gallon from the second quarter of 2021 to the second quarter of 2022. The increase may have been more had we not decreased the volume of our third-party feedstock purchases by 18% compared to the second quarter of fiscal 2021. This decrease was made possible by the increase in internal used oil collection volume I mentioned earlier. The increase between our net pay for oil during the second quarter of fiscal 2021 to the net pay for oil during the second quarter of fiscal 2022 is $0.34 per gallon. Sequentially our pay for oil increased by $0.11 per gallon from the first quarter of 2022 to the second quarter of 2022. As Brian mentioned, our re-refinery continues to run well. During the second quarter, we produced base oil at a rate of 102.4% of our nameplate capacity, while our production volume was up slightly. Operating costs or gallon of base oil produced increased by approximately 18%. This increase was driven in part by higher natural gas and hydrogen pricing from our suppliers. From a profitability standpoint, Oil Business segment profit before corporate SG&A expense increased by $11.6 million or 75.8% to $26.8 million, which represents an all-time record. The operating margin was 41.4% in the second quarter of 2022, compared to 34.2% in the second quarter of fiscal 2021. The operating margin compared to the second quarter of 2021 was mainly due to the increase in the spread between our netback and our base oil sales price and the price paid or charged to our customers for the removal of the used oil. This spread was up by $1.17 per gallon, compared to the second quarter of 2021 and up by $0.71 per gallon compared to the first quarter of 2022. Now let's discuss the Environmental Services segment. Environmental Services segment reported revenue of $91.9 million, an increase of $19.2 million or 26.4%, compared to the year ago quarter. The 26.4% increase in revenue was mainly due to an increase in demand for our services compared to the prior year quarter and to a lesser extent our revenue from acquisitions made during the second half of 2021. Revenue from acquisitions closed during the second half of fiscal 2021 accounted for 8.3% of the year-over-year growth during the second quarter of fiscal 2022. We experienced volume as well as price increases across all service lines in the segment when compared to the second quarter of 2021. A majority of the revenue growth was volume-driven led by our containerized waste and wastewater vacuum businesses. Environmental Services profit before corporate selling general and administrative expenses was a 12-week quarter record of $19.8 million or 21.5% of revenue compared to $19.2 million or 26.4% of revenue in the year-ago quarter. In addition to the factors Brian mentioned earlier, the decrease in operating margin was also negatively impacted by higher container costs and equipment rental expenses, partially offset by improved labor efficiency. As a result of these factors and the inflationary impact Brian mentioned earlier in both segments, our total company operating costs increased $26.4 million or 33.7% during the second quarter of 2022 compared to the second quarter of fiscal 2021. Our overall corporate SG&A expense of $16.5 million represents an increase of $2 million or 15.2% compared to the year ago quarter, driven by an increase in salaries and benefits as well as depreciation and amortization. As a percentage of revenue, corporate SG&A expense during the second quarter decreased to 10.5% compared to 12% during the second quarter last year. If you remove the cost incurred related to our pending acquisition of Patriot Environmental, our corporate SG&A expenses would have been $14.2 million, which would have represented an increase of only 8.9% compared with the second quarter of 2021. EBITDA of $35.9 million was an all-time record and up 37% compared to $26.2 million in the year ago quarter, and our adjusted EBITDA of $39.9 million in the second quarter was also a record. The company's effective income tax rate for the second quarter of fiscal 2022 was 27% compared to 26.1% in the second quarter of fiscal 2021. The rate increase is principally attributable to the increased impact of certain adjustments to the federal income tax -- federal taxable income, excuse me, as compared to the first half of fiscal 2021. Looking at the balance sheet, we had an increase of $2.7 million in cash during the second quarter of fiscal 2022, which resulted in a balance of $73.8 million of cash on hand at the end of the 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 $14.6 million in cash flow from operations during the quarter. We also generated free cash flow of $7.8 million during the second quarter of 2022 compared to $19.6 million during the second quarter of 2021. As Brian mentioned, we hope to close on our acquisition of Patriot Environmental in early August. Our $156 million purchase price represents a multiple of approximately 5.5 times 2021 EBITDA, which included a portion of a large spill cleanup project. If you adjust the results for this larger-than-normal project on a pro forma pre-synergy basis, the purchase price represents a multiple of approximately nine times the trailing 12-month EBITDA. We expect to generate approximately $7 million in cost synergies on an annualized basis from the acquisition. We anticipate most if not all of these synergies will be generated during the first 12 months post-acquisition. To recap, we're excited with the strong top line growth we're experiencing in our Environmental Services segment and we're working hard to combat the negative impacts inflation is having on our business in order to restore our margins in this segment. We continue to be pleased with the execution in the Oil Business segment and our ability to capitalize on the structural changes in the used oil collection industry which are allowing us to improve upon historical economics of that business. This concludes our prepared remarks. I'll now turn the call over to the operator to take your questions.
Operator: It comes from the line of David Manthey.
David Manthey: Good morning, guys.
Brian Recatto: Good morning.
Mark DeVita: Good morning. How are you?
David Manthey: Good, good. So I was wondering first off if you could discuss the $3 million investment in the battery recycling partner Retriev what's the nature of that investment? And how do you see that playing out?
Brian Recatto: Yes, David we're very interested in being a collecting partner for that group of assets. It's a company that's owned by the Heritage Group. And they currently have multiple locations that are processing spent batteries, including lithium batteries. We think our best role in that JV is the help on the collection front using our 130 locations branches and operating locations. We'll help Retriev gather up batteries from our core client base which would be the smaller manufacturing customers. We elected to go that route versus developing our own processing because we're focusing on other processing technologies. We thought our best fit in that JV would be to be the collecting partner and we thought the investment made sense. We're very bullish on the long-term potential of the battery business as you well know.
David Manthey: Okay. And then a couple of questions on oil. I believe that some of your more formal used oil sourcing contracts has some kind of an index in them, whether it's fixed oil or diesel. But given the changes that have happened since IMO 2020, are you making any changes to how you're approaching those contracts? It seemed like you would be in line to command more favorable terms given the situation in this base.
Brian Recatto : Yes. And I think we've commented on previous conference calls that relative to the price of crude oil, we are paying less for used motor oil feedstock from all of our suppliers than we would in an environment that involved $100 crude prior to IMO 2020. So, you're absolutely correct in that summary. We obviously changed the index because of that. We're not indexing off of crude anymore and we have ample supply. And as Mark said, we've reduced -- we still value tremendously our third-party suppliers, but over the last five years, we've certainly built up our retail business. We have our One Drive automotive program. So we focused more on automotive the last few years to begin building up our internal volume, because it's important for us to increase route density and lower our cost to deliver the used motor oil to the re-refinery. So, we've certainly been able to acquire at a lower price and the structural changes are real.
Mark DeVita : Yes. So that, I mean the quick way of saying some of those changes are already built in. We've done that. And I'm sure in those few instances that we're still using crude we just changed that percentage down. So whether the metric itself stays the same or that percentage changes the effect -- I mean, you're seeing it in the results.
David Manthey : Okay. Yes. And then finally on the back end of that operation, are you -- I can't remember if you've told us that you're marketing your base oils as green now? Are you receiving a premium over traditional refined Group two oils?
Brian Recatto : No, I wouldn't say, David that we're receiving a premium, but we're certainly not discounting to the levels that we discounted before. And there's certainly tremendous interest in our -- we only produce 50 million gallons of base oil, tremendous interest in our base oil driven by the fact that it is much greener and base oil produced from virgin crude. Most studies suggest 50% to 60% less energy to produce our base oil versus virgin base oil. So lots of interest and we're not discounting it like we were and that's all helped to improve our spread.
Mark DeVita : But I think as you look forward, we really -- that's -- because a lot of people would look at our results and say, well, this is hitting on all cylinders. And I think operationally and collections-wise operations at the plant collection line, I think, we're doing a great job. But there still is another leg to the story, because it's still -- if you look at spot prices we're still not on par yet. So as the things Brian mentioned and our VP of Base Oil or VP of Oil are working on we do more with some of the majors and super majors. We expect that to be a tailwind to the business in the future. It's just -- those are proverbial large ships to turn. So we're on board. We haven't quite grabbed the wheel yet to continue the analogy.
David Manthey : Got it. All right. Sounds like weâre closing -- moving in the right direction. So, thank you. Best of luck.
Brian Recatto : Thank you very much.
Operator: Your next question comes from the line of Michael Hoffman of Stifel. Please go ahead.
Brian Recatto : Hi, Michael.
Michael Hoffman: Hey, Brian and Mark. Good morning. Thanks for taking the queue. So I want to focus a little bit on Environmental Services first. And I recognize the world is facing lots of inflation. You've initiated price. Where do you -- there's sort of a couple of angles on this. Do you think the worst of that pressure is behind you and now you just have to keep working steadily through your pricing and your own productivity to recover margin, or are we still seeing some upward pressure on the inflation and so you're still chasing that up?
Brian Recatto : Great. It's a little bit of both Michael based on waste streams. We're certainly going to have -- you know what's happened to the incineration market. It's very oversupplied and underserved, which makes it difficult for us to move incinerables along with a lot of our other competitors. So we think we're going to feel inflationary pressure continuing through the balance of the year for certain waste streams. We're seeing easing in the landfill markets. We're seeing stability in the fuel blending markets. So, not going to be chasing ourselves on those waste streams but certainly incinerables. We're going to have to keep watching the price, and we're going to have to also continue to look at target price increases for specific waste streams. I think it's going to be a battle for the balance of the year, but we're quick to handle it.
Michael Hoffman: Well -- and so on that end yes, the incineration story is broadly known. But that player has been pushing a lot of price too to direct volume. So the disposal market, the generator market seeing price increases. So why can't you get that -- work that through faster? What's preventing that from happening?
Brian Recatto : I wouldn't say anything. We've done three price increases in 11 months. So, we've been pushing the price increases out and we'll do it again as needed. But there are other costs that are causing problems. I mean just logistics costs, Michael, which you're well aware of fuel, chemicals, containers. All of that's starting to ease which help make it a bit easier for us as we look into the balance of the year. And we want to be careful. We're not the lowest cost provider out there. We've been able to capture some market share. We're already -- because we deal with a smaller client base, considered to be an expensive provider in our space. We want to be careful that we're not predatory with our customers in the face of a potential recession. We know the market is going to begin to slow down. In my view, I can't get too aggressive and force them to go out and look for other opportunities to find cheaper vendors and we lose market share. So, we're balancing all that out. We are prepared to do additional price increases. We're going to continue to push to get our margins back into the mid-20% range by the end of this year.
Mark DeVita: Yes. I mean we still have to let some of this stuff and I think Brian covered it in his earlier remarks the work we did, the price actions we took at the end of the quarter end of Q2 let those work through. There are some customers that haven't even seen that yet. We don't get to everyone in four weeks. So, that -- we'll see how that plays out. And then if there's more action needed as Brian said we'll take it.
Michael Hoffman: Okay. So given your 12, 12, 12, 16 quarterly cycle, are we looking at 3Q in ES about the same on the topline, but slightly better on the profit line and then 4Q do that 12-week thing divided by 12 multiplied by 16 and improve the margin? That's the way to think about it in ES?
Mark DeVita: Yes, that's the way we're thinking about it.
Michael Hoffman: Okay. When do I -- what period -- or how if at all in 3Q or is it all in 4Q to add Patriot and how much do I add?
Mark DeVita: We think -- we can get into the details on any follow-up. But we hope we think this transaction is going to close early August, maybe as soon as next week. Obviously it's somewhat out of our hands. We got to hear back from DOJ, but we don't expect any problems as we said I think when we announced the deal. But I think you can tell from kind of the metrics I mentioned that -- well, I guess I should clarify. At least for now, we're going to have the full Patriot results will be in the Environmental Services segment. We think the margins are roughly the same as what we've been printing. And the revenue it's in that -- I think we talked about this your industry intelligence on that kind of $120-ish million revenue annual figures is right. So, hopefully that gives you enough.
Brian Recatto: Yes, normalizing now for the large spills.
Michael Hoffman: Yes. And is there any particular seasonality to their book of business that we need to factor in when we're thinking about modeling?
Mark DeVita: I think it's similar to what our ES business is. So, your first quarter is going to be a slower one. No that stands any large pills or anything occurring of course.
Michael Hoffman: Right. And -- but you now have a business that you can respond to that, but that's not the real reason to own it, isn't it? And I think those three facilities two in California and one in Oregon just change your relative position in wastewater and sludges.
Brian Recatto: Yes, they do. We're also excited about PFAS opportunities in California. We wanted to have the additional wastewater treatment plants. We love the operating and employee base for Patriot. We want to expand our field services and industrial services business across the United States. This is going to be the platform that will help us do that. Certainly other organic opportunities are going to pop-up in that marketplace. We now have quite a few operating locations that are going to allow us to internalize a lot of the waste that we've been shipping back to our core group of facilities in the South and Midwest. And that's expensive and doesn't work in today's market. So, we wanted the ability to control more of our own waste streams in the western half of the US. We don't even have truly a vac business out there. We will now because we own wastewater treatment plants. We're going to begin adding those assets out there. We'll start chasing more industrial waste streams to feed those plants.
Michael Hoffman: Got it. Okay, great. And then on used oil an unbelievable period. Who could ever figured we'd still be at this wide of a spread? What does your industry experience telling you when at least the supply-demand side comes back into some balance? I mean is there any visibility on that part of the equation?
Brian Recatto: Yes, I mean we certainly are more focused Michael on the used motor oil end of it because we can better control that. The base oil price is going to be the base oil price when supply-demand balances out a little bit better. We think with the structural changes from IMO 2020 we're going to be able to move used motor oil price quicker in the event base oil pricing comes down. So, we're bullish that we can make money in any environment. We prefer a more stable crude environment, so it's not so volatile. And I think we're going to get our wish, just understanding the crude markets the way we do. I think we're going to be range-bound 80 to 110, 75 to 110, which will be good for us. It will create stability on feedstock costs for the virgin refineries that are going to have stable pricing. If you look at the oil change market, I mean they're up 10%. I mean they had a pretty good year so far. So people are out, vehicle miles traveled up. So, we're overall bullish on the whole macro in the oil segment. We love the green properties of our base oil versus virgin base oil. Lots of people have made outreach to try to term up our supply, because they like the properties of it. So, all in all, we're bullish, yes. We know at some point base oil is going to come down in price. We're convinced that we can move the used motor oil quickly to recover some or all of that spread.
Michael Hoffman: Given your experience, how much of the base oil price increase that's in the market is the supply-demand imbalance versus the crude oil price move?
Brian Recatto: I think it's both, Michael. I mean it depends if feedstock DGO costs are high, crude oil prices are higher, they got to charge a lot for it.
Michael Hoffman: Yes, I get crudes driven it there too, but we're still out of balance. So, I mean that alone has helped pop. And I'm just curious once it comes back in the balance -- I mean my gut is the crude oil price is a bigger piece. And if you're right, we range bound at 80 to 100 then there's less downside risk. But there's some for the supply rebalancing.
Brian Recatto: No, no doubt. We're expecting that. We expect to begin to see that in the fourth quarter as we begin to hit the seasonal slowdown. There's no doubt, but we think we could move used motor oil and the rest of the industry as well. Not a lot of outlets for used motor oil compared to the old days.
Michael Hoffman: Right. And that's your point is you think you can flex from the PFO back to a charge for oil or a lot less PFO than you are real time, relative to the base oil price coming in?
Brian Recatto: Yes, that's our thought.
Michael Hoffman: Okay.
Mark DeVita: Yes. We sorry that allow someone else get a question, Michael.
Michael Hoffman: Yes, yes. Sorry. Go ahead.
Brian Recatto: Thank you very much.
Operator: Thank you. Your next question comes from the line of Jim Ricchiuti of Needham Company. Please go ahead.
Brian Recatto: Hi, Jim.
Jim Ricchiuti: Hi. A couple of questions. So congratulations, by the way, on the quarter.
Brian Recatto: Thank you.
Mark DeVita: Thank you.
Jim Ricchiuti: On Patriot. Will you continue to be active on the acquisition front, or is Patriot the piece that you are really hoping to secure, and you'll just look to integrate that?
Brian Recatto: Yes. I think we're going to focus, primarily on integrating Patriot. I'm not going to suggest that if an asset comes along that we truly like that we're going to pass on it. It will have to be a strategic physical asset that allows us to treat more waste in a limited bandwidth. It's a big acquisition for us. We want to focus our time and energy on spending time with our new employees integrating the assets we just acquired making sure that we expand on the organic opportunities that are going to develop as a result of the ability to cross-sell to their customers and vice versa. So, that's going to be our focus near term, but if something comes along that we truly, truly like it's a physical plant that gives us some capabilities in the marketplace we'll consider it.
Mark DeVita: When you do the math, Jim, the -- while, obviously what Brian went through is most important, somewhat of if there is a limiting factor that the factors that we look at first when we think of another material transaction. But financially, we're going to have less than one turn of leverage even -- I don't know, if we're officially not in a recession or whatever it is, but even if our EBITDA would -- and I don't think this is going to happen, but take a significant turn down, you're still not going to have much leverage. It would have to get really, really bad to even get us above 1.5 times. So, we're going to have the capacity. And the quicker we're able to recognize those synergies I mentioned and get everyone hitting on all cylinders from a Patriot and legacy business standpoint that's just going to give us more dry powder to get the next bigger deal done.
Jim Ricchiuti: Got it. And the follow-up question I have, it ties a little bit Mark into the comment about a recessionary environment. Let's say, it's a -- who knows, a mild recession. Just given your customer base, how quickly do you begin to see some impact from those customers, which obviously tend to be smaller?
Mark DeVita: Yes, it really depends not just on timing or duration, but it also -- at least in some of our businesses and it does vary, it really depends on how deep. Because if you have a more shallow recession as far as magnitude then historically anyway those recessions don't really have much impact on our businesses, especially ones like parts cleaning. If it's something used in a maintenance function, in fact if it's shallow and shorter, you will actually do more maintenance, sometimes as a manufacturer, because especially in this market the last year plus, you've been going full throttle. And you haven't had time to maintain anything. And if you're doing more maintenance then you're probably cleaning more things. And in fact, even on the waste side you might be generating more waste. Now on the containerized waste side the other part of that business, if it's production waste and you're producing less that gets hit a little quicker. So, it really varies based on the business. But I'm no economist. I don't know what is for sure with the next coming quarters we'll have. But I think usually, we're not the canary in the coal mine that's for sure. It will be usually a quarter or two impact delay for us and our businesses overall than the general economy.
Jim Ricchiuti: Okay. Got it. Thank you.
Brian Recatto: Thank you.
Operator: Your next question comes from the line of Kevin Steinke of Barrington Research. Please go ahead.
Brian Recatto: Hi, Kevin.
Mark DeVita: Good morning, Kevin.
Kevin Steinke: Hey, good morning, Brian and Mark. So I wanted to just dig into the Environmental Services growth a little bit more up 26.4% year-over-year. I'm sorry, if I missed it Mark but did you give the contribution from tuck-in acquisitions in the quarter? Just trying to get to kind of the organic growth number there?
Mark DeVita: Yeah. Yeah, it was 8.3% in ES for the Environmental Services side. So it's not meaningless but â and we're â we think we can get a lot more out of those acquisitions to be honest. They're not hitting on all cylinders yet. So that's â not only does that tell you hey the legacy business obviously performed, well, if you're doing 26-plus percent growth. But there's more in the tank so to speak for those businesses.
Brian Recatto: And the issue that Mark is referring to is one â one is primarily a broker of industrial waste and obviously the third-party facilities are backed up. It's difficult to even move waste directly into some of these end disposal sites. Obviously, we're working on alternative facilities, alternative plans, repackaging waste and we can get it into another disposal site. So it is a bit tricky. That will improve.
Kevin Steinke: Okay. Yeah. Nonetheless, I mean, you had what 18% organic growth in the quarter then in Environmental Services. Is there any â you just referenced increased demand for your services, but is there any â where you kind of parse that out in terms of price versus volume? And what do you think is driving the increased demand? I mean, market share gains, is there still recovery from the pandemic going on, or any other factors behind the organic growth.
Mark DeVita: I think it is pull-through, as you alluded to, of avenues that we're walking to get there. There's certainly some overall still increase in demand in that part of the story just from a market standpoint. If we're getting into a softer overall macroeconomic environment that might soften, but there definitely has been â this has been a continuous story for probably at least six quarters is other providers not being able to provide we get calls. And again, this is anecdote, so I can't give you a percentage. But certainly, some of it is market share gains, because other companies are having problems with labor, get basically problem servicing their customers. So that's been a piece of it. It's probably about 25% to 30% is price as well. So as far as the how you break that volume piece up into the first two categories, I don't have that data for you. That's not something we track. But it's certainly both market share gain and I would â my gut would tell you, it's more market share gain than just overall recovery. Maybe three, four quarters ago, it was more of the latter. But I think it's more the market share gains now from the â what's driving the volume piece.
Kevin Steinke: Yeah. That's helpful commentary. That adds a lot of kind of detail around what I was getting at there. So, just housekeeping here. You said nine times trailing 12 months EBITDA, excluding cost synergies is what you paid for Patriot. Is that for the trailing 12 months ended June 30?
Mark DeVita: No, I think it's spring. I think it's more like â it's side of that.
Kevin Steinke: Yeah. Okay. All right. You touched there a little bit on the cross-selling opportunities, I guess, to bring some of your services to the Patriot branches right as I understand that they don't really do much in the way of parts cleaning. So I mean can you â
Brian Recatto: I think it's going to be more of them delivering their services to our client base, because we're going to have the opportunity to do more general industrial maintenance within our client base. So it's going to be more them selling our â well, it's us together, but we'll be selling to our customers their services. As you know, we've been expanding our field services and industrial services business over the last few years. And we're going to continue that with the Patriot acquisition.
Mark DeVita: But that will â they don't do parts cleaning.
Brian Recatto: We will look for opportunities within their client base, but I think the bigger opportunity is going to be for them to service our core customers.
Kevin Steinke: Got it. Okay. So yeah, I mean, so they have a pretty significant field services piece, I guess. And if you look at your investor presentation, that's -- field services represent what 62% of the $8 billion market. So I guess, is that an area you really want to be pushing into more significantly going forward?
Brian Recatto: Yes, I've been in the business. I like the business. That's probably, why we went after Patriot. I think given some of the industry consolidations, it's going to create an opportunity for us. We have 90,000 customers that need those types of services. We can provide them a margin, that's better than calling on some of the larger industrial opportunities. So, I'm pretty excited about expanding that business.
Kevin Steinke: Great. I mean, I guess conceptually that could maybe lead to a little more lumpiness, but certainly more revenue and margin dollars flowing to your financials as well. So...
Brian Recatto: Yes, I agree. I mean the overall CapEx or the EBIT to buy own stock or lease own stock.
Mark DeVita: Yes, that's about it.
Brian Recatto: Good T&M business that generates good free cash flow.
Kevin Steinke: Okay great. Thatâs all I had. Appreciate you taking the question
Mark DeVita: Thank you
Brian Recatto: Thank you. Appreciate it.
Operator: Your next question comes from the line of Gerry Sweeney with Roth Capital. Please go ahead.
Gerry Sweeney: Hi, good morning. Thanks for taking my call.
Brian Recatto: Hi, Jerry. How are you?.
Gerry Sweeney: Good. I know this is getting a little long so, one sort of bigger picture question. And Brian, I think you touched upon it a little bit. But just with internalization of waste obviously, it sounds like Patriot brings some assets. Just curious as to -- it's a multifaceted question. It's what is sort of the opportunity and time line? And how is it going to impact, some savings over the next -- and how does this sort of roll out over the next couple of quarters? You have Patriot, I think they have some services. Maybe you can roll that through your system, but it also sounds as though you're trying to build out some internalization throughout your footprint. But how do we look at that, and what is the opportunity?
Brian Recatto: Yes, I'll talk to the macro the opportunity and Mark may have to put some numbers to it after the call. But the macro aspect of it is, we're going to touch 275,000 waste containers this year not counting any of our fault volumes of waste. 70%, of that approximately are waste streams that we can internalize, if we build out our capabilities. That will keep us Gerry, from having to rely on third parties, which are already backed up and creating some issues for us. So that's the macro focus for us is building out these wastewater treatment plants, to broaden their capabilities for various subcategories, the ability to handle containers, the ability to do some automated processing so we can speed up production and shove as many of those 275,000 drums in our own network. So that's the macro of what we're pursuing. Obviously, the work that we're doing out west, will help us take some of the pressure off of our other facilities. We can begin to feed drums into those Patriot assets. We're expanding our Seattle plant, which will have drum capabilities. So those are all the things that we're working on from a macro standpoint. Gerry, it takes time for that to result in improved EBITDA performance, because with any fixed facility, you have to baseload the fixed facility and cover the fixed cost. So we've got to continue to generate the business, feed the facilities. It's going to take time. It's a bit of a transition moving from third parties, to our own network. But we think, in the long run it's the best opportunity for our shareholders.
Gerry Sweeney: On the long run front obviously the market dynamics have changed a lot over the last couple of years. If you were to go back in time, would this opportunity still be something you would pursue if this -- if the pricing environment was similar to a couple of years ago?
Brian Recatto: Yes, we've been pursuing.
Mark DeVita: Yeah. We've been talking to Patriot for a couple of years.
Brian Recatto: Yeah.
Gerry Sweeney: Okay.
Brian Recatto: I like this business. I love field services and industrial services.
Gerry Sweeney: Got it. And then I just wanted toâ¦
Brian Recatto: We want to really Gerry want to be a full service environmental company and you have to have those capabilities if you're going to play that role. Right now we're using third parties and that's not the way we want to go.
Gerry Sweeney: Got it. And you're looking at the portfolio not just minimizing costs?
Brian Recatto: Yes. Correct.
Gerry Sweeney: Two -- or one or two other quick ones, you mentioned you know internal collections. How much of that would you target to collect internally as opposed to a third-party? Obviously I don't think you want to get to 100%, because you want some flex there. But how much are you targeting? And how close are you to that target?
Mark DeVita: Well, we want to control...
Brian Recatto: Flex capability with third parties.
Mark DeVita: Yeah. But you always want to have them, because you never know.
Gerry Sweeney: Yeah.
Mark DeVita: So we could go higher. I think it was 21.8% of what we -- our third-party purchases represented in Q2 about 21.8% of what we said. Now, again there's inventory and other things. So it's not a straight translation. But it really is about getting in many cases that generator as a customer, right? So we can get those other business service lines sold. I mean, we're at a rate if you would look there's 13 periods in our case we collected about 70 million gallons which might -- even might be a record. I think it probably is. And then, obviously, Q2 is seasonally -- Q2 and three are higher. But we talked about our efficiency going and growing in the last several periods. It's almost at a $77 million -- 77 million gallon, excuse me, run rate which depending on the quality of oil that in theory might even be if it was really dry everything we get not that everything is but if it was you're collecting all that you need. So we're getting close to where we want to be.
Gerry Sweeney: Yeah.
Mark DeVita: We can just have -- we have our third-party providers that supplement on a minor basis but we're in control of our destiny.
Brian Recatto: Yeah. So ideally for me probably 10% to 15% third parties, some of this oil is just dislocated. I mean it's not overly economic and/or logistics are very difficult to get into our re-refinery. So we really need our third-party supplier partners.
Gerry Sweeney: Sure, got that. And then, did you say you're still final question still targeting we'll say mid-20%, Environmental Services margins, by year-end?
Brian Recatto: Yeah, we've said that earlier.
Gerry Sweeney: Okay.
Brian Recatto: Obviously inflation is.
Gerry Sweeney: Sure.
Brian Recatto: Obviously inflation is a struggle will continue to be a struggle. We know we can move price we will move price. But we also want to be careful as we hit the back end of the year knowing that a recession is coming you're not going to -- I don't want the pressure of our customers feeling they need to go out. And then, we care about our customers. And service is important and not being predatory with our customers in the recession. I'm more concerned about the long-term than the short-term.
Gerry Sweeney: Got it, I think a holistic approach too.
Brian Recatto: Absolutely, but my experience is about the quarter-to-quarter performance, I'm concerned about long-term stability and keeping our client base.
Gerry Sweeney: Okay. Fair enough. I appreciate it. I will talk with you guys later this afternoon. Thank you.
Brian Recatto: Yeah. Thank you, Gerry.
Operator: Thank you. There are no further questions at this time. This concludes today's conference call. You may now disconnect your lines.
