Heritage-Crystal Clean, Inc
Q4 2020 Earnings Call Transcript

Published: 2 Mar 2021

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Heritage-Crystal Clean, Incorporated Fourth Quarter 2020 Earnings Conference Call. Today’s call is being recorded. At this time, all callers’ microphones are muted and you will have an opportunity at the end of the presentation to ask questions. Instructions will be provided at that time for you to queue up your question. We ask that all callers limit themselves to one or two questions. 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.

[Brian Recatto:]

Thank you, Chris. Good morning everyone and thank you for joining us today. This morning, we'll begin with a quick update on the impact of the pandemic and a brief review of our fourth quarter results and full year 2020 performance. During the fourth quarter, we continued executing the company's pandemic response plan to combat the COVID-19 outbreak in this downturn and remain focused on ensuring the health and safety of our employees and their families as well as those customers we came in contact with. To safeguard the well-being of our employees and decrease the spread of the COVID-19 virus, we continue to execute the following steps during the fourth quarter. Provided appropriate personal protective equipment and sanitizers, utilized the staggered work schedules to increase social distancing, allowed high risk or other impacted individuals to work from home when possible. Thoroughly cleaned and disinfected our facilities as needed. And lastly, we closed facilities temporarily as needed to prevent contagion. During the fourth quarter, total lost time from employees off the job due to COVID-19 related health issues and potential exposure was almost 7,900 hours companywide. On a normalized basis, this represents a 52% increase compared to our experience during the third quarter of 2020. Without the cooperation of our dedicated employees and the execution of the previously outlined preventive measures, it is highly likely the number of lost hours would have been even higher.

[Mark DeVita:]

Thanks, Brian. It's great to be with everyone this morning. In 2020, we generated $406 million of revenue compared to prior year revenue of $444.4 million, a decrease of $38.4 million, or 8.7%. The company's 2020 fiscal year was comprised of 256 working days compared to 253 working days in fiscal 2019. On our sales per working day basis, revenue decreased approximately 9.7% in fiscal 2020 compared to the prior year. The decrease in revenue was primarily driven by the negative impact of the COVID-19 pandemic and related shelter-in-place orders. Since experiencing a 24.3% revenue decline on a year-over-year basis during the second quarter amid the depths of the pandemic, our year-over-year revenue deficit shrank to 16.9% in the third quarter and only 4.9% in the fourth quarter. Net income attributable to common shareholders was $5.3 million, or $0.23 per diluted share, for the fourth quarter of 2020. This compares to a net loss attributable to common shareholders of $2.2 million, or $0.09 per diluted share, in the year earlier quarter, which included an $11 million pretax charge for class action lawsuit settlement pertaining to fuel surcharges. From a reporting segment standpoint, the Environmental Services segment reported revenue of $90.9 million, a decrease of $6 million, or 6.2%, during the quarter compared to the fourth quarter of 2019. The decrease in revenue was mainly due to the lingering impact of the COVID-19 related volume declines in our field services, parts cleaning and containerized waste lines, partially offset by favorable pricing in our parts cleaning business. On a sales per working day basis, Environmental Services segment revenues decreased approximately 8.5% during the fourth quarter compared to the prior year quarter. Our profit before corporate SG&A expense as a percentage of revenue was down slightly to 24.6% compared to 25.1% in the year ago quarter. The decline in margins was mainly due to lower revenue and higher containerized waste disposal expense, ethylene glycol costs and depreciation expense for trucks, partially offset by lower field services related disposal costs, worker's compensation expense and severance costs.

[Operator:]

Our first question comes from Michael Hoffman with Stifel. Your line is open.

[Michael Hoffman:]

Good morning, Brian and Mark thanks for taking the questions. I hope all of you are well.

[Brian Recatto:]

Yes, hi Michael.

[Mark DeVita:]

Yes, we are well I hope you are too?

[Michael Hoffman:]

We are, thank you. So on Environmental Services can you frame where you are in parts washer service cycles and particularly since your mix is approximately half industrial and half transportation. Can we characterize where you are coming into this year relative to the full recovery of activity?

[Mark DeVita:]

I mean I think we're kind of in line with some of the general economic metrics you see. I don't think we're ahead. I mean we might get into I think we're a little bit ahead on used oil collection as it relates to things like miles driven and the recovery there. But in parts cleaning I think we're in line on a normalized basis. We had a 6.5% increase over Q3 that's throughout all the crazy Q4 calendar stuff in parts cleaning. What we're seeing is volume is still down, price was up though I think Brian or I mentioned that in our prepared remarks. So we had kind of mid-single digit price increase which was great. And that's not much different than what we typically experienced with this more mature business. It's mostly price and usually we don't see the volume declines in non-pandemic environments, but we're still kind of in that same phase I guess with some of your general economic indicators. At least that’s my feel. And Brian, do you disagree?

[Brian Recatto:]

Yes. No, I absolutely agree it. Michael, with vehicle miles driven being down roughly 10%. Well we've been tracking a little bit ahead of vehicle miles driven. We're running at about as Mark said roughly 5% off of where we were pre-pandemic. And we think as we look out at economic indicators with GDP, we expect to see some meaningful growth in the back half of the year. We think we'll start trending back to more 2019 numbers by the end of the second quarter as our hope provided we don't see any further COVID-19 type slowdowns. But everything for us is positive and pointing in the direction that we'll begin to see. The recovery back to 2019 levels in the U.S. business by the end of the second quarter certainly in the third quarter.

[Michael Hoffman:]

Okay. And then I think you've answered my question then which was if it's 5%, it's about $20 million of reopening revenue. And what you're saying is on a run rate basis, you're going to be at that, divide that by 4 sort of $5 million a quarter roughly. I mean I get it. I got to do the 12-week thing. But through the second half of the year, so there is sort of this assumption of picking up about $15 million of that pandemic related displacement in 2021 and then there'd be a roll over about $4 million or $5 million into 2022, plus other underlying organic growth?

[Mark DeVita:]

Yes. Absolutely makes sense.

[Michael Hoffman:]

Okay. All right, cool. And then last question for me is, is there a particular issue that drove catalyst have always been the hot button of - oops in the used oil side, so with that was the mix of the oil coming out different because of the changing and driving and where is it sourcing or what drove the above average catalyst use?

[Mark DeVita:]

Yes, Michael I think we talked about it a little bit on our last conference call. We're in the middle of 10-year tank inspections, so we've been operating with smaller feed tanks which makes our feed quality less than optimal to put it mildly and we just completed the turnaround of our used motor oil tank so it's back in operation this quarter that'll begin to help our quality that was a primary driver for the additional catalyst expense in the fourth quarter. We're expecting pretty good production in Q1 we've got one five-day turnaround scheduled for the first quarter which we're in the middle of right now so is just the simple routine cleaning for us. We're going to be battling these tank inspections throughout the years because it's 10 years into the purchase of the tank, so we'll get that done this year we don't think it’ll cause any operating problems beyond what we've already experienced with feed quality now that we're done with the feed tank. So we feel pretty good and we think production will be in 11 to 12 million gallons in Q1, so not that inconsistent I think we were at 10.5 million gallons last year we had a few problems in Q1, but we feel positive about the plant going into this year. And obviously the spreads look much better as Mark talked about in his prepared remarks pretty excited about base oil price in these days that's off season has been to see a.

[Michael Hoffman:]

Terrific. Thanks for that add-in color. I appreciate it.

[Mark DeVita:]

You're welcome.

[Brian Recatto:]

Thanks Michael.

[Operator:]

Our next question is from David Manthey with Baird. Your line is open.

[David Manthey:]

Brain you mentioned that by the end of the year ES operating margin could be in the 27% range. Are you referring to a quarterly basis or is that the annual average?

[Brian Recatto:]

Yes. It definitely be - this is Mark, David. It's definitely be ramping up to that. We expect to see some headwinds just due to normal seasonality which really to be honest if you look back to 2020 people quite don't forget. But it was a very mild winter for the northern and eastern part of the US. So if you only go back one year you won't see it but you've covered us long enough to know that usually there's 1 percentage point to three percentage point headwind in our margin there. So, certainly we're not going to come out of the box this year with that. But we'll build up to that at least at a run rate basis as I thought.

[David Manthey:]

Okay. That makes sense.

[Brian Recatto:]

And let’s provide that David we see the revenue bump that talk I just mentioned in my conversation with Michael.

[David Manthey:]

Okay.

[Brian Recatto:]

In the direction of Q3 to see the revenue - I mean the margin improvement.

[David Manthey:]

Okay. All right. Thank you. And from a cost standpoint, I know during the pandemic you would - there have been some wage cuts and some furloughed employees and things like that but during the process of resetting those to more normal levels. So, as we look at the fourth quarter in its entirety were labor costs relatively normal in the fourth quarter or should we expect some additional reset as we move into the first quarter of 2021?

[Brian Recatto:]

If you look at our field labor we did a lot of things throughout the pandemic to make sure these being frontline workers, I mean legitimate not only are they coming to work every day but they’re going to five or eight or 10 different places of work. So we took steps to and it did result for some people keeping them whole. It wasn't completely intentional in that manner but we helped soften that blow. So we don't expect this. We come completely out of this that we'll see from that standpoint as big as impact as you might expect as far as kind of a return to work comp. We've gradually shifted back and our sales team has done a - our management team has done a great job of shifting that compensation in a gradual way back to what our traditional plan is. And we're going to be at that rate sometime here in the first half of 2020 or 2021 meaning compensation completely based on the same formula that we were pre-pandemic. So I think it's going to be pretty limited as far as the impact that labor is on the margin anyway. I don't know Brian if you just?

[Mark DeVita:]

No, I agree. And from a pure headcount standpoint David we're probably still short about 80 people in the field. And I think Mark was referencing that we'll begin to bring those people back throughout the course of the year as revenue begins to climb.

[David Manthey:]

Okay. And then the last question I believe you noted the price paid to third-party collectors is down. Could you talk about that dynamic? Do you expect that to continue?

[Brian Recatto:]

Yes, we expect it to continue. I mean I think you've heard the other - our other competitors talk about IMO 2020 and the HSFO market. We're not seeing an abundance of people aggregating used motor oil for shipment overseas. So we still think the preferred method for the third parties as they ship into a for the third-parties as they ship into a re-refiner we're seeing pretty good demand for third-party oil which means we get to pay less for it because of demand is still strong. I don't really see those dynamics changing. Certainly we've seen crude oil prices go up in the last 30 days in a meaningful way. I do think because of the shale plays and OpEx and ability to control themselves and we'll begin to see that level off as we hit the summer. I don't think crude prices are going to continue to rocket up, which should make it fairly consistent for us from a feedstock standpoint, we hope, that's what we want to see. So, I'm optimistic that we'll be able to keep the price, the third-party oil manageable. And we're seeing it pretty good volume, David, into the plant now, pretty good demand.

[Operator:]

Our next question is from Jim Ricchiuti with Needham. Your line is open.

[Jim Ricchiuti:]

Thanks for taking the question. Just I was surprised at the increase, but maybe not just given what we've seen from the pandemic in the lost time hours in the quarter versus Q3. How is that tracking, I'm just curious, thus far in Q1?

[Brian Recatto:]

It's much better in Q1. I think we unfortunately dealt with the impact of the holidays. I mean, you had a lot of family gatherings I think, people were just overall frustrated with the fact, they couldn't get out. They got out more in the fourth quarter mainly driven by time off and holidays. And we experienced a rise in case count and in November post-Thanksgiving and into the Christmas holidays. But it's certainly way more manageable today. We were literally dealing with - we were dealing with every day in the fourth quarter it felt like it's much better today, much more manageable.

[Jim Ricchiuti:]

That's good to hear.

[Brian Recatto:]

We’ve obviously seen - obviously more of our employees are accepting the vaccine. I think you're beginning to see some herd immunity out there. We definitely see the case count consistent with the rest of the country, if you just read statistics its way down from where it was in the fourth quarter.

[Jim Ricchiuti:]

Got it. And maybe too early to tell, but I'm just wondering if you look at the business and perhaps the ES business if you see any lasting structural changes perhaps to the business from the pandemic since with respect to customer attrition? It's still a little too early to tell if there has been any kind of lasting change to the customer base?

[Brian Recatto:]

I would suggest it's probably too early to tell. We certainly have not seen it. We're on the phone with our branch managers our BSMs on a regular basis. They're not seeing shutdowns, by our target customer base which would be small manufacturers. I mean how many customers we have its 90,000 plus in both divisions combined. And we're not seeing it - I mean we're not seeing a lot of closures out there. So, we're not seeing any fundamental structural changes to our business.

[Jim Ricchiuti:]

Good. And last question, you noted that pickup in the M&A activity you guys are out there and looking and I'm just wondering how would you characterize the pipeline, the opportunities and maybe the valuations that are out there?

[Brian Recatto:]

Yes, I'll let Mark talk a little bit valuation. I'll talk to the opportunities. I think with a potential change in the capital gains, the tax structure. We're seeing a lot of smaller tuck-in opportunities. We've got a long list of pipeline opportunities. I think we mentioned on the call. Last quarter, we think we'll get a couple of deals, tuck-in deals closed in the first half of this year. Pretty excited about it, because it continues to expand our footprint and gives us some capabilities at the operating level, plant level that will enhance our profitability. So long pipeline of smaller deals for us. And I think you'll see some larger deals that are being put in play this year. Obviously, there's a lot of money available, and multiples are pretty high. We'll have to manage that and look for opportunities with synergies to avoid overpaying for acquisitions. But pipeline as Mark talked about very long, and we think we'll get some deals close this year. I don't know if you want to plan on some of this?

[Mark DeVita:]

No, I would just say Brian mentioned that valuations, if you compare let's say where we were a year ago, you can say - I mean there's some nuance there Jim as I'm sure you can appreciate. If you're trying to measure it as let's say where were multiples of earnings, multiples of EBITDA as a method to define valuation. You can stay there back to what was pretty frothy, pretty pandemic. But it also depends on what earnings number are you talking about. Is it something that's been aggressively adjusted or hey, we had a nine year in terms of COVID. So we're going to take out X dollars or add back I should say X dollars. So without getting to nuance, I would say it is probably in that same range that it was. It’s pretty much back to what it was pre-pandemic which is to say it's not a cheap market.

[Operator:]

Our next question is from Kevin Steinke with Barrington Research. Your line is open.

[Kevin Steinke:]

So you talked about your optimism with regard to base oil prices. Just wondering how quickly you think you can begin to realize some of the benefits of these improved posted prices we've seen or is that already started to flow through here in the first quarter?

[Brian Recatto:]

Yes, it's certainly starting to flow through in the first quarter. We've made a meaningful change in the base oil pricing since the end of the year driven by the fact that the market is undersupplied because of - refinery utilization, the refineries are down the utilization is probably off. Last statistic I saw was 13% so refined products are off 10%. There's just not a need for jet fuel and distillate products until we begin to fly again, travel again to the levels we were prior to the pandemic. So I think, we'll benefit from that as we said in our prepared remarks through the first half maybe the first three quarters of the year. And it's already beginning to flow into our income statement in a meaningful way.

[Mark DeVita:]

If you look at - Kevin and this is going to be comparing a quarterly average from Q4. So point in time so - and it's in a rising price environment. So it could be a little dangerous, but given that context I just laid out you're looking at close to - there has been in - our guess is one of - the people we look to get a feel for the market. In their latest report last Friday that the stock market was up almost $0.70 from the Q4 average to what it was point in time just - in the last week. So, that doesn't mean our price is exactly up that much, but that can give you a flavor for what’s pushing through, and again - that $2 roughly for the average of group - that coupon. But so the 100 and 200 recycled products of around $260 a gallon is what that translates to, at the end of the last week. That has been on the rise. So, it hasn't been that way by - in any stretch the whole quarter so far, but it's going in the right direction.

[Kevin Steinke:]

Okay.

[Brian Recatto:]

A good first quarter, as we mentioned in our prepared remarks in oil.

[Kevin Steinke:]

Yes, okay great. Yes, that's helpful. Do you have any targets in terms of base oil production either in the first quarter or 2021 that you could discuss?

[Brian Recatto:]

Yes, I think I mentioned on an earlier call that we're shooting from between 11 million gallons and 11.5 million gallons in the first quarter. The overall capacity in terms of production is 49 million gallons. We see no reason to not get there - absent an issue. We forecasted 28 days of maintenance for the year which is consistent with last year. We always budgeted a few extra days for issues. Obviously, we've battled a hell of winter so far, but knock on wood we've been able to get through it without any major issues contrary to a lot of refineries that have been struggling with the weather. So all in all, we're projecting to get close to that product capacity.

[Kevin Steinke:]

Okay, great. Lastly do you have any growth investments or growth plans that you're thinking about for Environmental Services segment in 2021 in terms of branch openings or adding new sales resources or is that maybe something that you're just going to wait on until we kind of get back to a more normal business activity levels?

[Brian Recatto:]

I think the game plan, well I know what the game plan is, our plans for this year to do the tuck-in acquisitions and build around those tuck-ins versus opening up pure organic locations. The other things I mentioned on the earlier call, we’ll certainly bring back the furloughed reps. We're still down in sheer numbers. So that'll give us growth as our customer. The reason we haven't done it so far is it's very difficult to get into new customers. I mean it's almost impossible because of the pandemic. We think as we move deeper into the year with the vaccines, the herd immunity, our customers will open back up our target customers will open up. We'll begin to bring back new reps which will give us the lift that we talked about getting our revenue back to 2019 levels. But I doubt we do any organic offices unless we see an opportunity or pick-up a corporate account need to open an office. But we'll certainly build around these tuck-in acquisitions to get into new marketplaces. Hopefully that answers your question.

[Kevin Steinke:]

It does, yes thank you all right. Well congratulations on the nice results here.

[Operator:]

Ladies and gentlemen this concludes the Q&A session and today's conference call. Thank you for your participation. And at this time you may now disconnect.