Heritage-Crystal Clean, Inc
Q3 2014 Earnings Call Transcript

Published: 17 Oct 2014

[Operator:]

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). 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 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 a reconciliation of these non-GAAP financial measures to GAAP. For more information about our company, please visit our website at www.crystal-clean.com. With us today from the company are the 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.

[Joe Chalhoub:]

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 with 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, 2014. Year-to-date revenue increase 16% to $222 million compared to $191 million for the first three quarters of 2013. Revenue grew in both of our operating segment due to mainly organic growth and expansion. Our oil business segment experience robust revenue growth driven by increased throughput as 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 refinery and capacity had to offset some of the pressure on our margins due to the lower base oil prices. In addition, during the third quarter we continue to reduce the price we paid to generators for the 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 the used oil had decreased by more than $0.09 per gallon from the end of 2013. This experience, gives us confidence in the system, we have implemented the 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 purchased from generators. We believe that the price control system, we implemented roughly a year ago and which has served as well in the first three quarter, will enable us to do a better job of maintaining stable margins despite volatility of energy prices. In addition, we continue to see substantial improvement in our used oil collection route efficiency during the quarter. Enabling us to increase the average drawing most used oil collected per truck. We are encouraged by strong used oil collections volume, reduced used oil pay and improved throughput and efficiency at the refinery. These combined efforts enabled us to increase our operating margins in the oil business segment, during the third quarter compared to the same 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 operate 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.

[Mark DeVita:]

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 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 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 at 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 approximately $720,000 during the quarter compared to $635,000 in the third quarter, 1 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 margins 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 a result of increased leverage in the fixed cost 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 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 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 our oil business experienced a loss before corporate SG&A of $500,000 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 cost 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 compare to interest expense of $97,000 in the year ago quarter. We incurred a $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, 2013. An increase of $1.1 million of 84% year-to-date net income was $2.7 million compared to $1.9 million in the first three quarter 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 the presentation that you may wish to refer to. We are going to discuss FCC Environmental 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, Joe Chalhoub and he'll discuss the transaction rationale.

[Joe Chalhoub:]

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 benefit. First of all, we see an opportunity for significant operational cost synergy. Due to the extensive geographic overlap, between FCCE current service area in the South central, Southeast and eastern United States and Heritage-Crystal Clean -- Greg Ray, will discuss synergy opportunities in a few minutes. We also added FCCE, 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 service traditional HCCI's 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 account. 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 fee. In addition, FCCE is an asset rich business. The organization was created years ago, as the roll up of multiple predecessor company. In the used oil and the environmental business. Consequently, if now on strategically important site, treatment facilities and 10 farms [ph] in many local market. For example, FCCE has significant processing capabilities for vacuum services and oil waste. We can now take advantage of these capabilities to serve our combined organization. The Parent of FCCE acquired this business from seaman [ph] 2008 for $182.5 million and we feel 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 three main outlets for used oil. Re-refining to produce lube oil and distillation to produce vacuum gas oil. With this transaction HCCI has broad capability 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 acquired business in more details, to also discuss expected synergies.

[Greg Ray:]

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 [indiscernible]. 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, a 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 slide available on our website. We describe FCCE's service capabilities and some details on Pages 6 through 10. FCCE's service offerings are complimentary to ours and include used oil collection and recycling, oily water disposals, 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 transactional 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 increased our operating flexibility by enabling us to process used oil for sale, industrial fuel. FCCE also collects and drew a significant volume of oily water and waste water. Some of this is collected on FCCE trucks, with their programs that are comparable to Heritage-Crystal Clean's vacuum service offer. However, FCCE has the ability to process the collectability 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 now 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 oil service provider of parts cleaning services in the United States. And finally, FCC Environmental has engaged in used antifreeze collection and recycling. Their current antifreeze recycling program is similar in magnitude to Crystal Clean Zone program. However, FCCE has excess recycling capacity that we can use to grow this line of business. You can see, FCC Environmental current package of service offering is complimentary 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 complimentary service offerings. We have identified $20 million of annual anticipated synergies. These synergy opportunities include streamlining oil collection, vacuum services and oily water collection rounds. 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 a 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 point, 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 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 the 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, utility, maintenance and logistics cost. 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 these synergies and approximately 20 million synergies per year, beginning in year two. Now Mark DeVita, will discuss the transaction consideration.

[Mark DeVita:]

Thanks, Greg. The consideration for the transaction is all cash, which is finance 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.

[Operator:]

Thank you, ladies and gentlemen. (Operator Instructions) our first question comes from Ryan Merkel – William Blair. Your line is now open.

[Ryan Merkel:]

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

[Joe Chalhoub:]

Yes, this is Joe here and I don't know we had a chance kind of understand the history of FCC Parent in Madrid, it's a large company their sales last year was $12 billion. They have been going into the construction and their business is environmental as well and they operate in many countries, this was large based in the United States, but pretty small as far as their overall business, didn't fit in with what as they're doing. They also have had the issues with the debt loan and have been going through a divesture program over the last year, year and a half. This is one of the businesses that they thought, it doesn't quite fit, the system.

[Ryan Merkel:]

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

[Joe Chalhoub:]

Yes, the purchase price was based on what, how we negotiated deal. We wanted for deal, where we handed up. Our justification, financial justification came in based on our ability to get the synergies that Greg has discussed and review that and plus, what they were looking for and happy, we were able to negotiate the acquisition.

[Ryan Merkel:]

Yes, it just seems like roughly four 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, working while you're trading. So I guess last question for me to $20 million of synergies is that all on the cost side or are you including revenue synergies in that as well?

[Greg Ray:]

That's substantial 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 a transaction the revenue side.

[Mark DeVita:]

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

[Ryan Merkel:]

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

[Operator:]

Thank you. Our next question comes from David Mandell of Robert W. Baird. Your line is now open.

[David Mandell:]

I was hoping, maybe you could help us understand relative profitability of all these segments with FCC. I assume to get to the breakeven EBITDA, you got some segments that are profitable and some not and the reason, I asked of that other than the assumption that fuel oil was not a great business in any case and I'm wondering, it is oily water is in a more comfortable business and if you talk about the antifreeze and the oil filters, etc. Just trying to understand, you know all the pieces here which ones today are profitable, which ones are to get us to this net zero.

[Joe Chalhoub:]

This is Joe here. When we analyze the business, I don't have the numbers in front of me, but I will tell you that most of the lines of businesses were weak and nothing is spared in one area or another, but there is a lot, infrastructure cost, the way the business is organized and product is moved from one area to another to go to the market and these additional cost today compared to where they were many years ago, when people would sell the used oil to local, to a market has affected the possibility of the business. And not, there is not enough density in parts cleaning for example compared to what we have, we don't have the tools, mainly of different parts cleaning devices or the chemistry for the business, something, we would definitely add to the manual and not in the phase that was, this one area, was really very weak. They're all led to the weak margin.

[David Mandell:]

Okay and then in terms of the collection capacity here, to round numbers. Let's say you will 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 excuse me, you don't have an [ph] overage let's say 20 million, 25 million gallons. Do you plan on just eliminating routes to get rid of that? again, to selling the fuel oil, I was under the impression that was not a great business to begin with or can you talk about business change at all, your view on potentially building another re-refinery?

[Joe Chalhoub:]

Well, we don't have any plans to build another re-refining facility as today's market condition, but the market condition is, today it's not only affecting re-refining affecting anybody in the used oil management service business. And we continue to have an interest in maximizing our capacity in Indianapolis and our next step being here is to realize these synergies and get efficiency, out of this acquisition and before we consider, any capacity. So I don't see anything in the short-term nor medium-term. Regarding the remaining routes, we won't eliminate routes as such because we have excess capacity. What we will do, we will get the overall combined routes at the efficiency level that we would like to keep and as a result, we will see a reduction of number of routes and a reduction of the cost of collecting the used oil. Remember, we also buy some used oil ourselves and 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 market place in the selection and also in the processing and sale of the product.

[Greg Ray:]

And I could add to that, I can appreciate from your question that it may and the surface seem like the transaction could be characterizes, when will end up with an oversupply of oil relative to our re-refining capacity, but we don't view it at that way at all. We view that, 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 gives us flexibility to operate, to flexibility to develop future growth strategies as market conditions change. And we think that, you know 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 involved to markets to be more aggressive for example on our pricing and be worried about the possible impact of some amount of volume loss that could impact our plant operation.

[David Mandell:]

Okay, thanks for that Greg and last question. You noted in the slight that, at the peak this business is running with a $15 million EBITDA. I'm wondering, if you can give us what the lowest level large and just roughly what were the conditions around that peak and trough profitability those two periods in time.

[Mark DeVita:]

Yes, I might need you to repeat that part of it? Dave, but in general this is been a business that you know always most recently has seen its trough at least, you know if you're going back to couple of years, I don't have all the numbers to go back 5, 10 years, but within the more near term, breakeven at EBITDA level and that, we mentioned it was running around that currently at least in 2014 in a PTM basis early on the year that is relatively the lower band so to speak, the lower part of the band. We referenced '13, I think is within the past couple of years. figured they've operated at and you wanted to know relative to that, you had some other part of your question, I missed?

[David Mandell:]

Yes, just finally what were the conditions that led to the peak levels versus the trough. Is it mainly, spreads or is there something else that drives the profitability of this business?

[Joe Chalhoub:]

Yes, we need even to go back to a bit further, the $3 million is arrived, recent, but we recall to industry information that their profitability within the last decade was up in the high teen, $50 million, $90 million and the difference over the years is A; it is the spread between the selling price and what they pay to those generators and also the change in industry for people that are in the fuel market, where in the past they could service the customers, collect the oil and sell it to local actual plant. A lot of these plants were converted to natural gas and now they have to transport to further business by [indiscernible], which at a cost and people didn't really get the margin, if 9% spread was the good number, it wasn't good anymore and larger spreads. We have been needed in this industry.

[Greg Ray:]

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 met and think are going to be able to help us. The company has struggled with respect to kind of 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 with the parent company in Madrid, has had severe financial challenges, which have caused them to constrain a capital available to the business to a very large degree and so that affects the planning's 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 up to the integration.

[David Mandell:]

All right, thanks very much.

[Operator:]

Thank you. Our next question comes from Sean Hannan of Needham & Company. Your line is now open.

[Sean Hannan:]

Yes, thanks for taking my question. Can you hear me?

[Joe Chalhoub:]

Yes, we can.

[Sean Hannan:]

Good morning, folk's congratulations on the quarter and the deal.

[Joe Chalhoub:]

Thank you.

[Sean Hannan:]

So on FCC, I believe so they have a re-refinery they're in Baltimore, correct?

[Joe Chalhoub:]

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

[Sean Hannan:]

Okay, but in terms of those plans. I mean, is that something that now becomes effectively tables and shelves. You know in perpetuity or how have you view the intentions for that re-refinery, what are some thoughts there? Thanks

[Joe Chalhoub:]

We have, we look at the Baltimore sight and the permits, they've put forward as an asset for us and we don't plan on the short-term to go ahead and bring the re-refining plant either in Baltimore anywhere else. It's in a good location on the East Coast, there is a lot of oil on the East Coast and, so we like that asset, but at this stage. We are going to be disciplined. We 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, as nicely profited.

[Sean Hannan:]

And so, in terms of, when you think about local markets for used oil collection, how will 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 procuring these oil.

[Joe Chalhoub:]

I didn't quite catch the back-end, how is their historical or how is their current situation? When you talk about pricing?

[Greg Ray:]

If you're asking about their role compared to us, historically. We certainly see them and have seen them 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 5% share of the US market and FCC had about 5% share. So we don't bump into each other at every account, every day. There is a little bit of differentiation in terms of the types of customers that we have focused on or service. I heard, it's Crystal Clean has tended a little bit towards the smaller side of the market, that's a little bit less price sensitive and FCC has tended slightly more towards larger customers and 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 their same periods of time. Does that answer your question?

[Mark DeVita:]

Well, in that case, this is Mark. Sean. If you look at, you know we had a graphic in the slides that's about the overlap from a geographic standpoint and to get somewhat deeper I believe, our most efficient routes tend to be in the Midwest, closer where our re-refinery is and if you look at, where their footprint is, I mean, we are in efficient as a whole, but there is less efficient routes in the South east and a lot of footprint where, FCC routes are stronger exist. So the degree to which we bump against them even on a micro level, if you really look, where of the two companies highest density routes are, they're in different locations. So that lessen the direct impact.

[Sean Hannan:]

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 maybe better progress in terms of the pay for oil, in those markets or is that not necessarily something that you be able to expect or work towards?

[Joe Chalhoub:]

There's difference to market force depending on the different areas, but the biggest issues. We've had a challenge in our oil collection, part of our business is, we have revenue routes and customer relationship, that's a bit refined because hardly there are new customer and then try to optimize, then they were preventing a service, even if we are paying for. So we like the transaction because it is the small volume, where we can get the kind of margin that's needed and if we lose volume, we have enough volume to satisfy our need in supply to the plant. I mean, that's really one aspect. Our aspect, we like about FCC is it's the roll up. Their own history, the roll up of businesses have been around for 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 is in that, and our ability to manage the branch network. I think we can optimize our routes and run an efficient oil collection at really low stats [ph] overall cost for the industry.

[Sean Hannan:]

That's great. Final question here, really more specific to the quarter, two-parts of this. 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 the quarter. when we might see a little bit more pressure on margins this next quarter, yes or no? And then, part B to that, their certainly have been some substitute markets for the used oil. You know that you bring in, that's kind of kept pressure on prices, paid in the past. Is that not a dynamic that you're seeing much off today and can you provide any color on that? thanks.

[Joe Chalhoub:]

Well, we've answered this first quarter, the end of the third quarter was a reduction of prices of crude oil, has affected oil product and in the past, we were talking about the lube oil capacity, new capacity in the United States, how that affects the price of lube oil and the spread between lube oil and crude and lube oil.

[Sean Hannan:]

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

[Joe Chalhoub:]

Yes, the lube oil prices has dropped, but then a big factor, recently and we are leading through this quarter is that, reduction of the price of crude that is in turn affecting the price of lube oil rather than excess capacity or additional capacity from the Chevron [ph] grassroots movement [ph] and so our plan is, as we said earlier is to reduce the pay for oil and with FCC, being in the business of fuel, gives a lot more flexibility in moving stuff down and to reflect the impact of the reduction of the price of lube and crude oil.

[Sean Hannan:]

Okay, so it sounds like net-net. You were going to be able to just find the offsets based on, taking advantage of the crude oil pricing on the used oil with [indiscernible] or you will find something.

[Joe Chalhoub:]

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

[Greg Ray:]

I'd add, there is a sort of time horizon issue because the 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 is some period of several weeks, when we are working to adjust our street price or pay for oil and we suffer deteriorated 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, where we want them to be and so we get that pricing back, if we do our job right. So that we're back to normal, but there can be an inventory effect typically as well, not the one time change. We don't do anything to try and hedge, we view it as a sort of acceptable business risk, but obviously for you and your peers who were trying to forecast our financial results that's something you need to take into account, when prices drop significantly.

[Sean Hannan:]

Great. Thanks for the color.

[Operator:]

Thank you. Our next question comes from Kevin Steinke of Barrington Research. Your line is now open.

[Kevin Steinke:]

Good morning. 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?

[Mark DeVita:]

Yes, no problem. We look at it, this in the following manner. About two-thirds of the revenue in activity is from the used oil collection and processing, that like processing, they do a resale into that recycle fuel market and then, there is a number of businesses, that add to that, that would traditionally be categorized from a hey, it's just a thing standpoint in our environmental services segment and that we represent basically the other fair to the revenue.

[Kevin Steinke:]

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

[Joe Chalhoub:]

Yes, you know before this acquisition and we have shared that with you. It is been historically buying volume in Indianapolis from collectors and 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, this transaction pretty independent as far as supply and for example out of FCC there is some volume in New Orleans being collected in New Orleans. Economically, there's – though, it doesn't make much sense for us to close this happened and somebody to provide in Chicago, prices that we're happy with and move the materials from New Orleans, when we can market it locally. Now some other markets are going to be different. In any case, this is something that varies depending on. You know we are trying to optimize, minimize the cost of our raw material, whatever it is.

[Greg Ray:]

And so straightforward excise our decision at any point in time, if we had somebody offering us used oil at our re-refinery at attractive prices then we can leave other volume that we collect that's near to fuel customers in the Southeast there and save on the combined transportation and cost of feed stock, we make that decision. Previous to this deal, we would have said that, we couldn't really, we have debate more to the suppliers entering through the Indianapolis re-refinery, if they had more leverage with us because if we didn't have their oil. We have to factor in, 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 as, its' the right thing to do and we think that it has been successful for us, so far. It hasn't caused us any significant difficulties to be operating and working with the select third-party suppliers that we have. We are not, we are 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 supplies, it's just a handful of people that, we've developed good relationships within, we think have been good suppliers for us.

[Kevin Steinke:]

Okay, so 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?

[Greg Ray:]

Well, I would tell you the way, we run the business. We very much like being over supplied with feedstock relative to our re-refining capacity. The moreover supply 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 is something like, you know growing 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. And so we have no problem with the philosophy or thought process, but we would remain significantly over supplied with feedstock for an extended period, then the question becomes can be get rid of that surplus volume, which gives us all this flexibility at prices that are attractive and again, the price at being attractive is an issue of margin or spread, if the finished product markets. Whether it's fuel oil, DGO [ph] or lube oil aren't at a price that's good, then we need to adjust what we paid for the oil and reduce it and make the margins attractive and we can afford to do that, if we're over supplied because the risk of some volume loss isn't a big negative.

[Kevin Steinke:]

Alright, great, thanks. Very helpful. Mark, I think well in the press release, you said that, you expect the FCC transaction to be accretive in fiscal 2015. I'm just wondering, where that accretion comes from is that mostly from the cost synergies you expect to achieve?

[Mark DeVita:]

Yes.

[Kevin Steinke:]

Okay. perfect. Let's see in terms of integration cost, how should we be think about those over the next couple of years?

[Mark DeVita:]

Well, you know the integration we hold, I mean, we'll refine our plan over the next several week. I mean, we had a plan, but we just need to refine it and get even that much more familiar with the asset, the resources, how we're going to allocate them, but we have a pretty aggressive plan and most of the cost, as far as once we make the decision. A lot of the cost are involved in, this severance and other things like that. So we think from a time horizon standpoint, what will incur most of these cost are relatively quickly and you know on a year one, if you kind of set the calendar from yesterday or today, is a fruitful day I guess. You know, we expect that I think we said in the slide about growth about $14 million in year one synergies and they'll be close to $6 million of cost there and it will all be in, we estimate in the first year. So net-net, we'll have roughly if we think positive impact and then going forward, we will get up to that $20 million figure.

[Greg Ray:]

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

[Mark DeVita:]

Definitely. Yes.

[Greg Ray:]

There is not so much, in the second half of the first year, if I'm correct, position.

[Mark DeVita:]

No, you're exactly, right.

[Kevin Steinke:]

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

[Mark DeVita:]

Yes, that's true.

[Kevin Steinke:]

Okay, great well. Thanks for taking my questions.

[Operator:]

Thank you. (Operator Instructions) Our next question comes from Michael Hoffman of Stifel. Your line is now open.

[Michael Hoffman:]

Hi, thank you very much and congratulations on this deal. I'm glad, it finally get done. So I believe, 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 [indiscernible] offline. How do we think about legacy company performance and so if I take the $0.13 divided by 12 multiply it by 17, am I getting that number or am I going to be back to offset number because of this [indiscernible] being done?

[Joe Chalhoub:]

The [indiscernible], I'll let Mark, get into the specific number. We had plan to shut down during the quarter and we had, downtime that was this is now in the first quarter and downtime has been, it really extended because of the situation of the plant and so we've advance the schedule. There is going to be an impact on first of all our plan, but we are going to work hard of course, we are still in the, early on the quarter to try catch up on the production rate, throughout the quarter.

[Mark DeVita:]

Again and we have ground to make up, there we don't have a great field right now for the actual total impact, but the downtime alone is going to be pretty sure, basis a negative impact for at least a couple sent to me, what estimated at this point.

[Michael Hoffman:]

Okay and it's a right way to think about it, just take 13 divide it by 12, multiply by 17 and start with that number.

[Mark DeVita:]

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

[Michael Hoffman:]

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 like four weeks to that?

[Mark DeVita:]

Which spread?

[Michael Hoffman:]

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

[Mark DeVita:]

Yes, we usually have a little more than a few years’ worth of inventory, a little less than two. So.

[Michael Hoffman:]

So that's four weeks?

[Mark DeVita:]

Well, in between four and eight and more of an four.

[Michael Hoffman:]

Okay and then, when you say the deal is going to be accretive that's not including the $6 million in cost, you know it's net of the cost, it's accretive?

[Mark DeVita:]

It's net, yes.

[Michael Hoffman:]

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

[Joe Chalhoub:]

That is been pretty steady.

[Michael Hoffman:]

So you're saying it's in that $50 million, $54 million number?

[Joe Chalhoub:]

That's right.

[Michael Hoffman:]

Okay, so and how many of those gallons are under some sort of restructure contract, we're not going to be able to impact the PSO quickly?

[Joe Chalhoub:]

I would say, we haven't seen all of the numbers, but it's going to be almost half and half, the half is kind of an open market. Other half is tied into petrol and formula and so.

[Greg Ray:]

In that.

[Joe Chalhoub:]

And in that and so as the price of fuel drops and crude drops then it has, both affect about a half isn't in that. so our view is that, all of the volume, we have flexibility with all of the volume, some of the former them and that will bring down the pay for oil and other one, it's our own offer to those generate.

[Michael Hoffman:]

Okay and then, why look at March comment, the two-thirds of revenues for related to sale of BMO [ph], how much of that two-thirds becomes cost of goods sold and no longer is a revenue actually because it's your internal licensing.

[Mark DeVita:]

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

[Joe Chalhoub:]

Mark, I can answer this. To make sure, the refinery is running at $65 million, annualized, but 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 close of branches and release equivalent volume into other branches of FCC like in New Orleans or Florida, where they have local market. As time goes on and we add more capacity as the refinery can, then some of it we're going to cost of sales versus extra sale.

[Michael Hoffman:]

Okay, alright. Great, thank you very much for taking my calls.

[Operator:]

Thank you. Our next question is a follow-up from Sean Hannan of Needham & Company. Your line is now open.

[Sean Hannan:]

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

[Operator:]

Thank you, sir. (Operator Instructions) our next question is a follow-up from Kevin Steinke of Barrington Research. Your line is now open.

[Kevin Steinke:]

Yes, thank you. Just wondering. How we should think about the margins for both of your segments going forward post transaction? I mean, 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?

[Greg Ray:]

I will and answer you as best I can, Kevin. In the environmental services side, the historic HCC business should be able to sustain and potentially even slightly improve the margins in our environmental services. If you'll exclude that acquisition, when we blend in the environmental services piece of the acquisition, as we've 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 bring 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 historically. I think it's a little early for us to give you a definite answer on what the longer term margins 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, as the field services, there's the waste water treatment business and plants. And so, we'll be reporting in the future about whether all those slices or segments will get us to the margins, we want to be at, but the broad picture is, environmental services should be resuming good margin profile. In 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 all 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. The crude oil price is and we already talked on this call about, that 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 you know your guess is good as ours, if oil prices continue to have insignificant oil price declines, we will 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, then others based on contractual provisions and things like that. so you know 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.

[Kevin Steinke:]

Great, well thanks for taking my follow-up question.

[Operator:]

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. We invite you to join us on our next conference call. Everyone, have a wonderful day.