Heritage-Crystal Clean, Inc
Q2 2018 Earnings Call Transcript

Published: 28 Jul 2018

[Operator:]

Good morning, ladies and gentlemen, and welcome to Heritage-Crystal Clean, Incorporated Second Quarter 2018 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 the Investor Relations section of our website. Also, please note that certain financial measures we may use on this call, such as earnings before interest, taxes, depreciation and amortization, or EBITDA, or 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 Financial Officer, Mr. Mark DeVita. At this time, I would now like to turn the call over to Brian Recatto. Please go ahead, sir.

[Brian Recatto:]

Thank you and welcome to everyone joining us this morning. Last night, we reported our second quarter 2018 results. We recorded diluted earnings per share during the quarter of $0.26 compared to diluted earnings per share of $0.30 in the second quarter of 2017. While we were down $0.04 from Q2 2017, it’s important to note that our second quarter 2017 results included a non-recurring settlement award that favorably impacted diluted earnings per share by $0.11. Our revenues for the second quarter increased 16.1% compared to the second quarter of 2017 to $100.3 million, driven by 17% growth in our Environmental Services segment and 14.6% growth in our Oil Business segment. Mark will provide more financial details in a moment but I would like to discuss other areas of our business. I would first like to discuss the results in our Environmental Services segment. From a revenue standpoint, I’m proud of the fact that we delivered strong double-digit growth through our continued focus on industrial customers, cross-selling initiatives and additional sales and service resources. All of our lines of business in this segment experienced growth on a year-over-year basis. Our revenue growth in 2018 has been aided by the five new branches we added during 2017 as well as the sales and service resources, such as branch sales managers, antifreeze sales and service reps, vacuum sales and service reps, ESP specialists and field services reps we added throughout 2017. The cost incurred in the first half of 2018 associated with the new branches and resources added during 2017 was approximately $5.2 million, from which we generated $5.7 million in additional revenue. Looking forward, we plan to continue to add new branches as well as sales and service resources in this segment. We estimate that we will incur $1.7 million of new cost for resources to be added during fiscal 2018. We anticipate these additional resources will generate $1.6 million of revenue during the year. Our Environmental Services operating margin in the second quarter of 2018 was 25.6%, down from 30.3% the same quarter a year ago. Despite the decrease from the prior year, this result represents a 2.5 percentage point increase compared with the first quarter of 2018 and we moved more than halfway to our goal of returning the operating margin of this segment to the same range we achieved during the second half of 2017. As expected, disposal cost continue to be a headwind during the first part of the second quarter but we showed progress in controlling these costs as the quarter progressed. All in all, we are very excited about the record revenue our branch sales and service team produced during the second quarter. As anticipated, we also generated sequential improvement in our operating margin in the Environmental Services segment compared to the first quarter of 2018. We continue to work toward our goal of bringing operating margins back to the level experienced during the second half of 2017. Moving onto our Oil Business, in the second quarter of fiscal 2018, Oil Business revenues were up $4.6 million or 14.6% compared to the second quarter of fiscal 2017. The increase in revenue was driven by improved conditions in the base oil market, in part due to rising crude oil prices as well as record sales volume. Our base oil netback increased by $0.18 per gallon during the second quarter compared to the first quarter. On the feedstock side of the business, the higher crude oil prices I mentioned earlier continued to impact the price we have to pay for generators for their used oil. The price we paid to generators to collect their used oil continued to climb during the quarter. We experienced an increase of $0.07 per gallon in our pay for oil during the second quarter compared to the first quarter of this year. On a positive note during the second quarter, we increased our collection gallons on a per truck basis by 7.7% compared to the second quarter of 2017. This result also represents a record high for overall oil collection route efficiency. We are very excited to report that our re-refinery demonstrated its potential during the second quarter by producing record-breaking results. The re-refinery ran at 105% of our nameplate production capacity during the quarter compared to 94% during the second quarter of 2017. This level of production allowed us to take advantage of the higher base oil netbacks as well as better leverage the fixed cost at our re-refinery. The net result was a record-breaking operating margin during the second quarter of 13%. As we do each year, we expect to have one longer planned shutdown of the re-refinery. Typically, these longer shutdowns last roughly eight to 10 days. We expect that we’ll take a longer shut down either at the end of this quarter or the beginning of our fourth quarter. In addition to normal maintenance items, we expect to complete several capital projects during this upcoming shutdown. As a result of our work during this planned downtime, we expect to increase our efficiency and consistency of operations at the re-refinery. On the acquisition front, we continue to pursue opportunities of various sizes. In addition to the antifreeze business we discussed during our first quarter earnings conference call, we also closed a small Environmental Services acquisition in the Western U.S. during the second quarter. We are optimistic that we’ll be able to close additional acquisitions during the second half of 2018. Mark will now walk us through our second quarter financial results in detail.

[Mark DeVita:]

Thanks, Brian. I’ll start by discussing Environmental Services segment. In the second quarter of fiscal 2018, Environmental Services revenue increased by approximately $9.4 million or 17% from $55.1 million in the second quarter of fiscal 2017 to $64.4 million in the second quarter of fiscal 2018. We experienced higher revenue in all lines of business in this segment, led by our field services and Containerized Waste businesses. The revenue growth was the result of price gains in some of our businesses and volume increases in others. In the parts cleaning business, we experienced price gains and volume increases, resulting in solid growth for the business. In our Containerized Waste business, we experienced strong volume growth, while price and service mix declined slightly. The vacuum services business had favorable increases in our price and service mix, but volume was down slightly. Same branch revenues grew approximately 14.4% on a year-over-year basis during the second quarter. Profit before corporate SG&A expense in the Environmental Services segment was $16.5 million. This result represents a 4.7 percentage point decline in our second quarter operating margin compared to the year-ago quarter. As Brian mentioned, the decline in operating margin compared to last year was primarily due to higher disposal and labor costs during the quarter. In the Oil Business segment, the increase in revenue was due to stronger base oil pricing and the higher volumes of base oil gallons sold as the result of record base oil production at our re-refinery during the second quarter of 2018. During the second quarter of 2018, we produced 11.4 million gallons of base oil compared to 9.8 million gallons during the second quarter of 2017. During the second quarter of 2018, we sold approximately 10.7 million gallons of base oil compared to 9.8 million gallons during the second quarter of 2017. Profit before corporate SG&A expense in the Oil Business segment increased $1.6 million in the second quarter from $3.1 million in the second quarter of 2017 to $4.7 million in the second quarter of 2018. This represents a 3.1 percentage point improvement in operating margin on a year-over-year basis. As Brian mentioned, our operating margin of 13% is not only a record high since we began operating the re-refinery but it’s the first time we generated double-digit operating margin in this segment. Our overall corporate SG&A expense as a percentage of revenue is 12.3% compared to 13.2% from the year-ago quarter, mainly driven by higher revenue, partially offset by higher severance and share-based compensation expense. The company’s effective income tax rate for the second quarter of 2018 was 26% compared to 36% in the year-ago quarter. The rate difference is principally attributable to the decrease in the federal income tax rate. Second quarter EBITDA was $12.2 million compared to $15.6 million in the year ago quarter. The decrease in EBITDA was mainly due to the fact that our second quarter 2017 EBITDA was inflated by a $3.6 million settlement we received in that quarter related to our acquisition of FCC Environmental. Second quarter 2018 adjusted EBITDA was $13.7 million compared to $12.8 million in 2017. Turning to the balance sheet, cash on hand at the end of the quarter stood at $41.8 million compared to $37.6 million at the end of the second quarter of 2018. Total debt stood at $28.8 million compared to $28.7 million, one year ago. During the second quarter we generated $13.4 million in cash flow from operations. This represents an increase of over 12% compared to the second quarter of 2017, if you exclude the $4.3 million payment we received as a result of our settlement related to our acquisition of FCC Environmental. We intend to use our excess cash balance to seek additional acquisition opportunities as well as pursue capital projects to help drive revenue growth and improve operational efficiency. In summary, we had a strong second quarter, during which we achieved record revenue and profitability. We are excited about the opportunities in front of us and our team is focused on continuing to improve during the remainder of 2018. And with that, I’ll turn control of the call over to the operator to take your questions.

[Operator:]

Thank you. [Operator Instructions]. And our first question comes from Gerry Sweeney from Roth Capital. Your line is now open.

[Gerard Sweeney:]

Hey, good morning, Brian and Mark. Congratulations.

[Mark DeVita:]

Thank you, Brian.

[Brian Recatto:]

Thank you. How are you?

[Gerard Sweeney:]

I’m doing well. thanks. I wanted to just focus in on the oil side, and I think Brian, you even mentioned it, you’re going to do some capital investment to increase efficiency but I think even more importantly, consistency. As we look at the quarter, obviously you were running above nameplate capacity. I think, I’m not sure if some of that was from the first quarter, where you had some downtime maybe you had some extra product to put through the system. But as we look at the re-refinery, how much of this performance was maybe catch up from the first quarter? How much ability is this just half investments? And can you keep it running at this type of level and consistency, going forward? And taking into account maybe some of the investments you’re going to make later this year?

[Brian Recatto:]

Yes, obviously our goal is to continue at this production rate. No, it was not catch up, this is kind of the new normal, provided we don’t have any unscheduled downtime for the re-refinery. I think we’ve been guiding our overall capacity from that 45 million to 47-million-gallon range. And we’re fairly confident that we’ll achieve those numbers in Q3. And the work that we’re going to do in Q4 is going to – we’re looking at the first week in Q4 to do this capital project and the maintenance work and we fully expect that to add to the consistency. We’re going to be replacing a couple of critical piece of equipment that we had trouble with during the harsh winter months. We’re also going to do some mechanical integrity work, which will keep us from having issues on the non-routine basis going forward. So we think the new normal for the plant as we see it would be one long term, around the year of roughly 10 days and two shorter turnarounds of five days each, with a capacity of 47 million gallons a year at just a normalized run rate, just kind of what we’re expecting without any unscheduled downtime. So we’re pretty optimistic and the work that we’re going to do in the fourth quarter is going to also enhance our cost structure a little bit. We’re going to improve that system that we talked about last year, which aids in allowing us to extend the life of our catalyst. And that will help us continue to control the cost and then we’re adding a piece of equipment that will reduce some labor cost, which will save us another $0.015 on our cost structure. So overall, pretty optimistic with our performance in Q2, and Q3 looks good as well in terms of the production. We expect similar production numbers in Q3.

[Gerard Sweeney:]

Okay, great. And switching over, I guess to the base oil. Obviously, it looks like pay for oil was up $0.07 in the quarter, but more than offset by I think pricing, which I have it here in my notes, was I believe $0.19, or within around that area. As we go into the second half...

[Brian Recatto:]

I think it was $0.18. It was $0.18, yes.

[Gerard Sweeney:]

Okay, sorry, wrote that down. As we go into the second half of the year, any thoughts on base oil prices? There’s obviously, I believe, some seasonality, et cetera but based oil has been doing very well for an extended period of time, any thoughts as to how we should look at that on a go-forward basis?

[Brian Recatto:]

Yes, we don’t expect any material changes in base oil price as we look out into Q3. But the market has certainly been a little bit softer the second quarter and the third quarter, but overall pricing is relatively flat due to the fact that crude oil’s trading in a fairly tight band. So we’re not forecasting much of a spread change as we look at Q3. And obviously, it’s harder as you get out into the out quarters because I would need you to tell me where crude oil is going to be in Q4 for me to give you some guidance on where we think base oil’s going to be and it’s very dependent on feedstock costs.

[Gerard Sweeney:]

Got it, okay. I appreciate it. I’ll jump back in line. Thanks.

[Brian Recatto:]

Thank you.

[Operator:]

Thank you. And our next question comes from Sean Hannan from Needham. Your line is now open.

[Sean Hannan:]

Yeah. Thanks. Good morning. Thanks for taking the question here. Just wanted to follow up as well on the oil side of the business. So just think about that pricing for base oil, let’s consider – we have some general consistency in terms of where crude is as we extend out. There typically is some seasonal pricing that will pull in a little bit toward the end of the summer. And then you guys are also going to have an extended downtime as telegraphed here. So just trying to get a sense on a quarter-on-quarter basis, I would suspect that revenues as well as margins might come back, perhaps a little bit quarter-on-quarter. Just from a logic standpoint, not necessarily from anything that’s going wrong. I just wanted to check the logic on that with you folks.

[Brian Recatto:]

Sean, I don’t your logic is that far off. I mean obviously, Q3, we do typically see some seasonal weakness. And a lot of the refineries had a pretty mild turnaround season as you look at the first quarter and the second quarter. You didn’t have any extended shutdowns in some of the virgin base oil producers. So I think directionally, you’re accurate, but we still expect to have a nice Q3 in the Oil Business.

[Mark DeVita:]

Yes, I think margins, Brian – I agree with Brian, and your outlook kind of mirrors mine. We’ve seen trends in Street price shifting the PFO, for us this year, obviously still going up, it went up another $0.07 as Brian mentioned. So that’s – while we think that, that’s going to level off, again that’s somewhat crude dependent as well in terms of spill up quarter-over-quarter and certainly year-over-year big time. So if we have that type of environment, then it’s easier for us to get closer to the performance, the record performance we generated. If we don’t then maybe you do see a slight movement back.

[Sean Hannan:]

Okay. And in terms – sorry, go ahead.

[Brian Recatto:]

The only thing that could impact Q3 is if we pull the turnaround into Q3. At this point, we’re not forecasting it. But it’s always based on our pegging cycle. And right now, everything looks pretty good for us to do it the first week. Our plan right now is to do it in the first week of Q4.

[Sean Hannan:]

Okay, that’s fair. And then when commenting on the – if there’s an element of market softness on just trying to make sure that I understand that, that’s on a relative basis versus a lot of what had been well seen as some production tightness that really had some kind of artificial impacts on demands coming out of last year’s late summer fall season or is there anything else to really interpret there?

[Brian Recatto:]

No, we’re not seeing anything else that you should be interpreting differently. The market is pretty well balanced. It’s a good market right now. We don’t expect any index changes.

[Sean Hannan:]

Okay. Very good. Thanks so much for addressing my questions.

[Brian Recatto:]

Thank you.

[Mark DeVita:]

Yeah. You’re welcome.

[Operator:]

Thank you. Our next question comes from Paul Dircks from William Blair. Your line is now open.

[Paul Dircks:]

Hi, good morning, guys. Nice quarter.

[Brian Recatto:]

Thank you, Paul.

[Mark DeVita:]

Thank you, appreciate it.

[Paul Dircks:]

So just a couple from me on the Environmental Services business, first of all, organic growth was quite strong in the quarter and certainly above the high single-digit target that you guys have set out. To the best of your ability, can you sort of parse out how much of this is from some of your early-stage businesses? How much is from your empowerment of branch managers? And perhaps how much might be attributable to outperformance in any select industrial markets that you guys are targeting?

[Mark DeVita:]

I think the first part of your question, we can answer is yes. The first part of your question, I think you hit on one of the big drivers. I mean overall, we were ecstatic with the growth, the same branch sales growth especially and one of the biggest drivers that stands out versus other quarters is our field services business. It had tremendous growth in the quarter and on a year-over-year basis or even sequentially. Brian can maybe add some commentary when I’m done here about, I wouldn’t call it a shift in strategy, but just how we are varying our approach. Again, we’ve only been in this business as Heritage-Crystal Clean for a couple of years and as you might expect, we’re learning how to attack the market a little bit better. So, Brian can talk to the strategy in a little bit, but from a numbers standpoint, we had one particularly large project. If you would strip that out, our growth rate from a same branch sales basis was about 8.5%. So again still strong, still high-single digit. We’re still ecstatic, but having these early-stage businesses and thanks for using my terminology, having them contribute in a way that field services did is great. But again, you still have the same things other than that. Parts cleaning we’re still getting a little bit of growth on volume and price, very strong double-digit for Containerized Waste – excuse me, double-digit volume growth and all the other usual actors. But Brian, do you want to talk about field services?

[Brian Recatto:]

Yes, Paul as I mentioned in my prepared remarks, we’ve added some field services reps. We also have our branch, sales managers and then our professional salespeople called ESPs that are kind of on-site environmental specialist, they are out there pursuing these types of projects. We, as you all know, we have 95,000 customers, so we’re out there aggressively pursuing one-off project work that we think with our capabilities to manage and disposal, the ability to manage an environmental project, we’re chasing it harder than we used to. I’ve had exposure in my past career to the environmental response remediation, field services type activities. So it’s become more of a focus item for us, we’re allowing our guys to be more aggressive when it makes sense.

[Mark DeVita:]

And I think more and more thing to work…

[Brian Recatto:]

We’ll continue as there is the point that I think we want to drive home is that we’re going to continue to pursue that. So we’ll see good growth in that area.

[Mark DeVita:]

One other thing, I don’t know if you specifically asked it, but I’d imagine or I just want to make sure that the investors and our analysts understand that we mentioned during our last call about the middle – basically, the middle of the quarter, we had done an antifreeze-centric acquisition and payments we did at time one at the end of the quarter as well. Those in general, didn’t have much of an impact, I mean they were about 1.5% of revenue growth and less than $1 million in the quarter, it will be a little bit higher on a run-rate basis due to the timing we just mentioned. But it wasn’t a big driver at all but it did help get us up to that 17% level.

[Paul Dircks:]

That’s very helpful. I appreciate the color. Just to piggyback on one of your comments in there about the one particularly large project. Can you offer any more color on the nature of that project? Is it a customer or perhaps a market where you can follow up with those kind of projects? Should we expect there to be a little bit more lumpiness in the business now that you guys are shifting your strategy a little bit and targeting some of those projects?

[Brian Recatto:]

I don’t think – our focus is not on large projects. This happened to be an existing customer and we took advantage of an opportunity and performed the job extremely well. They’re very happy. We’re going to continue to do ongoing work for them. But I don’t expect to see the lumpiness in this business that you’re seeing in Q2 because we historically have focused on smaller projects and we’ll continue to focus there because we don’t want the exposure and I like certainly, the positive margin impact of the smaller jobs versus the larger jobs. So I don’t think you’ll see a lot of lumpiness in this business in one quarter or two, yeah.

[Paul Dircks:]

Okay. Got it. One more for me. Within ES, the underlying margin was robust in the quarter and really just wanted to ask your thoughts on the sustainability of it. Of course, if you’re not going to have the same kind of lumpiness each quarter, we can ratchet down our expectations on the amount of pull-through there. But specifically, I want to talk about your thoughts on higher disposal and labor cost during the quarter, how do you see them trending over the balance of the year? And how should we think about the underlying margin in Environmental Services over the next couple of quarters?

[Mark DeVita:]

Great question. It is front of our mind. It has been all year, and will continue to be. Disposals we made headway during the quarter and we had talked – not you directly Paul but investors in general, about the fact that we were going to have some bleed into Q2 from some of the problems we have identified but since some of this is somewhat of a large ship that’s hard to turn, if I can use that analogy, but it wasn’t going to be instantly gone, the headwinds that is, or in areas like disposal in Q2. But our goal is to continue to improve and get back to that 27% range as far as operating margin. And then go from there. On the labor side, we should continue to see better leverage. Again, it’s from adding those resources. Brian made reference the specific positions, those resources need to produce and in fact I don’t want to get too granular, but in a few cases here and there, some of them if they don’t produce, we make decisions on personnel. So either way we should be getting more efficient with that spend and thus that should become less of a headwind from a margin standpoint.

[Brian Recatto:]

Yes.

[Paul Dircks:]

Got it.

[Brian Recatto:]

Good Mark, and I do want to add to what Mark is saying that inflation is real, we’re going to have to continue to work hard to get to those margin numbers and – not due to any operational issues we’re having like we did in Q1, but inflation is real in the marketplace, you’re going to hear it from all of the companies that you cover. Transportation, ELD standards have reduced the amount of hours that a truck driver can run for example. We all know there’s a shortage of drivers out there. Overall, you’re seeing cost creep in general in the industry. And we’re having to work hard as a senior leadership team and Mark made the comment that we’re very laser focused on it, because we have to be.

[Paul Dircks:]

Yes. No, absolutely, it’s something we’ve heard from many others as well. Just a follow up on one of your comments there, the last question for me. On the additional resources side, can you just remind me when was it – was it about a year ago that you guys started to more diligently add headcount to Environmental Services and appreciating while you may continue to add headcount next year, should we not be anniversary-ing some of those extra costs as we look forward here into the third quarter and fourth quarter?

[Mark DeVita:]

We did start adding these maybe even technically some of them at the end of 2016. And we should start to anniversary some of these to your other point. But as far as the actual magnitude, most of that – not most of it, mostly on the new branches side, I guess that’s one of – there’s two pieces when we say new resources, we’ve been talking about call it, new branches and new personnel in existing branches. And new branches were heavily weighted towards the back end of last year. So those we’re not going to anniversary until a lot of them in the fourth quarter. I mean some of them are literally – kind of, we just planted the flag in the last week or two of the year. The actual headcount resources were a little more spread out. So we’ll start to anniversary those sooner.

[Paul Dircks:]

Got it, that’s helpful color. Thank you guys.

[Mark DeVita:]

You’re welcome.

[Operator:]

Thank you. And our next question comes from Kevin Steinke, Barrington Research. Your line is now open.

[Kevin Steinke:]

Hi. Just following up on the Environmental Services growth rate spiked up a bit due to the large field services projects. So I mean going forward, should we expect that to normalize to more of a high single-digit growth rate in the second half?

[Mark DeVita:]

Brian mentioned, we’re going to continue to do projects. So while we might not expect to have the same magnitude that we did other projects, because this one is pretty material, at least the impact in Q2 is pretty material, I think the real base line without any contributions from field services is basically that 8-plus-percent. So whether it’s – this job in the quarter was over $3 million, whether you get that, that will shoot you up into the mid-double digits. But we should expect with our new strategy, it’s not like we just stumbled across this, this is – we’ve been investing in new resources. I think it actually happens to be one in an area in the Midwest, where we did add a new field service rep within the last year or so. We should expect something here. We don’t have a long track record to give you a lot of detail there, Kevin, that I can give you an actual number there, but it’s somewhere probably in between that range.

[Kevin Steinke:]

Okay. And I guess on top of that, then the next couple of quarters you have contribution from these acquisitions you made, maybe that’s a couple of points on top of the organic growth.

[Mark DeVita:]

Yes probably.

[Kevin Steinke:]

Okay. Also Environmental Services, you mentioned in the prepared comments, continued focus on cross-selling. Can you just give us an update on your cross-selling efforts and maybe any successes there? I think you’ve been trying to maybe formalize that program a little bit more. So just how is it going overall?

[Mark DeVita:]

Yes. And again, it has been formalized, just like anything it needs to have continual attention. And this is something that as Brian mentioned, most of the people that I talked to over the past year, plus since Brian’s been on board, what he has is periodic and routine calls with branch managers, reminding them about things like this in some of those calls is one of the benefit. When you look at what we did in Q2, our cross-selling initiatives for first-time revenue was up 6.5%. So that really is the type of continued focus that we want to know. You could probably make an argument before we got more followed on this a couple of years ago, that we had something. I know we did. We just didn’t track it. But I can guarantee that we’re doing a better job at it now and with more focus, the numbers just like they had been in the last six quarters have been better than more ad hoc approach that we used to use.

[Kevin Steinke:]

Good. And do you plan to open any new Environmental Services branches in 2018?

[Brian Recatto:]

Yes, we are planning to open some. And it’s going to be, once again, it will be backloaded. So the goal at the start of the year was three to 5, and I still think that’s going to be achievable but it will be backloaded this year, for fourth quarter.

[Mark DeVita:]

And some of that might be within that range organic and inorganic. A small acquisition that we did was basically adding a new branch for us. So that is one into that kind of 5-ish total.

[Kevin Steinke:]

Okay. That’s helpful. So just on the nameplate capacity, when you’re producing at 105% nameplate, is the nameplate capacity still defined as 45 million gallons? Or is it now 47 million? Just wondering how you get there.

[Brian Recatto:]

It’s more in the 47 million gallons range. But I really don’t want to go there yet. I’d like to get this turnaround done, the capital projects completed. And then let’s run this refinery for six months to a year and then we’ll make a formal change to the nameplate capacity once we know a little bit more. And as I’ve talked about, we’re making some significant changes in the Q4 turnaround, which we think will have an impact on our ability to perform at a higher level. So let us get through that. Let us run for a couple of quarters and then we’ll give you our new nameplate capacity.

[Mark DeVita:]

I think in the interim though, this quarter, last quarter, as I’ve stated the last couple of calls, we are doing – if you do the math, the math we do to get to those numbers, it’s 47 million gallons a year right now. And like Brian said, we hope to see benefits from an additional pegging and whatnot, the capital projects we’re going to conduct here in the next extended shutdown. So we really need to run it after that. I think these are living creatures in a way, I hate to romanticize it, but that’s what these plants are, and you don’t really know until they are lying down and running for a while.

[Brian Recatto:]

The exciting thing for us as – everybody is aware of the 20-day issue we had in Q1, we’re going to – at the pace we’re on right now, the way the plant is running, barring any unforeseen shutdowns, we should exceed 2017’s production in 2018 in spite of the fact that we lost 20 days to an unscheduled downturn. I mean, turnaround. So very positive performance for the re-refinery in Q2 and we’re forecasting good performance in Q3 as well.

[Kevin Steinke:]

Okay. So then mathematically, the 105% is calculated off of 45 million gallons or 47 million gallons, I guess is what I’m partly trying to get at?

[Mark DeVita:]

Yes, 47 million gallons, Kevin. Same as last quarter. It will continue to be that way for several quarters until we get a few quarters past the work Brian outlined.

[Kevin Steinke:]

All right. Just lastly, you had a little bit more elevated severance expense in the quarter, which pushed up corporate SG&A a bit sequentially. I mean, is that an indication that we should expect SG&A expenses to come down going forward, not only because of the absence of severance expense but maybe you’ve taken some actions there to bring down costs?

[Mark DeVita:]

That’s intentional. I’ve talked about this a little bit because if it’s not apparent, it wasn’t a huge number. You can see it in our press release, it’s like $0.5 million. But that is really an extension of the new organization and just tweaking it that Brian himself leads. So we still have a little bit left to do probably this year. Plus it’s not going to be probably do much more from a dollar standpoint than what you’ve seen. So – but that is – it’s really part of the strategic plan, some of it has to happen sequentially. Yes, in a perfect world the day after Brian walked in the door, he threw it off, but that’s not realistic. So – but this is intentional and we think it drives continued efficiency in SG&A. Now if we continue our growth rate at above expectations on revenue, then from an absolute dollars standpoint, we’re going to start to see that go up.

[Kevin Steinke:]

Yes. Okay, okay. That makes sense. All right. Thanks for taking the questions.

[Brian Recatto:]

Thank you very much.

[Mark DeVita:]

Thanks, Kevin.

[Operator:]

Thank you. And our next question comes from Brian Butler from Stifel. Your line is now open.

[Brian Butler:]

Good morning. Thank you for taking my questions.

[Brian Recatto:]

Good morning, Brian. How are you doing?

[Mark DeVita:]

Hey, Brian. How are you doing?

[Brian Butler:]

Good. The first one, do you have any number on the impact from the third party disposal that was expected to trail a little bit into the second quarter?

[Mark DeVita:]

I don’t have that. It’s part of – I mean it was the biggest...

[Brian Recatto:]

Let’s just follow up with him on that.

[Mark DeVita:]

Yes, it was the biggest driver, but I don’t have how much of that is kind of excessive versus ongoing, if that’s where you’re going, Brian.

[Brian Butler:]

Yes, I’m just trying to understand the magnitude versus the first quarter. All right then, I guess on the Oil Business, can you give us some thoughts on I guess the flexibility on the pay for oil and the charge for oil? And if base prices move from here, what impact can be seen on the margin? I guess what I’m trying to get at is how much of the margin right now is dependent on base oil prices being where they are versus if prices came down and you’re able to flex back to lower pay for oil or change back to charge for oil, can the margins be maintained based on how the plant’s running now?

[Brian Recatto:]

Yes, I mean our expectation would be under that scenario, we begin to see a decline in base oil environment, that means crude oil prices and feedstock costs are going down which is changing that index pricing. Our assumption would be that our charge for oil was going to – our pay for oil is going to change along with the change in the crude oil pricing. So yes, we would expect to be able to maintain the spread.

[Mark DeVita:]

But if you remember Brian, there’s always a lag, especially we’ve done a great job as Brian highlighted in his prepared remarks, growing volume especially on a per-truck basis. We have had success in doing that and one of the ways you do that we certainly haven’t done it by going away from our bread and butter, we call them local accounts, but growing some larger volume accounts has definitely been a piece of that. And if there were a lot of those around indexes that have an adjustment that trails whatever it was last month then it gets adjusted the next month. So there’s usually, if you add maybe even one extra month or two, there’s a couple month lag minimum and you usually just don’t snap your fingers and all of a sudden on the way up or down and that’s why rising is always better in this industry and declining, these price environments are always a little tougher temporarily.

[Brian Butler:]

Okay. And one last one on the cash flow side. Can you give detail on the CapEx spending growth and growth in maintenance CapEx as well as what does working capital do?

[Mark DeVita:]

On the – I can get you the detail on the working capital. On the CapEx, you see it when we file our Q today, it’s about $3.8 million from a cash standpoint. So if you do the math, it’s about $9.6 million in free cash flow, which is something we’re very happy with. If you look at for the year, we spent about the same amount in CapEx in Q1. And we do have some projects, Brian mentioned on the re-refinery side and whatnot, that most of those are maintenance that we have coming, we’ve spent a couple million bucks this year in parts cleaners, which is probably 2/3 growth. And then the rest has been some SG&A type spend.

[Operator:]

And this concludes our Q&A session. Ladies and gentlemen, thank you for your participation in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a great day.