Heritage-Crystal Clean Inc (HCCI) 2021 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Heritage-Crystal Clean, Inc. Fourth Quarter 2021 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, the 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 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.

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

On behalf of the entire Crystal Clean team, I want to let our investors know I'm pleased we are with a record-setting fourth quarter results and full year performance. We produced record revenue, EBITDA and adjusted EBITDA during the fourth quarter. Mark will provide additional detail, but total fourth quarter revenue exceeded expectations at $169.5 million, which helped produce record EBITDA of $33.1 million.

Now I would like to discuss the results in both of our reporting segments. Let me start with our Oil Business segment. During the fourth quarter of fiscal 2021, Oil Business revenues increased 60.1% to $65.8 million compared to the fourth quarter of fiscal 2020. The increase in revenue was mainly due to an increase in our base oil netback of $2.06 per gallon compared to the fourth quarter of 2020 netback (inaudible). Oil Business segment operating margin improved 24.7 percentage points to 33.7% in the fourth quarter of 2021 (inaudible) 1% during the same period of 2020. The higher operating margin compared to the fourth quarter of 2020 was mainly due to an increase in the spread between the netback on our base oil sales and the price paid or charged to our customers for the removal of their used motor oil.

Our re-refinery team continued to execute well during the fourth quarter. It has been several years since we've had significant unplanned downtime in our re-refinery. We produced 14.2 million gallons of base oil, which was approximately 10% less than the fourth quarter of 2020 due to the timing of a planned turnaround. Remember that in 2020, we intensely took an extended shutdown during our second quarter due to the impact of the COVID-19 pandemic. In the years before the pandemic, we had always taken our once-per-year extended shutdown during the fourth quarter. We have now returned to that cadence during 2021. We're very pleased with the consistency of our re-refinery operations demonstrated over the past 3 years.

Let's now move on to the Environmental Services segment. In the Environmental Services segment, revenue for the fourth quarter of 2021 was $103.7 million compared to $90.9 million for the same quarter of 2020, an increase of $12.8 million or 14%. The increase in revenue was mainly due to the continued increase in the demand for our services compared to the prior-year quarter. We experienced volume increases across the majority of our service lines in the segment when compared to the fourth quarter of 2020. While it was great to see our improvement relative to the pandemic impacted results through 2020, we were also pleased to see that our revenue for the fourth quarter exceeded revenue for the fourth quarter of 2019 by 7% in this segment.

Environmental Services segment profit before corporate selling, general and administrative expenses was 22.8% or 22% of revenue compared to $22.4 million or 24.6% of revenue in the year ago quarter. The decline in operating margin percentage was mainly due to the higher transportation and disposal related expenses as well as higher container, insurance and workers' compensation expense. Labor costs and staffing vacant positions will continue to be a challenge as we exit the pandemic. However, I am happy to report that our COVID-19 case count has declined meaningfully as of the end of February.

Last, but most important, I want to commend our team for achieving the lowest lagging indicator safety metrics in the history of our company. We're very proud of our performance given the tremendous turmoil that pandemic has caused our field personnel.

Now I'd like to look forward to discuss our outlook for the future. In our Environmental Services segment, we experienced a great start to our first quarter from a revenue perspective. Despite the fact that we experienced more confirming cases of COVID-19 in January 2022 than any previous month during the pandemic, we still have managed to generate double-digit revenue growth on a year-over-year basis for the first several weeks of the first quarter. Assuming the overall U.S. economy remains steady, we expect to achieve low double-digit revenue growth during the first half of 2022 with slower growth in the second half of the year as we face tougher comparable results from 2021.

From an operating margin percentage standpoint, we expect to continue to battle higher costs during the first half of the year. While our fourth quarter price increase in the Environmental Services segment was successful, we did not anticipate that the factors driving higher costs in various parts of our business will not only continue, but worsened throughout the fourth quarter and into the first quarter. In response to these higher costs, we implemented additional price increases during the first quarter. Since some of these increases were not implemented until the end of February, we expect operating margin to be in the low 20% range during the first quarter with gradual improvement throughout the remainder of the year. We expect to exit fiscal 2022 with segment operating margin at or close to 27%, provided inflationary conditions stabilize as expected.

From an Oil Business segment perspective, we're happy with the start of 2022. During the fourth quarter of 2021, the base oil market moved into an oversupply position, which put downward pressure on base oil pricing. In response, virgin producers sold excess supplies into the export market and some also reduced production runs to bring the market back into balance. From a pricing standpoint, several virgin base oil producers raised their posted prices in the past few weeks. These moves are in response to higher crude oil prices.

The supply and pricing moves have stabilized the market going into the busier spring and summer driving seasons. Demand from our customers remains steady, and we expect it to remain consistent, provided additive supply improves as we move into the busier spring and summer seasons. While the higher crude oil prices will continue to put pressure on our pay for oil, we believe the combination of factors I just discussed will allow us to generate operating margin in the mid-20% range during the first half of 2022.

I'm also happy to report that our acquisition-related activities are in full swing as we look to utilize our strong balance sheet to build on the momentum generated from the 2 transactions we closed during the fourth quarter. Our focus will continue to be on businesses that expand our ES footprint and operational capabilities. We now own 8 non-hazardous waste processing facilities, which allow us to not only treat wastewater, but we also have the ability to consolidate and solidify waste drums at a growing number of these locations. These capabilities will help offset the high cost of third-party disposal services. 2 of our current operating locations will be commissioning drum processes that should become operational during the second quarter of 2022.

With that, Mark will take us through our fourth quarter financial results.

Thanks, Brian.

It's great to speak with everyone today. In 2021, we generated $515.3 million of revenue compared to the prior year revenue of $406 million, an increase of $109.4 million or 26.9%. The company's 2021 fiscal year was comprised of 253 working days compared to 256 working days in fiscal 2020. Sales per working day basis, revenue increased approximately 28.5% in fiscal 2021 compared to the prior year. The increase in revenue was due to improvement in base oil pricing in our Oil Business segment, along with our recovery from the negative impacts of the COVID-19 pandemic as well as continued organic and inorganic growth in our Environmental Services segment. Net income attributable to common shareholders was $18.1 million or $0.77 per diluted share for the fourth quarter of 2021. This compares to a net income of $5.3 million or $0.23 per diluted share in the year earlier quarter.

Let's get into the details and discuss our Oil Business segment results. As Brian mentioned, our Oil Business segment revenue increased 60.1% to $65.8 million compared to the fourth quarter of fiscal 2020. An increase in base oil prices was the main driver of the increase in revenue, along with increased revenue as a result of 2021 acquisitions. Fourth quarter revenue growth as a result of 2021 acquisitions was approximately $0.7 million or 1.7% in this segment. From a profitability standpoint, Oil Business segment operating margin was $22.2 million or 33.7% of segment revenue during the fourth quarter. This represents a fourth quarter record on both a dollar value and a percentage basis. The largest driver for this improvement was the spread between the netback on our base oil sales and the price paid or charged to our customers for the removal of the used oil, which Brian previously mentioned.

Brian also mentioned the large increase in our base oil netback. This increase was only partially offset by a $0.43 per gallon net change in what we charge customers to pick up their used oil during the fourth quarter of 2020 compared to what we paid customers for their used oil in the fourth quarter of 2021. Compared to the third quarter, our pay for oil increased by $0.05 per gallon during the fourth quarter. We were able to sell 14 million gallons of base oil in the fourth quarter. This was down by 2.7 million gallons compared to the year earlier quarter because of the lack of a planned extended shutdown during the fourth quarter of 2020 as well as the fourth quarter of 2021 having 1 less week compared to the fourth quarter of 2020.

From the re-refinery perspective, we finished fiscal 2021 with a record 50.5 million gallons of base oil production. Based on the performance over the past 2 years, we officially increased the nameplate base oil production volume of the re-refinery from 49 million to 50 million gallons per year. This change is effective beginning with the first quarter of 2022.

Now let's discuss Environmental Services. The Environmental Services segment reported revenue of $103.7 million, an increase of $12.8 million or 14% during the quarter compared to the fourth quarter of fiscal 2020. The increase in revenue was mainly due to volume increases in our containerized waste, wastewater vacuum and antifreeze businesses as well as improved pricing in parts cleaning, containerized waste and wastewater vacuum. In addition, fourth quarter revenue growth as a result of 2021 acquisitions was approximately $3.9 million or a 4.3% increase. On a sales per working day basis, overall Environmental Services segment revenue increased approximately 18.5% compared to the prior-year quarter.

Our profit before corporate SG&A expense as a percentage of revenue decreased to 22% compared to 24.6% in the year-ago quarter. The decline in margin was driven by the factors Brian mentioned earlier, along with higher expense for solvents as well as higher parts cleaning machine costs. While we implemented a price increase across most of the Environmental Services segment businesses during the beginning of the fourth quarter, this was not enough to offset the extremely high inflation we experienced in this segment during the quarter.

Our overall corporate SG&A expense of $20.6 million increased by $4.3 million compared to the year-ago quarter. The increase was mainly driven by higher share-based compensation and management incentive compensation expense as well as higher legal fees, partially offset by lower retirement and severance costs. Corporate SG&A expense as a percentage of revenue was 12.1% compared to 12.3% in the year-ago quarter, driven by the increase in revenue, partially offset by higher overall SG&A expense. EBITDA of $33.1 million was a record and up $14.7 million compared to the year-ago quarter. Adjusted EBITDA of $35.7 million was also a record and represents 21.1% of revenue and an 88.9% increase compared to the prior year quarter.

The company's effective income tax rate for fiscal 2021 was 25.8% compared to 28.8% in fiscal 2020. The decline in the effective tax rate is principally attributable to the diminished impact of certain required adjustments to financial reporting income in determining taxable income in 2021 as compared to the impact of those adjustments in fiscal 2020 due to financial reporting income in 2021, increasing substantially over financial reporting income in 2020.

Looking at the balance sheet, we had $56.3 million of cash on hand at the end of the quarter. Our primary sources of liquidity for the quarter are cash flows from operations and funds available to borrow under our revolving bank credit facility. We generated $27.9 million in cash flow from operations during the quarter, which represents a 27% increase compared to the fourth quarter of 2020. We also generated free cash flow of $15.9 million during the fourth quarter of 2021 compared to $15.2 million during the fourth quarter of 2020.

To summarize, we are excited with the strong top line growth we're experiencing in our Environmental Services segment, and we're working hard to combat the negative impacts inflation is having on our business in order to restore our margins in this segment. We continue to be pleased with the execution in the Oil Business segment and our ability to capitalize on favorable market conditions.

This concludes our prepared remarks. I'll now turn the call over to Katrina to take your questions.

(Operator Instructions) Our first question is from David Manthey with Baird.

So just a few modeling questions here, if I could. We can talk about the segments in a second. But on the corporate SG&A side, I think you've historically said that should grow at about half the rate of revenue growth, but there's obviously a lot of unusual dynamics going on near term here. How should we think about that in 2022? Should we just escalate it slightly from what we saw in '21? Or just if you can give us any kind of clue into that corporate SG&A line?

Yes. I think that's the right approach. We're -- again, we all -- I know the management team would love to have the bonuses that are higher than target and some of the other things. But we did incur that. We mentioned legal fees, our debt and I don't think you're going to have as much of an increase as you might normally have from what, I guess, is what I'm saying is an inflated 2021 number for SG&A.

Okay. And then speaking of the abnormalities, as we look at 2021 Environmental Services business, it seems like in 2020, you had a large project in there, you had some strange parts loss or trends. Is 2021 a pretty reasonable base to think about more normalized growth off of and adding a price increase and getting a little bit of volume growth potentially? Or is there anything unusual in '21 we need to consider?

No, I really think we're coming out of all these unusual and a lot of it is pandemic induced, but these unusual items that make comparability in this traditional year-over-year basis, it didn't really work that much in the last 6-plus quarters. But we're really beginning with this quarter we're in now, first quarter 2022. I think comparing that to 2021 is going to be a valid and valuable comparison. So we're planning on from a management approach, really getting back into that model.

Yes. I bet that we agree, David, on that. I mean, obviously, you listened to us relative to the prepared remarks around cost structure. I've been in the industrial business for 35 years. I've never seen cost creep like we've seen in the last 12 months. It's been a big battle, especially in the last 6 months. So unfortunately, we'll have to do another price increase we have in the first quarter who knows what the inflation is going to bring for the balance of the year in terms of additional price increases. We're trying not to be so disruptive to our client base.

I mean we're already an expensive provider because we deal with a lot of smaller quality generated. So we want to be careful, make sure we treat our customers the right way. We know this is not going to last forever. It will stabilize. And so we're not going to price ourselves out of business. And we've got to work on the cost side of the business, the P&D piece of it, and we're doing that with adding our own capabilities. But that costs money to get it done, and we'll reap the benefits after the plants are up and running, and we can maximize throughput, reduce the operating cost.

Okay, Brian. And then finally, you've historically thought about the ES business as being kind of a mid- to high-20s segment operating margin business. And I think you used to talk about the oil businesses optimally running about 15% segment operating margin, correct me if I'm wrong on that. But given everything that's going on here, ultimately, 3 to 5 years out, is that where we're headed again, do you think? Or is there just too much volatility and even put a pinpoint on where profitability should be ultimately?

Yes, I definitely agree with your commentary on ES. I mean you know where our goal is relative to margin that's been impacted. Whatever you're growing like we're growing, David, obviously, we've had to deal with the issues around inflation, it's been tougher, but we'll get back there. We know how to get back there. Oil is a little bit harder to predict. We certainly think we see some structural changes in the business, but we're not going to go out and say that our run rate margins are going to look what they do today.

We think 10% to 15%, 15% would be a number that we could live with going forward on a day in, day out basis as the structural changes become very stable, it's just volatile right now, hard to predict. The spreads are high in Q1, I mean, the business looks good. We expect Q2 to be good. We do know that the virgin refineries are back up and running. I mean they produced 61 million barrels last year of crude -- of lube, so the market is back in good shape post the events of last year, pandemic and the severe winter storm. So we know the supply is out there. We do think we'll begin to see a little bit of weakness in base oil pricing as we get to the back end of the year. But we're still bullish on the fact that we can perform better than we have historically in the oil business. So 15% for sure.

Our next question is from Brian Butler with Stifel.

Just, I guess, on the Oil Business as you've been talking about it. Just what are you seeing in the spot market when you take a discount to kind of the posted prices? Has that tightened up? Is there any increased demand for the renewable nature of your oil?

Yes. We haven't seen any spot pricing discounts. We've actually sold some base oil at prices above spot. But certainly, that's spot or better is what we're seeing now. And as we talked about in our prepared remarks, we're seeing pretty good demand on the base oil front. From our customers, which are, as you know, more Midwest based. So we're not competing as much with the industrial complex down south, the virgin refineries. And yes, they do like our oil. And certainly, we're talking to quite a few of the super majors. The energy cost to produce our base oil versus the virgin refinery, we're going to try to really quantify that over the balance of this year, but we think it's probably half the energy cost to produce our base oil versus the virgin refinery. That's exciting for the virgin producers to participate in that. So yes, there's a lot of attraction to green base oil these days because of ESG.

Yes, and not just the producers, but any of the -- anyone that's going to be an end user, I'll finish -- that story more and more.

Okay. And when you look at the facilities for 2022, can you give some color on the timing and maybe the planned turnaround. Is that -- again, I think you alluded to it was going to be fourth quarter again? But can you give some color around the quarters?

I think we'll have the normal cadence that we had pre-2010 or pre-pandemic and not too much different than what we had in 2021. So we -- it should be, and I kind of was saying this on talking with Dave a minute ago, 2021 is going to be a nice comparable base for us. And that's even flows through to how the re-refinery at least planned to when the turnarounds are going to happen, when the long run is going to happen, and it will be in that Q4, beginning of Q4 and the Q3 time frame again.

Yes. We're taking the long turnaround on being September, and we'll have our normal pigging cycles as we always do, which are shorter turnarounds. So a similar cadence as the last year.

Okay. And then on the ES side of the business, what's the plan for new facilities? Is it still that 3 to 4? And you talked about exiting the year kind of at 27% margins. Does that suggest the new facility growth kind of slows down in 2023?

No. I think most of our growth will come from acquisitions. We don't have a lot of plans to open organic branches unless it's around the tuck-in acquisition. And I think we've talked about that the last couple of quarters, we prefer to open up in new markets with a tuck-in acquisition and bolt-on our service lines. It's just much easier in this environment because of the difficulty in recruiting employees, staffing and roll trucks, I mean, it's a tough labor market. So we're going to go to the tuck-in acquisition route and we'll expand that way.

I'll finish. Part of that, Brian, is driven by where is our math, not expense. And it's in those western areas where most likely if you get an acquisition, you usually get some logistical complement to that or support with it. If we're going to do any more greenfield, they're more likely to be in an area where we have the logistical support already. And that -- it starts to get pretty cost efficient and attractive to do it or down there. But if not, given our cash position since most of the opportunities are where we're less dense, we're going to be doing the acquisition route.

And then as we talked about in our prepared remarks, we're going to work harder on our own internal process. We were on a run rate last year of about 60,000 containers that we processed internally. We like to see that number get into the near 100,000 in 2022. As I've talked about in the prepared remarks, we have 2 facilities that will be commissioned here fairly soon. They'll start receiving drums, the permits are in place. We've got -- we really need to lower our T&D costs, difficult to do when you're utilizing mostly third parties, and you've listened to their conference calls. They've all raised prices quite a bit over the last 6 months, and we've had to deal with it because we don't process a lot of waste. So our objective is to internalize more, get our capabilities built up, so we can control our own destiny from a cost standpoint.

Okay. And then just if I can put one last one in. Just on the bookkeeping side. What should we be using for a tax rate for 2022?

I think we've been guiding before. I had, Brian, when we spoke at the 27% number, given the outlook for profitability and the lessening impact of some of those permanent items on just a larger income base. I'd probably ratchet it down to 26%.

26%. Great.

And that assumes, I mean, there doesn't anything else stands are different from 8, 12 months ago when we all thought corporate income tax rate increases were imminent. I think we all think the opposite now. So that is embedded, if not for my guys.

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

Brian, I just wanted to go back to the comments you made about exiting 2 on the ES side with, I think you said (inaudible) and this is an environment that you really haven't seen in some time, just from an inflationary standpoint. So I'm just trying to get a better sense as to how much can you do in terms of increases if we think this is kind of inflationary pressure and give you what the confidence to get to that kind of operating margin on the ES during the year?

I mean, I think we're confident provided inflation begins to stabilize. I mean it's very difficult to stay ahead of it when you're having the third party, a lot of your own waste streams. But we talk to the disposal sites every day. We feel fairly confident that they're done with their price increases, at least near term. As we talked about in our prepared remarks, we're raising prices again this quarter, which will match the price increases that we've been dealing with. We have the ability with our client base to raise prices. We just don't want to be predatory because we don't think this is going to be permanent and costs will get back to normal at some point.

And we care about our customers. We value the growth, and we're not the lowest price provider out there now. So we want to make sure we don't price ourselves out of business. So we're going to do the price increase in Q1, and then obviously, we'll continue to monitor it. And we'll probably be back on our normal cadence for a price increase as we approach the fourth quarter like we do every year, and we'll analyze inflation at that point, make our decision. So we're confident that we can get close to that 27% number provided. We don't see continual inflationary pressure through the balance of the year because you're always going to have that lag to get our price increase out there.

Got it. And you mentioned potential for additional acquisitions. And I may have missed it. Did you -- one, was any of the M&A that you've done recently contributing a meaningful contributor to Q4, yes? And what's the pipeline look like in terms of additional M&A as we think about '22?

Yes. I'll let Mark talk to the revenue impact, but I'll talk about the cost impact. It's never easy when you do acquisitions. Obviously, we have operating standards that we want to meet. So we -- for example, one of our acquisitions, we're doing capital projects at the acquisition now. So we suspended waste treatment to get the capital done. So that negatively impacts your cost structure. We love the revenue side of it, and we're seeing tremendous opportunities on the revenue front. That's why we bought the companies, but it does take time to line out logistics and cost structure, especially in this market. So probably hurt our profitability in the fourth quarter helped our revenue, and we'll get the profitability back as we make the changes to the plans. And we were going to make as we bought them, we knew the changes had to be made.

So I'll let Mark comment on revenue.

Yes. From a number standpoint, overall on a combined basis, it was a little more than $4.5 million to the top line, that's both segments and ES was a little less than $4 million. So it was a vast majority of there's just a few of them have a smaller oil component. And that when we look at deals, and again, who knows if it may change in the future depending on as we get more clarity on how the oil market is going to unfold further out. But right now, our acquisitions are clearly and Brian might have mentioned this, I'll just reiterate, clearly focused on the Environmental Services segment and related environmental businesses. But when we get the opportunity, some of these companies also have a little bit in oil, it's obviously a great fit for us, especially for getting gallons where we're still bringing in a little bit of third party. So it does still fit.

Our next question is from Kevin Steinke with Barrington Research.

So in the earnings release and the discussion here, you called out on a year-over-year basis, the margin decline in environmental services, mainly due to higher transportation and disposal-related expenses, and you've talked about your initiatives to internalize more of the waste disposal. So how much do you think that can help from a cost perspective kind of going into the second half of the year? And is that something you're factoring into your target of getting to that 27% margin by the end of the year?

So it's definitely a factor. It's meaningful. It could help certainly 100-plus basis points, maybe a couple of hundred. So it really depends on getting some scale through there. We certainly have the demand and the fit is when you think of our business, and this is a general trend in the industry. It's more and more nonregulated or non-hazardous not directly has and that's just like a glove with what we're developing. But Brian mentioned in his prepared remarks, we expect 2 more of these sites to really start to come on here in the near term. And you're adding some of the fixed costs right away. And so you need to build volume. So part of it not just so much getting -- having it from a generator standpoint, it's customers, but making sure we can get it to these sites and start to process it that way. So that -- to me, though, that's just a timing issue. We'll get that done. And on a run rate basis, that's why Brian made his comments on margins. On a run rate basis, we're going to get there this year. We're pretty confident, but it's a matter of, well, timing, when are you going to get there?

All right. That's helpful because, yes, that would be a pretty significant boost there. Okay. So just any -- I know you're seeing some upward pressure on used oil costs from higher crude oil prices. But just any comment on IMO 2020 and what impact that's having on the market? And do you think that's still benefiting you on the used oil cost side now and over the longer term?

Yes. We definitely -- and I think we've talked about this on the last couple of calls. We're convinced that we're seeing some benefit from IMO 2020 because the aggregators are not collecting a lot of used motor oil. We've had no issue with receipts at the re-refinery. We've been able to supply volume. That's been good. And if you look at historical trends relative to the price of crude, we are cheaper than we ever have relative to the price of crude, 50% to 20% cheaper than historical, maybe even more in certain cases. So definitely have seen some structural changes in the used motor oil market. A matter of fact, Michigan 30 days ago talked about banning the burning of used motor oil and asphalt plants. So you're seeing because of ESG, the greenhouse gas issue that everybody is focused on, at least in the current administration. And we support it as more and more oil, we think, is going to be directed to the re-refineries because it's a better use of the molecule and people see that now.

Yes. And so it's going beyond IMO 2020 to just an overall even in some cases, beyond regulatory, just an efficient way to use the molecule. It just makes economic sense overall to move that transaction, if you want to call it that away from this onetime use and substitute that with other cleaner fuels.

We certainly saw some pandemic-related volume decreases in the fourth and a little bit in January, but that's picking back up. I mean the driving miles are going back up again. So we expect the spring to be fine from a used motor oil collection standpoint.

All right. Yes, very helpful. And just lastly, as you noted, you increased the nameplate capacity of the re-refinery to 50 million gallons annualized. And you produced, I think, you said 50.5 million in 2021. So is it safe to just assume kind of a flattish production year-over-year in 2022 in terms of base oil?

Yes, we've squeezed every drop out of that re-refinery without spending additional capital on it. And then the other tricky thing that we have to do this year is we're going to be commissioning the flare. So we've got some work to do there, but we're still signaling a number close to the 50 million, barring any upset conditions, knock on wood, we haven't had any as we talked about for 3 years. So in that range, but we've maxed out the capacity that plant based on our current operations. We certainly, as the market -- as we continue to see structural improvements in the market, and we're convinced that the structural improvements are long term, we're not opposed and welcome the opportunity to look for additional debottlenecking opportunities. We have our engineers, our -- we've got a great team now that they're working on debottlenecking opportunities now. So we're always going to look for opportunities to expand. We're not going to do that unless we're convinced the structural changes are here to stay.

And our next question is from Gerry Sweeney with ROTH Capital.

My question was really around the oil side and some of it, I think, was answered just in the last series. But I was curious to sort of the thought process behind expansion efforts at the refinery. Brian, as you said, I think you're maxing out capacity and maybe there's some more debottlenecking opportunities, which may add incremental capacity. But obviously, I think we've seen a structural change in the oil market. You underscored that 15% operating margin. But what would be the decision-making process maybe for a larger expansion of the oil of the re-refinery?

Yes, I think we'll have to get through this year, get convinced that the structural changes are here to stay. And as we move into next year, certainly, the Board, we will just refresh off of a Board meeting, and we discuss that exact subject. We're going to table it for now. We have a lot of work to do at the plant to get the flare commissioned. So we're going to focus on that. As I've talked about on prior calls, we're adding a wastewater treatment system to the plant, so we can process commercial waters and not as waste streams. It's adding to our capabilities. We're going to do some other work around the ES segment at the re-refinery to promote even more cross-selling. So we're going to focus on getting that done this year, and we'll see how the structural changes play out. And we have the guys working on options for the re-refinery debottlenecking projects, and they'll present them to me this year, and we'll make decisions around that going into next year. But nothing will happen this year doing a debottlenecking.

You can tell by Brian's comments, as you look further, it's really first, let's say, we even got to that point. We can do things to get more out of that one site, and that will take us the next leg. It would be a few steps removed from even that decision to reinvest that we'd have to greenfield anything.

Got it. That makes sense. And I figured that would be the response. So -- and then just staying on the sort of theme of maybe expansion, and you talked a little bit about it on the ES side, but in terms of increasing the barrel capacity 60,000 to 100,000. And as you look at the environmental side, how much opportunity is there to internalize waste across the spectrum?

Well, we've moved 260,000 containers last year and only processed 60,000. And 70% of what we take in is non-rec or regulated. So you could do the math. We have a tremendous amount of opportunities. The other thing that we have to work on is just the overall logistics around how we move all of our containers because we're kind of in between models right now. We have the 4 hubs that you guys are aware of, we have the 90 branches were hub and spoking back into the hubs. We're looking at opportunities to move waste directly from the branches into the processing centers. So we have a lot of work to do over the next year on logistics, but our intention is to move as many of the 70% of the 260,000 drums and our system as we possibly can. And we've increased our capacity, we're commissioning 2 additional sites now. The sites we own, we're just adding capabilities to. We know how to process waste. So we will get it done. And I think we can hit that 100,000 number by the end of this year and just keep growing it.

And I think the side benefit that's going to come from and as we get deeper into this is really working the logistics angle as we move into 2023. It's not something we'll do in 2022. But once we get the drums routed, we'll relook at how we operate the hubs too. I want to start optimizing the cost side of our business as we move into this year. We've been very, very focused on growth and permanent changes and capital projects and getting these plants up and running. We've got to get them optimized this year.

Got it. The follow-up would be -- and this is just more out of curiosity than anything. As you sort of grow some of your treatment capacity, is there an opportunity to even do that for some outside players to increase leverage or speed up the process?

Absolutely. We're doing it now. We've got great partnerships with our third-party TSDFs.

But I would say, Brian, I'm sure you'd agree. We're just scratching the surface of it. So there's -- we've proven we can do it. It's just a matter of taking -- our typical sales approach hasn't been geared towards that part of the market. So we have great experience in more of that, as Brian would say, kind of retail type space, but it's just getting -- and by evidence that we're doing it a little bit, we're starting to do that, and there's just a ton of upside.

They're great partnerships because we're in turn, brokering the house waste our third-party TSDF partners. They can deliver an odd has, they can pick up as they're leaving our plant. So we like the strategy. And look, we're looking at emerging markets, too. I mean we're very tuned into the battery business. I mean PFAS is a growing opportunity for us that we're going to -- we're looking at very hard.

And that is our last question for today's speakers. Thank you. Ladies and gentlemen...

Thank you. Thank you, everybody.

Thank you.

You're welcome. Ladies and gentlemen, this concludes today's conference. Thank you, again, for your participation, and have a wonderful day. You may all disconnect.