Heritage-Crystal Clean Inc (HCCI) 2014 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Heritage-Crystal Clean Incorporated third quarter 2014 earnings conference call. Today's call is being recorded. (Operator Instructions). 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 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 press 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 Chief Financial Officer, Mr. Mark DeVita. At this time I'd like to turn the call over to Joe Chalhoub. Please go ahead, sir.

Thank you. I would like to welcome everyone to our call. Last night we issued our third quarter 2014 press release and posted it on the investor relations page of our website for your review. In addition, last night we announced the completion of the acquisition of FCC Environmental, an environmental services provider which serves 30,000 customers and is a significant collector of used oil in the United States.

Today we will discuss our third quarter 2014 financial and operating results and the FCC Environmental acquisition, and respond to questions you may have about either. We are pleased that with our revenue growth in the third quarter. Our third-quarter revenue grew 15%, from $67.6 million in the third quarter of 2013 to $77.9 million in the third quarter of 2014.

Year-to-date revenue increased 16% to $222 million compared to $191 million for the first three quarters of 2013. Revenue grew in both of our operating segments due to mainly organic growth and expansion.

Our oil business segment experienced robust revenue growth driven by increased throughput at the re-refinery. During the quarter, we produced 9 million gallons of base lube oil, corresponding to a run rate of approximately 100% of the new 65 million gallon nameplate capacity. Operating the re-refinery at capacity has to offset some of the pressure on our margins due to the lower base oil prices.

In addition, during the third quarter, we continued to reduce the price we paid to generators for their used oil. We lowered the weighted average price paid to generators by $0.03 compared to the second quarter of 2014. By the end of the third quarter, the price we paid to generators for their used oil had decreased by more than $0.09 per gallon from the end of 2013. This experience gives us confidence in the systems we have implemented to manage the price we pay for used oil at more than 65,000 used oil customers' locations.

Towards the end of the third quarter, the price of crude oil began to decline below its recent trading range at a rapid pace. Significant changes in the price of crude oil tend to impact the value of all of the products from the re-refining process. In response to these market conditions, we have significantly increased the magnitude of our price reductions related to the used oil we purchase from generators. We believe that the price control system we implemented roughly a year ago, and which has served us well in the first three quarters, will enable us to do a better job of maintaining stable margins despite the volatility of energy prices.

In addition, we continued to see substantial improvement in our used oil collection route efficiency during the quarter, enabling us to increase average volume of used oil collected per truck. We are encouraged by strong used oil collection volumes, reduced used oil sales and improved throughput and efficiency at the re-refinery. These combined efforts enabled us to increase our operating margins in the oil business segment during the third quarter compared to the second quarter.

In our environmental services segment, we are pleased with our same branch sales growth of 10.6% and particularly happy with our operating margins of 28.6%. During the quarter we opened one additional branch, which increased our total branch count to 77 at the end of the quarter.

Our Chief Financial Officer, Mr. Mark DeVita, will now further discuss the financial results.

Thank you, Joe. I appreciate the opportunity to discuss HCCI's third quarter 2014 results with our investors and analysts today. In the environmental services segment, revenue grew $5.1 million or 14% in the third quarter compared to the third quarter of 2013. Of the 74 branches that were in operation throughout both the third quarter of 2014 and 2013, the growth in same branch sales was 10.6%.

For the first three quarters of the year, revenue increased $15.1 million or 14% in this segment. Same branch sales for the first three quarters of fiscal 2014 grew 9.4% compared to the first three quarters of fiscal 2013. On average, revenue per working day in the environmental services segment increased to approximately $720,000 during the quarter compared to $635,000 in the third quarter one year ago.

Operating costs in the environmental services segment increased approximately $1.9 million compared to the third quarter of 2013. Operating margin in this segment was 28.6% for the quarter compared to 23.8% in the year ago quarter. For the first three quarters of 2014, our operating margin in this segment was 26.6%.

We are very pleased with the recovery in our operating margin considering the disappointing margin in the first quarter, which was caused primarily by harsh winter weather conditions. This improvement in the environmental services segment margin in the third quarter was the result of increased leveraging of fixed costs from higher sales volume and from the price increase implemented earlier in the year.

In the oil business segment, revenue for the third quarter was up $5.2 million or 16.8% from the third quarter of 2013 as a result of increased production at the re-refinery, offset by lower product prices. For the first three quarters of fiscal 2014, revenue was up $15.7 million or 19% compared to the first three quarters of fiscal 2013.

In the third quarter, our oil business experienced income before corporate SG&A of $1.3 million compared to $1.2 million in the third quarter of last year. In the first three quarters of fiscal 2014, the oil business experienced a loss before corporate SG&A of $0.5 million compared to a loss of $1.4 million in the first three quarters of fiscal 2013. Corporate SG&A was 10.5% of revenues during the third quarter, up from 10.4% in the year ago quarter. Year-to-date corporate SG&A was 11.4% compared to 10.8% for the same period in 2013. The increase from the first three quarters of fiscal 2013 was primarily due to higher costs associated with the evaluation of the FCC Environmental acquisition.

At the end of the quarter, we had $19.3 million of total debt and $15.9 million of cash on hand. We incurred $24,000 of interest expense for the third quarter of 2014 compared to interest expense of $97,000 in the year ago quarter. We incurred $110,000 of interest expense in the first three quarters of fiscal 2014 compared to $310,000 in the first three quarters of fiscal 2013.

For the third quarter we recorded net income of $2.4 million compared to $1.3 million in the third quarter of 2013, an increase of $1.1 million or 84%. Year-to-date net income was $2.7 million compared to $1.9 million in the first three quarters of 2013. Our net income per share for the quarter was $0.13 compared to $0.07 in the year ago quarter. For the first three quarters of the year, basic net income per share was $0.15 compared to $0.10 for the first three quarters of last year.

We would now like to talk to you about the FCC Environmental acquisition. Last night we issued a press release announcing the transaction, as well as a presentation that you may wish to refer to. We're going to discuss FCC Environmental's business, the transaction rationale, synergy opportunities and financing, and then we will answer any questions you may have.

I will now turn the call back to Joe Chalhoub and he will discuss the transaction rationale.

Thank you Mark. We are very pleased to announce the acquisition of the US business of FCC Environmental or FCCE, an environmental services provider with approximately 30,000 customers, for approximately $90 million in cash. This transaction is our largest acquisition to date.

We acquired FCCE to pursue several potential benefits. First of all we see an opportunity for significant operational cost synergies due to the extensive geographic overlap between FCCE current service area in the South-Central, Southeast, and Eastern United States and Heritage-Crystal Clean existing coverage in virtually all of these areas. Greg Ray will discuss synergy opportunities in a few minutes.

We also added FCCE's 30,000 customers to HCCI's existing base of 98,000. This increases our scale in the business and provides us with new opportunities. We can cross-sell traditional HCCI services, like parts cleaning and drum waste management to historical FCCE customers. We can also cross-sell the services that FCCE offers to historical HCCI accounts.

With this transaction we become the second-largest collector of used oil in the United States and we expect the increased volume to enable us to quickly improve the overall efficiency of our used oil collection fleet.

In addition, FCCE is an asset-rich business. The organization was created years ago as a rollup of multiple predecessor companies in the used oil and environmental business. Consequently, it now owns strategically important sites, treatment facilities, and tank farms in many local markets.

For example, FCCE has significant processing capabilities for vacuum services and oily waste. We can now take advantage of these capabilities to serve our combined organization. The parent of FCCE acquired this business from Siemens in 2008 for $182.5 million. And we feel that HCCI is now buying the business and assets for a good price, near the bottom of the cycle.

Another benefit we expect to achieve from the transaction is operational flexibility. HCCI already has good ways to participate in two of the three main outlets for used oil: re-refining to produce lube oil and distillation to produce vacuum gas oil. With this transaction, HCCI adds broad capabilities to process used oil for sale to the industrial fuel market.

I will now invite Greg Ray, our Chief Operating Officer, to discuss the operations of the acquired business in more details. He will also discuss expected synergies.

Thank you Joe. First I would like to say that we are confident that this is the right deal for Heritage-Crystal Clean. For most of our history, we have placed a much greater emphasis on organic growth than acquisitions. Our industry has provided us with lots of potential transactions to consider, but we have been patient. We have considered a great many opportunities in recent years and this is the one we were waiting for.

The great history of this company and its predecessor firms, the talented personnel, and the large customer base with significant overlap with Heritage-Crystal Clean all make this a very attractive opportunity for us. And our entire leadership team is committed to working hard to deliver on the potential here and to increase shareholder value.

In the presentation slides available on our website, we describe FCCE's service capabilities in some detail on pages 6 through 10. FCCE's service offerings are complementary to ours, and include used oil collection and recycling, oily water disposal, vacuum services, parts cleaning services, used antifreeze collection and recycling, used oil filter collection and recycling, and other environmental field services.

As mentioned previously, FCCE is a significant collector of used oil in the United States. We expect the transaction will result in additional used oil volume of approximately 54 million gallons per year based on their historical performance.

Joe has already mentioned that this transaction increases our operating flexibility by enabling us to process used oil for sale as industrial fuel. FCC also collects and manages a significant volume of oily water and wastewater. Some of this is collected on FCCE trucks with their programs that are comparable to Heritage-Crystal Clean's vacuum service offering.

However, FCCE has the ability to process the collected oily water through their own facilities which separate the oil and water, after which they sell the recovered oil as industrial fuel. FCCE has a significant program in providing field services. This is a set of services which HCC has not historically offered. FCCE's field services program is a comprehensive offering to provide on-site labor and equipment for various environmental projects such as storage tank cleaning, facility decommissioning, pipeline services, spill cleanup and remediation.

Additionally, FCC Environmental is the third-largest full-service provider of parts cleaning services in the United States. And finally, FCC Environmental is engaged in used antifreeze collection and recycling. Their current antifreeze recycling program is similar in magnitude to Crystal Clean's own program. However, FCCE has excess recycling capacity that we can use to grow this line of business.

So you can see, FCC Environmental's current package of service offerings is complementary to Crystal Clean's business and we believe we will be able to grow both businesses through our ability to offer customers a broader array of services.

In addition to complementary service offerings, we have identified $20 million of annual anticipated synergies. These synergy opportunities include streamlining oil collection, vacuum services, and oily water collection routes; facility and head office consolidation; transportation and logistics; opportunities in the parts cleaning and antifreeze business, and business insurance. We have been working on this transaction for quite a while and we have developed very detailed plans for how we expect to achieve these synergies. We don't wish to discuss every aspect publicly, but I will offer a few examples to give you a sense of what to expect.

At this time, Crystal Clean's oil collection routes are operating well below the volume of used oil we consider to be a fully efficient route, mostly due to the fact that we are operating young, less dense routes. With the acquisition of FCCE, we believe we can consolidate routes across our system and achieve a much higher collection density per route.

Another example of a synergy we expect from the transaction is the consolidation of locations. FCC Environmental operates 34 branches, storage depots and treatment facilities in a market area that overlaps with Crystal Clean's current service area. We plan to consolidate a significant number of these sites, which will allow us to save on rent, utilities, maintenance and logistics costs.

Our management team will begin implementing these changes within the next 90 days. We believe we will realize approximately $14 million in synergies in year one, before consideration of the one-time costs to achieve the synergies, and approximately $20 million in synergies per year beginning in year two. Now, Mark DeVita will discuss the transaction consideration.

Thanks Greg. The consideration for the transaction is all cash, which was financed through an expansion of the credit facility we had in place prior to the close of the transaction. As of October 16, 2014 immediately following the close we had $92 million outstanding on our credit facility, of which $80 million was in the form of Term A loans and $12 million was in the form of our revolving credit line.

We will now give control of the call over to the operator, who will open it up for your questions.

Ryan Merkel, William Blair.

So I guess first of all, you said this is the business you've wanted to buy. And I'm curious, why did FCC -- why were they willing to sell right now?

This is Joe here. And I don't know if you had a chance to kind of understand the history of FCC parent in Madrid. It's a large company. Their sales last year were $12 billion. They have been going into the construction business, environmental as well, and they operate in many countries.

This was a large base in the United States, but pretty small as far as their overall business; didn't fit in with what it is they are doing. They also have had issues with their debt load and have been going through a divestiture program over the last year, year and a half. This is one of the businesses that they decided doesn't quite fit their system.

I see. So, it does feel pretty opportunistic, then, okay. And then can you walk me through how you arrived at the purchase price of the $90 million?

The purchase price was based on what the -- how we negotiated the deal, what they wanted for the deal and where we ended up. Our justification -- the financial justification came in based on our ability to get the synergies that Greg has discussed, and we've used that and plus what they were looking for, and were able to negotiate that acquisition price.

Yes, it just seems like roughly 4 times EBITDA is a fairly good price. I know the profitability is down from where it has been. It just feels like it's a pretty good price, particularly given where you're trading. So I guess last question from me, the $20 million in synergies, is that all on the cost side? Or are you including revenue synergies in that as well?

Yes. That's substantially all on the cost side, Ryan. We do see additional opportunities on the revenue side. I alluded to cross-selling. And we haven't really considered those as synergies the way that we are describing them to you and to our other investors.

We are going to try and track and measure synergies in a separate way so that we are confident we are hitting our goals there. But you will, I think, see other benefits to the Company resulting from the transaction on the revenue side.

Yes, I would add -- this is Mark -- that our banks, when we were looking at the transaction, obviously considered 90% of this bankable cost, traditional cost cut type synergies.

Okay good. Okay great, I'll get in line. Thanks.

David Manthey, Robert W Baird.

I was hoping maybe you could help us understand relative profitability of all of these segments of FCC. I assume to get to the breakeven EBITDA you've got some segments that are profitable and some not. And the reason I ask is I was under the assumption that fuel oil was not a great business in any case.

And I'm wondering, is oily water, is it a more profitable business? And if you talk about the antifreeze and oil filters, etc., just trying to understand all the pieces here, just which ones today are profitable, which ones aren't, to get us to this net zero.

This is Joe here. When we have analyzed the business, I don't have the numbers in front of me, I would tell you that the most of the lines of businesses were weak. And so, nothing spared in one area or another. There is a lot of infrastructure costs the way the business is organized and product is moved from one area to another to go to the market. And it's these additional costs today compared to where they were many years ago, when people would sell the used or to local -- to a market has affected the profitability of the business.

And not -- they don't have enough density in parts cleaning for example compared to what we have. They don't have the full menu of different parts cleaning devices or the chemistry for the additives, and it's something we would definitely add to the menu. And nothing there is a -- or got us to feel this one area was really very weak. They are all relatively weak [margins].

Okay, and then in terms of the collection capacity here, just round numbers let's say you'll end up somewhere around 100 million gallons overall. And what I'm wondering is, with the current re-refining capacity you have or will get to, it seems like you'll have an overage of say 20 million, 25 million gallons. Do you plan on just eliminating routes to get rid of that?

Again with the selling of fuel oil, I was under the impression that it was not a great business to begin with. Or can you talk about does this change at all your view on potentially building another re-refinery?

Well, we don't have any plans to build another re-refining facility at today's market condition. But market condition today is not only affecting re-refining, but affecting anybody in the used or management service business. And we continue to have an interest in maximizing our capacity in Indianapolis. And our next step in here is to realize these synergies and get the efficiencies out of this acquisition and before we consider any capacity. So I don't see anything in the short term, nor medium-term.

Regarding eliminating routes, we won't eliminate routes as such because we have excess capacity. But what we will do, we will get the overall combined routes at the efficiency level that we would like to see. And as a result, we will see a reduction of number of routes and a reduction of the cost of collecting the used oil.

And remember, we also buy some used oil ourselves for the plant in Indianapolis, and we intend to continue to do it if the economics are right to purchase that oil. So, this definitely gives us more flexibility in the marketplace, in the collection and also in the processing and sale of the product.

If I could add to that, I can appreciate from your question that it may, on the surface, seem like the transaction could be characterized as one where we end up with an oversupply of oil relative to our re-refining capacity. But we don't view it that way at all. We view that we've acquired more sources of oil and we like to be in a position where we have surplus volume to our re-refining needs, and that we can be in the other markets, and that that gives us flexibility to operate and flexibility to develop future growth strategies as market conditions change.

And we think that adding the customers and the cross-selling opportunities is very valuable as well. But, just from the point of view of our oil business, having surplus volume gives us flexibility when we are in volatile markets to be more aggressive, for example, on our pricing and not be worried about the possible impact of some amount of volume loss that could impact our plant operation.

Okay, thanks for that, Greg. And last question, you noted in this slide that at the peak, this business was running with $13 million EBITDA. I'm wondering if you can give us what the lowest level was. And just roughly, what were the conditions around that peak and trough profitability, those two periods in time?

I might need you to repeat the last part of it, Dave, but in general this has been a business that is -- most recently has seen its trough. At least, you know, if you're going back a couple years I don't have all the numbers to go back five, ten years. But within the more near-term breakeven at an EBITDA level, and that we mentioned it was running around that currently or at least in 2014 on a TTM basis earlier in the year, that that is relatively the lower band, so to speak, a lower part of the band.

And we referenced $13 million I think was within the past couple of years a figure they've operated at. And you wanted to know relative to that -- you had some other part of your question I missed.

I was just primarily wondering -- what were the conditions that led to the peak level versus the trough? Is it mainly spreads or is there something else that drives the profitability of this business?

Well, we need even to go back a little bit further. The $13 million is relatively recent. But, we recall through industry and information that their profitability within the last decade has -- was up in the high teens -- $18 million, $19 million. And the difference over the years is a spread between the selling price and what they pay their generators, and also, the change in the industry for people that are in the fuel market.

Where in the past they could sell -- they could service the customers, collect the oil and sell it to local ash oil plants, a lot of these plans were converted to natural gas. And now they have to transport it further distances by railcars, which added costs and people didn't really get the margins. If $0.90 spread was a good number, it wasn't good anymore and larger spreads have been needed in this industry.

If I could add to this, the idea about why the company has struggled over the last few years, I would say that while we have a very sincere respect for the local team on the ground that we've met and think are going to be able to help us, the company has struggled with respect to kind of the leadership. I think there have been three changes of the people that were sort of the top in running the company in the last three years.

And they've suffered with the handicap that the parent company in Madrid has had severe financial challenges which have caused them to constrain capital available to the business to a very large degree. And so, that affects the kinds of projects or business decisions that could be made. And we see that we have the ability to help correct some of those things and make it a stronger organization after the integration.

All right thanks very much.

Sean Hannan, Needham & Company.

Congratulations on the quarter and the deal. So, on FCC, I believe -- so they have a re-refinery there in Baltimore, correct?

No, no, they don't. What they have is a project they were trying to develop. They have land, but nothing else, and have not put any real capital into creating a re-refinery. It was just something they hoped to do.

Okay, but in terms of those plans, is that something that now becomes effectively tabled and shelved in perpetuity? Or how do you view the intentions for that re-refinery and what are some thoughts there? Thanks.

We look at the Baltimore site and the permit that is put forward as an asset for us, and -- but we don't plan on the short term to go ahead and build a re-refining plant, either in Baltimore or anywhere else. It's in a good location on the East Coast. There's a lot of oil on the East Coast.

And so, we like that asset, but at this stage we're going to be disciplined. We've got a lot of stuff on our plate and we need to execute this and improve the margins of the oil business, so we can have two strong businesses that are nicely profitable.

And so, in terms of when you think about local markets for used oil collection, how would you characterize FCC in terms of their pricing? And to what degree has that impacted you positively, negatively, for some of the efforts that you have to procuring used oil?

I didn't quite catch the back end. How is their historical or how is their current situation when we talk about pricing?

If you are asking about their role as a competitor to us historically, we certainly see them and have seen then in the market as a competitor for the used oil. But, it's not like either of us on our own have been particularly large competitors with each other. Prior to this transaction, Heritage-Crystal Clean had about a 5% share of the US market and FCC had about a 5% share, so we don't bump into each other at every account every day.

There's a little bit of differentiation in terms of the types of customers that we have focused on or serviced. Heritage-Crystal Clean has tended a little bit towards the smaller side of the market. It's a little bit less price-sensitive and FCC has tended slightly more towards larger customers. So we like the broadening of our scope or capabilities in terms of customer penetration there.

But, you know, we don't see that their position in the market relative to pricing or where they were was dramatically different than where we've been in the same periods of time. Does that answer your question?

This is Mark, Sean. If you look at -- we have a graphic the slide deck about the overlap for major graphic standpoint. And to get somewhat deeper in the weeds, our most efficient drives tend to be in the Midwest, closer to where our re-refinery is. And if you look at where their footprint is and -- I mean, we are inefficient as a whole, but there's less efficient routes in the Southeast and a lot of the footprint where FCC routes are stronger or exist. So, the degree to which we bump up against them even on a macro level, if you really look at where at the two companies' highest density routes are, they are in different locations. So that lessens the direct impact.

That's all very helpful. And then from a logic standpoint, when you think about the combined entity being able to have the power that -- would you, in theory, be able to get incrementally a -- maybe better progress in terms of the pay for oil in those markets? Or is that not necessarily something that you'd be able to expect or work toward?

There is different market forces here depending on the different areas. But the biggest issue we've had a challenge in our oil collection part of the oil business is we have rather new routes and customer relationships. It takes a bit of time. It's pretty hard to get a new customer and then try to optimize as you -- at the end of the day, we are providing a service even if we are paying for it.

So we like the transaction because it gives us more volume where we can get the kind of margin that is needed. And if we lose volume, we have enough volume to satisfy our needs and supply into the plant. That's really one aspect -- our aspect we like about FCC is the rollup. Their own history is a rollup of businesses that have been around for a very, very long time.

And so, you have that service -- direct customer relation that is pretty solid and people are more loyal to long-term route people. And between that and our ability to manage the branch network, I think we can optimize our routes and run an efficient oil collection at the really lowest cost -- overall cost for the industry.

That's great. Final question here, really more specific to the quarter, two parts to this. So number one, great progress in terms of the margins within that oil business there. I'm assuming that due to the pricing pressure we saw that really materializing for the back half of the quarter and we might see a little bit more pressure on margins this next quarter. Yes or no?

And then part B to that, there certainly have been some substitute markets for the used oil that you bring in that's kind of kept pressure on prices paid in the past. Is that not a dynamic that you are seeing much of today? And can you provide any color around that? Thanks.

Well, we've entered this fourth quarter, the end of the third quarter with a reduction of price -- of the price of crude oil has affected all oil products. And in the past, we were talking about the lube oil capacity, new capacity in the United States and how that affects the price of lube oil, and the spread between lube oil -- crude and lube oil.

Yes, and I was getting at the lube oil pricing that it had dropped to.

Yes, the lube oil prices have dropped. But then, the big factor here recently -- and we are living it through this quarter -- is the reduction of the price of crude that is in turn affecting the price of lube oil, rather than excess capacity or additional capacities from the fairground grassroots blue plan. And so our plan is to, as we said earlier, is to reduce the pay for oil. And with FCC being in the business of fuel, it gives us a lot more flexibility in moving stuff down and to reflect the impact of the reduction of the price of crude and crude oil.

Okay, so it sounds like net-net we are going to be able to just finance the offsets based on taking advantage of the crude oil pricing on the used oil regardless of the price for re-refining (multiple speakers)

Our target -- our plan and our target is, as the price of lube oil and crude comes down, is that we get the relief from paying less to the customers.

I'd add, there is sort of a time horizon issue here, because if crude price takes a sudden and dramatic drop, we know that we cannot -- even with our good systems we don't instantaneously change what we pay for oil. So there's some period of several weeks when we are working to adjust our street pricing or pay for oil, and we suffer deteriorating margins. It's not very long-term with the systems we put in place, but that's one phenomenon.

The other thing is, our long-term goal is to get our margins restored to where we want them to be, and so we get that pricing back if we do our job right, so that we are back to normal. But there can be an inventory effect, typically, as well. And that's a onetime charge. We don't do anything to try and hedge that. We view it as sort of an acceptable business risk. But obviously, for you and your peers who are trying to forecast our financial results, that's something you need to take into account when prices drop significantly.

Great. Thanks for all the color.

Kevin Steinke, Barrington Research.

I was hoping you could give us maybe an approximate percentage breakdown of FCC's revenue sources in terms of the used oil collection and recycling versus the other various environmental services that they offer.

Yes, no problem. We really look at it in the following manner. About 2/3 of the revenue and activity is from the used oil collection and processing that -- the light processing they do, and resale into that recycled fuel oil market. And then there's a number of businesses that add to that, that would traditionally be categorized from a Heritage-Crystal Clean standpoint in our environmental services segment. And that would represent basically the other 1/3 of the revenue.

Okay, great, that's helpful. And I think earlier, Joe, you might've said earlier in the call that you may still look to buy in some used oil from third parties, even though you have this additional collection capacity now. Is that correct?

Yes. And before this acquisition, and we've shared that with you, we have been historically buying volume in Indianapolis from collectors. And they are mainly Midwest sources, but we occasionally have an opportunity to get stuff from other markets if the price is right. And we will continue to do that, other than -- with this transaction, we are pretty independent as far as supply.

And for example, part of FCC, there is some volume in New Orleans, being collected in New Orleans. Economically there's -- it wouldn't make much sense for us to close the tap, and somebody provides it in Chicago at prices that we are happy with, and move the material from New Orleans when we can market it locally. Now, some other markets are going to be different. But in any case, this is something that varies depending on -- we are trying to optimize or minimize the cost of our raw materials, wherever it is.

It's a straightforward exercise or decision at any point in time. If we have somebody offering us used oil at our re-refinery at attractive prices and we can leave other volume that we collected near to fuel customers in the Southeast there, and save on the combined transportation and cost of feedstock then, we make that decision.

Previous to this deal, we would've said that we couldn't really -- we had to pay more to the suppliers delivering to the Indianapolis re-refinery or that they had more leverage with us, because if we didn't have their oil we had to factor in we are running the plant at a reduced rate, and that's expensive. We don't have that threat anymore. We can run the plant with oil from third-party suppliers or by shipping it in from other locations with some flexibility. So, maybe there is a shift in the balance of that equation.

But we still think keeping kind of all those options open to us as we move forward is the right thing to do. And we think that it's been successful for us so far and hasn't caused us any significant difficulties to be operating and working with the select third-party suppliers that we have. We're not out shopping and affecting the market in some dramatic way where we are contacting people day in and day out looking for used oil supply. It's just a handful of people that we have developed good relationships with, that we think have been good suppliers for us.

Okay, that makes more sense now. It's just kind of what represents the best economic decision at that time in terms of whether to buy in from third parties. But I guess, over the longer term, is still the goal to feed your re-refinery close to 100% from internal collection?

Well, I would tell you, the way we run the business, we very much like being oversupplied with feedstock relative to our re-refining capacity. The more oversupply we have within reason, the more flexibility we feel we have to respond to changing market prices and conditions, to be aggressive on price and to sometimes take the risk of losing volume in a market or the risk of losing a big account because they maybe don't like our price quote. That gives us more leverage and we worry less about running dry of supply to the plant. So we always like it for that reason, just in terms of the way that we operate the business day to day.

As a strategic matter, owning used oil collection trucks and routes Joe likes to characterize as something like drilling or buying an oil well. We have a supply of feedstock now, and to the extent that we have some surplus, when market conditions are superior -- and that we expect will happen at some future date -- that allows us the flexibility to think about planning, designing, or adding to capacity for additional re-refining, if that's where market conditions are steering the used oil to go.

So, we have no problem with the philosophy or thought process that we would remain significantly oversupplied with feedstock for an extended period. Then the question becomes -- can we get rid of that surplus volume which gives us all this flexibility at prices that are attractive? And again, the price of being attractive is an issue of margin or spread.

If the finished product markets, whether it's fuel oil, DGO, or lube oil, aren't at a price that's good, then we need to adjust what we pay for the oil and reduce it, and make the margins attractive. And we can afford to do that if we are oversupplied, because the risk of some volume loss isn't a big negative.

All right, great, thanks; very helpful. Mark, I think in the press release you said that you expect the FCC transaction to be accretive in fiscal 2015. And just wondering where that accretion comes from; is that mostly from the costs synergies you expect to achieve?

Yes.

Okay perfect. Let's see. In terms of integration costs, how should we be thinking about those over the next couple of years?

Well, you know, the integration we hope -- we'll refine our plan over the next several weeks and we have a plan, but we just need to refine it and get even that much more familiar with the assets, the resources, how we are going to allocate them. But we have a pretty aggressive plan and most of the cost, as far as once we make the decisions -- a lot of the costs are involved in severance and other things like that.

So we think from a time horizon standpoint we'll incur most of these costs relatively quickly. And year one, if you kind of set the calendar from yesterday or today as the first full day, I guess, we expect -- I think as we said in the slide about -- gross about $14 million in year one synergies. And there will be close to $6 million of costs there and it will all be, we estimate, in the first year. So, net-net we'll have roughly [8], we think, positive impact. And then going forward will get up to that $20 million figure.

And if I remember, Mark, the cost to achieve is probably planned primarily in the first half of the year.

Definitely, yes.

There is not so much in the second half as the first year after acquisition.

Exactly right.

Okay great, so it will be accretive next year, even including those integration costs.

That's true.

Okay great. Well, thanks for taking my questions.

(Operator Instructions) Michael Hoffman, Stifel.

Thank you very much and congratulations on this deal. I'm glad it's finally getting done. So believe it or not, I'd like to talk about the legacy company.

You put in the 10-Q that you had unscheduled downtime at the beginning of the quarter. The hydrotreater was off-line. How do we think about legacy company performance? And sort of if I take the $0.13, divide it by 12, multiply it by 17, am I getting that number? Or am I going to be backed off that number because of this hydrotreater being down?

Well, the hydrotreater -- just to clarify, and then I'll let Mark get into the specific number, we had planned a shutdown during the quarter and we had downtime that was -- this is now in the fourth quarter, and the downtime has been really extended because of the situation at the plant. And so we've advanced the schedule. There's going to be an impact compared to our plan, but we're going to work hard -- of course we are still early in the quarter -- to try to catch up on the production rate throughout the quarter.

We have ground to make up. We don't have a great feel right now for the actual total impact. But the downtime alone is going to be, on a per-share basis, a negative impact for at least a couple of cents we would estimate at this point.

Okay. And it's the right way to think about it is take $0.13, divide it by 12, multiply by 17 and start with that number.

If you're trying to do a steady-state, and you know there's a lot of seasonality in our business so -- but it's not a bad way to look at it.

Okay. And then how quickly did you clear the inventory off of the spread compression? Was that done in two weeks? Or did we have four weeks of that?

Which spread --?

You mean this is -- well, if the commodity drops, you're sitting on inventory, you're going to get some spread compression.

Yes, we usually have a little more than a period's worth of inventory, a little less than two, so --

So that's four weeks.

Well, in between four and eight, but more than four.

Okay, okay. And then when you say the deal is going to be accretive, that's not including the $6 million in costs. It's -- net of the costs, it's accretive.

It's net, yes.

And then, when you think about the collection run rate of FCC for like the last 90 days, or the -- what would be your third quarter, how many gallons were they collecting on an annualized basis in that sort of last 90 days in used motor oil?

It has been pretty steady.

So you think it's in that 50 million, 54 million number?

That's right.

Okay, so how many of those gallons are under some type of a structural contract where you're not going to be able to impact the PFO quickly?

I would say we haven't seen all of the numbers, but it's going to be almost half and half. The other half is kind of an open market. The other half is tied into petroleum formula and so (multiple speakers) -- an index.

And so, as the price of residual fuel drops and crude drops, that affects about half and the other half is -- doesn't index. And so, our view here is that all of the volume, we have flexibility with all of the volume, some of the formula, and that will bring down the pay for oil. And the other one is our own offer to the generators.

Okay, and then when I look at the March comment that 2/3 of the revenues were related to sale of the UMO, how much of that 2/3 becomes a cost of goods sold and no longer is a revenue, actually, because you are internalizing it?

You know, Greg mentioned, and Joe and Greg can chime in, but this will be a fluid situation, not just the next couple of months but on a continual basis. So we've put in various scenarios in our forecast model. It's certainly a percentage of that. But I don't know that we have enough confidence in what we've put together to discuss the future (multiple speakers)

Well, I can -- Mark, I can answer this. Initially, the refinery is running at a 65 million annualized capacity, and initially we said a little bit earlier our plan is to continue to get third-party suppliers at the refinery. So, we don't see movement into the refinery. If we did anything we would bring in volume in from the closer branches and release equivalent volume into other branches of FCC, like in New Orleans or Florida, where they have local markets. As time goes on, and we add more capacity at the re-refining plant, then some of it will go into cost of sales versus actual sales.

Okay. All right great, thank you very much for taking my calls.

Sean Hannan, Needham and Company.

Yes, actually my question was just asked. Thanks very much.

Thank you Sir. (Operator Instructions) Kevin Steinke, Barrington Research.

Thank you. Just wondering how we should think about the margins for both of your segments going forward post-transaction. Obviously you're generating really nice high margins on the environmental services side and oil business margins are improving. Any material changes to where those margins are now for your businesses?

I'll try and answer you as best as I can, Kevin. On the environmental services side, the historic HCC business should be able to sustain and potentially even slightly improve the margins in environmental services, if you exclude the acquisition. When we blend in the environmental services piece of the acquisition, as we said, prior to achieving synergies, the margins of the acquired business environmental service segment are much below what we've been running at Heritage-Crystal Clean and so the blending effect will ring down our reported margins on that segment for a while.

We don't really see why we can't aspire to get those margins back up into the ranges that Heritage-Crystal Clean has been doing historically. I think it's a little early for us to give you a definite answer on what the longer-term margin goals would be, because as we've said, some of the environmental service capabilities or programs that FCC Environmental has are different from things HCC has been operating or running. There is the field services, that wastewater treatment business and plants, and so we'll be reporting in the future about whether all the slices or segments will get us to the margins we want to be at.

But the broad picture is, environmental services should be resuming a good margin profile.

On the oil business side, some of the same thing will be happening where we'll be blending in the FCC business, but there, we don't have such strong margins for Heritage-Crystal Clean in the recent history. And so you probably won't, in the short term, see any dramatic change in the margins until we begin to achieve the synergies we've targeted. And as we accomplish those synergies, we should see the entire oil business segment start to improve its margins correspondingly.

Having said that, on the oil business it's obviously the more sensitive part of our business due to crude oil prices. And we've already talked on this call about how we are seeing a lot of volatility there and we are seeking to be aggressive about managing that in a way that diminishes the negative impact on our business of dropping oil prices. But, your guess is as good as ours. If oil prices continue to have more and significant oil price declines, we'll feel that at least on the inventory line and on the margin line until we are able to adjust our pay for oil prices.

And as another caller talked about, we do have some business that's a little bit slower to react than others based on contractual provisions and things like that. So, it's still not good in the short term for us to see oil price declines, but frankly, in the longer-term it doesn't bother us at all.

Great. Thanks for taking my follow-up question.

Thank you. Ladies and gentlemen, that does conclude our Q&A session for today. Thank you for your time and interest. We are grateful for your support and we invite you to join us on our next conference call. Everyone have a wonderful day.