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Edited Transcript of HCCI earnings conference call or presentation 3-Mar-20 3:30pm GMT

Q4 2019 Heritage-Crystal Clean Inc Earnings Call

ELGIN Mar 21, 2020 (Thomson StreetEvents) -- Edited Transcript of Heritage-Crystal Clean Inc earnings conference call or presentation Tuesday, March 3, 2020 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian J. Recatto

Heritage-Crystal Clean, Inc - CEO, President & Director

* Mark DeVita

Heritage-Crystal Clean, Inc - CFO

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Conference Call Participants

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* David John Manthey

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

* Gerard J. Sweeney

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

* James Andrew Ricchiuti

Needham & Company, LLC, Research Division - Senior Analyst

* Kevin Mark Steinke

Barrington Research Associates, Inc., Research Division - MD

* Michael Edward Hoffman

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research

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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. Fourth Quarter 2019 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 in 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 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 and 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 Chief Financial Officer, Mr. Mark DeVita.

At this time, I would 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 & Director [2]

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Thank you, Tawanda, and welcome, everyone, to Heritage-Crystal Clean's 2019 Fourth Quarter and Year-End Earnings Conference Call. I'll begin with a brief review of our fourth quarter and full year performance and then turn it over to Mark to provide more detail regarding our financial results. Following Mark's comments, we will open up the lines to take your questions.

I am excited to share with you that we reported record fourth quarter revenue of $138.8 million, an increase of $9.3 million -- an increase of 9.3%, and record full year revenue of $444.4 million, an increase of 8.3% year-over-year. We reported a net loss of $2.2 million or $0.09 per diluted share in the quarter compared to net income of $2.5 million or $0.11 per diluted share in the fourth quarter of 2018. Earnings in the fourth quarter of 2019 were impacted by an $11 million charge due to a class-action settlement, which Mark will discuss later. Our full year earnings were $8.4 million or $0.36 per diluted share.

Turning now to our Environmental Services segment. We are pleased that we delivered 12.8% revenue growth compared to the fourth quarter of 2018. This marks the 8th consecutive quarter of at least high single-digit revenue growth in the segment. Fourth quarter results were aided by a large field services project, which contributed $4 million in revenue or 4.7 percentage points to the revenue growth. Part of our revenue growth was related to investments in new field sales resources and new branches added during 2018. Through fiscal 2019, we generated $8.7 million of revenue and incurred $7.2 million in operating cost from those investments. New positions added during 2019 collectively added $7.6 million in revenue and $5.6 million in costs.

Our Environmental Services operating margin in the fourth quarter of 2019 fell to 25.1% compared to 27.3% in the same quarter a year ago driven by higher disposal costs, fleet repairs, along with higher health care costs, which Mark will discuss in more detail shortly.

Moving on to our Oil Business. In the fourth quarter of fiscal 2019, Oil Business revenues increased $0.8 million or 1.9% compared to the fourth quarter of fiscal 2018. The increase in revenue was driven by an increase in the volume of base oil gallons sold, partially offset by a decrease in the selling price of our base oil. Our base oil netback decreased by $0.15 per gallon during the fourth quarter compared to last year and decreased $0.12 per gallon compared to the third quarter of 2019.

Our re-refinery continued operating effectively at 106.9% of base oil capacity as we produced 15.5 million gallons of base oil compared to 13.2 million gallons during the fourth quarter of fiscal 2018, an increase of almost 17%.

On a weighted average basis, we were still in a pay-for-oil position for the fourth quarter as a whole. Our average pay-for-oil increased $0.01 during the fourth quarter compared to the third quarter of 2019, but decreased $0.13 per gallon compared to the fourth quarter of last year.

As most of you know, in mid-January, the major virgin base oil producers announced posted price increases in the $0.20 to $0.30 per gallon range. While these increases have been implemented slowly, we did see our base oil netback begin to recover the price erosion experienced during the fourth quarter. However, at the end of February, virgin base oil producers announced a posted price decrease. This recent price decline will negatively impact spread, and our plan is to quickly lower our pay-for-oil to recover a portion of this compression. This price decrease appears to be driven primarily by the decline in crude price, driven by the fear of the negative impact of the coronavirus. We will continue to monitor the impact of the coronavirus outbreak and are prepared to take the steps necessary to keep our employees safe while continuing to deliver the high level of service our customers have come to expect from HCC.

The end of the fourth quarter saw a widening in the spread between the price of high sulfur fuel oil and crude. Unfortunately, as the price of crude began to fall during the first quarter, the price for No. 6 oil was relatively stable, which led to a contraction in the spread between the price of crude oil and No. 6 oil.

We are not completely surprised that the pricing relationship between high sulfur fuel and crude oil has been choppy in the first few months post the effective date of the new IMO 2020 regulation. We believe that as we move deeper into the year, the spread between high sulfur fuel oil and crude oil will begin to widen again and present us an opportunity to drive our feedstock costs lower.

From a re-refinery perspective, we continue to make progress during the fourth quarter and beginning of the first quarter of 2020 on our programs for mechanical integrity and the establishment of an inventory of key spare parts and equipment.

Beginning in the first quarter of 2020, we've officially raised the nameplate base oil capacity to approximately 49 million gallons annually in 2020. While we have begun to see slower growth in some of the markets we serve in our Environmental Services segment, we believe we have enough momentum overall to support mid- to high single-digit organic growth during 2020.

From an operating margin perspective, we are taking steps to lower our costs in the areas of logistics, disposal and fleet. We expect to have our operating margins back up to the 27% range in the second half of 2020. For example, regarding our fleet program, we engaged a new fleet management company in the second half of last year to help us better maintain our fleet and manage our overall costs.

Based on an improved preventive maintenance discipline, we saw an increase in preventive maintenance work on our fleet during the fourth quarter. While this contributed to a short-term increase in our costs, long term, this should result in less significant maintenance events and lower overall costs.

As we work to address the leased portions of our fleet, which were at the end-of-life, we incurred higher-than-expected costs when turning in these trucks. We are confident that our increased focus on preventive maintenance will allow us to lower our fleet-related costs in the future.

With that, Mark will now walk us through our fourth quarter full year financial results in more detail.

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

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Thanks, Brian, and good morning, everybody. I'd like to begin discussing the charge we took in the fourth quarter related to a settlement to resolve claims made against us in a class-action litigation pertaining to fuel surcharges.

Back in 2015, we became one of many companies in the waste industry faced with litigation involving fuel surcharges. Like most of those companies, we eventually determined it was most prudent to enter into a settlement rather than continue to incur the cost necessary to litigate this matter. Under the settlement, the company agreed to fund up to $11 million, less deductions in payments for administrative expenses, attorney's fees and other expenses for claims of class members.

Based on an analysis of claim rates from similar class-action settlements we are aware of, we expect our actual cash payments related to this settlement, including payments to attorney's fees, administrative fees and other related fees, to be less than $4.5 million, although we cannot be sure that this expectation will be accurate. We expect the final amount owed pursuant to this settlement will be determined by the end of the second fiscal quarter of 2020. Once the final amounts owed are determined, we will make a final adjustment to the $11 million accrual. To the extent our actual cash payments are less than $11 million, this difference will be taken into income at that time.

The impact of the charge swung us to a net loss attributable to common shareholders of $2.2 million or negative $0.09 per share diluted for the fourth quarter of 2019. This compares to net income attributable to common shareholders of $2.5 million or $0.11 per diluted share in the year earlier quarter.

Excluding the settlement charge, net income attributable to common shareholders was $6.1 million or $0.26 per diluted share. Net income attributable to common shareholders for fiscal 2019 was $8.4 million or $0.36 per diluted share compared to net income of $14.7 million or $0.63 per diluted share for fiscal 2018. Excluding the settlement charge, net income attributable to common shareholders for the year was $16.8 million or $0.72 per diluted share.

I'll now turn to the Environmental Services segment. In the fourth quarter, we posted Environmental Services segment revenues of $96.9 million compared to $85.9 million in the fourth quarter of 2018. The $11 million or 12.8% increase in revenue was driven mainly by strong growth in our field services, containerized waste and antifreeze recycling businesses.

The growth in our field services business was mainly due to a large project in which we recorded $4 million of revenue during the quarter. We expect to record approximately $6.5 million in revenue related to this same project during the first quarter of 2020. The growth in our containerized waste business is volume-driven, with a slight increase in price, while our antifreeze recycling business growth was the result of both volume increases and price improvement. The volume increase in our antifreeze business was primarily due to an acquisition we made during the first quarter of 2019. Revenue from this acquisition was approximately $1.2 million during the fourth quarter.

Overall, same branch revenues grew approximately 12.4% on a year-over-year basis during the fourth quarter. Same branch revenues after adjusting for the field services project mentioned earlier was 7.7% during the quarter.

Moving on, profit before corporate SG&A expense in the Environmental Services segment was $24.3 million compared to $23.4 million in the year ago quarter. Operating margin fell to 25% -- 25.1% compared to last year at 27.3%. Our segment operating margin fell short of expectations primarily due to higher-than-expected fleet and repair costs, which Brian already discussed, higher health care costs and excess of disposal costs during the quarter. These 3 items resulted in approximately 140 basis points of operating margin headwind.

In the Oil Business segment, we sold approximately 14.5 million gallons of base oil during the fourth quarter of 2019 compared to 12.7 million gallons during the fourth quarter of 2018, an increase of over 14%.

Profit before corporate SG&A expense in the Oil Business segment increased $4.4 million and improved 10.6 percentage points to 3.5% in the fourth quarter of 2019 compared to negative 7.1% during the same period of 2018. The improvement in margin was mainly due to less re-refinery downtime, which led to lower shutdown expenses as well as lower catalyst costs compared to the year ago quarter.

Next, let's talk about corporate SG&A expense. Overall, corporate SG&A expense as a percentage of revenue came in at 12.1% compared to 12.2% from the year ago quarter. But overall expense was up $1.3 million, mainly driven by higher nonmanagement salaries, bad debt expense and employee health benefits, partially offset by lower professional services fees and lower management salaries.

The company's effective income tax rate for 2019 was 27% compared to 26.6% for fiscal 2018. Fourth quarter EBITDA was $4.1 million compared to $9.4 million in the year ago quarter. Adjusted EBITDA for the fourth quarter was $16.7 million compared to $11.2 million in the fourth quarter of 2018.

From a balance sheet perspective, cash on hand at the end of the quarter was $60.7 million. We generated $17 million in cash flow from operations during the quarter compared to $7.1 million in the fourth quarter of 2018. Total debt remained steady at $29 million year-over-year. We continue to identify opportunities to deploy our excess cash on potential acquisition targets, and organic growth initiatives, we feel, will improve our business and help drive value for our shareholders.

In conclusion, we are pleased with the fourth quarter results in both our reporting segments and look to continue our strong revenue growth in the Environmental Services segment and increased profitability in both segments during 2020.

I want to thank everyone for their interest in Heritage-Crystal Clean. Thanks for joining us today. I'll now turn the call back to Tawanda to take 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 with 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, Mark, right there at the end of your prepared comments, I think you gave some general statements about the outlook and maybe I didn't catch it earlier. Did you give any specifics in terms of revenue growth or EBITDA growth margin in 2020 that I just didn't catch?

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

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Yes. Well, Brian, actually, in his prepared remarks, talked about that, at least from an organic standpoint, and the subjective part here is we are working on a lot of acquisitions. At least relative to us historically, we have what I would describe as a pretty robust pipeline. And you can go back and see if it's between 5 percentage points or less as to quarter-to-quarter, how much that inorganic pieces meant to us.

But from an organic standpoint, we look to continue the mid- to high single-digit, at least in Environmental Services anyway, revenue growth rate. And we have seen some headwinds, obviously, from a margin standpoint. Brian and I both alluded to fleet, health care was up almost $1 million year-over-year in Q4. We had some other headwinds, which we touched on, I can dig into if we want. But to get back to that 27% area, we think it might take us till the second half of the year. So we see some headwinds here short term and that could be also impacted by any downturn from the coronavirus and any impact that might have on business in general.

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [4]

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And the reason we went to mid- to high single digit was driven by the oilfield branches. We are, Mark alluded to, seeing a slowdown. It's mostly related to oilfield activity in our Southern branches, but the rest of our branches are holding up fairly well. Pretty happy with what we've seen so far.

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David John Manthey, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [5]

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Okay. And then as it relates to the pricing component of your growth, does this settlement have any impact on your ability to price just generally going forward? Or is it not a factor you're concerned about?

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [6]

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It is not a factor we're concerned about. This case, I mentioned it takes back 5 years, but the actual activity dates back even much before that. And long since we've got to this point, we had changed our process as far as assessing energy surcharges and the like. So we shouldn't see any impact from what we've been doing the last couple of years. It's driven by commodity price, so to the extent we see -- let's say, we see a route in diesel price, well, you're going to have less fuel surcharges, but then, of course, our costs will be coming down as well.

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [7]

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David, we really felt like we had to get that piece of litigation over with. It was a major distraction for us. We were spending a ton of money on legal fees. The appeal process was pending, which was going to be expensive. And we just felt like we had to get it resolved.

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [8]

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Yes. And as long as we're on that topic, I think some people are probably wondering from a pure cash standpoint, I kind of went through what the -- in my prepared remarks, what the accounting will probably look like. But from a cash standpoint, in Q4, we really haven't written any check so to speak, and we had some legal costs and whatnot. But materially, there wasn't really any cash impact, and that's not surprising why we [rose] such a fabulously high operating cash flow figure. So we expect to see in Q1 and Q2 to write whatever checks we're going to have to write related to this.

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David John Manthey, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [9]

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Okay. Yes. And then maybe last one if I could sneak one in here. Anything you're seeing right now on the used motor oil supply and demand picture? Are there any imbalances starting to form post the carriage ban? And then just generally, if you can speak to your top competitor mentioned they believe that they'll see benefits on both ends of the spread during 2020. Just trying to check your head on how you're thinking about 2020 and IMO, how it rolls out.

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [10]

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Yes. I think up until this point, we're a little bit disappointed in the supply/demand balance on used motor oil, especially in our core marketplace, which is Midwest, Northeast. Everybody went into HSFO with extremely high pricing last year. It was in their best interest, knowing that the price could potentially collapse and the differential will spread out to sell as much used motor oil as they could into that high-priced market last year. So everybody went into the fall season, which is our slower season, less oil changes, less activity. So we've struggled a little bit, moving the needle on used motor oil. As you saw from our prepared remarks, we're still bullish on the fact that it will change over time. We know it will because there are no outlets for used motor oil outside of VGO plants, its re-refineries.

So we think over the long haul that we're going to begin to see the differential spread out like it's supposed to. The added rankle here is what's going to happen relative to coronavirus and demand for commodities. I mean you guys tell us, we don't know. I mean shipping was down. I just read a report this morning, just in the port of L.A., 25% in the month of February. So we are going to see a little bit of a struggle here over the next couple of months until this all levels off. But the fundamentals are still very bullish on it. We know that we're going to be able to get the price on used motor oil. We're going to get it one way or the other. And I think our competitors feel the same way. We have to because everybody saw what the majors have done on base oil, we've got to go get the spread back.

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Operator [11]

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Our next question comes from the line of Michael Hoffman with Stifel.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [12]

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So we've gotten somewhat used to the idea that the oil business has this bounces around because you can't control the spread as much as you'd like to. We've gotten better at that control. But I'm a little surprised that this almost feels like you get stuck up on in the ES business, that's been such a reliable, repeatable, do it over and over again. So can you help us a little bit and understand what was going on with the pieces in the 220 basis points? And you identified 3 of them are 2/3 of that, but there's still 80 basis points or other stuff. How much of it, like, can you get rid of right away? How much of it you're going to have to drag through the first half of the year to get to the 27%? Just trying to understand that because it's out of character for that segment.

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [13]

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Yes. Good question. Let me add some color. And hopefully, this will paint the rest of the picture, so to speak. So we mentioned, we called out larger-than-normal field services project that actually, we're still working on in Q1, but -- or was impactful during Q4. And while that's bringing in higher-margin dollars, to get some of those bigger projects relative to the rest of our business in that line of business, we're typically and expectedly going to bring that in at a little lower margin, so that was about 20 basis points headwind.

And then our antifreeze business, if you look at it year-over-year, the -- for Q4, the margin was down in that line of business alone, and overall, to the ES segment, that was about 30 basis points in additional headwind. We've seen really the impact there. As you probably experienced or at least are aware, we've had a pretty mild winter or at least the back half of Q4, that first part of winter was pretty mild, so that was a headwind to our business.

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [14]

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The other comment that I'll add to antifreeze, Michael, is that we, in the acquisition, took on a few additional plants that we're going to be rationalizing and have already started and they will be out of the system by the end of this quarter. And that will help us rightsize the cost. We had too much capacity and used antifreeze production -- receipt in production, and obviously that comes with plants and assets and people, and we made those changes. And it was always our plan to develop that over the course of the year after we did the acquisition.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [15]

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And are health care -- it's just self-insured, so is it -- that's timing and that kind of goes away, but the fleet's going to be a carry, the antifreeze is probably a carry and that's the drag that's through the first half, that's how to think about it?

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [16]

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Yes. I think the fleet will carry into the -- certainly the first quarter. We've got a -- started the oil business in 2011. So we have a lot of trucks that are 7-plus-years old that were leased, and we're turning those trucks back in. Inevitably, when you turn a truck in, you're going to get a maintenance bill for repair work, so that's a function of the oil business. We'll work through that. We've got obviously older trucks in ES, and we're doing the same thing there.

Within our prepared remarks, we talked about our desire to have just a better fleet management program, and we've got to do more preventive maintenance that captured some of the pent-up expense in the fourth quarter, a little bit will happen in Q1. But we feel like we're getting on top of it. Getting rid of trucks that we don't need, the aging fleet, we had excess spare trucks that we're eliminating. So we think over the first half of the year, we'll clean that up for sure.

And we're also working on other initiatives, like -- and we talked about it on the last call relative to disposal. As you know, when you talk to our competitors, I mean, they've all raised their prices, of which we get settled with a price increase because we're primarily a broker. We've been working extremely hard gaining control of our own internal processing capabilities relative to some of our larger waste streams (inaudible). And you'll see over the course of the year with the pipeline that Mark is generating through our M&A program that we're going to augment these plants and have the ability to process some of our own internal waste, which should drive our disposal costs down and make us not so -- I mean right now, we're obligated to our third-party competitors and obviously we pushed out a price increase. But it doesn't give us any margin bump and we want a margin bump. And we'll get that from internalizing some of these waste streams over the course of the year.

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Operator [17]

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Our next question comes from the line of Jim Ricchiuti with Needham & Company.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [18]

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So it sounds like there's some benefit that you're anticipating on the ES side of the business from some margin improvement. But the bulk of it is going to occur in the back half. Is that weighted more towards Q4? Or do you see the -- would you anticipate some of these changes, these initiatives beginning to play out in Q3 as well?

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

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Yes. We would definitely expect to see some of them earlier than Q4. So that is what we're planning for and what we anticipate.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [20]

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And Mark, it sounds like you've got a number of initiatives that you're pursuing to drive some margin improvement in this part of the business. Is there any way that we might think about looking out a year, what kind of target margin you might be looking for, all else being equal, just given some of the various things you're doing?

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [21]

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Well, I think that 27% target that, Jim, we've had in place now for a couple of years is a good target in a growth -- organic growth environment that we're in. We have had some struggles in growing as fast as we want from a headcount standpoint, which hasn't really impacted, surprisingly, our top line growth that much. But I would tell you, it would be even better if we would be able to bring on as many people as we kind of put on the chalkboard, so to speak. But the hiring market hasn't gotten any easier in the last 1.5 years, 2 years.

So you really have to answer that question saying, if you stop trying to grow other than just general route density but you're not adding headcount, you're not going to try and add facilities, you could maybe even see margins start to approach. And we did this more than a couple of years back, you get up even closer to 30% and we're above the 27% range. But we think as you look out beyond even 2020 that we will balance those 2 and probably keep margin in that range.

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [22]

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Our balance sheet is so strong. And we've talked about this on other calls. Our Board, I mean, Mark can attest to that, they're very charged up about organic growth. And we're going to continue to pursue it. Yes, we can hunker down and get the margins to 30%, but that's not what we want to do. And as you open branches out west, and you don't have the density, it's expensive to operate outside of our core marketplaces. I mean it's simple 11,000 of load to get supplies out to Seattle would be an example. And those are some of the things that as we build density, we'll have capabilities out west where we can source commodities locally. We'll have a hub out there, which will lower our costs for distribution. We'll have better plans and programs to manage waste streams. But you've got to have the density that comes with time. So we're going to continue to suggest that we're going to be in that 27% range until we decide to slow down the growth, which is not what we're going to do because we like the opportunities that we're seeing.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [23]

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Got it. And just with respect to those comments just about increasing density, how significant is that in terms of focus on the M&A side is looking to really add density particularly in some of the regions that you just mentioned?

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [24]

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It is definitely a focus. I'm glad you brought that up. This is a recurring theme. If you would have asked this question even a year or so ago or even 2 years ago, we have -- while we're -- I mean we definitely have a preference for helping us build density in the less dense areas. Those are high priorities. We're not forsaking other opportunities. But certainly, it's left in a vacuum to do 2 deals. We're going to do the one first and prioritize the one first that's in areas where we have less density. So in general, we're talking about, for the most part, the Western U.S. and Eastern Canada.

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James Andrew Ricchiuti, Needham & Company, LLC, Research Division - Senior Analyst [25]

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And last question, it sounds like the pipeline of opportunities that you're seeing there is fairly active right now.

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [26]

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Yes. We're really excited. I mentioned, I think, on the last call that we have a director of M&A for the first time and brought him in. I think he started about 6, 7 months ago. And he's got both the manufacturing and also an M&A or investment banking background, and he's coming up to speed on the industry and the rest of the stuff he knows really well. So we couldn't be more pleased with at least the early results. Now again, like it's similar to a sales cycle, Jim, you probably know this, that you're not going to walk in here and close a bunch of deals because the pipeline wasn't that bad. But we do see several deals here coming in Q1 and Q2 that were going to get closed.

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

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Yes. Pretty excited about this pipeline.

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Operator [28]

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Our next question comes from the line of Gerry Sweeney with Roth Capital.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [29]

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A question on the pay-for-oil side. Obviously, oil prices have come down quite a bit in the last 8 weeks. You mentioned that on your -- in your remarks. But how fast or how responsive do you think your customers can be or you can push those pricing through your chain?

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [30]

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Mechanically, we can push it through our system in 24 hours. It could not be any easier. Dynamically out in the marketplace, it's a little bit trickier, but everybody that's selling into this lower commodity price market has to do something. And we took a 30% to 40% -- $0.30 to $0.40 price decline just a week ago. So we're going to get out aggressively this week and get at least half of that back through our used motor oil program. And everybody else is going to have to do the same thing.

At this point, when I look at where the market is headed, it really needs to become a waste stream, like every other liquid waste. I mean we spend a lot of money collecting used motor oil. It's not cheap to run these route trucks around picking up used motor oil, of which it's not always high quality. So we've got to be aggressive as an industry and try to change the dynamics because none of us can control base oil price and it's extremely volatile and very frustrating. So we can only control the used motor oil piece, and we've got to do a better job of it.

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [31]

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But even, Gerry -- to just put in perspective, even if we're as successful as Brian alludes to, given where we're at, you're not going to see much -- I mean I'm just being a realist, you're not going to see much in the print for Q1 as far as, wow, we're able to lower our cents per gallon like to $0.20 or whatever we just want.

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [32]

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You're also not going to see the rapid erosion of base oil prices either, which will help. It's not going to immediately become a $0.30 decline.

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [33]

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Yes, exactly. So those will counterbalance each other.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [34]

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Got it. That's helpful. And because the last go around a bunch of years ago, obviously, pricing changed and there was a little bit of, I guess, psychology going from getting paid for oil to pay for -- versus charge, et cetera. And -- but it sounds like the environment is a little bit different this go around. Is that fair?

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [35]

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Yes. I would tell you, since it had been so long back when -- earlier time you are referencing, that same dynamic, no one wants to get paid less or should be charged more, no mistake about it. But in general, that whole catharsis should be a nonissue that we went through back several years ago.

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

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Shifting gears to field services. Obviously, a pretty large contract and pretty impactful. What's the backlog or opportunity look like for this business? Every once in a while, we see something pop in. Just curious, are you seeing more activity, more opportunity? And should we keep an eye out on it more in the future?

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [37]

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Yes. We're seeing -- we have 90,000 customers. So we're seeing plenty of opportunities to do smaller cleanup projects for our core client base. We've added to our field services reps. We've encouraged our branches. We put in their quota to go out and help market field services. So that's a major piece of our focus.

And it's all part of this desire to call on more industrial customers to augment what we do out in the field. We're adding the plants. We're adding some capabilities to process our own waste range, focused on our core client base, which is mostly nonregulated. Regulated stuff will continue to -- brokered to our partners.

But we like this business, like where it's taken us. I mean, obviously, the larger projects impact margin, and that's what happened in Q4. You're not going to mark up the large field services job that much, you can't.

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [38]

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To Brian's theme, well, maybe saying I'll add that this is -- there's very few projects that we do if you look at kind of project count that we're doing at entities or companies that aren't a customer for something else. So this is one of the benefits of just trying to -- basically, what we like to say is give our people the opportunity to just say yes when a customer's need arises and not have to say, well, we don't do that. So this is business that is not something we have to go out and solicit a separate customer base. There are some projects where maybe we haven't done anything with someone, but that's the exception.

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [39]

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And it's just work that doesn't fit into the traditional branch approach, and we have these guys out there that are experts at doing these smaller cleanup projects and they take over for the branches to make it easier, so they could focus on the core business of collecting small-quantity waste streams and managing parts washer services.

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

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Got it. I'll take the gross profit dollars any day of the week. So I appreciate it.

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [41]

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You agree.

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Operator [42]

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

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [43]

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So you've talked on the last couple of calls here about the inflationary -- some of the inflationary pressures you're seeing. And just want to talk about that in relation to the price increases you look to implement in Environmental Services going into 2020. Have they been larger than normal? What's been the customer uptake of those price increases? And do you think you can largely offset the inflationary headwinds that you've been experiencing?

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [44]

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In general, the answer is yes. Health care, I can talk about that in a second, has been its own beast, so to speak. But to remind everyone, we've used the normal cadence, I'd say normal, the cadence we'd used for most of the 20 years we've been in business and have implemented at the end of last year or -- and usually early November-ish when we begin to implement, that has varied somewhat, but that's what we did this past year, our annual price increase. So basically, most of the revenue or most of the services offered under our Environmental Services reporting segment.

And usually, we'll plan to get a portion of that or realize a portion of that in Q4 because we give our field sales and service personnel some flexibility in implementation of this, as I'm sure you remember, Kevin. So if you really look overall, we're probably close to about 3% realization. Some lines of business were more or less than others as far as realizing price. But overall, for the segment -- and again, this excludes field services because field services is nonrecurring project work. But for all the other lines of business, which is the lion's share of the revenue, that's around where we're at.

And what we went out with to get what we realized, which I just spoke of, what we went out with was something that was about middle of the road, not more aggressive than normal but not less aggressive. It was a little more tailored. We had -- sometimes, we'll take a very generic approach of x dollars or x percent across a certain line of business on existing dollars. And this time, we differentiated by things like discount rate of the existing business and other factors to do more of what we like to say a rifle as opposed to a shotgun approach.

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [45]

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And we have seen less inflationary pressure recently. I mean, obviously, you've seen transportation numbers, which are down. So we're actually seeing some opportunity to lower our costs going forward.

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [46]

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Yes. I mean health care is the real wild card because that...

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [47]

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Disposal has been a wildcard, too, because of the tight market.

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [48]

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But when you have people having catastrophic illnesses, which we, for some reason, just add a rash on we talked about it in Q3, but they continued on in Q4, there's nothing that says that's going to continue. Now our reinsurance premiums are higher in 2020 now because of what happened. But the actual claim rates, we're hopeful that they'll come back to some type of normalized level.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [49]

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Okay. But you're trying to capture the higher health insurance premiums with those price increases, at least?

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [50]

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Yes.

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [51]

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Yes.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [52]

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Okay. And then also related to Environmental Services, you mentioned given the tight labor market, it can sometimes be challenging to add people. How does that play into the growth investments you're looking to make in 2020? I believe you had been talking about 4 to 5 new ES branches this year as well as trying to add a similar number of sales personnel as you did in 2019. So are those still roughly what the plans are? Or maybe just any comments on those items for this year.

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Mark DeVita, Heritage-Crystal Clean, Inc - CFO [53]

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Yes. We're really -- from a facilities or a brand standpoint, we're trying to take a holistic approach and be agnostic, whether it's facility or a branch territory. We open up through an inorganic approach, meaning acquisition or one that we do from a grassroot standpoint. When you look at a lot of the deals and a lot of the great things about -- or potential positive things about some overall general economic headwinds, whether it's driven by coronavirus or other factors, we're seeing a glimpse of the acquisition market maybe loosening up to where we can not have to be faced with a lot of the insanely high multiples of earnings that we've been looking at or staring at the last couple of years.

So I think my gut tells me it will be more towards maybe inorganic or kind of the buy instead of make if you look at the classic economic approach. But whether it's -- we acquire 3 sites or we acquire one, we're still trying to get to that 4 to 5-ish in 2020. We know we did not hit that in 2019. And as far as headcount, we added about 14 heads, that was much better than in 2018 when we only had 4, and we had about 20 in 2017. And I think around that same target from -- running at that same number that we had last year for 2020 is really what we're shooting for from a new position standpoint.

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Brian J. Recatto, Heritage-Crystal Clean, Inc - CEO, President & Director [54]

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And I think we touched on -- we're still -- I mean maybe in Q3, we had 90-plus vacancies, we're still at 85. So we want to continue to work to recruit people to support our existing branches. I agree with Mark that we certainly like the acquisition route. It's much easier because you acquire people as well and put them into our system and we could grow off of that. It's much easier. Now obviously we can't pull off the acquisitions. We are going to open organically because we need to increase density in the Western half of the U.S., and we will do that one way or the other.

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Operator [55]

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Thank you. I'm showing no further questions in the queue. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect. Everyone, have a wonderful day.