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Edited Transcript of HCCI.OQ earnings conference call or presentation 23-Jul-20 2:30pm GMT

Q2 2020 Heritage-Crystal Clean Inc Earnings Call

ELGIN Aug 31, 2020 (Thomson StreetEvents) -- Edited Transcript of Heritage-Crystal Clean Inc earnings conference call or presentation Thursday, July 23, 2020 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian J. Recatto

Heritage-Crystal Clean, Inc - CEO, President & Director

* Mark DeVita

Heritage-Crystal Clean, Inc - CFO

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Conference Call Participants

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* James Andrew Ricchiuti

Needham & Company, LLC, Research Division - Senior Analyst

* Kevin Mark Steinke

Barrington Research Associates, Inc., Research Division - MD

* Michael Edward Hoffman

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Heritage-Crystal Clean, Inc. Second Quarter 2020 Earnings Conference Call. Today's call is being recorded. (Operator Instructions)

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 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 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 the call over to Brian Recatto. Please go ahead, sir.

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [2]

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Thank you, Shannon. Good morning, everyone, and thank you for joining us today.

This morning, we will begin with an update on the impact of the pandemic, discuss our second quarter results and share our third quarter outlook. Like most companies, since the end of March, we have faced many challenges as a result of the global COVID-19 pandemic. Since our company and many of our customers have been deemed essential businesses, we have worked hard to adapt to the challenging operating environment the pandemic has created.

To safeguard the well-being of our employees and decrease the spread of the COVID-19 virus, we implemented the following steps during the second quarter: provided additional personal protective equipment and sanitizers; utilized a staggered work schedule to increase social distancing; allowed high-risk or other impacted individuals to work from home when possible; thoroughly cleaned and disinfected some of our facilities; temporarily closed less than 10 of our facilities, none of which were closed for more than 3 to 4 business days at a time. These steps, along with the cooperation of our employees, have allowed us to limit the number of confirmed suspected cases of COVID-19 amongst our employees. During the second quarter, total lost time from employees off the job due to COVID-19-related health issues was approximately 5,000 hours company-wide.

From a customer standpoint, during the second quarter, we experienced situations where some of our customers temporarily closed their businesses while others remained open, but limited our access to their facilities which curbed our ability to fully service those customers. Other active customers have had a decreased need for our products and services due to the economic downturn. We continue to encounter the same conditions into the early part of the third quarter.

In addition to taking steps to ensure the safety of our employees, during the second quarter, we also executed several actions to ensure the health of our business. Some of these actions include, but are not limited to, the following: implementation of salary reductions for all levels of management; implementation of furlough and a reduction in force programs; implementation of reductions of cash compensation for members of our Board of Directors; elimination of 401(k) plan company match; reduction of capital expenditures; suspension of mergers and acquisitions activity; elimination of nonessential travel; implementation of a hiring freeze; thorough assessment of vendors to ensure continuity of critical supplies and materials; and lastly, the tightening of customer credit controls. Although we have restarted our mergers and acquisitions activities, many of the other initiatives I just mentioned are still in effect today. During the second quarter, we also launched a COVID-19 decontamination service to help our customers implement their return-to-work strategies. We will continue to offer this service as we see a need for it in the marketplace.

I would now like to spend a little time talking about our Oil Business. During the second quarter, there was a significant drop in demand for crude oil and oil refined products due to the COVID-19 pandemic. This deflated demand scenario came on the heels of a battle for market share between 2 of the world's largest oil-producing countries, Saudi Arabia and Russia. This market share of battle led to a historic oversupply of crude oil, and the supply demand dynamics pushed the price of crude oil and finished products to all-time lows during the quarter. While crude pricing has rebounded from historic lows, lower demand as a result of the economic slowdown has resulted in ample supplies of crude oil in the market today.

The shelter-in-place orders, which were widespread during the second quarter, led to a drastic decrease in driving and lower levels of manufacturing activity. This, in turn, has led to a decreased need to replace finished lubricants such as engine or hydraulic oil. Less oil changes mean less used oil to be collected and less demand for finished lubricants. As most of you know, base oil is the main ingredient in finished lubricant. As the demand for finished lubricant plummeted, this led to a decreased demand for our base oil as well as downward pressure on the price for our product.

Early in the third quarter, we have seen an easing of the shelter-in-place orders in many parts of the country, which increased the demand for finished lubricants and base oil. This allowed base oil producers, including Heritage-Crystal Clean, to gradually increase prices during the early part of the third quarter. However, the recent resurgence in COVID-19 cases in areas which were the earliest to rescind shelter-in-place orders has the potential to limit the level of improvement we will see in base oil demand and pricing. The steep decline in the price of crude oil during the second quarter, which I mentioned earlier, led to a decline in value across the oil commodity complex. This provided us an opportunity to move from a slight pay-for-oil position during the first quarter to a significant charge for oil position during the second quarter.

On a net basis, from the first quarter to the second quarter of fiscal 2020, we saw a net improvement of $0.48 per gallon in our charge for oil program. As the price of crude oil has come off historic lows, we have seen increased pricing pressure related to used oil collection charges in the early part of the third quarter.

Due to lower demand for our base oil as well as a soft pricing environment, we decided to move up a scheduled extended turnaround from the beginning of the fourth quarter of fiscal 2020 into the second quarter. We also executed the turnaround at a more deliberate pace to limit overtime and other labor costs, which would normally be incurred during the turnaround. As a result of the extended turnaround, the re-refinery was down for approximately 3 weeks, which led to base oil production of 6.5 million gallons or 57.2% of base oil capacity during the second quarter compared to 11.8 million gallons in the year earlier quarter.

During the early portion of the third quarter, the re-refinery is performing well as we increased production to meet growing base oil demand. We're also experiencing increasing availability of feedstock, which will improve our planned operating performance and utilization. We are projecting base oil production to be in excess of 11 million gallons for the third quarter, provided we are not faced with additional shelter-in-place orders because of accelerating COVID-19 virus cases.

As we move forward, we estimate in the third quarter, the Environmental Services segment will see year-over-year revenue performance slightly better than what we saw for the second quarter. In addition, we estimate the Environmental Services segment operating margin percentage will be 2 to 3 percentage points better than our second quarter operating margin percentage. From an Oil Business segment perspective, we estimate third quarter revenue will be down 25% to 35% from the prior year quarter, and we estimate our operating margin will improve sequentially quarter-over-quarter.

We believe we have seen the worst of the impact of the COVID-19 pandemic on our financial results. However, recent surges in COVID-19 infections in certain parts of the country could bring new or additional shelter-in-place orders, which could directly or indirectly negatively impact the demand for our services, the health of our workforce and our future financial results.

While our results for the remainder of 2020 and into 2021 are hard to predict, one thing I am confident of is knowing all of our employees are determined to continue to provide the high level of service our customers have come to expect from us in a safe a manner as possible. I'm also pleased that we have maintained our strong balance sheet and are in a good position to take advantage of improving market conditions. However, at this point, we are unable to predict the ultimate impact the COVID-19 pandemic will have on our business, results of operations, financial condition and cash flows.

With that, Mark will now walk us through our second quarter financial results.

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [3]

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Thank you, Brian. Good morning, everyone.

Revenue for the second quarter of 2020 was $79.5 million compared to $105 million for the same quarter of 2019, a decrease of 24.3%. Net loss attributable to common shareholders for the second quarter was $2.7 million compared to net income of $7.1 million in the year earlier quarter. Basic loss per share was $0.11 compared to basic earnings per share of $0.30 in the year ago quarter. Earnings in the current quarter were favorably impacted by $0.20 per share as a result of an adjustment to an accrual established during the fourth quarter of 2019 related to a settled class action lawsuit. Excluding this accrual adjustment, net loss attributable to common shareholders would have been $7.3 million or $0.31 per share.

Moving on to Environmental Services. We recorded segment revenues of $59.8 million compared to $70.2 million in the second quarter of 2019. The 14.8% decrease in revenue was mainly due to COVID-19-related volume declines in most of our product and service lines, partially offset by favorable pricing variances in our parts cleaning, containerized waste and antifreeze lines of business. Environmental Services profit before corporate SG&A expense was $8.3 million compared to $19 million in the year ago quarter. Operating margin declined to 14% from 27% in the second quarter of 2019. But we were pleased with our overall operating performance in this segment given the very challenging economic conditions.

Oil Business segment revenues decreased 43.3% to $19.7 million compared to $34.8 million in the second quarter of fiscal 2019 as the COVID-19 pandemic and related shelter-in-place orders led to a significant decrease in the demand for finished lubricants, which directly impacted demand for our base oil products. Pandemic impacts also led to a significant decline in the generation of used oil, which negatively impacted used oil collection and feedstock volumes used in our re-refinery. As Brian mentioned earlier, these headwinds led us to move up the timing of an extended turnaround at our re-refinery into the second quarter. These unfavorable conditions resulted in our Oil Business generating negative operating margin of 28.2% for the second quarter. During the second quarter, the weighted average increase in our net charge to customers to collect their used oil was $0.48 per gallon compared to the first quarter of 2020.

From a base oil standpoint, we sold 7.1 million gallons during the second quarter, and our netback declined $0.65 per gallon compared to the first quarter of 2020 and $0.61 per gallon compared to the second quarter of 2019. Our overall corporate SG&A expense increased slightly by $0.4 million compared to the second quarter of 2019. SG&A expense as a percentage of revenue was 15.3% compared to 11.2% from the year ago quarter. This percentage basis increase was mainly driven by lower revenues and higher severance and bad debt expense, partially offset by lower travel expenses, share-based compensation and legal fees.

EBITDA for the second quarter was $2.9 million compared to $13.6 million in the year ago quarter. The company's effective income tax rate for the second quarter of fiscal 2020 was 8.7% compared to 23.1% in the second quarter of fiscal 2019. The rate decrease is principally attributable to the opposing effect on the tax rate from changes in year-to-date earnings in an income quarter as compared to a loss quarter.

At the beginning of the second quarter, we closed on an acquisition of an Environmental Services business focused on field services and wastewater treatment for $10.1 million. This acquisition provides us our first wastewater treatment operation in the Midwestern U.S. as well as the ability to use internal labor to perform various field services projects, albeit in a limited geography. We ended the quarter with $50.8 million of cash on hand. This balance represents a decline of $9.9 million from the end of the first quarter.

In addition to the cash outlay for the acquisition I just mentioned, we also paid out approximately $4.5 million during the quarter -- second quarter, excuse me, related to the legal settlement I previously mentioned. The payments made during the second quarter represent all material amounts owed by the company related to the settlement. For the quarter, we were able to generate $7.6 million in operating cash flow and we were also able to generate free cash flow of $4.3 million during the second quarter.

Despite the many challenges presented by the COVID-19 outbreak, we maintained a strong balance sheet and net cash position as of the end of the second quarter. We do not expect the impact of the pandemic to force us to exercise any portion of our still unused revolving loan in the coming quarters. As we move forward, we've restarted our acquisition-related activities during the third quarter as we look to leverage our strong balance sheet to execute on opportunities, which we believe can create value for our shareholders.

In conclusion, given the challenges presented by the COVID-19 pandemic, we are pleased with the execution of our team during the second quarter, and we believe we are well positioned for the challenges we may encounter during the third quarter and remainder of the year. We hope everyone stays safe and healthy. And as always, we appreciate your continued interest in our company. Thank you for joining us today.

I will now turn the call back to Shannon to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Michael Hoffman with Stifel.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [2]

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Glad to hear that your employees are safe and all and all okay.

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [3]

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Michael, how are you? How are things at your end?

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [4]

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We can't complain. What's the point anyway, right?

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [5]

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We're here to listen.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [6]

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I just want to tease out a little bit of your outlook for 3Q to try to understand the pieces. When we think about what was the rate of change down in, say, Environmental Services. Parts cleaning is down almost 16%, vacuum is down a little over 20%, but field services is up, antifreeze is down in mid-20s. How do I think about those pieces in 3Q given the rolling reopening of economies in where your branches are located?

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [7]

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Let me talk to what we're currently seeing, and maybe Mark can review some additional Q2 history. But we are beginning to see gradually increasing revenue performance for most of our branches. Obviously, Michael, the oilfield has impacted -- oilfield branches, we have 14 that are impacted more severely than the rest of our network. So their current run rate we're seeing those branches in -- down 18% to 20% year-over-year. The rest of our network running in the 10% clip down year-over-year, and we're pretty happy with that.

Obviously, we're seeing hotspots of COVID-19 around the country, and that may impact some branches going forward more than others. Right now, Florida is pretty hot; Texas, we're seeing a little bit of a slowing in some of those branches only because of COVID-19. But overall, that will give you some color on what we're seeing currently.

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [8]

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And Michael, if you look at -- from a -- Brian talked to the geographic impacts. If you look to the overall line of business impacts, you called out the 3 most important ones. If you look at parts cleaning compared to vacuum and our containerized waste businesses, as you just outlined, those businesses, the latter 2, were impacted from a negative standpoint about -- had about twice the decrease on a year-over-year basis that our parts cleaning business did. And that really makes sense I think if you think about it logically. The parts cleaning business is a scheduled routine business, and you would expect that compared to businesses where the waste pretty much is connected to production or activity more directly anyway that you'd see a quicker, more drastic downturn.

So I think on the way back up, when you think Brian mentioned getting some -- a couple of percentage points increase from the last quarter's performance in the ES segment overall, I'd probably say maybe 2/3 of that from the vacuum and containerized waste business combined and 1/3 of that from parts cleaning because parts cleaning has that much less further to come back from as opposed to those 2 other businesses.

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [9]

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And we don't expect to see any quarter-over-quarter improvement in field services. A lot of the projects that we performed in Q2 were already teed up, Michael. That's why you didn't see any erosion in revenue in field services. We'll begin to see some of that filter through the income statement in Q2.

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [10]

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In field services, there's about a little more than $1 million. So if you look at on a quarter basis, you obviously have looked through our Q, you got that breakdown. It's close to -- not quite, but close to 25% of the revenue is kind of COVID-related.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [11]

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That's the decontamination work?

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [12]

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Yes.

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [13]

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Yes. We're obviously doing it for our manufacturing client base, smaller client base. So it's not on the level of some of the other industrial service contractors, but fits to what we do really well because we're supporting our customers and helping them get back open.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [14]

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Okay. And then if I switch gears to oil, you shared that you thought you'd be at 11 million gallons of production. That's a very high capacity utilization. I mean that puts you at approaching 100% utilization.

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [15]

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Yes. That's provided, Michael, the feedstock continues to be available like it is today. I think I said that in prepared remarks.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [16]

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Yes. Yes, you did. And I wanted to sort of tie that in, which is so vehicle miles traveled based on gasoline supplies seem to be back up about 70% from the bottom. So...

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [17]

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I'd' say a little higher than that based on what I'm reading. But yes, definitely way up from where it was.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [18]

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And therefore, oil is back in supply. The other part of that question is has the oversupply of base oil been corrected, so we've rebalanced the market relative to the current level of driving?

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [19]

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Yes. I'm not going to go as far as saying we've rebalanced base oil. I think, as you know, a lot of refineries have reduced production, including us and some of the other re-refiners, which obviously took some base oil out of the marketplace way less fuel and distillate demand, which I think will keep the refineries at lower capacity utilization. So for now, we feel pretty good about supply/demand on base oil. And I'm projecting, at least as we put our numbers together for our Board over the last couple of days, we're projecting relatively flat base oil pricing near term, expecting it to be balanced. And obviously, we'll hit the fourth quarter, which is a slower base oil period.

We'll see where it goes from there. But near term, we're projecting flat base oil price, even pretty good demand. We haven't had any trouble moving the base oil that we've been producing. We feel pretty good about the 11 million gallons. And if you look at our past performance last year, I think we were at 11.7 million gallons for the plant. So getting back close to 100% capacity, not all the way there, but close. Yes. And pretty good demand from our third-party suppliers. So I know everybody's seeing increased used motor oil activity based on what I'm hearing from the third parties, including us, our route density on our trucks has picked up quite a bit since the worst part of the COVID pandemic, which was April, first part of May.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [20]

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Okay. And just so I'm clear, when you say a flat base oil price, that's flat sequentially or flat year-over-year? It's got to be down year-over-year, isn't it?

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [21]

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Yes. No. Sequentially, I'm talking just run rates...

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [22]

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Okay.

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [23]

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Yes. Sequentially, the way they are year-over-year and as you know.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [24]

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Yes. And just so we're -- about how -- the relative spread sequentially has been materially enhanced by the charge for oil in -- within your collection business. Is that correct?

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [25]

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Yes. We're happy -- I mean we're happier with where our spread is today. I'm not where I want to be, but we've made a lot of progress with our charge for used motor oil, significant progress. We obviously got a -- you saw Motiva's price increase. So we got a price increase on base oil which helped our spread. So between the 2, we're pleased. I mean it -- I don't know if it gets us all the way where we need to be, but I'm much happier than I was in Q2, which is why we're producing base oil.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [26]

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Okay. And then, Mark, the capital spending reduction, what are we -- what should we be modeling for capital spending as we sort of work through a cash flow statement?

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [27]

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Yes. We weren't successful as we wanted to be. We spent roughly, from a cash basis, $1.5 million more than what we had forecast and I know I had talked to the market on. And I'd rather just conservatively, especially since our cash position, we were able to, from an operating basis, produce a better result than we thought. We're probably going to put out and forecast another $3.5 million for Q3 and Q4. And Q4, I know it's an outsized calendar quarter, but say, try and shoot for another $7 million total in the second half of the year. And hopefully, we can beat that. I really hope so. It's a matter of when Brian and I get people coming to us about they need this and they need that, trying to make sure we do the right thing.

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [28]

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Look a lot of it, Michael, is rolling stock. I mean you've heard us on calls before, we're buying a lot of our power these days, especially on our specialty trucks because we -- it lasts longer, it reduces our maintenance cost. We like having the asset, we can repurpose the ancillary equipment that's associated with it. So it makes sense for us. We pushed a lot of it off. But at some point, we know this market is going to recover. Our balance sheet is strong. We want to get ourselves into a position to have these plants optimized and to have our rolling stock in good shape so we can hit the ground running in 2021.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [29]

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Okay. And then the last couple around that cash subject. So clearly, cash collections were good. Bad debt provisions seem like they were not bad on a percent of total revenues. How do we think about where that trend -- all that overall trend is?

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [30]

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Yes. I think we've taken extra special care on bad debt, especially with the new accounting rules. I think that the CECL standard is what the accountants call it. But to -- not just do our normal looking at specific accounts, which we do have some things we deserve for, but ramp up that bad debt. So I really think outside of some specific account, big account reserves, which are always hard to predict, we're probably seeing the worst of it or hopefully book the worst into our allowance right now. But things could change if shelter-in-place orders hit extra hard again, then maybe we'll have a different outlook. But right now, I feel pretty comfortable that we're not going to have any additional big shocks that we're going to have to absorb in the P&L and that our allowance is in good shape.

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [31]

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You always worry, Michael, as you move from a slight pay-for-used motor oil to a charge. And it's a lot of smaller customers, never easy to collect money from those guys.

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Operator [32]

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Our next question comes from Jim Ricchiuti with Needham & Company.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [33]

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If I look at the -- Mark, the cost reductions that we saw in Q2, how much of that is -- would you characterize as temporary in nature? I don't know if you could size that. Because I guess what I'm also trying to get to is how should we think about that expense being layered back in as you do start to see the business improves?

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [34]

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I think a vast majority of it is temporary. The layering in, you're not going to probably like my answer because we don't have a ton of clarity there. Certainly, at the beginning part of the third quarter, you're seeing those same savings in place. And I would say that for -- since we're almost halfway done, most of the third quarter, they're probably going to be in place in that -- into the fourth quarter is when you'll see some of those costs come back into frame. I can't tell you how much, how quick. That's about as granular as I can get. But we're already basically halfway through, and we're holding the line. And we've taken advantage. We haven't done any large reduction in force, but we've selectively pruned the tree. There has been some permanency in some of the cost reductions but most of it, we hope we'll bring back, but we're dependent on activity increasing.

Brian, do you have anything to add?

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [35]

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No. I'll just second that. I mean, obviously, we hope that we could bring these furloughed employees back sooner rather than later. But right now, we're not seeing the revenue increase to justify bringing them back. We feel like we're staffed fairly well. In some markets, we may need to bring people back because as the restrictions have eased like in the Midwest and the Northeast, we're seeing more rapidly recovering revenue. Those were the hardest hit areas early on because of the lockdown. We're seeing improving conditions there. So we may selectively again to bring people back geographically where we're seeing increased revenue.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [36]

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Got it. And then guys, again, with respect to some of the areas where we've seen the flare-ups in recent weeks, within the ES business, are you seeing some noticeable impact? Or is it just a case of the opening of these states has outweighed what we're seeing?

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [37]

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Yes. I think I mentioned this. Michael asked a similar question. Initially, we saw a greater impact in the Midwest and Northeast because it's shut down sooner. Obviously, the -- a lot of the southern states continue to operate, although not at 100%, but certainly at a greater percentage than Midwest and Northeast. We're kind of seeing the reverse today. A lot of the southern states have had the flare-ups. And we're seeing a little more caution out in the field from our customers where they're pushing back on not wanting us to have access to their plants and people.

So I would say, if you look at what's happened in the last few weeks, probably a little more of a lesser activity in the southern states, better in the Midwest and Northeast. But overall, our branches in general are running at about 90% clipped compared to 2019 with a heavier impact down South and less up Midwest, Northeast because of increased activity as a result of them going back to work.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [38]

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Brian, maybe even in these areas that are most affected in some of these southern states, it's -- and again, I'm just trying to get a sense. It's not anything close to what we saw it sounds like earlier than we were seeing in the Northeast and some of the other states that are really shutdown?

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [39]

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No. You're absolutely right. Less of a percentage, certainly. We're still getting the work on. It's just harder.

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [40]

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I think it's just a reflection of I think the general economy, Jim, is getting a little bit more used in navigating with this. It might not be that much better the situation medically, but I think we're a little more prepared, incrementally more prepared as an economy.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [41]

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Okay. And just on the M&A side, the idea that you're restarting some of the activities there. What's driving that? Are you seeing some potentially more attractive valuations out there? Or are you just saying, "Hey, this is the time we should be doing it. We've got the balance sheet. Let's start refocusing on that?"

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [42]

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Yes. I think it's certainly a combination of the 2. I don't think people are going to put their companies into play near term. It doesn't make a lot of sense when your EBITDA run rates are as low as they are today based on historical performance. But it takes time to gen up these opportunities. And we think starting now, we'll get us in a position to close some strategic deals in 2021. A very important component of our overall business strategy, as we've talked about on many calls, we've done quite a few tuck-ins in 3 years. We still think that strategy works for us. Yes, we'd like to do bigger deals. They may or may not develop because of struggling balance sheets in 2021 coming out of this pandemic. So we're going to focus on tuck-ins first and then look for these big strategic opportunities certainly with a focus on ES, continued focus on ES, continued focus on wastewater treatment because it fits our vacuum truck business well. It's a type of industrial customer that we like to call on. So really, nothing has changed. We just think the opportunities will begin to develop in 2021 and we need to get after it now.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [43]

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Got it. And last question from me. I know it was a fairly small acquisition, but I'm just curious on the COVID-19 service revenue stream. Is that showing signs of contributing in any somewhat meaningful fashion in the current quarter? How should we think about that?

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [44]

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I don't have quarter-to-date information right at my fingertips, Jim. But I would think you can basically look forward and whatever your forecast is for the return-to-work approach would be the way I would try and forecast what this business would do. Personally, I think as there's more education around the virus, how long it lives on certain services, we're not planning on this growing much more than kind of around where it's at. And if it does, if it's way bigger, then fantastic. It's a way to help keep our people engaged and obviously offset the headwinds from the other lines of business.

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [45]

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A lot of people in the business, Jim. I mean our focus was to protect our client base. We want to make sure our customers are taken care of and can get back to work and we want to be the ones to help them.

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Operator [46]

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Our next question comes from Kevin Steinke with Barrington Research.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [47]

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So I wanted to ask -- start off by asking about your expectations for the Environmental Services operating margin. In the third quarter, you said I believe, 2 to 3 percentage points better than the second quarter. What -- how should we think about that improvement occurring? Is it because you said maybe revenue decline will be slightly less? Or are you taking up more costs? What's kind of driving that expected improvement in the ES margin?

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [48]

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I'll offer a little commentary and let Mark give more detail if necessary. But yes, it's driven by both slight uptick in revenue, which we talked about, and the full effect of the cost reductions. Obviously, the pandemic happened and started really in earnest in March, April, and we worked on our cost-reduction plan. The costs weren't pulled out of the system until mid-second quarter. So it will be the full effect of the cost reduction. So a little bit of both.

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [49]

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Yes. I am not going to add. That's perfect.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [50]

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Okay. Good. And then you called out severance and bad debt impacting the corporate SG&A expense. Is there any way you could quantify that impact so we can kind of get an idea of what it was in the quarter and what we might expect for the next couple of quarters if those items will be impacting going forward as well?

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [51]

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Yes. We're not...

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [52]

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Go ahead.

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [53]

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Just from a color standpoint, we're not expecting any additional severance or meaningful bad debt changes for Q3. Even absent a failure of a customer, we're not forecasting that.

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [54]

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Yes. The severance, it's kind of buried at the back of our press release. It was a little over $300,000 in the quarter, specifically. And then bad debt, I can follow up with you on that detail, Kevin.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [55]

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Okay. And then you mentioned you started to see some pressure on used oil collection charges given commodity prices rebounding. What's the state of the competition there in terms of used oil collectors? You would think they're under pretty significant pressure given the current environment and also IMO 2020, are you seeing any competitive failures there or any less competitive pressure over time? I mean what's the outlook there in terms of the competitive pressures on collection charges?

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [56]

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Yes. I think our comment on pricing, I mean, obviously, we have corporate accounts and that's indexed to the commodity itself. So that's going to drive some of the price change for used motor oil. We're certainly seeing a lot of the smaller third-party used motor oil collectors under pressure. There's not a robust RFO market at least this time of the year. Certainly, in the winter, there's more opportunity to move RFO, which is why our phone is ringing and then our supply has increased quite a bit from the worst time frame in the pandemic. So we feel pretty good about supply.

And yes, I think The Street is fairly stable as of right now. Absent any meaningful commodity price change, I don't expect to see much deterioration in our charge for oil over the next couple of periods. I can't. As you know, oil is so volatile. I'm not going to go beyond that. But certainly, near term, we feel pretty good about competitive pressures and pricing being relatively stable over the near term for charge for oil.

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [57]

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And just to be clear, we have seen some deterioration from our weighted average for the quarter. So the trend was downward on our charges.

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [58]

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And as price of crude goes up, I mean, obviously, that's going to impact our corporate pricing structures.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [59]

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Okay. Got it. Just following up on your M&A activity, what's -- kind of what's most attractive to you in this environment in terms of your environmental -- building out the Environmental Services footprint, if you are able to provide any color on that at all?

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [60]

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Yes. I think I could talk to it generically. I don't really want to spell out what we're looking. There's a lot of competition for acquisitions already. But as you know, we really want to focus on the environmental side of our business, drum collections, drum waste management, wastewater treatment, light-field-service-type companies that don't and are not asset-heavy that fit with our small to mid-sized industrial customer base, anything back truck companies that service those types of customers. So we're really focusing on the customer and then looking for acquisitions that fit in terms of what they do historically.

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [61]

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That's something we've always done, Kevin. We try and leverage that customer base that we already have. And that's one of the key pillars if we're doing just general screens or high-level screens of opportunities. So that hasn't changed.

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [62]

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And we need density out West, as we've talked about on a few of our phone calls, try to build up our branch network and capabilities in the western half of the U.S.

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Operator [63]

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Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.