Image source: The Motley Fool.
Heritage-Crystal Clean Inc (HCCI)
Q2Â 2019 Earnings Call
Jul 25, 2019, 10:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, ladies and gentlemen, and welcome to the Heritage-Crystal Clean Incorporated Second Quarter 2019 Earnings Conference Call. [Operator Instructions] Some of the comments we will make today are forward looking. Generally, the words aim, anticipate, believe, could, estimate, expect, intend, may. planned, 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 or 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 President and Chief Executive Officer, Mr. Brian Recatto; and the Chief Financial Officer, Mr. Mark DeVita. At this time, I would like to turn the call over to Brian Recatto. Please go ahead, sir.
Brian J. Recatto -- Chief Executive Officer, President & Director
Thank you, and welcome to everyone joining us this morning. I'm thrilled to share with you strong second quarter results that demonstrate the talent and dedication of our team. We reported second quarter record revenue of $105 million, which compares to $100.3 million in the second quarter of 2018. We improved our margins in both segments and this performance allowed us to report net income of $7.1 million, which is a record for a 12-week quarter. From an earnings per share standpoint, we're recording diluted income per share during the quarter at $0.30 compared to diluted income per share of $0.26 in the second quarter of 2018.
I will begin discussing our Environmental Services segment performance. From a revenue standpoint, I'm excited that we delivered 8.9% growth in the segment compared to the second quarter of 2018. This level of growth is even more impressive when you consider the unusually large field services project that was part of our second and third quarter results last year. Our second quarter revenue performance represents a second consecutive record for a 12-week work.
I want to comment on the impact of the investments in organic revenue growth which we made during 2018. The cost incurred during 2019 associated with the new branches and resources added during 2018 was approximately $2.9 million during the second quarter, from which we generated approximately $3.1 million in revenue.
As previously mentioned, our plan for this year would be more aggressive with the addition of new sales and service resources compared to last year. Our 2019 plan also includes the addition of approximately five new branches during 2019. During the first half of 2019, we added one branch. For the full year 2019, we expect new sales and service resources and new branches to collectively add $4.1 million in cost and $4.8 million in revenue. In the second quarter of 2019, we incurred approximately $2.1 million in operating cost while generating approximately $2.7 million in revenue for the resources added this year.
Our Environmental Services operating margin in the second quarter of 2019 was 27%, up from 25.6% in the same quarter a year ago. Better management of our disposal costs helped drive the improvement compared to last year and we plan to build on this progress in the future. We expect some of the cost improvement to be driven by expanding our internal waste management capabilities including consolidation at some of our sites of non-hazardous waste generated by our customers.
Moving on to our Oil Business. In the second quarter of fiscal 2019, Oil Business revenues were down $1.1 million or 2.9% compared to the record results we imposed in the second quarter of fiscal 2018. The decrease in revenue was driven by a decrease in the selling price of our base oil, partially offset by an increase in the volume of base oil gallons sold. Our base oil netback decreased by $0.30 per gallon during the second quarter compared to last year, but increased $0.23 per gallon compared to the first quarter of 2019. While we improved our discipline and began charging our customers for used oil collection service during the first half of the quarter, during the second half of the quarter, we moved back into a pay for oil position. On a weighted average basis, we're still on a slight pay for oil position for the second quarter as a whole.
Our average pay for oil increased $0.02 during the second quarter compared to the first quarter of 2019 and decreased $0.12 per gallon compared to the second quarter of last year. I'm happy to report that our rerefinery operated 109% of base oil capacity during the second quarter. During the quarter, we increased base oil production by almost 3.6% compared to the same quarter a year ago, which resulted in record production and helped deliver double-digit operating margin. Looking forward, base oil prices have been steady early in the third quarter, in part due to higher crude oil prices. Used motor oil collection markets continue to be competitive with no noticeable impact from IMO 2020 as of yet.
From a rerefinery perspective, we continue to work to improve the reliability of our operation. To support this goal, we have enhanced our mechanical integrity programs, utilizing third-party expertise and have also hired a new reliability engineer. As discussed last quarter, we will continue to improve metallurgical, eliminate unplanned downtime in the future. In regard to IMO 2020, we continue to believe this initiative will improve both the feedstock and finished product portions of our spread. While we anticipate seeing some of the effects from IMO 2020 prior to the end of 2019, we are not certain as to the exact timing or magnitude of these impacts. For now, we will continue to work hard to operate the rerefinery efficiently and manage our spreads effectively.
From an Environmental Services segment perspective, we continue to see momentum that we believe will support high single digit organic growth during 2019 despite tougher comparisons in 2018. We look to supplement our organic growth by closing on additional acquisition opportunities. Also, we expect our operating margin percentage for 2019 -- for the remainder of 2019 will be in the same range as our second quarter figure.
Mark will now walk us through our second quarter financial results in more detail.
Mark DeVita -- Chief Financial Officer
Thanks, Brian. Beginning with our Environmental Services segment, second quarter revenues were 12-week record at $70.2 million compared to $64.4 million in the year-ago quarter. The 8.9% increase in revenue was driven by continued growth in most of our product and service lines, with the antifreeze, vacuum and containerized waste businesses being the largest contributors. The majority of growth in these three lines of business was due to volume increases. In the parts cleaning business, our growth was primarily price driven during the quarter.
The increase in antifreeze business was primarily due to gains from the acquisitions we made in 2018 and the first quarter of 2019. Revenue from these acquisitions was approximately $1.5 million during the second quarter. It's important to note that our total Environmental Services revenue growth was 14.7%. If you exclude a $3.2 million from our second quarter 2018 results, which was generated from an unusually large field services project. Excluding the impact of the same project from our second quarter 2018 results, our organic growth during the quarter would have been 11.3%.
Our same-branch revenues grew approximately 9% on a year-over-year basis during the second quarter, or approximately 13% excluding the impact of the previously mentioned field services project.
Profit before corporate SG&A expense in the Environmental Services segment was $19 million, compared to $16.5 million in the year-ago quarter. operating margin came in at 27% or 140 basis points better than last year. The $2.5 million increase in margin was mainly driven by higher revenue, along with lower disposal costs, partially offset by higher labor and employee benefit costs.
In the Oil Business segment, we produced a record 11.8 million gallons of base oil compared to 11.4 million gallons during the second quarter of fiscal 2018. From the sales standpoint, we sold approximately 10.9 million gallons of base oil during the second quarter of 2019 compared to 10.7 million gallons during the second quarter of 2018.
Profits before corporate SG&A expense in the Oil Business segment decreased $0.8 million in the second quarter as our operating margin percentage fell from a record high 13% in the second quarter last year to 11.2% this year. The decline was mainly driven by the steep drop in base oil pricing and the resulting decrease in the spreads between our feedstock costs and the selling price for base oil. Our overall corporate SG&A expense as a percentage of revenue came in at 11.2%, compared to 12.3% from the year-ago quarter, mainly driven by higher revenue, lower severance costs and lower share-based compensation expense, partially offset by higher bad debt expense.
The Company's effective income tax rate for the second quarter of fiscal 2019 was 23.1%, compared to 26% in the second quarter of fiscal 2018. The rate difference is principally attributable to windfall tax benefits associated with stock compensation having a greater effect on the tax rate in the second quarter of this year compared to the second quarter of 2018. Second quarter EBITDA was $13.6 million, compared to $12.2 million in the year-ago quarter. Adjusted EBITDA for the second quarter was a record $15.9 million, compared to $13.9 million in the second quarter of 2018.
As Brian mentioned, income per share on a deluded basis was $0.30 during the second quarter. If you exclude the impact of site closure cost primarily related to a former FCC Environmental location we acquired back in late 2014, our adjusted income per share on a diluted basis would have been $0.35.
From a balance sheet perspective, cash on hand at the end of the quarter stood at a record $52.2 million. We generated $16.2 million in cash flow from operations during the quarter, compared to $12.3 million in the second quarter of 2018. Total debt remained steady at $29 million year-over-year. We continue to work on identifying opportunities to deploy our excess cash, focusing on potential acquisition targets and organic growth initiatives we feel will improve our business and help create value for our shareholders.
In summary, we're very pleased with the hard work of the Crystal Clean team in delivering strong second quarter results, and we remain focused on executing our strategy of growth and profitability for the remainder of 2019. Thank you for joining us today. I will now turn the call over to the operator to take your questions.
Questions and Answers:
Operator
[Operator Instructions] Our first question or comment comes from the line of Quinn Fredrickson from Baird. Your line is open.
Quinn Fredrickson -- Robert W. Baird & Co. -- Analyst
Hey, good morning, guys.
Brian J. Recatto -- Chief Executive Officer, President & Director
Good morning. How are you?
Quinn Fredrickson -- Robert W. Baird & Co. -- Analyst
Good. So I think you mentioned segment margins in ES for the rest of the year being pretty steady with 2Q. Curious how you guys thinking about in the back half the year for the Oil Business, the segment margins there?
Mark DeVita -- Chief Financial Officer
For the Oil Business, we're probably thinking about the same direction that we gave you at this time last quarter, which is high single digits. We obviously have the potential to overperform and everything really depends on spreads and how we manage that in the near term here. But that's what we're targeting, assuming we get decent production from our rerefinery, I don't know that we can always expect a record performance we had in Q2, but that's where we see it at this point.
Brian J. Recatto -- Chief Executive Officer, President & Director
Yeah, I would agree to that.
Quinn Fredrickson -- Robert W. Baird & Co. -- Analyst
Got you. And then you guys talked about, you know, not yet seeing the benefits from IMO 2020, but just curious, you know, has there been an uptick in awareness from other collectors that you're perceiving at this point? Or how would you kind of characterize awareness in the market, both from collectors and customers at this point?
Brian J. Recatto -- Chief Executive Officer, President & Director
Well, there's no doubt that people are aware of it because of the impact of pricing relative to number six. I mean, we fully expect as you look at futures, the number six value will go down by the end of the year. There's certainly some angst among the collectors that are not affiliated with rerefinery, we've yet to see it because it's not going to become an impact to the field until January. But there's certainly angst over it. We haven't seen the softening of the used motor oil market that we thought we'd see, but we fully expect it to develop over the back half of the year.
Quinn Fredrickson -- Robert W. Baird & Co. -- Analyst
Got you. Okay. Thank you very much guys.
Operator
Thank you. Our next question or comment comes from the line of Kevin Steinke from Barrington Research. Your line is open.
Kevin Mark Steinke -- Barrington Research Associates, Inc., Research Division -- Analyst
Good morning.
Brian J. Recatto -- Chief Executive Officer, President & Director
Good morning.
Mark DeVita -- Chief Financial Officer
Good morning, Kevin.
Kevin Mark Steinke -- Barrington Research Associates, Inc., Research Division -- Analyst
So I was curious about following up on the ES operating margin, you cited better management of disposal costs as a driver there. I'm just wondering about if you could elaborate on that a little bit more and what the opportunity is for that going forward to continue helping the ES margin?
Brian J. Recatto -- Chief Executive Officer, President & Director
Yeah, Kevin, from an operating standpoint, we kind of split the responsibility up among our product managers that really know each of these service lines and they're responsible for helping us manage in disposal costs, and obviously we worked hard to internalize as much of the waste as we can. You've heard on our conference calls that we're developing some of our own in-house waste water treatment capabilities, the ability to add some value to these waste drains. And that's really the initiative that we focused on. Also, better logistics costs, we've upgraded our transportation team significantly over the past couple of years to enhance our ability to move this waste through our branches and hubs at a cheaper cost structure. So I think a little bit of internalization, better management of some of our hazardous waste vendors and logistics that are the focus items for us, that help as maintain our margins. Because we want to continue to invest organically, we're going to continue to add resources as the best use of our money today. So that will obviously put a little bit of pressure on margins, on the flip side, we've got to get it back by working harder on the operating side. We like the organic openings of branches and adding people.
Kevin Mark Steinke -- Barrington Research Associates, Inc., Research Division -- Analyst
Okay. Got it. And I thought it was interesting that you expect ES margin to remain at that similar level to the second quarter, even as it sounds like the new branch openings in the second half of '19 will be higher than the first half. I believe you said one branch was opened in the first half and you planned five for the year. So I guess we should expect four in the second half, but you'll be able to offset the cost pressure from those openings with other initiatives?
Brian J. Recatto -- Chief Executive Officer, President & Director
Yes, obviously, as in past years, most of our branch additions are typically in the latter half of the fourth quarter. It takes time to get the leases done, get it organized, getting people hired. But we've also added a lot of branch resources -- same-branch resources which increases our cost and that's important initiative for us because we see opportunities that our stable branches to grow revenue organically as well. So most of the additions of the new branches all happened late in the year, which is why we're confident that we can maintain margins absent any issues in the field.
Kevin Mark Steinke -- Barrington Research Associates, Inc., Research Division -- Analyst
Okay, great. And so obviously really strong operating performance utilization at the rerefinery. Any -- anything we should be thinking about for the second half that might cause lower utilization, I mean, in terms of plant shutdowns or anything else that you anticipate in the second half?
Brian J. Recatto -- Chief Executive Officer, President & Director
No, out of the ordinary planned shutdowns of the plant. We're not doing any large capital projects at the back half of the year. We have our normal turnarounds that are all coming mainly for just routine maintenance. So more of the same in Q3, we feel pretty good about it. I mean, obviously, you have seasonal softness that begins to happen in the base oil market in late fall, but we're still seeing strong demand at a solid base oil pricing. So I feel pretty good near term, plants running great.
Kevin Mark Steinke -- Barrington Research Associates, Inc., Research Division -- Analyst
Okay. And are you -- how far along are you with the various upgrades that you were making in terms of metallurgy or any other mechanical or other upgrades that you wanted to complete in the rerefinery?
Brian J. Recatto -- Chief Executive Officer, President & Director
We have another round of upgrades that we'll be making in our large fall turnaround, which is a scheduled turnaround. It'll be the next phase of our improvement. What we're working on now is more system work to make sure that our mechanical integrity program is as good as exists in the industry. And we've brought in some help as a comment on our prepared remarks to make sure that we build the systems and we've added a reliability engineer who can help on rotating equipment and mechanical integrity. So there's more of the same.
Mark DeVita -- Chief Financial Officer
To reemphasize what Brian said in his earlier comment a minute ago, we have this planned out that we have for Q4. We're going to do some of this work. We're not planning anything anywhere near as long as the planned outage of last year's Q4. I just want to make sure that that's clear that one was nearly 20 days. So we usually have one year, usually around in Q3, beginning in Q4, that is longer than the three to five day ones that are typical in the other periods and the other times a year, it isn't going to be one of those at least not scheduled to be one of those 20 days type thing.
Brian J. Recatto -- Chief Executive Officer, President & Director
Correct.
Kevin Mark Steinke -- Barrington Research Associates, Inc., Research Division -- Analyst
Okay. Thanks for taking my questions.
Brian J. Recatto -- Chief Executive Officer, President & Director
Thank you.
Mark DeVita -- Chief Financial Officer
Thank you, Kevin.
Operator
Thank you. [Operator Instructions] Our next question or comment comes from the line of Brian Butler from Stifel. Your line is open.
Brian Butler -- Stifel -- Analyst
Hi. Good morning. Thank you for taking my questions.
Brian J. Recatto -- Chief Executive Officer, President & Director
Hi Brian.
Mark DeVita -- Chief Financial Officer
Hi Brian.
Brian Butler -- Stifel -- Analyst
Just first on the Environmental Services piece, how much of the service -- that field service project was in second quarter, I mean, third quarter '18. So how much should we see? How much of a headwind is that going next quarter?
Mark DeVita -- Chief Financial Officer
It should be about $2 million. I think it was $1.9 million technically in Q3 of last year. So a lion's share of it was, you know, I think we said $3.5 million in our prepared remarks. The lion's share of it was Q2 last year and that was ramping down in Q3.
Brian Butler -- Stifel -- Analyst
Okay, and then when you think about the back -- backend waiting of the branch additions. When you think about going into 2020, is that going to be another headwind to margins for at least the first half, if not the full year for 2020? Is that the right way to think about it? And what kind of headwind is that? Is that another 50 basis points to 100 basis points?
Mark DeVita -- Chief Financial Officer
I don't think it's that big a headwind, when you think about it, unless we decide that we're going to ramp up the pace more than what we've stated. You're talking about these additions being smaller and smaller -- smaller additions overall versus larger and larger base number of branches. So we don't anticipate at this point that there'll be anything more than our regular seasonality. We always know that Q1 is typically 200 basis points to 300 basis points potentially lower. But that could -- I don't know 50 basis points or less be it from maybe some new additions possibly. But it really won't be driving much margin erosion overall.
Brian J. Recatto -- Chief Executive Officer, President & Director
And Brian, some of those new locations can come from acquisitions as well. We've got a pretty robust pipeline of smaller deals. Obviously, we look at those as opportunities to expand our footprint.
Brian Butler -- Stifel -- Analyst
Right. But I guess from a growth perspective, when you look out, at least, you know, kind of the next 12, 18 months, that expansion, that geographic expansion and the branch additions is still somewhat of a limiter of margins, really expand into what they can be, right, until that starts to slow down margins kind of where they are is a reasonable place to be, I guess, this is another way to look at it.
Mark DeVita -- Chief Financial Officer
Yeah. At this pace, we probably should start to see maybe if not 12 months, maybe it's 18 months, 24 months to start to see actually still some incremental expansion. But to get to that 30% or even the low 30s that we talk about, that we know based on our mature branches that this segment is capable of printing, that certainly is not going to be achieved here in the next 18 months.
Brian Butler -- Stifel -- Analyst
Okay.
Brian J. Recatto -- Chief Executive Officer, President & Director
But a good use of our capital would be absolutely any acquisitions. We will continue to invest in organic growth. And we also will have a marginal impact on the percentages.
Brian Butler -- Stifel -- Analyst
Okay. And then on the site closure costs you had this quarter, is there any of those that roll into third quarter '19?
Mark DeVita -- Chief Financial Officer
But for that one site, there'd be very little on that. We do have other sites. I'll be honest, this is probably the largest site, one of the largest sites that we acquired in that acquisition, you remember, from almost five years ago now, and probably the most complicated and we're running most of the other sites and this is one that we never even operated because it had some issues. So we're just happy to put this chapter behind us where we will have to take closure costs occasionally from time to time, yeah, but they won't typically be this magnitude.
Brian J. Recatto -- Chief Executive Officer, President & Director
And Brian, we expect to recover our cash when we sell the property.
Mark DeVita -- Chief Financial Officer
Yeah. We'll call that out assuming there's if we get what we want for there might be a material gain. So we'll likely have an -- I don't know if you remember we sold a property in Southern Florida a couple of years ago and I think we had three=plus million dollar gain on that one. So -- and we called that out.
Brian Butler -- Stifel -- Analyst
Okay. And then on the Oil Business, just the -- spread trend definitely improved first quarter going into the second quarter. What's it look like I guess in the early part of third quarter here? Is it still, I mean, it sounds like pay for oil -- you're still on pay for oil environment, but is that on the pricing side improved?
Brian J. Recatto -- Chief Executive Officer, President & Director
We're not expecting much of a spread change in Q3. And I think you could pick that up from our prepared remarks. I mean, $0.20 spread improvement quarter-over-quarter, we expect it to be relatively flat in Q3.
Brian Butler -- Stifel -- Analyst
Okay. And then just the last one on the scheduled downtime. Are those in third quarter or in the fourth quarter for your scheduled turnarounds?
Brian J. Recatto -- Chief Executive Officer, President & Director
We've got a short shutdown in Q3, five days shutdown, which is typical for us.
Brian Butler -- Stifel -- Analyst
And then nothing in the fourth quarter?
Mark DeVita -- Chief Financial Officer
No. The longer one that's like, the more closer to 10 days one. But that those are again, that would be the planned as opposed to last Q4, remember, we had something like a 20-day or around there.
Brian J. Recatto -- Chief Executive Officer, President & Director
We did a major capital construction project last year, we're not doing it this year.
Mark DeVita -- Chief Financial Officer
Yeah, we were lining up even doing some other things we're talking about. So we don't have any of those big projects. The projects within the projects are the ones Brian mentioned part of the beefing up our metallurgy and mechanical integrity initiatives that are ongoing and these are ones that you can, if you do it right, you're planning well, you have the systems that Brian mentioned in his remarks that we've taken strides to put in place. You should be able to do it in unison with some of this routine work.
Brian Butler -- Stifel -- Analyst
Okay. But in the second quarter, you didn't have any turnarounds or downtime, so that 109 --
Brian J. Recatto -- Chief Executive Officer, President & Director
No, we had some downtime in Q2.
Mark DeVita -- Chief Financial Officer
Yeah out of routine maintenance.
Brian J. Recatto -- Chief Executive Officer, President & Director
So [Indecipherable] going to have in Q3.
Brian Butler -- Stifel -- Analyst
Okay.
Mark DeVita -- Chief Financial Officer
So if you look going forward and we've talked about this in Q4 last year, unfortunately, we had unplanned outage in Q1, which we talked about previously. But if we can show the consistency here, there's a good chance, just like we said, that, nine months or so ago that we'll probably rerate the maximum for the plant as far as maximum output on a base oil basis.
Brian J. Recatto -- Chief Executive Officer, President & Director
And in a normal year, absent any mechanical issues, our goal is 25 days to 35 days of planned maintenance downtime and that's still our consistent thought.
Brian Butler -- Stifel -- Analyst
Okay, great. Thank you very much for taking my questions.
Brian J. Recatto -- Chief Executive Officer, President & Director
Thank you.
Mark DeVita -- Chief Financial Officer
Thanks Brian.
Operator
Thank you. I'm showing no additional questions in the queue at this time. [Operator Closing Remarks]
Duration: 29 minutes
Call participants:
Brian J. Recatto -- Chief Executive Officer, President & Director
Mark DeVita -- Chief Financial Officer
Quinn Fredrickson -- Robert W. Baird & Co. -- Analyst
Kevin Mark Steinke -- Barrington Research Associates, Inc., Research Division -- Analyst
Brian Butler -- Stifel -- Analyst
