Heritage-Crystal Clean Inc (HCCI) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Heritage-Crystal Clean, Inc. first-quarter 2014 earnings conference call. Today's call is being recorded.

(Operator Instructions).

Some of the comments we will make today are forward-looking. Generally, the words aim, anticipate, believe, could, estimate, expect, intend, may, plan, project, should, will be, will continue, will likely result, would and similar expressions identify forward-looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated of these forward-looking statements.

These risks and uncertainties include a variety of factors some of which are beyond our control. These forward-looking statements speak as of today and you should not rely on them as representing our views in the future.

We undertake no obligation to update these statements after this call. Please refer to our SEC filings including our annual report on Form 10-K as well as our earnings release posted on our website for a more detailed description of the risk factors that may affect our results. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website.

Also, please note that certain financial measures we may use on this call such as earnings before interest, taxes, depreciation and amortization, or EBITDA, 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 program over to Joe Chalhoub. Please go ahead, sir.

Thank you, and welcome to our conference call. Last night we issued our first-quarter 2014 press release and posted it on the Investor Relations page of our website for your review. This morning we will discuss the financial statement and our operations in the first quarter and we will respond to questions you may have relating to our business.

Our first-quarter sales were $66 million compared to $60 million in the first quarter of 2013, an increase of 9.9%. Across both segments of our business the first quarter was characterized by unusually harsh winter weather, which interrupted our service routes and impaired our receipt and shipments of materials.

In our oil business segment the extreme winter weather slowed our used oil collections and resulted in reduced throughput at our three refineries. During the quarter we produced 7.1 million gallons of re-refined base oil at our re-refinery. This volume represents an annualized run rate of base oil production of 30.7 million gallons per year, or 85% of our current expanded capacity down from 94% in the fourth quarter of fiscal 2013.

In addition, we experienced an additional shutdown at the refinery during the quarter compared to the first quarter of 2013. The market price for base oil continued to decline in the first quarter placing further pressure on revenue and margins in our will business.

During the quarter we further consolidated the number of active used oil collection routes from 150 down to 143. We expect this to improve our route efficiency enabling us to increase the average volume of used oil collected per truck.

In our fourth-quarter conference call we announced a new initiative to lower the average amount we pay for the used oil we collect. We are pleased to share with you that towards the end of the first quarter these efforts started to gain traction.

At the end of the quarter we achieved a price reduction of approximately $0.03 per gallon. Coming as it did at the end of the quarter, this didn't have much impact on our quarter-one results but we expect it to have a positive impact on our margins in subsequent quarters.

Our ability to achieve this cost-reduction is a testament to the quality of our service and the good customer relations that our employees have developed with tens of thousands of individual accounts. It also reflects our strong commitment to restore some of the margins we have lost as a result of lower lube oil prices.

To manage this cost we have implemented a daily control system enabling our regional managers to monitor the price space by every oil route driver to every customer, every day and to immediately compare this to the previous price we have paid. This has allowed us to effectively manage the reduction and make sure we are making steady progress.

While we were disappointed with the performance of our oil business segment, we continue to take steps to improve the efficiency of our routes and our re-refineries. For the first four weeks of our second quarter we ran our re-refinery at or above the nameplate capacity -- excuse me, at the nameplate capacity. Also, the base oil market has shown some signs of improved pricing in the second quarter relative to the first quarter.

In our environmental services segment the extreme winter weather limited our same-branch sales growth and created inefficiencies at many of our branches. We also experienced below average solvent recycling yields in our parts cleaning business during the first quarter, which negatively impacted our margins in this segment.

With the winter weather behind us we expect our results in both business segments will improve in the second quarter compared to the first quarter. We also opened one new branch during the first quarter to bring the total number of branches in our network up to 75.

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 first-quarter 2014 results with our investors today.

In the environmental services segment sales grew $4.1 million, or 11.8% in the first quarter compared to the first quarter of 2013. Of the 73 branches that were in operation throughout both the first quarter of 2014 and 2013, the growth in the same-branch sales was 6.2%. The revenue growth figures for same-branch sales exclude revenues generated as a result of acquisitions made during fiscal 2013.

Our average sales per working day in the environmental services segment increased to approximately 655,000 compared to 650,000 in the fourth quarter of 2014 and compared to 580,000 in the first quarter one year ago. Operating costs in the environmental services segment increased approximately $3.3 million compared to the first quarter of 2013.

We are disappointed that our operating margin was 22.6% for the quarter compared to 23.5% in the year-ago quarter. As previously mentioned, harsh winter weather and poor solvent yields negatively impacted our margin during the first quarter.

In the oil business segment sales for the first quarter were up $1.8 million from the first quarter of 2013 as a result of increased production at the re-refinery due to our current expansion program offset by lower product prices. In the first quarter our oil business experienced a loss before corporate SG&A of $2.3 million.

As was mentioned earlier, extreme winter weather and lower base oil selling prices negatively impacted our operating efficiencies and margin in this segment. Corporate SG&A was 13.4% of sales, up from 11% in the year-ago quarter. The increase during the current quarter was primarily due to higher costs associated with the evaluation of potential acquisitions.

At the end of the quarter we had $20.4 million of total debt and $19.9 million of cash on hand. We incurred $53,000 of interest expense for the first quarter of 2014 compared to interest expense of $106,000 in the year-ago quarter.

For the first quarter we experienced a loss attributable to common stockholders of $1.7 million compared to $0.4 million in the first quarter of 2013. Our basic and fully diluted loss per share for the quarter was $0.09 compared to $0.02 in the year-ago quarter. We expect to produce improved profitability in future quarters as the harsh winter weather is behind us and we focus on growing revenue and improving operative margin in both of the segments.

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

(Operator Instructions). Sean Hannan, Needham & Co.

Yes, good morning. So a few questions here.

First thing, I just want to see if I can validate that I heard something correctly from Joe's comments. You're operating now at or above nameplate capacity of that $60 million at least on the input side thus far in 2Q, did I hear that correctly?

Well, no, I have clarified that, in summary, we have operated slightly above the capacity. But I think from a practical point of view we were at capacity in the first period, the first four weeks.

And as we said in our comments, in today's price of where the ruble is and the weaker margins, we've got to maximize operations at the refinery. And this is where our performance for the quarter was disappointing because of weather factors and additional shutdowns at 85% versus what we have seen in the fourth quarter where we have enjoyed a better performance by running at a higher capacity.

Sure, okay and they maybe went to validate that was a 2Q comment. Sounds like it is.

On that topic, Joe, we have certainly seen, and I think you commented to this a little bit earlier, posted and spot, it has been improving, but I think we are still down a few percentage points from where we exited 2013. Can you comment a little bit more on this in terms of the realized pricing that you are seeing and where does this stand today, May 1, rough difference versus what you may have averaged say in either December or March? Thanks.

Overall we had in Q1 a lower price, slightly lower, than what we had in Q4. And a lot of that is due to the fact that while Q4 we started hopefully to see coming out of Q1 some stabilization and potential signs of improvement, Q4 had the benefit of September, most of September, October. And we are really riding a downward slope throughout that quarter and really held down.

And the spot -- forgetting our specifics, not our prices -- but the spot market prices for the type of product that we produce and sell were down roughly $0.08. Early in the second quarter while there are signs of supply tightening and due to some planned, some unplanned shutdowns, Chevron plant not starting, there still is initially if you do the math the way we do it, and you now we produce a 150 viscosity product.

So we take the average of the posted 100 and 200 and do all of that math, we are technically in the first four weeks, technically a little bit down. But we do see an upward trend we think in Q2 versus where they are -- where they were in Q1.

Okay, all right, thank you. Now in terms of the environmental services side of the business, solvent yields, can you provide a little bit more color in terms of how we improve that there, exactly what happened and to a degree that that is fully resolved?

Yes, maybe I can provide. We track solvent yields. There's two segments.

One is through the return back from our services, from the branches, and the other one through the operations of tower, the refracting tower at the refinery. And what we are seeing here in the first quarter, we have had a very unusual low-level of yields compared to what we've been doing quarter after quarter, which increase our cost of solvents.

And there are several factors that have affected this. Weather was a big factor at the refinery, operation of the tower and also material coming back from the field and backlog of return solvents. We do a service we pick up the spent solvents and if we have less services than what we had planned, we do catch-up in the following period.

But we've had a backup of reduction of services in the first quarter because of the shutdown of several branches during the difficult weather conditions. And so we didn't do all of the services that we should have done and as we catch this up in this quarter, that is going to help as well as the tower operations. But we rely on our historical performance and we compare the first quarter was substantially lower in the yield areas.

Okay, so it sounds like based on what drove those issues, that should naturally resolve itself in the second quarter given much of the challenge was weather-related?

Absolutely.

Okay. And then last question here for the moment, just going back to the oil business side, I want to understand how much of the negative margin within the oil business really was driven by the pricing declines versus other variables. If there's any context you can provide around that, that would be great.

Joe and Greg might want to chime in, but from a pure numbers standpoint if you look at our performance versus Q4, it was a little less than 5% of the impact of the negative move in margin or decline in margin was due to lower base oil selling price. Joe, if you want to add -- ?

Yes, I would say the simple quick answer here is that the biggest factor is the capacity utilization of the plant. And this is the biggest factor.

And the second factor would be the route, the oil collection route and efficiency as weather condition affecting these, and branch closure during the -- for the weather condition. And then obviously the lube prices were a factor in the quarter compared to the fourth quarter.

We are seeing the lube restoring prices here coming up again in the quarter. Now there's [in the cloud] of the Chevron plant and so we clearly won't know the impact of the thing until the plant is running and things stabilize.

We have talked a little bit about the lube pricing and excess capacity that is in the market. And I have to say we are seeing some indications here that the Group I plants, which are under extreme tight margins, some players in this industry will be going out.

And this week we've seen an announcement of Shell in Europe announcing the shutdown of a 7,000 barrels per day, Group I plant due in two stages in 2015 and 2016. I'm sure other players are looking at the older plants and there may be more exits as a result.

Okay. Very helpful, thanks so much.

David Mandell, William Blair.

Good morning. Regarding the $0.03 per gallon reduction you guys realized in the used oil collection. What is that on a percentage basis and what kind of reduction are you guys targeting?

We really don't get into what our exact pricing is, so as far as a percentage of our total we are not going to discuss that. But we are targeting not only sustaining that because I wouldn't say it's easy to get $0.03 but you have to be really focused and make sure you don't go backwards, and we have a sustained program.

I don't think we want to limit ourselves and Greg and Joe can comment further, but we do think we have more progress to make. We think the market is still in a place that there is still room to make progress there.

And I will let you know, or maybe clarify, the improvement was really in the last third of our first quarter. Overall our price had crept up because we had a full quarter, if you will, of higher-priced oil from our acquisition of URS, our universal lubricants RS routes.

So it really wasn't even a net benefit the overall PFO, or used oil pay in the period. But it certainly is going in the right direction at the tail end of the quarter, it was, and into this quarter. I don't know if Joe or Greg might want to comment --

Yes, I think we said it was call and I want to reiterate, this Company wants to take a leadership in this industry to reduce the pricing. We are happy to see what we have been able to accomplish. We have 65,000 customers, basically.

And a big organization and we've got some customers that want high prices but many customers want service. And so we are focusing on the one-to-one service and pricing is not essential. And we are driving this through our network and we expect to do more.

All right, and then regarding the dollars you spent looking at potential acquisitions. Can you quantify how much you spent and maybe put some more color around specifically what you guys are looking at?

Well, we don't really comment on any possible or potential future acquisitions but as far as the numbers go, it was about $1.1 million, $1.2 million in the quarter.

All right, thank you for taking my questions.

Kevin Steinke, Barrington Research.

Good morning. Was wondering if you could give us an update on the re-refinery expansion, where that stands and do you expect to still get that completed around the middle of 2014?

We are looking at that to be completed and started up in the third quarter. Again, the weather didn't help us in the first quarter -- put in foundations and extreme conditions in Indianapolis have been an issue for us. And we will be seeing that -- we are expecting to see this starting in the third quarter.

Okay, and once you do get up to that higher input capacity, does that do anything to your capacity utilization in the short term, or do you expect to still be able to run that at high rates despite the expansion?

Our objective from on a day-to-day basis is to keep running the plant at the maximum capacity. So once we get that level we will be looking at putting more through the plant and selling the product. That's our objective.

I think part of his question may be also, will the process of building out and finishing the expansion interfere with normal operations in the quarter to come in the next coming months.

Right.

Okay, I'm sorry I didn't catch the angle. We have put in place tie-ins, etc. and every time we get into a turnaround for equipment turnaround we try to put in place these tie-ins so that we can get other equipment in place without taking a long shutdown. And there are going to be some shutdowns needed and we don't see these shutdowns are going to be any big factors in quarter two.

Okay, you did mention one additional shutdown at the re-refinery in the first quarter. And was that related to the expansion plans and how much of an impact does one of those normally have on the capacity utilization?

I believe this is the hydrotreater (multiple speakers)

Yes, hydrotreater in the kettle?

No, it's not based on our expansion. In the hydrotreating section we had to change the catalyst ahead of what we anticipated. And the cost of that was $0.5 million in value of catalyst and obviously we lost some production to this production to change the catalyst.

The way I think about it, a number quarter we have is about 84 days. And when we have a normal shutdown it's typically in the two- or three-day range. So a shutdown causes us to lose 3% of our production volume in a quarter.

And most quarters we would have a shutdown. But if we have a second shutdown that can take 3% of the production volume off of the top.

Okay, that's helpful. And you talked about reducing used oil costs by $0.03 per gallon and the fact that it should benefit margins in coming quarters, can you give us some sense as to the magnitude of the margin benefit at all? At least directionally -- well, not directionally, but relative to your overall cost structure?

Well, we talked about what we've been able to achieve in raw dollars. You can really fill in based on our collection, probably if you look towards the higher seasonal periods of Q2, which comes up from the winter months our collection will be in that $40-plus million gallon range as far as collection on an annual run rate basis.

You can roughly do the math based on how much improvement you think we have left to do, or can do. We know we can do more.

Like I said earlier, when a previous caller asked the question, we haven't set a limit on how much more we can improve. But depending on where you want to forecast that you can do the math pretty easily and get whatever impact would result from that.

Okay, yes, sure. This last one for me.

Could you just give a little more insight into the weather impact on the oil business? Was that not only difficulty for your own trucks but also maybe railroads being impaired? Just a little more color or insight on --?

It affected us in several ways. We have had to slow down the plant because of supply and the supply was bringing our own material in. The railroad was a big factor, not being able to operate on certain days in Indianapolis because of the weather.

So we didn't receive the material in. Even our hydrogen supplier which brings in hydrogen for the hydrotreater because of a shutdown on Highway 65 couldn't bring the stuff in, and so we have lost some time, a day in this case.

And so every time we had an interruption it affects your throughput. And third-party collectors that we buy material from because of road conditions couldn't bring the product in, or couldn't bring it in at the same rate. But this was extreme conditions.

And we have learned ourselves, we do have a feed tank and we try to build the volume before the winter. But we didn't, due to the severity, we were impacted and that is now behind us.

The effects of the weather on the plant were more severe just due to these logistic things rather than the shortfall and supply from our own collection operations.

To add a tiny bit more color from a route standpoint, or a feedstock standpoint, it probably impacts our, if you look at the different types of trucks and route business we have, it, the bad weather that is, more negatively impacted, and typically does, our oil collection routes more than anything. The pumps did not get too deep in the weeds, but the pumps tend to freeze up more. Obviously box trucks and the other trucks don't even have them.

The butterfly valves. Basically our trucks primarily pick up oil but they're picking up oily water streams, machining fluid as well. And if even one day, if the last stop you make is an oily water pickup, that butterfly valve will freeze.

And then a lot of our branches that are in the northern part of the US, we usually plan ahead and arrange for either on-site or off-site inside storage, but this bad weather went so far down south there were many areas, Kansas City as an example, where we don't typically have to plan for that and so these vehicles are sitting outside. We even had the diesel fueled gelling and that obviously applies to all of the route trucks, but it particularly hits the oil route trucks hardest.

And customers were impacted as well. When our trucks were out there were an awful lot of customer businesses that were shut down, or operating at reduced activity levels during the same difficult winter months.

Okay, yes, that's all very helpful. Thanks for taking my questions.

Brian Butler, Wunderlich Securities.

Good morning, thanks for taking my questions. First on the environmental side with the gross margins being down significantly on the sequential basis due to weather, can you just break out maybe a little bit on how much of that was really the weather and how much of that is your normal seasonal? And then thinking forward, can you make up in the remainder of 2014 that lost profitability associated with the weather in the environmental business?

I think we can make up some of it. Some of the weather impact is simply due to some of our services. The need for them is activity based on behalf of our customers.

So to the extent they produced less widgets and they produced one drum of waste every thousand widgets, or whatever their ratios are, they experienced some of the same transportation and logistics problems that Joe and Greg outlined that we had at our facility. So some of that you are not to get back unless they ramp production back up and some of that really gets to the ultimate use of the product.

If generally if consumers or retailers that the products are used that way had less activity, which they generally did, some of that you're not going to make up. So we can't define how much that is but we believe we are starting to make up and will make up some of it.

But some of that you won't make up. It's just a lost opportunity.

As far as if we looked what we would normally expect because -- I don't want to compare our margin from Q4 because we normally wouldn't expect that same type of weather condition in our Q1 especially with our Q4 being still into the fall, the main underperformance was in the solvent area and some in our drum area. Basically the mix even on our machine, the types of machines and services we are doing, the mix of those was unfavorable versus what we would normally plan for.

So you have a certain amount of let's say whether it's solvent or aqueous chemistry, used in machine X versus machine Y and the difference between how you might price that. It's not all simply tied to how many gallons of solution is in a machine.

So if you get a different mix you can get then a different impact on your profitability. And it happened to be negative, but this is one of the things, Brian, that swings back and forth between quarters.

If your remember last quarter when we had our call I had mentioned there was probably 1.2% of what made our margin so favorable in Q4 was really recouping some of the negative mix that we had in Q3 prior. So some of this is just quarter-to-quarter noise but the biggest things are then the solvent side in the mix and a little bit on our drums as well.

Okay, that's helpful. You touched on a little bit on the feedstock and the utilization on the oil side of the business. And when you think about that 85% utilization, can we draw this out and maybe give a little bit more color on how much was that reduced due to the additional shutdown versus lower volumes on your routes versus how much was third-party volumes impacted?

I don't know that we can really do the math and specifically identify. It's all so interrelated.

If Greg and Joe want to comment further, but it really more points to the logistics surrounding getting material to the plant and that impacted our feedstock, as Greg mentioned, even third parties -- I mean if Interstate 65 is closed, that impacts both our third-party suppliers and our hydrogen and other consumable suppliers. So I think it's mostly around the logistics of it. I don't know if Greg, or Joe, want to comment further?

Well, if you want to get into the numbers, we earlier commented that the plant was running in the first quarter at 85% compared to 94% in the prior quarter. And in an answer to an earlier question I said that the additional shutdown could probably be extrapolated to represent about 3% differential.

So had we not had the extra shutdown our operating rate might have been 88% instead of 85%, still 6% short of the fourth-quarter mark. And I would say that most of that 6% differential from Q4 to Q1 was due to other logistical challenges at the re-refinery -- of the delay in getting product delivered in and transferred.

There were places where we had oils toward nearby that we couldn't get it moved to the plant and had to slow down the plant operating rate for extended periods of time. We had third-party oil available to us as well as our own oil that we couldn't get there, or when we did get it there then we had delays in loading and shipping it out and that caused us to slow things. So I would say most of that other 6% had more to do with logistical challenges and weather-related operating challenges than it did the scarcity of feedstock, in general, throughout the system. Was not helpful?

Yes, that's exactly what I was looking kind of breakout wise. That's very good. And I think you answered this, and last one, just on the weather in this quarter, that didn't change the timing of the capacity expansion at the oil facility?

It's affecting it somehow because of the construction, foundation work, etc. got delayed. But we are still looking at starting this up in the third quarter of this year. So there's a little bit of a delay but not substantial.

So more at the end of the third quarter versus the beginning of the third quarter, is that kind of the way to think about it?

Yes, we were looking at -- we said early on and we had planned it to start in the middle of the year. That's what we have been scheduling to do and now we are saying it's in the third quarter without being any more specific.

Okay. Thank you very much.

(Operator Instructions). Sean Hannan, Needham & Co.

Yes, great. Thanks for taking my follow-up here.

High-level perspective, wanted to see if we could get some feedback from you folks in terms of the acquisition activity that has been taking place in this space. Specifically as we think about VeroLube, Vertex Energy getting involved here, how do you think about the risks to your operation based on your regional presence and expansion plans versus really where they either are operating today, or plan to in future quarters?

Any color around that would be great. Thanks.

Yes, this is Joe. I can maybe comment on both of these players.

VeroLube are looking at finalizing their acquisition of Thermo Fluids and Thermo Fluids are operating mainly in the Western parts of the United States. We have most of our activities away from that market but we don't see much of an impact with that acquisition.

And they are looking at building other processing plants and we've looked at the passion and the technology of VeroLube and we are not too concerned about the economics of their processes versus what is out there with us and other players in the industry. But it's mainly a geographical presence on the service side of the business.

In the case of Vertex, they have acquired a facility that recycles the product and produces basically vacuum gas oil that is the largest one of the two acquired facilities in Louisiana. And so it kind of changes hands from one player to another player. The same facility, the same kind of throughput.

Vertex have historically been in the oil business collecting, or collecting a little bit of oil. Most of the oil they handle is bringing oil from other parties and directing it from one location to another. And we haven't seen any changes yet in their collection piece of the business.

So at this stage we don't see much of an impact on the New Orleans facility. The refinery in Las Vegas, the Bango refinery, again we are not active in the western part of the United States.

Plus, the Bango refinery was shut down. They had an incident last year and my understanding it hasn't started to stand up but even when they start it's not going to impact what we are doing. Greg, do you want to add anything more?

No. I guess I would just would say that extrapolating beyond just those two and thinking about the entire industry, we know that this has always been a very intriguing industry for entrepreneurs and those with capital to try and get into.

It seems to have more activity than many other business areas. And we are not surprised to see continuing initiatives on the part of people that think they have come up with a better technology, or have a better strategy.

History would suggest to us that there's been a lot of people that believe they've got a new angle on the business and have tried to develop it and not very many of them have been able to cut it here. So I think that we expect not just now but in the future we will keep seeing new people get financing and try and build technologies, new plants, or acquire existing businesses and build on those.

But the one technology that we think has been demonstrated over 30 years that really has worked, and the only one that has worked on a consistent basis, has been re-refining with vacuum distillation and hydrotreating. And it's really only worked when it's been combined with a fully integrated model that includes a broad array of services provided to the customers and when it's combined with a team with experience that has struggled and learned the mistakes of the past.

And so it is very tough business for new entrants. We wish anybody well who wants to try, but it's obviously challenging for us right now with all the experience we bring to bear. And we are much more focused on getting back to doing things right ourselves and fixing the problems and improving on our business, not worrying, looking over our shoulder at the many challenges that are going to be faced by new entrants.

Thank you, sir. And thank you for your time and your interest.

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

This concludes today's program. You may now disconnect. Everyone have a wonderful day.