Heritage-Crystal Clean, Inc
Q4 2014 Earnings Call Transcript

Published: 17 Mar 2015

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Heritage-Crystal Clean, Incorporated Fourth Quarter 2014 Earnings Conference Call. Today's call is being recorded. At this time, all callers' microphones are muted, and you will have an opportunity at the end of the presentation to ask questions. Instructions will be provided at that time for you to queue up your question. We ask that all callers limit themselves to one question or two questions. Some of the comments we will make today are forward-looking. Generally, the words aim, anticipate, believe, could, estimate, expect, intend, may, plan, project, should, will be, will continue, will likely result, would, and similar expressions identify forward-looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward-looking statements. These risks and uncertainties include a variety of factors, some of which are beyond our control. These forward-looking statements speak as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. Please refer to our SEC filings, including our Annual Report on Form 10-K, as well as our earnings release posted on our website for a more detailed description of the risk factors that may affect our results. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website. Also, please note that certain financial measures we may use on this call such as earnings before interest, taxes, depreciation or amortization or EBITDA are non-GAAP measures. Please see our website for reconciliations of these non-GAAP financial measures to GAAP. For more information about our company, please visit our website at www.crystal-clean.com. With us today from the company are the Founder, President and Chief Executive Officer, Mr. Joseph Chalhoub; the Chief Operating Officer, Mr. Greg Ray; and the Chief Financial Officer, Mr. Mark DeVita. At this time, I would like to turn the call over to Joe Chalhoub. Please go ahead, sir.

[Joseph Chalhoub:]

Thank you. I would like to welcome everyone to our conference call. Last night, we issued our fourth quarter 2014 press release and posted it on the Investor Relations page of our website for your review. This morning, we will discuss the financial results and our operations for the fourth quarter and for fiscal 2014 and we will respond to questions you may have relating to our business. Our fourth quarter revenues were $117.1 million compared to $92 million in the fourth quarter of 2013. Fiscal 2014 revenues increased 19.7% to $339.1 million compared to $283.1 million for 2013. Revenues in fiscal 2014 increased from organic growth in the Environmental Services segment and from our acquisition of FCC Environmental, which we would be referring to as FCCE and from expansion at our re-refinery. In the Environmental Services segment, we experienced solid same-branch sales growth of 13.7% for the fourth quarter and 10.9% for fiscal 2014. We are especially pleased with our double digit same-branch sales growth for the year, given the extreme weather conditions that negatively impacted our first quarter results in this segment. Although, we gradually increased profitability in our Oil Business segment during the second quarter and third quarter of 2014, in part due to our leading initiative to reduce Street prices paid for used oil, in the fourth quarter, the price of crude oil declined sharply, which negatively impacted the pricing of our product, our oil product, and created a challenging environment for us and for the entire industry. The decrease in commodity pricing put pressure on the market price of our base oil product, which negatively impacted revenues in the Oil Business segment in the fourth quarter, despite operating the re-refinery at 95% of its nameplate capacity throughout the quarter. During fiscal 2014, production of lubricating base oil increased by 5.9 million gallons or 19% increase compared to fiscal 2013. In response to these market conditions, we aggressively reduced the price we paid to generators for their used oil. By the end of the fourth quarter of 2014, we had lowered the average price paid to generators by approximately $0.65 per gallon compared to the end of the third quarter of 2014, and by approximately $0.71 per gallon compared to the end of fiscal 2013. These figures include the impact of reducing the price paid to legacy FCCE customers who were being paid more than $0.10 per gallon more than HCC legacy generators at the time of the acquisition. During a short period of time, our team worked diligently to significantly reduce what we paid generators for used oil, which largely mitigated the impact of falling oil product prices and the spread between the price of oil products we sell and the cost of the used oil we collect. While we did a great job of reducing our PFO, the accounting requirement to write down the value of our oil inventory had a significant negative impact on our profitability for the fourth quarter and for the full year. On October 16, we closed on our acquisition of FCCE. Throughout the fourth quarter, management was focused on reviewing FCCE sites and taking significant steps to begin integrating the two legacy businesses. During fiscal 2015, we will continue the integration process and begin to realize synergies. When we announced the FCCE acquisition, we estimated that we would eventually realize approximately $20 million in synergies per year. We believe that we remain on track to achieve this level of synergies. Moving into the first quarter of fiscal 2015, we are continuing our review of the FCCE Environmental Services businesses to make the changes required to achieve the operating margins that we have historically enjoyed at Heritage-Crystal Clean in this segment. We look forward to revenue growth in our Environmental Services segment from the acquisition. And as we are able to sell our traditional HCC services like parts cleaning, vacuum services, and drum waste management to legacy FCCE customers. We will be operating out of 84 branches after the integration of the legacy HCC and FCCE businesses has concluded. In the Oil Business, our objectives for fiscal 2015 remain the same. First, we are striving to maintain the spread between the price paid or charge assessed to generators to collect their used oil and the price we receive for our product. However, this is a significant challenge as we work to balance our goals with market conditions. Second, we are focused on the integration of the legacy HCC and FCCE businesses, which will allow us to increase the productivity of our used oil collection routes. Third, we aim to operate our re-refinery at capacity. We maintain our plan to expand the re-refinery capacity from the current 65 million gallons per year of feed to 75 million gallons per year of feed. But we are deferring the completion of this expansion until the fourth quarter of 2015 to enable us to focus on the acquisition integration in the near-term. Overall, I think we did a good job in 2014 to manage our business in a turbulent environment and to complete a large and strategically important acquisition. In the coming year, we would be working diligently to convert these actions into bottom line improvement. Our Chief Financial Officer, Mr. Mark DeVita, will now further discuss the financial results, and then we will open the call for your questions.

[Mark DeVita:]

Thank you, Joe, and good morning, everyone. In the Environmental Services segment, revenues grew $17.4 million or 34.8% in the fourth quarter compared to the fourth quarter of 2013, and $32.4 million or 20.6% for the year compared to 2013. Of the 74 branches that were in operation throughout both the fourth quarter of 2014 and 2013, the growth in same-branch revenues was 18.4%. However, the fourth quarter of 2014 consisted of 17 weeks compared to 16 weeks in the fourth quarter of 2013. If we exclude the impact of that extra week of operations, same-branch revenues increased 13.7% for the fourth quarter. Also, excluding that extra week, same-branch revenues in our Environmental Services segment increased 10.9% for the full year. These revenue growth figures for same-branch sales exclude revenues generated as a result of the FCCE acquisition. Our average revenue per working day in the Environmental Services segment increased to approximately $840,000 compared to $720,000 in the third quarter of 2014 and compared to $650,000 in the fourth quarter one year ago. In the Oil Business segment, revenues for the fourth quarter were up 18.4% from $42 million in the fourth quarter of fiscal 2013 to $49.7 million due in large part to the contribution of revenues of recycled fuel oil or RFO from the FCCE acquisition. For fiscal 2014, Oil Business segment revenues were up $23.5 million over fiscal 2013 as higher production volumes at our re-refinery offset lower product prices. During the fourth quarter, our operating margin in the Environmental Services segment was 22.4% compared to 30.1% in the fourth quarter of 2013. The operating margin decreased compared to the prior year, mainly as a result of the impact of the acquisition of FCCE and also from increased disposals and from increased employee healthcare costs. Our operating margin in the Environmental Services segment decreased to 25.1% for fiscal 2014 compared to 26.6% in fiscal year 2013. In the fourth quarter, our Oil Business experienced a loss before corporate SG&A of $9.5 million. For fiscal 2014, the Oil Business experienced a loss before corporate SG&A of $10 million. As had been mentioned, during the year lower base oil selling prices negatively impacted our operating margin. In addition, we incurred a non-cash write-down of $6.1 million for inventory in the fourth quarter as commodity prices declined. Corporate SG&A was 17.3% of revenues, up significantly from 10.4% in the year ago quarter. For the year, SG&A was 13.5% of revenue, up considerably from the 10.7% in fiscal 2013. During the fourth quarter, we incurred $2.8 million in integration costs for FCCE which excluded severance obligations. We also incurred an additional $2.3 million in acquisition-related costs. We expect to incur approximately $3 million in additional costs during 2015 to finalize the integration. For the entire year, FCCE acquisition and integration costs were $7.4 million. In order to finance the acquisition of FCCE, we amended our credit facility and increased our term A loan by $62.1 million. We also drew approximately $12 million on our revolving loan to close the transaction. During the fourth quarter, we completed a follow-on equity offering of 3.6 million shares which raised about $33.4 million net of offering costs. The initial use of proceeds included the paydown of the revolving portion of our bank credit facility with the remainder available for general corporate purposes, which may include the expansion of our re-refinery. At the end of the quarter, we had $79.2 million of total debt and $21.6 million of cash on hand. We incurred $579,000 of interest expense for the fourth quarter of 2014 compared to interest expense of $107,000 in the year ago quarter. We incurred $689,000 of interest expense for fiscal 2014 compared to $417,000 of interest expense in fiscal 2013. For the fourth quarter, we experienced a net loss of $9.7 million compared to income of $2.6 million in the fourth quarter of 2013. As a reminder, our fourth quarter 2014 results included a write-down of our inventory value of $6.1 million due to the decline in oil prices, acquisition and integration costs of $5.1 million. Our loss per share for the quarter was $0.51 compared to basic earnings per share of $0.15 in the year ago quarter. For fiscal 2014, we experienced a net loss of $7 million compared to net income of $4.5 million in 2013. Our loss per share was $0.38 for the year compared to basic earnings per share of $0.25 in fiscal 2013. Thank you for your continuing interest in Heritage-Crystal Clean. At this time, I will turn control of the call over to our operator and she will advise you of the procedure to submit your questions.

[Operator:]

Thank you. Our first question comes from David Manthey with Robert W. Baird. Your line is open.

[David J. Manthey:]

Hi. Thank you. Good morning, guys.

[Mark DeVita:]

Hey, Dave.

[David J. Manthey:]

First off, I was wondering in the424B5 filing on page F10, you had given us 2015 net income and adjusted EBITDA guidance for 2015. I was just wondering if you would be willing to address that. I assume some of the things like interest expense, tax rate, D&A, et cetera. would remain the same. But in terms of the EBITDA that you're assuming that you start with and integration costs and so forth, any changes you'd like to mention there?

[Mark DeVita:]

Yes. So, overall, as we manage the spread and assuming we execute the way we want, we see EBITDA being in the same range that we have there. Obviously, it will be at a lower revenue figure, and most of that would just be impact of crude. So, exactly where that will be, I don't know. We didn't break down our revenue estimate. It's not in the one table that you're referring to, but above that, we had revenue figures for the year, and I think we had between $405 million and $444 million in annual revenue. We would estimate that that would be closer to $360 million to $400 million in revenue, and that decline would be from revenue in the Oil Business segment. So, we would think this still translates, if we manage the spread properly, to the same EBITDA. We would also – on the adjusted EBITDA figure, there was two line items there. We'd have no change in the non-cash comp, but on the acquisition and integration costs with FCC Environmental, we would think that would be a couple million dollars lower than what it is listed there. So, the adjusted EBITDA figure would have to be adjusted for that.

[David J. Manthey:]

Okay.

[Mark DeVita:]

Because, it was basically for that last item, Dave, we've pushed and recognized – you can see with – we thought we're going to recognize $3.1 million in acquisition and integration costs, and we recognized $5.1 million actual. So, we basically – which we think is a good thing. We're moving at least certain aspects of the integration. We moved it up a little bit and recognized some of those costs that we thought we were going to have in Q1 in Q4. Does that make sense?

[David J. Manthey:]

Got it. That's very helpful. And in terms of your PFO right now, you said that there was a $0.65 drop from third quarter to fourth quarter. That's a really good figure. I'm wondering you just...

[Mark DeVita:]

Yes, if I can add that in – I'm sorry to interrupt you, Dave.

[David J. Manthey:]

Sure.

[Mark DeVita:]

That's not a pure weighted average. That's not a day measurement either, but it's from the end of the quarter to the end of the quarter.

[David J. Manthey:]

Yes.

[Mark DeVita:]

Okay. I just want to make sure you're clear for your modeling.

[David J. Manthey:]

Yes, got it. And then, so related to that, I'm wondering if I look at base oil prices relative to that, and think about the movement of both of those, I'm wondering if your spreads actually weren't okay or relatively constant in the fourth quarter. And then, a related question here is we're looking ahead, to your point, Mark, when you said that was a point estimate at the end of the quarter. I would assume that that number is even lower between then and here, mid-March. Could you give us any light into that movement?

[Mark DeVita:]

Well, I'll answer your couple of questions and Greg and Joe can chime in if they want. To go in reverse order, it is lower. We have made progress since then on the PFO, where we're at now versus that point estimate. And I forgot, what was the first part of your question then?

[Joseph Chalhoub:]

Spread...

[David J. Manthey:]

Well, in terms of the spread...

[Mark DeVita:]

Oh, the spread, yes. I think the last 2/3 of the quarter we did a good job of maintaining that. Any time you see movement in crude oil, a lot of the times there is a general lag in how that translates to used oil price on the Street and typically you're not going to move immediately to move that down. So if there was any negative impact in the fourth quarter on managing that, it was in that time where we're initially assessing because remember, our fourth quarter started at the beginning of September, as we were initially assessing if this was just a little bit of volatility and going to bounce back up or if we needed to take the more drastic action which obviously we took to get the results for the quarter. But it would be more at the beginning of the quarter where we suffered a little deterioration. I don't know if Joe or Greg want to add anything to that.

[Gregory Ray:]

I guess, I just would add that of the two parts of our Oil Business, the legacy Heritage-Crystal Clean and the FCCE business that we acquired, Heritage-Crystal Clean had more tools and systems in place to enable prompt reaction to changing Street price and market conditions, and we've been working with those tools in the prior year after we developed them. And so that side of our business was a little bit more agile. And it was a big challenge for us, I'd say, a huge challenge for us, essentially, as we acquired this company to jump in and have to figure out how to get their systems to be more reactive and give us the leverage we needed to change pricing in an organization that hadn't done that for a long time. And so we went as fast as we could, and I think we did a pretty good job of it. But it was a very challenging and difficult environment where we were trying to both integrate the two businesses and figure out how we were going to put these companies together, and at the same time, deal with an extremely volatile pricing environment and be sort of renegotiating with tens of thousands of customers on the fly. So...

[David J. Manthey:]

Right.

[Gregory Ray:]

...probably didn't keep – on a day-to-day basis, we didn't have the same kind of maintenance of our margins on the FCC side that we would have liked over the first few weeks, but it didn't last for very long before we got our arms around it.

[David J. Manthey:]

Yes. Okay. Thank you. And if I can just sneak one more in here, Mark. I'm wondering the charges as we look at them, I'm wondering which ones are allocated to the segment that you reported and which one is going to the corporate overhead side? If you think about write-down of inventory, acquisition integration, cost of the shutdown and then non-cash comp, could you just give me an idea of where those reside so I can work them out in my model?

[Mark DeVita:]

Yes. Inventory and the shutdown would all be in Oil Business. Non-cash comp and the other acquisition costs, most of them would be in SG&A or unallocated, some of them. We're commandeering some of our personnel, field base, that are sometimes allocated to some of the businesses, and they might not be all in SG&A, but a vast majority of that acquisition and integration costs would not be segment-specific.

[David J. Manthey:]

Okay. Perfect. All right, thank you very much, guys.

[Operator:]

Our next question comes from David Mandell with William Blair. Your line is open.

[David M. Mandell:]

Good morning.

[Joseph Chalhoub:]

Good morning.

[Mark DeVita:]

Good morning, Dave.

[David M. Mandell:]

On the Environmental Services side of the business, what would the operating margin have been for just the core Heritage business in the quarter?

[Mark DeVita:]

We don't have a pure number. Believe me, I thought long and hard about this, and we have figures, as we've integrated here, to be completely transparent, we started to transition some of the activity into the legacy HCC systems, and that information would be reported through the, to get technical, the general ledger systems and whatnot of HCC, the legacy HCC. And the same would be true on the FCC side. So, as we transition things over, there would be – and there wasn't much of this, but there was some of this in Q4. There would still be – most of the legacy figures would be accumulated and recorded up through the legacy FCCE general ledger and accounting systems. But to say that the results from either of those systems really represent the legacy companies would not be accurate. So, it's really tough for us at this time to give you a number that is completely representative of what the old business was.

[David M. Mandell:]

All right. And that applies to the sales also?

[Mark DeVita:]

Yes.

[David M. Mandell:]

Okay. And then, Joe, you said you were pushing back the timeline to add the extra $10 million of capacity to the re-refinery to the fourth quarter. What was the prior timeline?

[Mark DeVita:]

That – you want to go ahead?

[Joseph Chalhoub:]

No, go ahead...

[Mark DeVita:]

The prior timeline at least is it was reflected in our thoughts and our planning was going to be the beginning of the second half, so beginning of the third quarter. So you're roughly five periods or so depending on when it gets done.

[David M. Mandell:]

All right. Thank you for taking my questions.

[Joseph Chalhoub:]

Thank you, David.

[Operator:]

Our next question comes from Sean Hannan with Needham & Company. Your line is open.

[Sean K. Hannan:]

Yes. Thanks. Good morning and thanks for taking my question.

[Mark DeVita:]

Good morning.

[Sean K. Hannan:]

One thing I wanted to see if I could just clarify and I think maybe some prior questions may have gotten at this a little bit. But if I were to consider how to think about what was normalized for this fourth quarter report, if I exclude all the write-downs and unique items, tax at around 42.5%. So I think it's been relatively close what you've done in the past. I come up with a $0.16 loss and then if I think about pulling out that inventory write-down, and then the shutdown as well if I look at your Oil Business, that actually was a negative 6.3% margin. Is that appropriate to think about the results in that manner?

[Mark DeVita:]

The last part, I agree with. What was – can you repeat the first part, Sean?

[Sean K. Hannan:]

Yes. So the first part, just looking at a more normalized earnings, the write-downs, unique items, taxing that at about 42.5%. I came up with about a $0.16 loss. And we could follow up offline but...

[Mark DeVita:]

Yes, the tax rate is going to be a little different, there are some items that are not deductible when you're in a loss situation, and items that are, so our tax rate is probably going to be closer to 35%. So, that is one thing you'd want to think about if you're getting down to the actual net income line.

[Sean K. Hannan:]

Okay. Great, all right. And then in terms of the pricing that you're seeing on the oil side today, that's dipped a little further since the December quarter. Can you give us a sense of how much more that has dipped?

[Joseph Chalhoub:]

Well, at the end of last year, when we look at the first part, so this is January, the price of oil dipped further, and then went up close to $10 a barrel, and even the other thing that we track very closely because the refined product track more Brent crude than WTI, and then we have seen the spread increase between WTI and Brent. But then over the last week or so, crude start coming down again. So, it's pretty turbulent at this stage, what we're seeing. And so we'll continue to keep a close watch at the spread between the selling price of lube and what we pay to generators.

[Sean K. Hannan:]

Okay. Yes. Thank you. And part of – and I may not have been as clear as I intended, part of what I was trying to get a sense of in terms of the pricing that you're getting on base lube, how much has that pricing come down for you? Is there a sense we can get of what's – the degree of what's been incremental since exiting the fourth quarter?

[Joseph Chalhoub:]

Yes. The lube price hasn't changed much in the last several weeks. The only thing that has happened, we've seen a bit more firmness here as we're coming out of winter month. And also Chevron has announced a price increase of $0.20 a gallon to reflect, some of it, to reflect the increase of the price of crude that happened at $10 a barrel that I mentioned earlier. And yet Shell, which is another large player, has not followed the increase that Chevron announced. So, we're watching this very carefully. But we've seen a little bit of firmness in our selling price as a result of the Chevron announcement, but not obviously, not the $0.20 a gallon.

[Sean K. Hannan:]

Right. Okay. And then on the cost side in terms of the feedstock, is there more of a sense we could get in terms of what you're paying now on a blended basis for the used oil? I appreciate you came down $0.65 through the course of the year. I just want to get a sense of where you might be today if there's a way to get a sense of that. And then is there any further consideration of going more to a zero-pay model, and if not, what would it take in order for you to consider that? Thanks.

[Joseph Chalhoub:]

Well, we haven't in the past, and we probably won't continue with this, we haven't provided the – where we are on the pricing. The same thing with the lube oil, but I can give you a little bit of color. In many of our accounts, we are down pretty close to breakeven. We have people that we charge. We have services that we now charge, such as the oil filters, which were provided free by the vast majority of the people in the industry. We've implemented charges there and we are tightening these charges. So we've been relatively successful on the oil filters, for example, but we still have a long way to go. We have some charges for the oil that we collect for some of the smaller account. But at today's price of crude, and more important, at today's market condition, it's very difficult for us to go to a relatively strong charge for the oil we collect. That may come in time, especially if oil weakens further. We are on the margin between lube oil and what we pay for the oil. That margin is still not where we want it to be. It's not far. As we said earlier, we've reduced the price we pay for the oil significantly, but we'd like to see an improvement. And I think the whole industry, if you go back the last couple of years, outside of the collapse of the price of oil, the whole industry has suffered from a shrinkage in that margin, whether it's lube oil to PFO, or RFO to PFO, from what we have seen in the marketplace. So, we would like to see that improve, but we are at a point, any significant improvement would need to get us into a material charge on the service side of the business. And we're watching this carefully, and we obviously don't want to get into a situation where our customers are telling us to come back for a pickup later because their tank is not full and they don't want to pay that $75 stock fee.

[Sean K. Hannan:]

That's a good point. Okay. Thanks so much for the color.

[Mark DeVita:]

Thanks, Sean.

[Operator:]

Our next question comes from Kevin Steinke with Barrington Research. Your line is open.

[Kevin M. Steinke:]

Good morning.

[Joseph Chalhoub:]

Good morning.

[Mark DeVita:]

Good morning, Kevin.

[Kevin M. Steinke:]

I just wanted to ask about where you are in the process of integrating your used oil collection routes with FCC's routes, and how long you anticipate that process taking?

[Joseph Chalhoub:]

Yes. We are in the middle of doing this. Just to give you a little bit more of a background, the first steps we've done to – back – soon after we acquired the business and our management team went out and visited all of the facilities of FCC and met with their people. We put quickly a plan to integrate the two organizations and I'm happy to report that we have been able to – we started this in the fourth quarter and we have completed the movement of responsibility under the same flag in all locations. In the company, we've done that in this current quarter. I'm also happy to report that we also got in the period that we're in right now the end of the quarter. We'll have the financials all reported under one system, the legacy HCC system and our IT has been merged along the way here with our financial. And so the one piece that is still ongoing and should be done here the next period or two periods is the oil route. We've had to merge the locations under the same flag before we started to rearrange the route of the two companies into one and reduce the head count and improve the productivity of these routes. So, this will be mostly completed by the end of the first quarter, but there'll be some more to go in the second quarter.

[Kevin M. Steinke:]

Okay. Yes, that's helpful. So, obviously, it sounds like then there's still the financial benefit from combining those routes is still to come as we move throughout the year.

[Joseph Chalhoub:]

Yes.

[Kevin M. Steinke:]

And does that – I think previously you had shared a $14 million synergy number for 2015. Is that what you're still targeting?

[Mark DeVita:]

Yes. Yes, all the original synergy figures...

[Kevin M. Steinke:]

Okay.

[Mark DeVita:]

...that we've communicated, the total, once we're done with the integration and what we expect for fiscal 2015, are all still in line.

[Joseph Chalhoub:]

Yes. We had announced the first full year after the merge that we would have synergies. We had planned synergies of $14 million, and for the second year, $20 million. We had also announced prior to the acquisition that we would have a cost of $6 million to achieve synergies. And so our net cost in the first full year was about $8 million.

[Kevin M. Steinke:]

Okay. Yes, and just to refresh my memory, the synergies, the $14 million, you're getting that, I guess, from both the Oil Business side, the integration of the routes, and then also Environmental Services side as well?

[Mark DeVita:]

Yes. If you remember in the presentation we published with Q3, there were eight key areas, and we got somewhat specific. One was oil reduction or oil route synergies or efficiency gains that Joe was just talking about. Same concept on the vacuum and oil side, there were head count reductions at the head office, and head office meaning whether people are physically at the old corporate office or at the legacy one here, that was all categorized together. And then, all of the head count in total was more than half of the cost reduction or synergy plan in total and there were also transportation improvements, internalizing disposal in certain cases, and a few other areas in antifreeze and insurance, that type of things. So those are the main pieces that got us to both the $14 million, and again, the $14 million is just timing versus the $20 million, so...

[Kevin M. Steinke:]

And, yes, I mean, it sounds like you're – well, I mean, how far along are you to getting that $14 million.

[Mark DeVita:]

We're making good progress. You'll start to see some of it in Q1. But as Joe mentioned, even though we're done integrating pretty much all of the field sites, that wasn't something that was complete at the beginning of the quarter by any stretch. So you'll see some of that in Q1, a good chunk of it will come on in the first half of the year, and then, whatever is left you will see on board obviously by the remainder of 2015.

[Kevin M. Steinke:]

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

[Mark DeVita:]

No worries.

[Joseph Chalhoub:]

You're welcome.

[Operator:]

Our next question comes from Michael Hoffman with Stifel. Your line is open.

[Brian Joseph Butler:]

Hi. This is actually Brian Butler in for Michael today. Thank you for taking my questions this morning.

[Mark DeVita:]

Hey, Brian, how is it going?

[Brian Joseph Butler:]

Going well, thank you. First one, just when you think about pushing out the re-refinery expansion into the fourth quarter, you talk a little bit how capital expenditures will then kind of look for, I guess, the second half of the year versus and I guess then into 2015 or does it – any of that CapEx going to 2016?

[Mark DeVita:]

Most of it will just be pushed into the fourth quarter and second half of the year. So you'll have the same rough. I think we talked about it when we had our equity offering in – it's – will be reiterated in our 10-K. We're probably in that $8 million to $10 million additional CapEx number to complete it.

[Brian Joseph Butler:]

And that just moves kind of from the second quarter and first quarter to third quarter and fourth quarter?

[Mark DeVita:]

Yes, most of it, more in the fourth quarter.

[Brian Joseph Butler:]

Okay. And then on the pay-for-oil, the decline you saw in the fourth quarter, is there more decline coming in the first quarter? I mean is it some of that – was there a little bit of roll through or are you kind of now at a point where you've found a level for the pay-for-oil?

[Mark DeVita:]

No, no. I think in earlier question had been posed and I said that we're still pushing it down versus what we ended the year at. So...

[Joseph Chalhoub:]

But the bulk of the reduction happened in the fourth quarter. And not to repeat myself, but I will repeat myself is, as we look at the spread today, it's not where we want it. But I think we're kind of in a difficult situation because there's other market players that we got to watch so we don't lose our route efficiencies, at the same time, there is instability. Just between January and February, the crude oil bounced by $0.20 a gallon and equivalent $10 – I think a little bit over $0.20 – $10 a barrel, so we got to be careful. But the vast majority of the cuts have occurred in the fourth quarter. We still would like to see an increase in that spread, and we're watching this carefully. We are also achieving some improvements, but it's driven by charges to some of the smaller customers and charges for the oil filter collection.

[Mark DeVita:]

To balance Joe's comments, you'll see, Brian, if we do hit stability, and that's a big if, as Joe just mentioned, the recent volatility, we will benefit from that stability. And on a weighted average basis, even with an incremental improvement versus where we ended the year, you'd see pretty decent improvement for Q1.

[Brian Joseph Butler:]

Okay. And then just thinking about the inventory write-down you took in the fourth quarter; is there more inventory to be written down in first quarter with oil at its current price?

[Mark DeVita:]

Well, again, it's risky to look very short-term here. Before this last week, I would say maybe there's not. There might be. We're in that range where it's possible, but it's too hard to predict at this point unless you're going to tell me exactly where oil will end up, crude oil. And again, it's somewhat uneven in how it – if you really get granular, Brian, how it affects each part of our oil inventory. It's not a homogenous set. There are several products that are in there. So...

[Brian Joseph Butler:]

Okay. And if I could just slip one last one in, on the RFO, can you talk a little bit what the RFO sales were in the fourth quarter and how to think about that going into 2015?

[Mark DeVita:]

I can get back to you on that. If I have it for the call here when we circle back, I'll dig out that number. I think we have it.

[Brian Joseph Butler:]

Okay, great. Thank you.

[Operator:]

Our next question comes from Adam Baumgarten with Macquarie. Your line is open. Adam Michael Baumgarten - Macquarie Capital (USA), Inc. Hey, guys. Thanks for taking my question. First question, just on SG&A, I know there were some sort of one-timers in the quarter. Can you talk about what we should expect for 2015?

[Mark DeVita:]

Well, there could be potentially inventory write-down. We just talked about that. There will be, as I mentioned earlier, when Dave Manthey, the first question, there will be additional integration costs that will be in there. Hopefully, we won't have any – if you look back in the most recent past, if we don't have any hiccups for the plant. We, occasionally, have had those but we don't expect any of those. So those would be the main, I would say, potential, say, one-time because inventory write-downs can happen in consecutive quarters as it might happen here, but those would be the unusual, I guess if you want to use that term, unusual items.

[Gregory Ray:]

And if the question was focused specifically on SG&A category one-time stuff, Mark, some of the things you mentioned wouldn't be (46

[Mark DeVita:]

Oh, yes. Inventory wouldn't be in there. I'm sorry, Adam. Yes, you did (46

[Mark DeVita:]

Well, percent of sales, it's hard. We're more these days focused on absolute numbers for SG&A; and quite honestly, it's a work in progress for us as we combine the two companies. The field organizations are for the most part integrated, as Joe mentioned, but usually you have to do that first before you can really dig in and finalize all the stuff on the back office and head office stuff. So it'll probably be premature at this point to say how low we think we can get that. Certainly, we think there's opportunity for improvement. We didn't get into forecasting what that is and we typically don't, so I'm going to stay away from giving you an actual number, but we do think part of the way we can help mitigate any shortfall in spread management is to be a little more aggressive in SG&A and use that as a way to continue to reach our goal of that $35 million to $45 million EBITDA for the year. Adam Michael Baumgarten - Macquarie Capital (USA), Inc. Okay, great.

[Joseph Chalhoub:]

...there is a significant benefit of merging these two entities in SG&A, and part of that $20 million of synergies is definitely SG&A. The difficulty in giving percentage here is the price of oil dropped, on an average, a little bit over $1 a gallon. And so between the two companies, we were handling about 100 million gallons. So, we got $100 million of reduction in selling prices and where the percentage becomes an issue. But from an absolute basis, there's pretty significant opportunities, and we have already taken a lot of these into action between merging these two entities. Adam Michael Baumgarten - Macquarie Capital (USA), Inc. Okay, great. And then just one last one on me, just maybe if you could frame the impact that you guys should see on a positive from lower fuel cost, the cost that you pay for fuel going forward.

[Joseph Chalhoub:]

This is definitely an advantage, but it's a bonus for us, and so we keep it on the side. We try to focus on the spread because, at the end of the day, the fuel – our estimate between the fuel and the solvent that we purchase for our parts cleaning is probably in the 5 million to – it's in the 5 million gallons a year to 7 million gallons a year versus 80 million gallons to 100 million gallons volume for the oil that we service and collect and process. Adam Michael Baumgarten - Macquarie Capital (USA), Inc. Okay, great. Thanks.

[Operator:]

Our next question comes from David Manthey with Robert W. Baird. Your line is open.

[David J. Manthey:]

Yes. Hey, thanks for the follow-up here. If I use the organic growth rate of the core business relative to the fourth quarter of 2013, I'm coming up with legacy ES revenues of about $60 million, which leaves just over $7 million for everything else, which I assume is mostly FCC. If I run that out on a sales per week basis, I'm assuming they are in for about 15 weeks, I'm coming up with something in the mid-$20 million range of ES revenues from FCC. Does that sound right or is there something in there that I'm not seeing correctly?

[Mark DeVita:]

For Q4 you're talking about?

[David J. Manthey:]

Well, I'm using the Q4 revenues, dividing that by weeks and then multiplying it out to get what it will be sort of an annual run rate for 2015. And it's lower than I thought it would be, but I'm coming up in somewhere in the mid-$20 million based on what you reported for the fourth quarter.

[Joseph Chalhoub:]

Yes. Well, Mark, I think, maybe I will cover – just to try to frame the ES size of the FCC. Their historical ES business was about $50 million a year. And in 2014, prior to the acquisition, they had scaled down some of the field service aspect of the business. And so as we close the transaction, and we are now comparing this first quarter to their operating numbers of a year ago, ES has shrunk a bit in the field services, but we're still expecting clearly over $40 million, $45 million of ES revenue from the FCCE legacy. And so it's hard to really look at just the fourth quarter and try to annualize it, unless Mark has more to say.

[Mark DeVita:]

Well, I agree with Joe. I mentioned earlier that we don't have a pure number. As far as getting the math right on – if you did – if you went through the exercise you just described, based on some of the numbers I'd have, it'd be closer to $30 million, then I think you said $20 million. But again, I don't have any official, hey, this is the FCC revenue to give anyone, but just back of the envelope, it'd be around $30 million. But as Joe mentioned, there were, and especially in this transition time, several issues that impacted that to the downside, but does not reflect our expectation go forward.

[David J. Manthey:]

Okay, got it. Thank you very much.

[Operator:]

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

[Sean K. Hannan:]

Yes. Thanks. I just wanted to follow-up in terms of the integration costs. I might be picking at this a little bit too much, but in how you've worded what you've completed so far with the integration, just trying to understand. So, if you did nothing more today, you would expect to reach the $20 million in synergies or just based on what you've accomplished and that gives you more confidence in the additional actions and tasks that you should be able to reach that number.

[Mark DeVita:]

I would say the latter.

[Sean K. Hannan:]

Okay.

[Mark DeVita:]

We're pretty far into the first quarter here and I don't – obviously, don't want to discuss any of that; don't have any of the numbers. But, Joe, I think, framed it well. We are significantly – when you look at the field integration, that basically being done, that's not the only piece of it, but that's a big part of it. But it is more of – there's more to come, we feel, as we move down this path and we execute along the way, we get that much more confident as we see the results and things are coming in, so to speak, on plan. We get that much more confident that the remaining steps in our plan are going to be executed to our liking.

[Sean K. Hannan:]

Okay. And so, would you give a rough sense of whether you think that that number could potentially even be upsized? Do you think that there are some scenarios, perhaps either in discussion or under review, that could suggest additional actions to take to drive out tangible operational synergies or is this kind of a cap to think of for the moment?

[Mark DeVita:]

Well, it really depends how you define it. We're always looking to try and improve the business, and especially with our focus not on acquiring and closing this business that obviously took some mind share of the team here. We could potentially have additional cost savings to wring out of the business, and actually I would say, we do, whether we – how much those are, A, and then, B, Sean, if you attach those as are they synergies from the deal, it can be somewhat subjective as to how you define those.

[Sean K. Hannan:]

Sure. Understood. Okay.

[Joseph Chalhoub:]

Yes, most of this target, $20 million is our cost figures, and the one area that we're really not clear yet about how fast we're going to be able to enjoy the benefits of this acquisition is the customer base and how we can use the customer base to expand our Environmental Services business. And we've done enough of that in the field that we feel good about it, but we want to spend here the next quarter or two quarters to see how much more we can do on the short-term. But that's the big opportunity for this company to grow its ES business, and we like the margin in our Environmental Services. And we need to work on the FCC legacy Environmental Services to bring it in line with ours, whether it's providing free services to pick up oil or provide drum waste removal at discounted prices compared to what we've been able to do with our customer base. These are the things that we're working with right now, and we see an upside, but it's hard to quantify it at this stage.

[Sean K. Hannan:]

Great. Thank you so much for all the feedback.

[Mark DeVita:]

You're welcome.

[Operator:]

Our next question comes from Kevin Steinke with Barrington Research. Your line is open.

[Kevin M. Steinke:]

Thanks. I just wanted to follow-up quickly on the Environmental Services margin. You typically see, I think, a sequential decrease from fourth quarter to first quarter. But you just mentioned the potential to get FCC margins up in Environmental Services. So, I don't know if beyond first quarter if you'd hope to see improved margins in Environmental Services as you go throughout 2015.

[Mark DeVita:]

Yes. I would say for Q1 because of its typical seasonal headwinds we have in that quarter that our expectations would be that we wouldn't see as much improvement as you might otherwise recognize because of the FCC Environmental legacy business that we've all talked about I think, Kevin, not only with you but with all the analysts and a lot of our investors that there is upside there. But it would be in the subsequent quarters. I think it'd be a lot more evident because until we have it all under one financial system, which Joe says, we're – for the most part we will have that certainly exiting the first quarter, it's not as easy to manage it. There's a reason that we like the systems we have is because it allows our team to focus in and address those opportunities a little better. So, I wouldn't expect much in Q1 and I would expect more to get to the traditional or move towards the traditional HCC legacy Environmental Services margins in subsequent quarters, but it is going to be – this isn't a one-quarter or two-quarter situation where we're going to be sitting here Q3 and going to have back to the high 20%-s margin. I mean, if we do great, we'll be a little ahead of our schedule, but we think this is going to take a little bit of time.

[Kevin M. Steinke:]

Okay. Thanks for the additional color. That's all I had.

[Operator:]

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