Heritage-Crystal Clean, Inc

Total first-quarter 2023 revenue was $193.5 million, a record for a three-month quarter. Net income was $16.6 million, or $0.70 per diluted share, versus $12.9 million, or $0.55 per diluted share, in the year-earlier quarter. EBITDA was $36.2 million, up 50.4% versus $24.1 million a year ago. Environmental Services revenue was $94.8 million versus $73.5 million, and segment profit before corporate SG&A was $22.7 million, or 24% of revenue, versus $13.1 million, or 17.7%. Industrial and Field Services revenue was $45.8 million versus $11.1 million, with operating margin at 16.3% versus a recast 9.8%; if certain labor costs had not been reclassified, management said the margin would have been 19.5%. Oil Business revenue was $53 million versus $54.7 million, with operating margin at 26.5% versus 33.8%, and base oil production was 12.1 million gallons, 1.8% higher than the year-ago quarter. Cash on hand ended at $35.3 million, cash from operations was $25.7 million, and free cash flow was $15.7 million. For Q2, management expects Environmental Services revenue growth in the mid-teens with margin relatively flat to Q1, Industrial and Field Services revenue growth in the mid-to-high single digits sequentially with mid-teens margins, and Oil Business margins in the mid-to-high teens due to weaker base oil pricing and the planned shutdown; for the full year, base oil production is expected to be 47 million to 48 million gallons.

Brian Recatto said the quarter showed strong organic growth in Environmental Services, good progress in Industrial and Field Services, and solid execution in Oil despite volume and pricing pressure. He emphasized that Patriot integration has gone better than expected, with unplanned synergies, and highlighted the company’s integrated PFAS solution as an opportunity. His tone was confident but cautious on the macro backdrop, repeatedly noting softening economy signals and the need to react to hazardous-waste disposal cost inflation.

Mark DeVita focused on the record financial results and the mechanics behind margin improvement. He noted operating costs as a percentage of revenue fell to 72.4% from 73%, corporate SG&A was $20.7 million, and cash increased by $13.3 million to $35.3 million at quarter-end; he also pointed to $25.7 million in operating cash flow and $15.7 million in free cash flow. On Industrial and Field Services, he said roughly $1.5 million of labor and benefit costs were reclassified to operating expense, which lowered the reported segment margin to 16.3%, while a like-for-like figure would have been 19.5%.

Analysts pressed management on inflation and pricing pass-through, and Brian said the main pressure point is hazardous-waste disposal costs, where the company expects to react with pricing again as soon as Q2. They also asked about labor retention, and management said hiring has improved versus last year because of a larger applicant pool and better CDL driver availability, though training remains important. On the oil side, analysts questioned weak demand and utilization; management said base oil production for the year should be 47 million to 48 million gallons, Q2 production will be lighter at roughly 11 million gallons, and the re-refinery will run in the 80s for utilization in Q2 because of the scheduled shutdown and soft demand. Management also said it is not seeing meaningful service interval extension in parts cleaning and that demand remains stable enough that they are not seeing a recession-driven slowdown in customer production.