Heritage-Crystal Clean Falling: Oil Weighing on Results

After the markets closed on Friday, Heritage released an 8-K providing a financial update on fiscal fourth quarter 2014 and fiscal 2015 guidance. Fourth-quarter results and 2015 guidance were below consensus, driven by falling lube and RFO selling prices, inventory write-downs, and an already disclosed unplanned shutdown of the re-refinery. FCC Environmental integration costs will also weigh on GAAP results, but we view these expenses as one-time. We have stayed bullish on the stock because of an attractive long-term opportunity.

With a perfect storm of risks converging on Heritage, we do not believe that it is time to give up on the story. The stock price is depressed and the risk/reward profile looks attractive with the bear case priced in. We maintain a long-term perspective and recommend the stock for patient investors. Admittedly, Heritage is a price taker in a commodity market and internal initiatives have taken longer than communicated to execute on. We remain confident in management and believe that earnings power remains well above $1.50. We hope that management was appropriately conservative in its outlook.

Fourth-quarter results are tracking significantly below consensus. Sales are expected to be $115 million-$125 million, versus prior consensus of $132 million. Oil segment sales had a $4.4 million headwind from the previously announced unplanned shutdown of the re-refinery. Lower lube selling prices are also a headwind to sales. The quarterly GAAP loss before interest, taxes, depreciation, and amortization is expected to be $3.7 million to $5.7 million. On an adjusted basis, the loss before interest, taxes, depreciation, and amortization is expected to be $2.0 million to break even. The consensus EBITDA estimate was previously $8 million.

Management provided fiscal 2015 sales guidance of $405 million to $445 million, which compares with prior consensus of $497 million. Guidance assumes a stable crude oil pricing environment and normal operations at the re-refinery. Under this scenario, adjusted EBITDA would be $42 million-$53 million. Before the 8-K, consensus was $48 million. We assume legacy oil business sales are down 15%, to $113 million, with a segment operating loss of $4 million.

For fourth quarter 2014, we now forecast sales to increase 26%, to $115 million, with an adjusted loss per share of $0.24. We have not lowered our expectation in the Environmental Services business.

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