Heritage-Crystal Clean Inc (HCCI) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Heritage-Crystal Clean Incorporated fourth-quarter 2013 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 presentat6ion to ask questions. Instructions will be provided at that time for you to queue up for your question. We ask 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 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 the call, such as earnings before interest, taxes, depreciation, and amortization, or 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 Founder, President, and Chief Executive Officer, Mr. Joseph Chalhoub; the Chief Operating Officer, Mr. Greg Ray; and the Chief Financial Officer, Mr. Mark DeVita.

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. Last night, we issued our fourth-quarter 2013 press release and posted it on the Investor Relations page on our website for your review. This morning, we will discuss the financial statements and our operations in the fourth quarter and for fiscal 2013. And we will respond to questions you may have relating to our business.

Our fourth-quarter sales were $92 million compared to $77.6 million in the fourth quarter of 2012. Fiscal 2013 sales increased 12.1% to $283.1 million compared to $252.5 million for 2012. On November 1, 2013, we purchased certain assets of the Northern Territory of RS Used Oil Services, a subsidiary of Universal Lubricants. The acquisition allows us to add more service routes to our existing businesses in Indiana, Ohio, Wisconsin, and parts of Illinois.

We are pleased with the progress to date, and we are integrating these new routes into our branch network. And we have seen growth in our used oil collection volume as a result of this transaction. As a result of the ongoing expansion projects at our re-refinery, we were able to increase nameplate capacity from 50 million to 60 million gallons per year at the end of the third quarter 2013.

In the fourth quarter, we produced 10.4 million gallons of re-refined base oil, which represents 94% of our current nameplate capacity. This volume represents an annualized run rate of base oil production of 33.7 million gallons per year. We expect to complete our current expansion project towards the middle of 2014. After completing -- or after completion of this project, the new nameplate capacity of our re-refinery will be 75 million gallons of used oil input per year.

Our oil business was negatively impacted during the quarter by a contamination incident, affecting the feedstock at our re-refinery. The financial impact of the incident was approximately $2.4 million, which includes lost production, cleanup and disposal costs, and increased transportation costs. If not of this incident, the oil business would have delivered a profit before corporate SG&A over second quarter in a row. Following this incident, we have taken steps to strengthen our controls to reduce the chances of a similar incident in the future.

Despite this incident and despite lower market prices of base oil, we were able to show improved profitability in our oil business segment during the second half of fiscal year 2013 compared to the second half of fiscal 2012. We improved the efficiency of our used oil collection routes, and we collected used oil at an annualized rate of approximately 37.8 million gallons -- annualized rate of that 37.8 million during the quarter.

In the Environmental Services segment, we experienced solid same-branch sales growth. At the beginning of the year, we established a goal of improving our margins in this segment. As a result of the focus and hard work of our team, we continued to improve our margins through the year, achieving superior margin, while at the same time delivering record revenues in the Environmental Services segment. Our growth in revenue was aided by our ability to continually add new customers. As of the end of the fourth quarter, we served over 96,000 individual customer locations from 74 branches.

Conditions in the used oil industry have been challenging for over a year. The industry has failed to control collection costs and bring down prices paid to generators, in parallel with the declining value of the recycled oil product. The published spot market prices for the type of group 2 base oil we sell decreased by approximately $1.14 per gallon from the first half of 2012 to the fourth quarter of 2013. Yet, used oil street prices are largely unchanged.

HCC is committed to correcting this. Starting in March, we are taking a new, more systematic and structured approach to lowering our average pay amount for used oil. While this won't have much of an impact in our first quarter, we hope to see an improvement in the second quarter of 2014.

The market pricing for base oil is not showing signs of improvement in the short-term. And the additional capacity of sugar-owned new Luke plant weighs on the market. We expect the declining price trends experienced in the fourth quarter of 2013 to continue. And this will be a headwind in the first quarter of 2014. Fortunately, our very strong Environmental Services segment should continue to provide stability to our overall business.

Our Chief Financial Officer, Mr. Mark DeVita, will now further discuss the financial results. And then, we will open the call for your questions.

Thank you, Joe. I appreciate the opportunity to discuss HCCI's fourth-quarter 2013 results with our investors today. During the fourth quarter, we produced solid results in our Environmental Services segment and saw volume growth in our Oil Business segment, compared to the fourth quarter of fiscal 2012. In the Environmental Services segment, revenues grew $5.5 million or 12.4% in the fourth quarter compared to the fourth quarter of 2012; and $18.1 million or 13% for the year compared to 2012.

Of the 70 branches that were in operation throughout both the fourth quarters of 2013 and 2012, the growth in same-branch sales was 8.8%. However, if we exclude the impact of those existing branches which gave up territory and customers to new branches, the growth in same-branch sales was 9% for the fourth quarter. For the year, same-branch sales in our Environmental Services segment increased 10.3%. These revenue growth figures for same-branch sales exclude revenues generated as a result of acquisitions made during fiscal 2013.

Our average revenue per working day in the Environmental Services segment increased to approximately $650,000 compared to $625,000 in the third quarter of 2013, and compared to $570,000 in the fourth quarter one year ago. Operating costs in the Environmental Services segment increased approximately $1.4 million in the fourth quarter compared to the fourth quarter of 2012, and $5.5 million for fiscal year 2013 compared to fiscal year 2012.

We are pleased that our operating margin in this segment was 30.1% for the quarter, which was a substantial improvement compared to 25% in the year-ago quarter, and compared to 23.8% in the third quarter of this year. For fiscal 2013, operating margin in the segment was 26.6% versus 21.2% for fiscal 2012. In the Oil Business segment, revenues for the fourth quarter were up $8.8 million from the fourth quarter of 2012, as increased production driven by increased capacity at the re-refinery offset lower product prices. For fiscal 2013, Oil Business segment revenues were up $12.5 million over fiscal 2012. Similar to the quarterly results, higher volumes offset lower prices.

In the fourth quarter, our Oil Business experienced a loss before corporate SG&A of $0.3 million entirely due to the contamination incident mentioned previously. For fiscal 2013, the Oil Business experienced a loss before corporate SG&A of $1.7 million. As was mentioned earlier, during the year, lower base oil selling prices negatively impacted our operating margin compared to 2012. Corporate SG&A was 10.4% of revenues, down from 11.1% in the year-ago quarter. For the year, SG&A was 10.7% of revenues, up from 10.4% in fiscal 2012.

At the end of the quarter, we had $21 million of total debt and $22.6 million of cash on-hand. We incurred $107,000 of interest expense for the fourth quarter of 2013 compared to interest expense of $140,000 in the year-ago quarter. We incurred of $417,000 of interest expense for fiscal 2013 compared to $585,000 of interest expense in fiscal 2012, when we were drawing on our revolving loan. For the fourth quarter, we experienced net income of $2.6 million compared to a loss of $0.3 million in the fourth quarter of 2012.

Our basic earnings per share for the quarter were $0.15 compared to a loss per share of $0.01 in the year-ago quarter. If you exclude the negative impact of the contamination incident at our re-refinery, we estimate our basic earnings per share would've been $0.22 per share for the fourth quarter. For fiscal 2013, our income was $4.5 million compared to $2.3 million in 2012. Our basic earnings per share were $0.25 for the year compared to basic and fully diluted earnings per share of $0.13 in fiscal 2012.

Looking forward to fiscal 2014, our team continues to focus on becoming more efficient in the oil business with the goal of improving the overall results in this segment. We are also very excited that we have been able to improve our margin in our Environmental Services segment. Moving forward, we will strive to continue to deliver revenue growth while maintaining margins in the mid-20% level in this segment.

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

(Operator Instructions). David Mandell, William Blair.

On the Environmental Services margin this quarter, was there one specific thing that drove the strong results?

Not one specific thing. I will mention if you go back to Q3 -- by the way, this is Mark -- if you go back to Q3, our margin was a little less than 24%. And one of the items that -- probably the second-largest item from our percent improvement basis, a little more than 1% -- was just inventory variation from machine expense. So, these are things -- machine expense and some other inventory items from time to time will swing back and forth. So this is probably an item that's -- I wouldn't say was probably a little -- had margins a little understated in Q3, and might have ongoing margins slightly -- maybe not overstated but a little higher than you would normally expect.

And, really, if you add 1.2% back to the 23.8% in Q3, you get 25%. So that's roughly around where we've been year-to-date at that time. And we do see improvement from things like antifreeze business; from typical Q4 items like reversing vacation accruals; other true-ups. But, for the most part, the only thing that might have a back-and-forth effect, if you will, would be about a little more than 1% or 1.2% from that machine item.

If I can add to that, the price increase that we did this last year was effective not only in parts cleaning for the first time, we were getting more effective at raising prices in our drum waste business and in our vacuum service business. And so that's had a continuing effect of improving our margins in Environmental Services through the course of the year. And I think Mark mentioned Mirachem. And we bought the Mirachem business really at the start of fiscal 2013. And that's given us better margins on our aqueous parts cleaning business going forward, because Mirachem supplies us with all the chemistry we use for that important growth business.

All right. And then on the topic of pricing, I think you guys usually implement your pricing in December for the following year. How did pricing -- your price increases go this year? Any change from strategy from what you've done in the past?

No. Not much of a change. The magnitude is slightly muted. Last year, I would describe the increase as both on what we went out with and what we realized as above average or above normal. We're probably shooting for something what we would call more in the normal historical range this year. And the early signs is -- we do implement it in November, actually is when we typically start to do it, Dave -- but the early signs of that, we are going to be effective, we wouldn't expect it to be realized as much, simply because we're going to the market with a lower figure this year, something more in line with what we typically do. And last year was above average.

All right. Thanks for taking my question.

Thanks, Dave.

Luke Junk, Robert W. Baird.

Thanks for taking my question. First question would be on what you had mentioned as the new structured approach to used oil generator pricing. Just wondering if you could give a little more detail on the process there? Obviously, you have some good mechanisms to increase price in the Environmental Services business. Do you -- can you take some shared best practices to implement for structural pricing as to what you're paying on the oil business as well?

Yes, this is Joe here. And we have been -- first of all, a bit of a background -- we have been attempting to reduce our costs for the used oil as we purchase from the generators for a certain period of time here, and the last couple of quarters. And we -- when we have implemented some measures to move this number down, unfortunately some of the larger volumes came in at -- are coming in as we are trying to improve the efficiency of our route at a higher price. And the net result is we didn't -- if you get where we wanted to go.

We had a pretty well-structured organization in our branches. And so we've decided to maybe go down deeper on the oil, focusing on the routes and down to the reps, and provided management tools to the organization at the rep levels and at the branch manager levels, and at our regional sales -- regional management level to track this thing a lot more closely. It's not going to be an easy task. The industry is not well-organized to deal with this. And our suffering margins. We're not the only one in the used oil recycling that is not happy with the margins. And so we -- we're quite confident we're going to see results, but how steep or deep, we'll be able to see that in the next couple of quarters.

That's helpful. And then maybe a little bit of a longer-term question on the oil business. But obviously we're nearing the completion of the expansion, and while that's going on, obviously continued pressure as it relates to group 2 pricing. Just curious looking out over the next, let's say, five or 10 years, what your thoughts as it relates to further potential expansion in this business? And then just your view of pricing for group 2, specifically realizing obviously there's a lot of noise related to the Chevron plant right now. But maybe just your structural view of group 2 pricing in the market.

Yes, we see the market pretty plentiful here with the startup of Chevron. And so, we don't see any relief on the pricing for this year and could be for the next couple of years. We are quite familiar with the cost structures of producing base oil with conventional crude refining. And as a result of today's pricing, in the lube market, there are a lot of players, especially group 1 players that are suffering. And we are expecting, over the next couple of years, seeing in Europe in particular, and -- but also possibly also in the United States, some shutdown of existing facilities, if these prices remain as they are.

And as we speak today, there is not much of a spread between lube oil and the raw materials used to produce lube oil from conventional crude, PG oil pricing. But it's pretty hard to foresee what the two or three large players are going to do in the market in the next year or two. Over the longer term, we've seen these cycles before. It's not the first time that a major facility was put in place. The last time I would say parallel to what we've seen here is in -- into mid to late 1990s, and that cycle lasted a couple of years.

So, is it going to be a couple of years here or more than that? It's pretty hard to forecast. And eventually, the margins went up and the people that were making lube oil, whether it's re-refiners or major oil companies, enjoyed a great five-year run that finished in the middle of 2012.

So then just to put a finer point on that, would it be fair to say that, given that you've seen this before, does it really change your long-term attitude towards investing in the market? Would that be fair to say?

Yes, I will tell you for -- on the short-term, it's going to be very difficult for us to specify a grassroots facility to re-refine oil. However, adding incremental capacity, as we are now doing at the Indianapolis plant, is something we would continue to look positively at doing.

Great. Thanks much.

Sean Hannan, Needham and Company.

So a couple of questions here. So first, I guess a little bit more administrative. How much revenue or oil production did we miss from that contamination incident? What explicitly are we thinking about as what was lost on the top line there?

Top line was -- probably the loss production piece?

Yes.

You're talking about the biggest piece is it was probably over -- it was about 1 million gallons of production. So you know, that's -- I don't know, about 40% of that number, I think.

It's the bottom line impact.

Yes.

Okay. And then in terms of the -- when I look at SG&A, even when I adjust for the fact that you guys had a 16-week quarter, the levels seemed a bit higher than I expected. And the overall line, I think, as a percentage certainly was higher in 2013 versus 2012. So is there a way perhaps Mark, if you can hit on the SG&A piece a little bit more, in terms of why we are not getting a little bit more revenue leverage out of that? And perhaps in the quarter or just in general, I don't know if there was some distracting costs related to that contamination incident? Or what has kind of kept that a little bit elevated? And what kind of leverage should we start to get this year?

Well, there's several things going on. You know one of the biggest things is, we started to have -- in some of these acquisitions, we are starting to amortize more intangibles, and that will have a somewhat increased impact -- you know, customer lists and whatnot, because some of these acquisitions -- I mean, one was made day one of the year, but others were made middle of the year, and one in the quarter, as Joe referenced in his statement and you remember. So that's a piece of it.

We didn't have any due to the poor performance in 2012; we didn't have any payout or expenses-related incentive comp for management last year compared to this quarter or this year. And that's a big piece of it. We also have moves that we've made to bring in some people that were more field-based and had their costs, their employees, the labor costs, et cetera, being recorded in items above the line in operating expense, especially focusing on used oil. And we have a lot of challenges there trying to grow the efficiency and whatnot.

So, some of it is just a reclassification of expenses to below the line in the SG&A line as opposed to above it in operating expenses. So those are some of the big things. In the quarter as well, we were a little over-accrued for or a little conservative in our bad debt allowance. So, we brought some of that back in effect -- or, another way to say it, we didn't record a whole lot of bad debt allowance because we had a fair amount of cushion or we were conservative in that number. And a lot of that just goes back to, Sean, getting into the oil business or back into it. Obviously, our team has experience.

But -- and 2012 was really our first year with dealing with the current set of customers in that business. And on a per customer basis, they're a much larger share of any Accounts Receivable than our normal Environmental Services business, where you're doing $200 invoices at a time. So, we took a while and we wanted to be conservative in tracking the potential allowances we would need in that business. But now that we've had basically two full years under our belt, or around the beginning of the quarter, almost two full years, we decided that what we had been experiencing, which was a lower rate than we had been accruing for, it was time to get closer to what the actual was. So that's hopefully some color there.

And if I could add, our incentive comp, we record the expense for that when it becomes probable that we are going to meet our targets and have a payout. In 2013, we were having a fairly soft or weak year in three quarters, and things got better in Q4 relative to our plan. And so, if I'm not mistaken, I think we booked more than half of the full-year cost for our management incentive compensation plan all in the fourth quarter, as we saw the rapid improvement in the bottom line. And so, that's not sort of a proportional or straight lined expense but we booked the SG&A during the quarter.

Yes, yes. Greg is right. There's a little bit of catch-up. We planned a conservative accrual and with the hockey stick, so to speak, in our performance based on the oil business, adding capacity. And you've seen, outside of the contamination incident, the impact that it can have. We didn't have all of that full performance that we ended up achieving, reflected until the end of the year. And the catch-up, so to speak, specifically in the fourth quarter number.

Okay, so if I were to step back from all those comments and they were all very helpful, and think about how to consider a normalized SG&A, it's probably an elevated base if we were to look at that December quarter. It seems that we should, in fact, get a little bit more leverage here in 2014, I think, and more typically right front-end loaded. And so that should move down as we progress through the year -- maybe not gangbusters, but at least that should be a trend, correct? And then how should we think about any type of a percentage change around that SG&A spend? Thanks.

I don't think -- I think we are at 11.1 or 11, I think, for the quarter. I don't -- I wouldn't plan on much of a decline simply because you're going to have -- a lot of the reasons -- yes, you are right, you will have a decline depending on how the performance is; the incentive comp might not be as high. But the amortization that we talk about for customer lists and intangibles, which is a decent chunk of consideration in some of these acquisitions, if you think of the timing of the deals, one was day one of the year, but two of them were in the middle of the year, and one was in the fourth quarter.

So you don't even have a full year there. So that's going to offset a lot of your leverage that you'd get in that. So, it's not going to be much different, we don't think, from where it is.

Okay. Thanks very much.

Kevin Steinke, Barrington Research.

I just wanted to follow-up on the ES margin. And it was really strong at 26.6% for the full year. And you talked about last quarter, you know when you get kind of above that 25% level, that's a signal to invest more in growth. So, just wondering what your plans are in terms of new branch openings in 2014 or other investments in the ES business?

Yes, obviously now that we've reached an improved margin in the ES, we have begun the process of increasing our investment in several areas. We have the branch -- additional branches is one. But, more important, now that we have 74 branches already exist, is resources that we put at the branches to support growth in business lines such as our vacuum business that only covers a certain number of branches. Now we've added the antifreeze as another line of business. And so we are looking at putting more energy in this and additional sales forces in the branches to make sure that we continue to grow out the double digits.

Yes. And this gets right to same-store or same-branch sales. Obviously, we have a bigger and bigger denominator or base that we have to go off of. And in addition to what Joe said, you have incubation stage programs, Kevin, that we talk a ton about individually, but we continue to look at those to make investments again in the branches in the network that's already established.

I think going forward, we are still probably in the three to five branch range. I think will be before 2014 is out, probably be in that range. So that probably won't change -- it won't ramp up in that way. It will be throughout the existing legacy network.

Okay, that's helpful. On the RS Used Oil acquisition, what's kind of the timing to where you start to see a real benefit to your margins in the oil business? I imagine it would take some time to consolidate their routes into yours. I mean is that -- or are you already seeing a benefit to your margins from that?

Yes. We haven't seen benefits yet from these margins. And there are -- has been some consolidation. And we didn't put this in place yet in the first month or two, but in this quarter, we are implementing some of these changes and throughout the rest of the year, from an efficiency point of view -- on one side.

On the other side, then we knew this when we got involved in looking at this acquisition, as typical to what we've seen in the past, that we are paying very dearly for this used oil. And so, they, together with the rest of our customers, are going to be targeted for adjustment. And we're going to do that very carefully. And it's a big advantage here for us on the long-term of this -- these volumes are pretty close to re-refining plants. So we are going to gain some efficiencies from the freights versus bringing the stuff in from further distance.

Okay, thanks. That's helpful. And also, how many used oil collection trucks did you end the quarter with? And do you have plans to roll out more in conjunction with the expanded re-refining capacity?

I think we are at 150-ish. You took around a 140 number. If you add roughly 10, the 11 routes that we had, from the UL RS acquisition, Joe mentioned we started to make those changes; but at the end of the quarter, we hadn't started to rationalize the fleet yet. But those changes have -- a lot of them have been done and they are ongoing in the quarter.

I don't know, longer-term, Greg or Joe, if you want to (multiple speakers) step in?

Yes, on -- for 2014, we are not looking at rolling out additional route trucks at our existing branches. And we would be relying at purchasing third-party oil from other collectors to fill in the gap.

Okay. So is the cost of buying from third parties still cheaper than collecting internally? And if so, is that benefiting your margins right now on the oil business?

Well, today, the cost of buying oil from third parties is cheaper. And that goes up and down. But the last couple of quarters, it has been lower than our own cost. We'll see when we implement our pricing and how successful we are. And we'll reevaluate that work. We're not planning in 2014 to aggressively roll out more trucks.

Okay. Well, one last one for me, just on the contamination incident. I don't know if you could expand any more on exactly what happened? And then what sort of controls you put in place to prevent back in the future?

Yes, this is Greg speaking. What happened to us is that we received some used oil into our facility that was contaminated with polychlorinated Biphenyls. And that's a material which is regulated differently from normal used oil, and that's what caused the situation where we had to divert that to other facilities.

And the cause, the root cause, as we've analyzed it, was really human error. We did have control procedures in place, which, if followed properly, would've avoided our getting that contaminated material into our facility -- although the problem does start with the generator or customer who gave it to us under a certification that they didn't have any chemical like that in their used oil. But we have controls in place that are expected to identify and catch that, and they didn't work because of an error, a human error in a laboratory. And we are basically implementing added control systems to kind of double up on our systems, and add checks and balances, so that hopefully a single person making an error will now not lead to the same kind of a problem or exposure.

Okay, great. Well, thanks for taking my questions.

Sure. Nice talking to you, Kevin.

Michael Hoffman, Wunderlich.

Thank you all for taking my question this morning. Can you help us with the percent change -- maybe is the way to think about it -- from an average in the fourth quarter to what it looks like in the first quarter on base lube? So, we sort of factor that in accurately as we think about our modeling?

From a market price standpoint -- let me back up. We look at, like most people in our industry, various publications that we'll publish not only posted prices, which is readily available, but with some of the subscription services' spot prices. And if you look week to week, it'd be things are periodically or are normally published, there has not been in Q1 of 2014 -- there has not been a whole lot of change from where we were at, at the end of Q4. I mean, you're talking a couple of cents here or there.

So it's gotten a few cents worse, which, on a percentage basis, isn't a big deal. But the trend throughout the fourth quarter -- especially remember our fourth quarter, Michael, with our quirky year you loved so much -- ended in September 7th, I think was the exact date. So we've had a steady ride downward throughout the quarter. And we had averages or whatnot, certainly where we are at even as we ended it, in the last day would be much below that. And we are probably tripled a nickel or so less.

I say published numbers because I don't know if skeptical is the right word, but these published spot numbers are, I think, as I've described before, a compilation of whatever research -- informal research these companies do that publish them. So, they are only published in ranges, and there is a lot of potential variability in actually what's on an invoice that someone is getting from who's ever -- whether it's Shell, Chevron, whoever they are getting their information from. But it's gotten a little more negative.

I don't know if Greg or Joe want to add anything more to that, as far as year-end for us versus what's happened in the last month.

Well, the postings from -- which is where the majors kind of start the discussion about pricing -- the last change in the postings was a downward change. And that occurred maybe two months ago or so. And I don't remember, Joe, was it $0.20 or $0.25 decline?

Yes, (multiple speakers) it was a $0.25, so (multiple speakers) --

I think it was January, actually $0.25.

Well, someone and I talked towards the end of the year and some, the rest all came in (multiple speakers) and --

Now that decline happened in the context of a market where spot or real prices were already discounted significantly below postings. And so when they brought the posted price down by $0.25, there's an expectation that the discounting will lessen, and that the real price won't move the full $0.25. And maybe you've move half that far. And that's sort of what we've been perceiving in the market, based on reports of spot prices, as spot prices and actual transacted prices have probably moved down in the $0.10 to $0.15 a gallon range, compared to where they were through most of Q4.

Okay, that's terrific help. And then on capital spending, can you give us a sense of what your capital spending will be for 2014? And can you break it up between maintenance and growth?

Well, usually we'll look at it by segment. We're probably going to -- our plan is to finish up the refinery. That probably has about another $10 million or $11 million left in it for the expansion. Typically, you're spending, in addition to that maintenance CapEx, of a little less than $2 million. So that's your oil.

And if you take ES and everything else, you're between $5 million and $10 million, depending on from our Environmental Services standpoint, our purchasing business, if we continue our trend more towards aqueous parts cleaning, it could be towards the higher end. Those machines are a little more capital-intensive than our traditional mineral spirits or solvent-based machines. But that non-oil figure includes information system and technology spend, and other spend as well. But the single biggest piece of that would be parts cleaning.

So parts cleaning is growth and the oil business expansion, or the oil plant expansion is growth. Really, the true maintenance piece is $2 million to $3 million a year.

Okay. So, if I'm adding all that up at the high-end, that's $21 million -- so about $25 million?

Yes. (multiple speakers)

At the high-end. Okay. That helps. Great. And then can you help us a little bit about what you think a working capital impact of the 10 million gallons the came on in the second half? And is it fair, if you give us -- if we have that sort of number, is it fair to sort of go to a 1 million gallon per change in your working capital to look at what the second half of 2014 would be?

Well, it really depends on the pricing environment. And depending on where the pricing is, you don't have the expansion in working capital that you would normally have. If you -- let's say you have an increasing pricing environment or a steady one, yes, you will have one; but if you are in a decreasing pricing environment, taking on more used oil and how that works through your working capital, really isn't that much -- it really doesn't increase that much.

Yes, I think, we are buying the used oil from generators, so we get a payable on the books. And that mitigates the increase in other working capital requirements. The big thing that I think about when I think of working capital and more volume isn't the normal working capital from the day-to-day activity but inventories swings. And so to the extent that we end up with more volume at certain peak points and inventory, more of that, that will queue up working capital. But, given the way that we are expanding the plant, it doesn't seem likely that the acquisition is going to add a lot of inventory.

But it's going to add some. I mean, your receivables are 30 days or so. And so -- but from that, deduct the payables for the used oil. So there's going to be some. I mean, you know roughly where the price of lube oil is in this $3.00 range and 30 days, but you've got to deduct the payable, as we were saying.

(multiple speakers) You're including the expansion of the throughput of the plant.

Yes, yes. I thought that was the question. (multiple speakers)

I was thinking that he was talking just about buying a collection business (multiple speakers) --.

No, I was thinking about the expansion though. That's what I was trying to really get my hands around -- you added 10 million gallons of expansion in the second half. You add 15 million in the (multiple speakers) --

Yes. And so, you assume we got, on an average, 30 days is our receivables, and sometimes a little bit better in the oil. And if we got -- we are buying used oil on the street and that's also 30 days or buying it from third parties, which is about 30 days payment.

Okay. So, on that vein, and I think about 2014, you had a pretty nice topline growth in ES, low double-digit. And the underlying organic growth is high single or very bottom of that low double when you factor in some of that type of this activity. How do I think about that in 2014? Is this -- should I think about it as a high single and maybe it pushes into the low double? Or is it still a double-digit revenue growth in environmental?

I think it's still double digit. You know when you look at our same-brand sales and it's kind of quirky. Let's say, it's not a huge part yet. But even our antifreeze business, it's really not reflected in any of that. It's stripped out. And because it's -- again, in some ways, it's operating somewhat standalone and other ways it's not. But we still think it's in the double-digit.

I don't know if, Greg and Joe, if you have any other comments?

Well, I just think that an earlier caller had asked the question about investment and growth opportunities, and reminded us what we'd said before -- that as our margins got better, we could open the spigot a little bit and do more. And we're certainly thinking that way. And so we will hope that those efforts continue to stimulate same-brand sales growth at a good clip. But -- and it remains our goal on a medium-term basis to be a double digit grower in Environmental Services.

Okay. And then on the used oil side, how do I think about the roughly 38 million run rate -- 38 million gallons that you are collecting? Is that number up 5 million, 10 million on your own? Or is it not -- don't grow that at all and focus on third-party to manage margin?

Well, our target is still to improve the productivity on the existing route trucks, and the productivity improvement we are looking at is perhaps a 10% improvement -- 10% to 15%. And it's a delicate balance. We've been trying to get that, and affecting the payment for the used oil. And the rest would be coming in from third parties.

I think our priority in the short-term is going to be on the pricing side rather than on the volume gains. And so it's hard to say how long it will take us to get comfortable that we've made the progress we want in pricing. But I think at least a few quarters at a bare minimum before we would start to shift our focus more to volume or efficiency of the fleet.

Okay. (multiple speakers)

And I would add, especially in the first quarter, there's been weather challenges. So it's usually seasonally down in the winter months anyway. And, January, February, obviously, both in our quarter. So quarter over quarter, Q4 has some better weather months in it, since it's four periods long. So relative to that, it, I think, accentuates that price is going to be the main focus. And if we were to step back a little bit there, I don't think it's necessarily going to be an alarm to us.

Fair enough. And then last question. The fourth quarter had a full benefit of the 10 million gallon incremental increase. And we saw clear margin improvement in 3Q. And when you strip out the noise of the contamination, further margin improvement. How would you characterize the total operating leverage -- I've got to figure out how to word this. Where were you in capturing the full operating leverage of that 10 million gallons in the context of the margin? Did you get 80% of it? 100% of it? But based on you had a full quarter but you had that oddity of that contamination issue? I'm trying to understand where we are left.

Yes, as we reported for the quarter, we announced we brought up the nameplate capacity to 60 million. And in reality, we've processed -- we run at 94% of that number. And so there was -- if we run at 60 million, it's always difficult to run at the full nameplate capacity. Everything has to line up to do it, but there is room eventually if we get efficient you get pretty close to the nameplate capacity. And so 6% is still a sizable improvement. And it's hard for me to quantify it, but there is room for improvement in margins due to the run rate of the plant. And it's going to be clear in the second half -- or clearer in the second half of this year when we really make it the move and finish the expansion to 75 million gallons.

Okay, that's helpful. Thank you very much for taking my questions.

Thanks, Mike.

Charles Hoeveler, Norwood.

Congratulations on a great quarter and a great year. I was just hoping just for modeling purposes to put a little bit of a finer point on the recent group 2 base oil price decrease. I understand you just walked through the math a little bit with Michael Hoffman. But we are seeing posted prices down $0.30. And if I just take that against your nameplate capacity of 60 million gallons, that would be a $20 million impact on the P&L in 2014. Do you have any mitigants there? Or am I thinking about that incorrectly?

Well, first, the math isn't quite right, because the 60 million gallons is our input; and our lube output is about 40 million gallons. So, you would say if our realized lube price came down $0.30, then you would be right -- it would be 12 million -- just do the math -- it would be $12 million impact on revenue and margins.

One of the things we commented on was that realized prices haven't moved down nearly as much as postings, because really the market had preceded that posted price decline by dropping spot or transacted prices well below the posted level. And so when postings came down $0.25 or even $0.30, depending on which major you're looking at, real prices moved down somewhat less than that.

In terms of how to mitigate the price decline, our view is that there is really, long-term, only a couple of things that we have available to us to maintain acceptable profitability in the face of declining lube prices. One of them is changing our cost of feedstock, which we can do by changing what we pay third parties; but more importantly, by changing what we pay on the street. We've talked about really both of those with an emphasis on driving down what we pay on the street.

And the other is to get better operating economics in the recycling process by driving more volume through the plant, which is a high fixed cost operation. And we've shown that we can do that in the last year, as we've raised the nameplate from 50 million to 60 million gallons a year, and we hope to do that in the coming year with a further increase in nameplate from 60 million to 75 million gallons. So those things will allow us to improve the overall profitability of the business or mitigate the negative impact of the price decline for as long as we have to live with what we consider unattractive prices for lube oil until the market recovers. Does that help?

Yes, and I would add one more thing we discussed in the past, that our current fleet for oil collection is running significantly below its capacity. And we look at efficient route trucks to run at much higher levels than what we have right now. But it's a delicate balance at this stage, because we're trying to reduce our raw material costs. And over the long run, that's going to be another important factor to improve the profitability of the business.

Okay, great. Very helpful. And then a quick question on the ES segment. It seems like you are growing much faster than the market. Would you attribute that to higher quality service? And how exactly are you taking share?

I think certainly -- this is Mark -- Charles, I think, certainly quality of service, we believe. While it's somewhat less tangible for some to really quantify, we think that's one of the main reasons. We think our approach and the type of structure we create, the responsibilities we give to our people who are in the trucks and on the street, and wear the uniforms, and how we incent them leads to good service or better service. But certainly, taking share 00 I mean, most of the markets we are in are, plus or minus, a couple of percent GDP type range growers. So, we think service is probably one of the main things.

I don't know if Joe and Greg have other comments?

Well, I think that's an important point. And I think we also have a handful of innovative service offerings that are not matched competitively. In parts cleaning, we are very proud of our aqueous program, which is growing faster than hard parts cleaning business is growing, and much faster than the industry is growing, where we have patented technology for machines in our portfolio, and we have proprietary chemistry that we think is better than the competitive offering. So that business is going very nicely, and we are proud of that. There's a few other things we have like that, that are where we think we've got better service programs and better offerings that allow us to grow our share more quickly.

Okay, great. Thanks for the clarification. Very helpful.

Our pleasure. Nice talking to you.

Sean Hannan, Needham.

So I just wanted to actually follow-up on the environment that you're seeing within Environmental Services. So, I think that there is a competitor that has talked about kind of a longer-term strategy to try and recapture some share, not specifically or explicitly targeting you folks, but I think ultimately, it's going to have some type of an impact within the market.

So just want to see if we can get a little bit of a kind of an updated view from you folks around -- are you seeing any impacts within the market today? How are you positioning for that type of dynamic? What are your general expectations? Thanks.

Yes. We've seen that note. And first, a quick answer -- we haven't seen anything that has affected us on a month-by-month or period-by-period basis here in the recent past, the last few months since this was announced. And then, you really need to look at -- and we're not concerned. We've been competing with the major players and have been able to grow the business from where we are -- from where we were to where we are now.

And we have, as Mark indicated, a pretty strong culture in our branches, and we're focusing on the small customer. We have decided earlier on that we would not focus on the large corporate accounts in the ES services. We have a piece of it but we don't have our share of the Fortune 500. And -- which a segment of it has been historically very competitive. And it's -- no matter who comes in into this business, it's very hard to duplicate and penetrate the market when we do $200 transactions.

So, we feel -- we don't feel cocky but we feel pretty comfortable that we won't see much of an impact. And then we are lucky enough to have pretty good margins. We don't want to try the same on price -- never a big issue at that kind of level in any case. But our view if we capture something that has been lost or slowed down somebody that has been capturing a piece of the market, as Greg said, we are very happy with our parts cleaning aqueous system, which is growing pretty -- in a healthy manner. And we have technology that with a patent the customers love. We just keep placing them.

That's great feedback. Thanks so much.

Thank you, Sean.

Kevin Steinke, Barrington Research.

Just had one follow up. You said there was potential to possibly improve from that 94% utilization level at the re-refinery. But in the short term, as you complete the expansion to 75 million gallons, is there any significant downtime that you expect to impact production over the next couple of quarters as you put new equipment in place or anything like that?

Nothing on the upside beyond the nameplate capacity of 60 million until we finish up the expansion. We've kind of got the low hanging fruit already in place of the 60 million gallon. And I also don't want to leave you with an impression that we are going to be able, on a consistent basis, run the nameplate. And typically, these units are affected by a lot of factors. We, surely in the first quarter, have weather issues in many of our branches and specifically Indianapolis was hit pretty hard compared to its typical history. And -- but as we keep -- as we finish the project, then we will get to another step-up in production capability.

Okay, thank you.

Thanks, Kevin.

Thank you for your time and interest. We are grateful for your support. We invite you to join us for our next conference call.