Heritage-Crystal Clean Inc (HCCI) 2010 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Heritage Crystal Clean Incorporated fourth quarter and fiscal year 2010 earnings conference call.

Today's call is being recorded. At this time all callers microphones are muted and you will have an opportunity at the end of the presentation to ask questions. Instructions will be provided at that time for you to queue up your questions. We asked that all callers limit themselves to one or two questions.

Some of the comments we will make today are forward-looking. Generally, the words aim, 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 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 are non-GAAP measures.

Please see our website for reconciliation 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. Joe Chalhoub. The Chief Financial Officer and VP of Business Management, Mr. Greg Ray. And the VP Oil and Chief Accounting Officer, Ms. Ellie Chaves.

At this time, I would like to turn the call over to Joe Chalhoub. Please go ahead, sir.

Thank you and welcome to our conference call.

Today, we issued our fourth quarter and fiscal year 2010 press release and posted it on the investor relations page of our website for your review.

We will now discuss the financials and our operations in the fourth quarter provided full year look back and respond to questions you have relating to these results. We are pleased to report that our fourth quarter sales were $36 million compared to $30 million in the fourth quarter of 2009. Reflecting a growth rate of 20%. We have now reported double-digit growth for three consecutive quarters.

Our average sales for working day increased to approximately $475,000 compared to $460,000 in the third quarter of 2010 we have reported -- increases in this metric since the fourth quarter of 2009 when our average daily sale was $390,000. For all of fiscal 2010, our year-over-year sales growth was 14%.

We ended the year with sales of $112.1 million compared to $98.4 million for fiscal 2009. We operated 62 branches at the end of 2010 and increased of four from a year ago.

Of these branches, there were 58 that were in operation throughout both 2010 and 2009. And the growth in same branch sales for these branches was 12%. Since the end of fiscal 2010, we opened four new branches bringing the total number of branches in operation today to 66.

Our sales team did a fantastic job in 2010, of growing our business back to pre-recession levels. Supporting our customers whose demand for our services increased in the year.

In 2010, we expanded our customer base bringing our active customer location count to over 44,000 from 41,001 year ago. Our sales team is energized and I am confident that the hard work will continue, as we work to further expand our business through excellent customer service.

In 2010, we successfully completed the follow-up offering of our common stock, raising approximately $25 million net of cost by selling 3.45 million new shares. They intended use of these proceeds is to fund a portion of the construction costs of our used oil refinery.

Our cash generation from operations during 2010 was strong. We were able to generate sufficient cash from operating activities to support both our team capital spending and to contribute to our investment in the re-refining process. At the end of 2010, we have zero debt and over $20 million in cash.

We continue to make good progress on our used oil re-refining project. Through the end of the fourth quarter, we have accumulated capitalized costs of approximately $12 million for this project of this quarter and have committed an additional $12 million in additional orders.

We are pleased with the phase of the project and see that we are now on track to begin producing this oil at partial capacity early 2012 or possibly even in late 2011. We also continue the expansion of our used oil collection program as we added eight new oil trucks near the fourth quarter, bringing the total oil truck count to 18 for the year.

We expect to continue to add new trucks at an accelerated pace in 2011. As we add new trucks in 2011, we also intend to continue to grow the volume collected in the existing trucks.

In our press release today, we announced the acquisition of certain assets of three related companies engaged in the used oil collection business. These companies are Warrior Oil Services, JBS Oil, and CNJ Recovery. The operations of these three companies are in relatively close proximity to our re-refinery making our acquisition particularly attractive.

Overall 2010 was a great year. I am proud of our sales team and value has continued strong performance and culture to win that is present throughout our organization. I want to thank our employees for their commitment to service, our customers for their continued patronage and our shareholders for their support.

Our Chief Financial Officer and Vice President of Business Management, Mr. Greg Ray, will now further discuss the financial results and then we will open the call for your questions.

Thank you, Joe.

I am happy to be with our investors today for HCCI's 2010 fourth quarter and fiscal year earnings conference call.

This year, our year-over-year comparisons were straightforward as both 2010 and 2009 were 52 week fiscal years. Our fourth quarter highlights were outlined in today's press release are really exciting.Revenues continue to grow at double digit rates and our customer location count increased and accelerated rates compared to 2009.

Along with the double-digit revenue growth, we were able to deliver strong earnings results. While adding four new branches at the beginning of 2010 and putting out 18 new used oil trucks throughout the year, we were able to leverage our fixed costs and deliver increased earnings.

Cost of sales as a percentage of sales increased for the year. Oil prices were higher in 2010 compared to 2009. And this lead to increased costs for the solvent that we buy in the used oil that we purchased from generators.

However, this was partially mitigated as we received a [fifle] benefit from selling accumulated reused solvent at higher prices. Also, during 2010, we did not repeat the right down of inventory we incurred in the first quarter 2009, which was about $900,000. Until our re-refinery begins to operate, our oil business will remain in low-margin activity. The past growth in this line in 2010, pressured our margins particularly cost of sales.

Our operating expenses decreased with a percentage of sales by two percentage points from 52.8% down to 50.8%. This figure was particularly high in 2009, as we experienced declines in our customer volumes and we were unable to scale back our costs proportionally. During 2010, as volume and revenue recovered, we have the capacity in our system to manage the increases.

I'd like to digress for a minute and follow-up on Joe's remarks about the re-refinery schedule. As he said, we have accelerated our previous schedule. We now think we may begin to producing lube oil at partial capacity early in 2012 or even late in 2011.

Now, the production of lube oil from our re-refinery is the key startup goal, there are intermediate steps that lead to this result. During the coming year, I anticipate that we will begin the test and startup various portions of the re-refinery. We expect that through this activity, we will begin to produce some marketable products. Not lube oil, but rather intermediate products, that can be sold to others for further processing.

These intermediate products may generate some additional short-term revenue, but we don't expect them to provide anything close to the margins we expect from re-refined lube oil. We view this activity as a normal transition phase for the project. We think it's a good new so we can see this phase happening during the current fiscal year.

Our fast to plant startup schedule is encouraging us to accelerate our growth in used oil collection volumes. The 18 oil trucks that we placed in service during 2010 cost us about $500,000 pre tax during the fourth quarter. The costs for the new oil truck rollouts for the full year was approximately $1 million as anticipated.

For 2011, we have a more aggressive plan and anticipate the cost would be approximately $2 million escalating throughout the year. These investments take advantage of our established branch structure which includes 66 branch locations today, our existing sales management, and a large customer base.

So, while the investments are significant, we think that we can deliver organic growth in oil volumes more efficiently than most competitors.

We incurred no interest expense for the fourth quarter of 2010 or 2009. For all of this for 2010 we incurred no interest expense compared to $3000 in 2009.

For the fourth quarter, our net profit available to common stockholders was $951,000 compared to $522,000 in the fourth quarter of 2009. Our basic and fully diluted earnings per share, was $0.07 compared to $0.05 in the year ago quarter, when we had fewer shares outstanding. For fiscal 2010, our earnings per share was $0.26 compared to $0.17 for 2009.

Joe indicated that we have finalized announced acquisition of three related used oil collection companies. Based on historical operating performance of the companies, we expect this to provide us with another 6.5 million gallons of used oil. Primarily from customers in Indiana, Illinois, and Kentucky.

The cost of the acquisition is approximately $4.2 million comprised of cash, stock, and subordinated debt. We are very pleased with this transaction as it brings us a significant volume of used oil in close proximity to our plant as well as a number of good experienced employees that are ready to join our team. We also expect to gain approximately 4,000 customers, many of which will have needs in other services that we offer.

In the short-term, we do not anticipate that this acquisition will contribute to our bottom line. We expect to reap the benefits once all are re-refinery is producing lube oil, which will allow us to upgrade the value of the selected used oil and also over time as we cross sell additional services to the require customer sites.

A year ago, I remarked that while 2009 was a tough year, we have positioned ourselves to resume our role as a growth company and I'm glad to report that not only are we again performing as a growth company, but also that we have exciting opportunities on the horizon in both our environmental services business and our oil business. We have the right people and culture in place to continue our success.

Thank you for your continuing interest in Heritage Crystal Clean. At this time, I will turn control over to our operator and he will advise you of the procedure to submit you questions.

(Operator Instructions)Thank you. Our first question comes from Ryan Merkel at William Blair.

Hello? Can you guys hear me?

Good afternoon, Ryan. This is Greg and Joe.

Hi, guys. This is actually Paul calling for Ryan. Congratulations on a good quarter.

Thank you.

I had just a couple quick questions I hope you guys can answer. For instance would any acquisition costs in the current quarter?

There was no material costs incurred in Q4 related to the announced acquisitions.

But you guys plan -- possibly going forward would you be willing to share that?

A very rough estimate and we have not pinned it down, but we think a guess might be $200,000 of cost that will probably substantially be incurred in Q1 into Q2.

Okay. That's great.

Now, I was wondering, does the acquisition change your ending share count for let's say of 1Q, 2011?

I'm sorry? As of what date?

For instance, do you guys expect a significant difference in your ending share counts for 1Q, 2011?

Well, the total number of shares issued was about 64,500. So, Q1 of '11 will reflect that increase in shares occurring during the quarter. It will not be a very material number but it will go up as a result.

Thank you. And then my last question is, do you guys expect this acquisition to significantly help you ramp up this pasteurization of re-refinery?

Yes, we think it will help us get to capacity faster.

Part of our plan, Paul, from sort of our early thinking about the re-refinery was that we would expect to, at startup, substantially supply it with used oil that we collected on our own trucks, but it will also be buying used oil from other collectors as we saw the opportunity to run the plant at higher rates in the early years.

So, to a degree, this acquisition of the Warrior Group of companies will allow us to buy relatively less oil from third parties and have more of that oil coming in on our own trucks and since could we expect a premium, if we buy the oil, that is one, that is one of the economic benefits reduction of the premium benefiting from others.

In addition to proximity of the collected volume to our plant means that this oil should come into the re-refinery wave materially lower average transportation costs and the typical blended average volume that we would have expected from our entire fleet. And that is another economic benefits.

That makes a lot of sense. Thank you guys. I will jump back in the cue.

Okay. Thank you.

(Operator Instructions)

Our next question comes from Luke Jones of Robert W. Baird.

I guess first off, if we look at the environmental business, would you talk a little bit about what you saw in the quarter in terms of either, your end markets or any difference in trends as you look at the business minds been involved and, of course, cleaning machines, drum management, et cetera.

Well, a couple comments that really are a continuation of themes that we have talked about in prior quarters.

First, obviously, the year-over-year growth in this quarter, was stronger than in prior recent quarters and that has just been a continuation of a trend that recovery as we restored ourselves to that 20% kind of growth rate. And that was to some degree true during the quarter internally as well.

In terms of the different segments of our business, all through 2010, the segment where we have the strongest comparisons year-over-year was our drum waste business because that is the segment that was most depressed due to recession in 2009 and that was again true in the fourth quarter.

I would say that all of our businesses performed quite nicely in the fourth quarter of 2010 showing meaningful growth from the year ago quarter.

And probably the fastest growth rate for a single business was our used oil collection business reflecting the major investments we have been making to roll out additional trucks and expand in that area. We were really pretty pleased across the board with progress, with the parts cleaning business and the drum waste business and the vacuumed business, as well as the all services business.

Joe, is anything you like to add? Okay.

Okay, good.

And then this maybe a little harder to tell.

I am curious as trends continue to pick up and seems to be accelerating here, whether you are seeing any differences in terms of your ability to go out and take a little share, maybe with customers feeling better, more willing to make a commitment to you, change vendors or in terms of cross-tieing multiple services to folks that maybe on the parts cleaning or on the used oil.

I will comment without having a lack of first-hand knowledge myself, but my intuition and from what I've heard talking with our field sales guys. There is a sense that Q4 with 20% growth, starts to feel a lot like behavior we have seen in the market in years prior to 2009 and prior to the recession. So, the customer reception and customer behavior starts to feel a lot like 2007-2008 when we were running at similar growth rates.

There doesn't seem to be any structural major change in customer behavior either generally or across in any our segments or lines of business.

We are taking share more quickly or for different reasons than we have in the past, but the reasons that have enabled up to gain share have included superior quality of customer service and differentiated offerings particularly in the parts cleaning business where we offer some non-hazardous alternatives the reduce regulatory burdens for our customers. And those seem to still designate and be important factors in getting customers to try our services and use them.

In terms of cross-selling, but one thing that I would mention is that we are going to get -- have an opportunity for an interesting experiment going forward in the next year, because as you know, we have just acquired about 4000 customers.

We don't yet have the count to know how many of those customers are new to Heritage-Crystal Clean. There may be a small segment of the population that are already are accounts for parts cleaning and our waste services and that are using the Warrior Group for their oil services.

But if we assume that close to 4,000 of them are new accounts, we're are afforded a good opportunity now to take that basic business and cross sell other services and we are developing plans to do that.

And we are keen to see if we can take that set of customers and be effective at penetrating those accounts with the services that the Warrior Group did not previously offer and gain some revenue and earnings momentum as a result of that.

And then just my last question would be with regards to what we're seen with oil prices recently, if you could talk to how that impacts your price increase is going onto the market and historically you have looked at in the order of, you know, mid-single digits, the Crystal Clean business and whatnot and then how you would relate to your quality costs as well.

Sure.

The higher oil prices have been and can be expected to continue to lead to-- are having some higher costs, but also in certain aspects some benefits. On the cost side, the solvent that we buy becomes more expensive to purchase and that fuel that we buy to run our trucks becomes more expensive.

In terms of how that translates into pricing, we have already implemented in late 2010 parts cleaning price increase and really other price increase not just parts cleaning that will apply for fiscal 2011.

But that price increase didn't contemplate sort of, you know, hundred dollar a barrel crude prices in the event that crude prices stay the current level or even become more expensive, we have in the past entertained and implemented energy or fuel surcharges and we might consider that again in 2011 and a higher oil price environment.

We also, as I alluded to, can see some benefits to our P&L in the short-term from higher energy related costs.For example, we hold a significant amount of solvent inventory in a couple forms that used solvent that we hold for resale which we call our Reused Solvent.

We typically have that in inventory, as well as Solvent and we have actually out in the field and customers machines that we keep titled to and that is valued on our books as well. That material comes backs into us or is valued on a receipt, its valued at a higher recovered price based on of market conditions we see some benefit on the recovery site.

And when we sell the used solvent that's been put into inventory earlier at lower hydrocarbon values, trade inventory and that lower cost and then we pick up the benefit to some of the higher current market prices.

Overall, if you think about our business excluding used oil, we typically would see our costs getting higher and higher energy costs and we might see a need to do energy surcharges if that increases significant. But as we get more into the used oil business, we have some mitigation or natural hedging, if you would like to call it that. In the used oil business. we typically are able to see some increase in our spreads, even today when we are picking up used oil and merely selling it as fuel, there's usually some small margin improvement as energy cost increase.

And that is more true or more extremely -- more the case as we get into the lube oil production that we hope will happen in the year or less, to the extent that we are able to produce lube oil and a high oil price environment we would expect to see superior margins in the refinancing of the business. I hope I gave you some information you're hoping for and feel free to follow up if I left anything fuzzy.

That was perfect. Great. Thanks very much.

(Operator Instructions)

Our next question comes from Michael [Simplensky], from First Analysis Security. Please go ahead.

Hi guys, Joe and Greg, nice quarter.

Thank you very much.

Just curious a little bit about the oil re-refinery in terms of the geographic market you can address given transportation costs and, you know, pricing in various parts of the country. Do you see that as a regional reach or is it a national reach?

Well, are you referring to the sale of the product or the supply segment?

The supply.

The supply segment. We view this as a national source of used oil.

The oil that is closest to the facility will have less of transportation costs, so we would have a tendency to have a higher concentration of supply coming from the locations closer to the refinery. But in general, each market has its own pricing.

And some other remote area pricing that people pay for our generators would be lower than locations that are closer to the refinery. So, our philosophy is we would tap our 66 branches to optimized power cost to bring in the supply to the plants as well as purchasing used oil from other collectors.

Is there a [rail spur] at the re-refinery?

Yes, we do have a [rail spur] at the refinery.

All right. Thank you.

Thank you.

(Operator Instructions)

Thank you for your time and interest could we are grateful for your support.

We invite you to join us for our upcoming shareholders meeting to be held on Thursday, May 5th, 2011, in Elgin, Illinois. Ladies and gentlemen, you may disconnect your lines at this time. Have a great day.