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Edited Transcript of HCCI earnings conference call or presentation 2-May-17 2:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Heritage-Crystal Clean Inc Earnings Call

ELGIN Aug 13, 2017 (Thomson StreetEvents) -- Edited Transcript of Heritage-Crystal Clean Inc earnings conference call or presentation Tuesday, May 2, 2017 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian J. Recatto

Heritage-Crystal Clean, Inc - CEO, President and Non-Employee Director

* Gregory Paul Ray

Heritage-Crystal Clean, Inc - Former COO & Secretary

* Mark DeVita

Heritage-Crystal Clean, Inc - CFO

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Conference Call Participants

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* Brian Joseph Butler

Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst

* David John Manthey

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Gerard J. Sweeney

Roth Capital Partners, LLC, Research Division - Senior Research Analyst

* Kevin Mark Steinke

Barrington Research Associates, Inc., Research Division - MD

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Heritage-Crystal Clean, Inc. First Quarter 2017 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 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 our -- visiting the Investor Relations section of our website.

Please also note that certain financial measures we may use on this call such as earnings before interest, tax, depreciation and amortization or EBITDA and adjusted 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 President and Chief Executive Officer, Mr. Brian Recatto; and the Chief Operating Officer, Mr. Greg Ray; and the Chief Financial Officer, Mr. Mark DeVita.

At this time, I would now like to turn the call over to Brian Recatto. Please go ahead, sir.

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President and Non-Employee Director [2]

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Thank you, and welcome to everyone joining us this morning.

Last night, we reported first quarter 2017 results. We're excited to report record earnings of $0.21 per share on a diluted basis compared to a loss of $0.08 per share in the first quarter of 2016. Our revenues for the first quarter increased 2.5% compared to the first quarter of 2016 to $80.5 million as we grew sales in both of our segments while also focusing on improved operating efficiencies. Mark will provide more financial details later, but I would like to talk about various aspects of our business.

There are several positive areas of our Environmental Service segment results I would like to discuss. From a revenue standpoint, while our first quarter 2017 year-over-year growth was only 1.6%, our growth in the last 4 weeks of the quarter was approximately 4%. During our fourth quarter earnings call a couple of months ago, we projected our growth would increase gradually by approximately 1% to 2% a quarter and progress up to a high single-digit run rate by the end of the year. We believe these results indicate that we're on track to achieve this goal.

In order to achieve our revenue growth goal in the Environmental Services segment, we have expedited our 2017 professional sales resource rollout schedule. It is important that our new resources added in 2016 and those that we are planning to add this year move up the learning curve quickly and produce increasingly better results as the year progresses. We have developed a new program during the first quarter to better focus these resources on our industrial business opportunities, which typically deliver higher margins and more revenue potential per customer compared to smaller vehicle maintenance customers. One of the new program includes a modified compensation structure and sales closing targets for industrial customers.

Another vehicle to drive growth is new service locations. Compared to the past couple of years, 2017 is more focused on new greenfield locations. Between new branches and satellite locations, we are planning to open between 5 to 7 sites during 2017, of which we have already moved forward on 2 sites year-to-date. These new locations will be in various parts of the U.S. and Canada, with an emphasis on the western half of the U.S.

Our Environmental Services operating margin in the first quarter of 2017 exceeded 28% for the fourth straight quarter for the first time in company history. While the addition of new sales and service resources will be a short-term margin headwind, as we grow our revenue, this should have a long-term positive impact on our margins. Operationally, we are focused on improving logistics and disposal cost in the containerized waste business.

Now I would like to talk about some important factors which improved our results in the Oil Business segment as well as offer some insight on how we see the business developing in the near term. In the Oil Business, we have trends moving in both the positive and negative direction. From a positive standpoint, our base oil netback was up $0.09 per gallon versus the fourth quarter of 2016 and our RFO netback increased approximately $0.07 per gallon. Based on price increases by the major virgin base oil producers, we expect base oil netbacks to be higher in the second quarter and into the third quarter. Barring a decline in crude oil price, we estimate base oil netbacks could increase another $0.15 to $0.20 per gallon.

While the first quarter provided higher product selling prices, our street price for used oil collection retreated for the second quarter in a row. During the first quarter, our street price declined $0.09 per gallon compared to the fourth quarter of 2016. While we continue to battle fierce competition in various geographic markets, we believe we have stabilized our street price in the current commodity price environment, except for the traditionally strong Gulf Coast RFO markets. Fortunately, we were able to improve our oil collection route efficiency by approximately 9% compared to the first quarter of fiscal 2016.

We are pleased that we operated the re-refinery at a rate of 96% of our nameplate capacity during the first quarter. During our fourth quarter earnings call, we indicated that we might incur a maintenance shutdown at the very end of the first quarter, which was going to negatively impact our throughput and operating margin. Fortunately, we were able to operate the re-refinery through the end of the first quarter without the additional shutdown, which allowed us to achieve our production targets and better leverage our fixed cost. Unfortunately, we expect to incur more downtime during the second quarter than we did during the first quarter. While the issues causing the increase in downtime are temporary, we expect this will negatively impact output by approximately 0.5 million gallons during the second quarter.

We continue to work hard toward obtaining a Title V permit for the re-refinery, which will provide us processing flexibility and operational cost savings. We are continuing to make progress and expect this permit to be issued in the second half of 2017.

During my first 90 days as CEO, I've been most impressed with the can-do spirit of our employees. I have implemented regular calls with our branch leadership. These calls as well as visits to various field locations have not only strengthened my belief in the capabilities of our, team but have also revealed opportunities for operational and sales improvements as well as greater efficiencies in administrative and back-office operations. While it would take some time to realize these benefits, I'm optimistic we will see improvement in the future.

Mark will now walk us through our first quarter financial results in detail.

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [3]

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Thanks, Brian. For the first quarter, we recorded net income attributable to common shareholders of $4.8 million compared to a loss attributable to common shareholders of $1.8 million in the first quarter of 2016. As Brian mentioned earlier, for the first quarter of 2017, we recorded record diluted earnings per share of $0.21 compared to loss of $0.08 per share in the first quarter of 2016. Our first quarter earnings included a net impact of $0.14 per share from a gain, interest income and offsetting expenses related to a partial arbitration award we received during the quarter. On a non-GAAP basis, excluding the impact of the arbitration awarded and related expenses, our adjusted earnings per share of $0.07 still has been a first quarter record. Please refer to our reconciliation of GAAP to non-GAAP supporting schedules in our press release.

Our revenues increased $2 million or 2.5% from $78.5 million in the first quarter of fiscal 2016 to $80.5 million in the first quarter of fiscal 2017. In the first quarter of fiscal 2017, Oil Business revenues were up $1.1 million or 4.4% compared to the first quarter of fiscal 2016. The increase in revenue was mainly driven by higher prices for our base oil and RFO products, partially offset by lower volumes sold. During the first quarter of fiscal 2017, we sold approximately 9.6 million gallons of base oil compared to 10.5 million gallons in the first quarter of fiscal 2016. During the first quarter of fiscal 2017, we produced base oil at a rate of 96% of the nameplate capacity of our re-refinery or 9.9 million gallons, which was in line compared to the first fiscal quarter of 2016, but up approximately 4% compared to the fourth quarter of 2016. We sold approximately 2.5 million gallons of RFO during the first quarter, which was down approximately 50% compared to the first quarter of fiscal 2016.

In the first quarter of fiscal 2017, Environmental Services revenues increased by approximately $0.9 million or 1.6% from $52.4 million in the first quarter of fiscal 2016 to $53.2 million in the first quarter of fiscal 2017. The increase in revenue was mainly due to increased activity in our containerized waste, increased parts cleaning and antifreeze lines of business, partially offset by lower activity in our solvent parts cleaning business.

Turning now to income statement -- or income before corporate SG&A expense. Oil Business income before corporate SG&A expense increased $3.9 million in the first quarter from a loss of $2.9 million in the first quarter of fiscal 2016 to income of $0.9 million in the first quarter of fiscal 2017. This improvement was primarily driven by the increase in base oil and RFO revenue as well as improved productivity from our oil collection routes during the first quarter of fiscal 2017 compared to the first quarter of fiscal 2016. These improvements were partially offset by lower sales volume of base oil and RFO as well as lower pricing for our used oil collection service during the first quarter of fiscal 2017 compared to the year-earlier quarter. Our overall SG&A expense as a percentage of revenue was 16.4%, which was slightly lower than the 16.6% in the year-ago quarter due to lower legal fees and severance costs, partially offset by higher incentive compensation.

During the first quarter, we recognized other income, net of other expense items, of $5 million, mainly driven by the partial award of $5.1 million from the arbitration related to our acquisition of FCC Environmental in 2014. We incurred approximately $0.1 million of net interest expense for the first quarter of 2017 compared to interest expense of $0.5 million in the year-ago quarter. First quarter EBITDA was a record high $11.8 million, which includes $4.8 million net impact from our arbitration award and represents a $9.8 million increase compared to EBITDA of $2.1 million for the first quarter of 2016.

Turning to the balance sheet. During the first quarter, we entered into a new credit agreement to refinance our bank debt outstanding at the end of fiscal 2016. Our new $95 million credit facility consists of a $65 million revolver and a $30 million Term A loan. As part of this transaction, we used our cash on hand to reduce our outstanding bank debt by approximately $35 million. At the end of the quarter, we had $28.5 million of total debt and $10.9 million of cash on hand.

One of the drivers behind our cash balance improvement is the resolution of various issues surrounding our 2014 acquisition of FCC Environmental. In February 2017, we received the partial award for claims made in our arbitration relating to this acquisition. As a result of this partial award, we recorded other income of $5.1 million and interest income of $0.4 million in the quarter.

Additionally, on March 8, 2017, we entered into a settlement agreement with the sellers of FCC Environmental, resolving all matters still in arbitration at that time, which were not covered by the partial award I just mentioned. Under the terms of this agreement, we agreed to withdraw our claims in the arbitration, and in return, the sellers of FCC Environmental agreed to pay us $8.6 million in 2 equal installments. The first installment of $4.3 million was received in the first quarter of 2017 and was used to reduce an existing receivable. We received the second installment of $4.3 million in the second quarter. A portion of the second installment will be applied to a receivable, and the remaining amount of approximately $3.6 million will be reported as a gain in the second quarter. The arbitration award and related settlement not only provide us additional cash, but they allow us to eliminate future legal expenses for the items which were part of the arbitration as well as allow us to focus more on opportunities to grow our business.

First quarter cash flow from operations increased 87.8% to $11.7 million compared to $6.2 million from the first quarter of 2016, driven mainly by the partial arbitration award and the first installment payment from settlement -- from the settlement agreement I just described. Our strong balance sheet, along with healthy cash flow from operations, provides us the flexibility to pursue acquisition opportunities as well as putting capital to work to help drive revenue growth or improve operational efficiency.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of David Manthey from Baird.

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David John Manthey, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

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First question. The recent list price increases in base oil, do you think they're sustainable with oil sort of hovering in this high 40s, low 50s range? And Brian, I think when you said $0.15 to $0.20 of expectation for net spread increase, if I heard you correctly, is that coming from higher base oil prices from here? Or do you expect to experience better charge for oil as we move through the rest of the year?

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President and Non-Employee Director [3]

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No, the change is going to come from higher base oil prices. And we're expecting base oil pricing to be solid through, at least, Q2, maybe even Q3, based on turnaround schedules. You've got a couple of large base oil virgin manufacturers that are going to be in turnarounds in May, so we feel like pricing will be stable to increasing through Q2, Q3. Street price is going to continue to be a war, as we said in our prepared remarks.

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David John Manthey, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4]

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Right. Okay. And in 2016, I guess you performed 300,000 parts cleaning services. I assume that just means the pickup/drop-off of the equipment. How many parts washers do you have in the field at any one time currently? And then if you could just talk a little bit about the trends you're seeing there in the parts washing business. I get the focus on industrial as opposed to auto body shops and auto repair shops. What type of growth do you think this industry will see over the next 5 to 7 years?

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [5]

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Well, let me take your first question first. This is Mark. We have about 50,000 to 60,000 units in service at any one time. It does vary, depends on if we do -- like when we did a large acquisition of FCC Environmental, that will sometimes spike up as we go through the records and try and really hone in on whether it's duplicative customer or duplicative machines in service. But in general, with our focus -- or with that as a background, our focus on industrial, we see opportunity that, I think, the foundation is driven by overall industrial and manufacturing production. And our additional resources that Brian mentioned earlier can add to that. We also then have our price component. So if you add all those up, we think that's really the foundation to get to the high single-digit growth rates that we've talked about here not only today but the last several quarters.

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David John Manthey, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [6]

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Okay, great. And then final question. On the ES business, does the current cost run rate that you're experiencing, does that include all the people that you've added? And I assume that adding 5 to 7 new locations will be over the top of what you're seeing right now. Maybe you could size that for us.

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [7]

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Yes. We've added a couple of branches already this year, and they wouldn't be in since day 1, so there's only a tiny bit of the new branch cost in what you see in the first quarter results. As far as the personnel, we've been adding personnel both in 2016 and in 2017 as we kind of came out of -- or came off the bottom in oil and, especially in the second half of the year, realized that we were on much steadier ground. So you're starting to see a little bit more of that on personnel. It's built in, but still, it's far less than half of what you'll see, and that will be additional headwinds here as we go. It really depends on the actual timing, which we probably won't get into here, of all these adds as far as how it will affect each quarter moving forward in 2017. But it will be a headwind.

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Operator [8]

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Our next question comes from the line of Brian Butler from Stifel.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [9]

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Just the first one back on Environmental Services, on that kind of margin look forward. Are you including -- when you're talking about getting to kind of mid-single-digit growth kind of exiting the fourth quarter of '17, is that including the new geographic locations? Or is that really just kind of on the current footprint?

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [10]

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No, that would be including all these initiatives.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [11]

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That's including the 5 to 7 new sites?

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [12]

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Right. Because when you think about the 5 to 7 new sites, they're not all branches. I think if you've paid close attention to what Brian said, some of them are satellites, and you've been around the story long enough to know that our satellite model is a real incremental model. It does help us minimize the negative margin impact that we see early on as opposed to a brand-new branch we're planning to flag. We're leasing a branch site. We're promoting or hiring a branch manager. All those load-up costs are more on the front end, and some -- but they do allow for better growth or quicker growth. And if you're doing some of these in satellites, which we are, you're going to have a lot more incremental revenue to go along with the lower-cost ramp.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [13]

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Okay. So some of that incremental margin -- the strength in the incremental margin you saw in the first quarter gets diminished, but I'm still guessing on mid-single-digit growth. You're still seeing incremental margins well above where your average is. Is that the right way to think about that?

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [14]

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Well, you got to keep first quarter in the right context. First quarter is usually a couple hundred basis points below all the other quarters. So if you're talking about second quarter relative to historical second quarter, you're probably -- whatever gains we've been building into the business here might be offset. I'm not saying it will be all by second quarter because we don't really know fully what the ramp is going to be for all the new resources. But you'll probably get to a situation where, into the third quarter, at least, you're starting to see that. And that's a headwind against your historical margin performance.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [15]

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Okay. And then on the corporate SG&A, if you take out the legal fees, I mean, you're still around $11.6 million. I think that's up about 7% year-over-year. Is that the right kind of run rate excluding kind of these nonrecurring SEC-related legal fees? Or is that -- should we think about that coming down? Because I know you had talked about in the past that there's some room there. I'm just trying to understand how to think about that from a magnitude -- connect it down to $11 million? Or is it really kind of where it's at?

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [16]

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Well, I think it's hard to give much more color. We do think that it will come down. It's just a matter of when. Brian made big reference to some initiatives that he's identified in working with not only the branch personnel, but people here. We have opportunities. One of them is going somewhat paperless and point-of-service transaction capture project. I mean, we have several projects that are 7-figure opportunities. It's just a matter of when we're going to realize those. And I don't think we're banking on it coming down materially, certainly, in the next quarter and maybe not in the third. But hopefully, we'll start to see some results in Q4. But it's really hard for me to give you any more clarity on those. Greg or Brian, do you want to...

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President and Non-Employee Director [17]

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No, I would agree with that. I mean, we're expecting 7 figures, and we should start seeing some recovery of cost in Q4. On the operating margin front, we're also identifying some opportunities to reduce our logistics cost. And we think we can get to some of that by the fourth quarter as well, which should help offset some of the potential margin erosion from the expansion.

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Brian Joseph Butler, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [18]

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Okay. And then if I could just ask one last one. On the utilization for second quarter, talking about downtime now getting pushed from first quarter to second quarter, should we be thinking about utilization now kind of in the 90% or lower? Or is it still potentially kind of being in that mid-90% range?

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [19]

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I would say it's closer to 90% than mid-90s.

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President and Non-Employee Director [20]

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But I think after we make these changes, we can get back to the mid-90% run rate. Some of the changes we're going to make over the next couple of quarters will allow us to have more uptime throughout the year. We're going to build isolates and reactors, some things that we've been wanting to do. That's going to happen over the next couple of quarters, which should improve efficiency. So short-term issue, a longer-term benefit.

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Operator [21]

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(Operator Instructions) Our next question comes from the line of Kevin Steinke from Barrington Research.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [22]

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Just following up on the new branch locations. You talked about some of those being satellite locations, which are lower-cost. You also mentioned in the prepared comments that some will be on the West Coast. So wondering if any of those openings are greenfield on the West Coast. I think I remember from the past, some discussion that branches on the West Coast can actually be a little more costly to start up just given the longer distances there and what have you. So are there any greenfield going on out West?

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Gregory Paul Ray, Heritage-Crystal Clean, Inc - Former COO & Secretary [23]

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Yes, Kevin, this is Greg. There's at least one that's going to be a greenfield out West. And you're right. Those are more expensive. In sort of the spectrum of cost, that's kind of the most expensive. And then a branch that's sort of nearer the existing infrastructure is less, and a satellite's even less expensive. So we'll have one that's a little more costly. As Mark said, we're -- if you're trying to think about margins in our ES business, Q1 is seasonally a tougher or the worst quarter for us in terms of margins, and so we'll have some sort of natural improvement as we go through the year. And so to the extent that some of that gets spent on new branch openings and other new sales resources, we're okay with that.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [24]

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Okay. And then when talking about the Environmental Services growth rate picking up throughout the year, you obviously talked about all your internal initiatives, but also just the recovery in drilling rigs and what have you in the energy sector is going on. But is -- does your business typically lag that pickup in activity in the field in terms of rigs? Is that the right way to think about it that activity is going on now, but maybe the -- your results lag a little bit relative to that activity in the field?

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President and Non-Employee Director [25]

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Yes, that's a correct assessment. I mean, typically, it's a 90-day lag period. It takes a while for a rig to generate waste that would ultimately add to our maintenance expense that would ultimately impact our branches. The other thing that we've got to be careful about with the recent rig count ramp-up is a lot of the rigs have been added to the Permian Basin, not to our core operating areas. We are beginning to see areas like the Eagle Ford, which is in Texas, the Haynesville Shale, which is in Louisiana, they are beginning to add rigs. So we will begin to see benefit as we get into Q2 and 3. We haven't seen a lot so far because most of the activity has been in West Texas, New Mexico, and we only have one branch in that marketplace.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [26]

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Okay, that's helpful. And then you talked about, obviously, the continued downward pressure on your used oil collection pricing. But you also mentioned that you think that's maybe stabilized now beyond the Gulf Coast regions. So what gives you some confidence that that's maybe stabilized a little bit here?

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President and Non-Employee Director [27]

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Well, we're constantly talking to our branch personnel and our oil reps, and we're not seeing a request for better pricing from the field locations outside of the Gulf Coast market. And I'm assuming you understand that, that market is -- has access to water, so it makes the RFO market a lot more competitive. We've seen quite a bit of stability in our Northern branches, our Eastern branches over the past 30 to 45 days in terms of price discount requests.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [28]

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All right. That's helpful. And then let's see. So in terms of this -- the Title V permit you mentioned potentially in the second half of the year for the re-refinery, can you just walk us through a little bit more what the benefit of that would be for you?

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President and Non-Employee Director [29]

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Yes. Currently, we're shipping water off-site from our process. With the addition of the Title V permit, it expands our emission limits. We will be able to internalize the waste water that we produce back into the process, which will save us roughly $0.05 a gallon in our cost structure. The other thing is we think it will give us a slight lift on production. Our guys are suggesting that we'll get anywhere from 3% to 5% increased production from Title V permit. And we'll be able to increase our gallons per minute production.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [30]

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Okay, good. Just a couple more here on the legal costs. So are -- should we think about no more legal costs in the second quarter here? Are those completely done? And then does this settlement you reached cover you potentially going after reimbursement of legal cost? Is that all covered, and you don't expect to recover any legal cost in the future?

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President and Non-Employee Director [31]

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We're essentially done with the SEC arbitration. We recovered everything that we're going to recover from that settlement. Having been a part of the company for 90 days, I would say that our legal expenses are higher than most companies of this size. And we're determined, over the course of this year, to clean that up. We've got a couple of other issues that we've got to work through, but we do intend to drive our legal cost down. But from an FCC standpoint, that issue has been resolved. Mark, you've got anything further?

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [32]

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No, but Brian's right. So there's no more -- Kevin, there's no more funds to recover from those items that we were in arbitration for or for the arbitration itself. We still have rights -- and Greg can probably comment more if we need to. We still have rights in the stock purchase agreement if there's other issues to pursue. But all the matters that we were, I guess, if you want to call it, litigating or disputing up to this point have been resolved. And we won't expect anything more because, as I mentioned, we already got the second installment of our settlement agreement. So it's effectively, we hope, so we can focus on running the business better, it's effectively over.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [33]

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Okay. And just any expected legal cost whatsoever in the second quarter from wrapping up this matter?

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [34]

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I think we're accrued. If we have some differences in invoicing and spend versus what was projected by the legal team, it'd be pretty minor.

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Operator [35]

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And our next question comes from the line of Gerry Sweeney from Roth Capital.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [36]

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Just another high-level question on the charge for oil. One, are you still charging today? And generally, sometimes, you talk about at what level. And two, at what point does this remain stable? Or does competition come back into the market, and there's going to be pressure on maybe further out on the curve, more competition causing you to degrade your charge for pricing? And what can change this longer term? Because several quarters ago, if not a year, it was always talking about getting the appropriate charge for all the services you provide. It's degraded a little bit. It seems to have stabilized. Is it there? Can you start reversing in the other direction at some point?

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Gregory Paul Ray, Heritage-Crystal Clean, Inc - Former COO & Secretary [37]

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This is Greg speaking. We are, on average, still charging for the service of picking up used oil. I don't think we're prepared to talk about the specific price level right now. One of the things that I think is descriptive of the pressures in the market is that although we primarily are bringing back used oil for re-refining, as some others are, the majority of the industry still has a lot of used oil going into the recycled fuel oil or RFO market. And when RFO prices are high, that enables many of our competitors to feel like they can try and gain market share by paying more to the generators, the quick lubes and gas stations that they get the used oil from, and that creates a lot of the pricing pressure. Circumstances in the last few months have been characterized by not so much of an increase in the fuel oil prices as an increase in lube oil prices. And so we and other re-refiners have some opportunity now to work with improved margins or spreads, while many of the other collectors who don't go to re-refining can't benefit from that. So that sort of differentiated pricing is helping us to expand margins. I don't want it to come across that this is an unusual margin scenario. I would say that what we were working within the last few years has been the unusual scenario, where fuel prices were quite high and lube prices were quite low on a relative basis. And maybe now we're getting back to what we think of is more of a natural long-term relationship, where there's a premium for re-refining as an outlet for oil compared to going into the fuel markets. But time will tell how that plays out. But that scenario is why right now we feel some comfort that prices in general on the street for used oil should be fairly stable, but the RFO and fuel market prices have not spiked or moved up in a dramatic way in the last few months, and that's sort of allowing the current price levels to settle in. Does that help answer your question?

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [38]

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It does. But I mean, at some point, it sounds like the base oil prices will -- I mean, that's sort of a temporary increase because of all the shutdowns. So once those shutdowns work through, I know there's probably a lag on that returning to full production. There could potentially also be some pricing -- some pressure on the base oil price market as well that sort of erodes that competition -- or that competitive advantage you have on the short term.

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Gregory Paul Ray, Heritage-Crystal Clean, Inc - Former COO & Secretary [39]

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There certainty could, and we can't predict base oil prices. They're set and heavily influenced by the major base oil producers. Probably one of the big themes in base oil pricing over the last 5 years has been the opening and startup of a large new base oil refinery by one of the majors in Mississippi, which is producing a lot of surplus base oil. The U.S. is oversupplied right now. And that major oil company has a plan to export their product primarily to Europe, but also to South America. And if you look at the longer-term trends in base oil production worldwide, the newer, more efficient Group II base oil plants are displacing the older, less efficient Group I base oil plants. There aren't very many big Group I base oil plants left in North America, but there's still quite a few of them left in Europe. And so I think that not just we but the trade press that we follow expects that over time, what we will see is more closures of these older, inefficient Group I base oil plants, more exporting from North America to Europe of Group II base oil. And that's going to restore supply-demand balance better in North America and get us back to more of a normal long-term trend in what the spread is between, say, crude as the feedstock and base oil as the product that most of these refiners make. And so those margins have been historically quite thin, that spread in the last few years. And we think it's a matter of time before that spread gets to -- restored to a more traditional level.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [40]

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Okay. And then real quick on the re-refinery shutdown. Was this a planned shutdown? Or was there -- meaning the typical CapEx upgrade? Or it sounds like -- or was this a problem developed, and you decided to go in and rework the system and then make upgrades?

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Gregory Paul Ray, Heritage-Crystal Clean, Inc - Former COO & Secretary [41]

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The Q1 shutdown -- we had one shutdown in Q1, which was a planned shutdown, but it was slightly extended from a normal shutdown because we were making some small upgrades or preparing for upgrades. It's usually a multistep process, where you do one shutdown, you do some groundwork and then a subsequent shutdown to finish things up. So that was our Q1 shutdown. We thought we were going to have a second shutdown right at the end of Q1 that was also planned, routine and primarily designed for catalyst exchange and maintenance, and we were able to successfully defer that to the start of Q2. So that shutdown has already occurred. We're now thinking that it's likely that we're going to have a very short additional shutdown that wasn't part of our full year schedule at the start of the year. And that's going to, again, likely be primarily for catalyst exchange.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [42]

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Got it. So overall, re-refinery is running as planned and operating effectively?

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Gregory Paul Ray, Heritage-Crystal Clean, Inc - Former COO & Secretary [43]

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I think that's fair to say, yes. And these haven't been sort of shutdowns because things were mechanically breaking down or failing or things like that.

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Operator [44]

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At this time, I'm showing no further questions. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.