Heritage-Crystal Clean, Inc
Q1 2013 Earnings Call Transcript

Published: 3 May 2013

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Heritage-Crystal Clean, Incorporated First Quarter 2013 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, are non-GAAP measures. Please see our website for reconciliations of these non-GAAP financial measures to GAAP. For more information about our company, please visit our website at www.crystal-clean.com. With us today from the company are the Founder, President and Chief Executive Officer, Mr. Joseph Chalhoub; the Chief Operating Officer, Mr. Greg Ray; and the Chief Financial Officer, Mr. Mark Devita. At this time, I would like to turn the call over to Joe Chalhoub. Please go ahead, sir.

[Joseph Chalhoub:]

Thank you, and welcome to our conference call. Last night, we issued our first quarter 2013 press release and posted it on the Investor Relations page of our website for your review. This morning, we will discuss the financial statement and our operations in the first quarter, and we will respond to questions you may have relating to our business. We are pleased to report that our first quarter sales were $60 million compared to $50.5 million in the first quarter of 2012, reflecting a growth rate of 18.8%. I'm pleased with the operation of our used oil refinery during the first quarter of 2013, which allowed us to produce 6.4 million gallons of re-refined base oil. This volume represents 92% of nameplate capacity for base oil production. During the quarter, we sold 6.6 million gallons of base oil. Unfortunately, the downward trend in lube oil market prices, which we experienced during the third and fourth quarters of fiscal 2012, continued during most of the first quarter of fiscal 2013. The continued decline in lube oil prices negatively impacted our Oil Business segment revenues and profits for the quarter. Fortunately, the market price for lube oil began to improve from recent lows before the end of the first quarter. This price recovery was consistent with our expectations as the extreme low lube prices relative to fixed stock costs were viewed throughout the industry as unsustainable, particularly for operators of traditional refineries. At the end of the first quarter, we had 140 oil collection trucks in service. Instead of adding new routes during the quarter, we focused on identifying inefficient routes and formulating trends to increase the efficiency of the unproductive routes. As a result of this work, we determined that we would be better served by hiring a small number of collection trucks and adding the customers previously serviced by the idled trucks into existing routes. We are pleased to announce that our Board of Directors has approved our plan to expand the annual input capacity of our Indianapolis re-refinery to 75 million gallons of used oil from its current 50-million gallon level. We expect that this expansion will improve the profitability of the oil business by allowing us to better leverage our fixed cost and improve utilization throughout this segment. The increased margin anticipated from this additional capacity should help us to partially offset the reduced profitability caused by the decline in lube prices. We expect the additional capacity to be added incrementally over the remainder of 2013 and the first half of 2014 with the entire amount of additional capacity in place by mid-2014. While the engineering is not yet complete, we anticipate the capital cost of the project will be up to $25 million including some logistical improvement. In the Environmental Services segment, we are pleased with our double-digit same-branch sales growth. We expect that our margins in this segment will continue to be positively impacted during the year as we more fully implement our fourth quarter 2012 price increase. We expect the new resources we've invested in over the last 1.5 years would allow us to continue to meet our growth goals for this segment. For several years, we have enjoyed good growth in the aqueous segment of our parts cleaning business. To enhance this, at the beginning of fiscal 2013, we acquired the assets of our main aqueous chemistry supplier and created a new subsidiary called Mirachem, LLC to hold these assets. We feel that this aqueous cleaning product is superior to others in the market and has already been proven with our customer base. Together with our passengers' equipment, we feel that our aqueous parts cleaning offer is the best in the business. We added 3 new branches during the quarter to bring our total number of branches to 74 at the end of the quarter compared to 71 branches a year ago. In addition, our growth was made possibly by our ability to continually add new customers. As of the end of the first quarter, we served over 88,000 individual customer locations. While the lack of profitability in our oil business in the latest quarter was disappointing, we continue to take steps to improve our efficiency in this segment in order to help mitigate the negative impact of current lube oil price conditions. The continued strength of our Environmental Services business provides the ability to help us through the current negative cycle in the Oil Business. Our Chief Financial Officer, Mr. Mark Devita, will now further discuss the financial results, and then we will open the call for your questions.

[Mark Devita:]

Thank you, Joe. It's good to be with our investors today for HCCI's First Quarter 2013 Conference Call. I am pleased with our first quarter revenue growth as outlined in last evening's press release. Revenues continue to grow at double-digit rates in both of our segments. In the Environmental Services segment, sales grew $4.3 million or 14% in the first quarter, of the 69 branches that were in operation throughout both the first quarters of 2013 and 2012, the growth in same branch sales was 11.8%. However, if we exclude the impact from those existing branches which gave up territory and customers to new branches, the growth in same-branch sales was 12.4% for the first quarter. Our average sales per working day in the Environmental Services segment increased to approximately $580,000 compared to $570,000 in the fourth quarter of 2012, and compared to $515,000 in the first quarter one year ago. Operating cost in the Environmental Services segment increased approximately $1.2 million compared to the first quarter of 2012. Our operating margin was 23.5% for the quarter, up from 17% in the year-ago quarter. We continued to work to recover the impact of higher solvent and diesel costs experienced over the past few years. In the Oil Business segment, sales of the first quarter grew $5.2 million or 26% as the result of continued growth in sales of base oil products and byproducts, from our used oil re-refineries. In the first quarter, our Oil Business experienced the loss before corporate SG&A of $2.1 million compared to income of $1.4 million in the first quarter of fiscal 2012. Lower base oil selling prices negatively impacted our revenue and operating margin during the quarter. In addition, seasonally lower collection volumes led to decreased leveraging of our internal collection costs during the quarter. We expect our collection volumes to increase during the second quarter based on typical seasonality. We have begun to see positive results from our effort to reduce cost and increase efficiency in a few areas. We saw a decrease in our production cost at the re-refinery from the fourth quarter of 2012 to the first quarter of 2013 of almost 20% on a per gallon basis. The primary driver of this improvement was the fact that our re-refinery shutdown during the first quarter was not as extensive as our shutdown during the fourth quarter of 2012. We also made some progress in reducing our transportation costs on a per gallon basis during the first quarter of 2013 compared to the fourth quarter of last year. We achieved this reduction even with the seasonal decrease in internal collection volume. While we have made some progress, we continue to work on several initiatives in the area of oil collection and transportation with the goal of increasing our efficiency and improving the profitability of the Oil Business segment. We had a favorable year-over-year result in the area of SG&A as a percentage of sales. Corporate SG&A was 11% of sales, down from 11.4% in the year-ago quarter. At the end of the quarter, we had $22 million of total debt and $44.5 million of cash on hand. We incurred $106,000 of interest expense for the first quarter of 2013 compared to $187,000 of interest expense in the year-ago quarter when we were drawing on our revolving loan. On February 5, 2013, we entered into an amended and restated credit agreement with a syndicate of banks led by Bank of America. The agreement provides for borrowings of up to $40 million and matures on February 15, 2018 or February 5 -- excuse me, 2018. The agreement also contains an accordion feature which allows for up to an additional $60 million borrowings, subject to the satisfaction of certain terms and conditions. As of March 23, 2013, we have borrowed $20 million under the agreement in the form of a Term A Loan. We can borrow up to an additional $20 million under the agreement as a revolving loan subject to limitations. For the first quarter, we experienced an after-tax loss of $0.4 million compared to income of $0.3 million in the first quarter of 2012. Our basic and fully diluted loss per share for the quarter was $0.02 compared to income of $0.02 in the year-ago quarter. During the remainder of 2013, we expect to increase our internal collection of used oil, increase the efficiency of our transportation network and take advantage of enhanced economies of scale as we ramp up and expand our re-refining capacity. Our team is focused on the fortunes of the Oil Business we can control with the goal of improving the overall results in this segment. We are equally focused on continuing to grow our revenues and increase our margin in our Environmental Services segment, and we have confidence in our ability to take advantage of the opportunities we see before us. Thank you for your continuing interest in Heritage-Crystal Clean. At this time, I will turn the call over to our operator, and she will advise you of the procedure to submit your questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of David Mandell from William Blair.

[David Mandell:]

So you guys mentioned that lube prices improved at the end of the quarter, and I was just trying to get a sense for where they are now versus maybe the fourth quarter? I imagine they're still below the fourth quarter levels, is that true?

[Mark Devita:]

Yes, that's accurate. Dave, we have seen some improvement. And we figure, we've talked about the market price and how we figure the products we produce into what's posted and what the spot prices are. So they've gone up slightly since there was the posted price increases in February and March, and spot prices started to increase following that. So we've seen increase overall in the market price since the end of the quarter. And certainly, we have room to go to get to where we were for our fourth quarter because remember, our fourth quarter goes all the way back 16 weeks into the year.

[David Mandell:]

All right. And then on the other side of that spread equation regarding kind of your collection prices, how did those, right now, how have those trended since the fourth quarter into the first quarter, and kind of where you are now?

[Joseph Chalhoub:]

Well, it's been a focus of ours to try and improve on those, and we really didn't see the improvement we were looking for. It's still a goal of ours and we think while a big portion of it is commodity driven, driven by things like the price of Number 6 fuel oil. There are some aspects to that where we think we can control and see improvement. And we have delivered that in the past, but we weren't as successful as we would have hoped and we really didn't see any gain at all in -- or we didn't see any reduction in used oil paid during the quarter compared to Q4.

[Gregory Paul Ray:]

If I could add to that, this is Greg Ray speaking, it remains our strong belief that our average price paid to generators at the very low end of the range of sort of market competitors. And we still haven't seen market competitors in aggregate or individually react significantly to the declines in the crude price and the recycled fuel oil prices that we've experienced in the last few months. So we're hopeful that that'll change soon. Usually competitors have some inventory and can afford to wait a little while. But we're hoping that they start reacting more to changing market price conditions, brands products and that we can take advantage of that opportunity as well.

[David Mandell:]

And then my last question was, did you guys do the expansion? Is there likely to be more extended plant shutdowns or can you guys do the expansion without shutting down current capacity?

[Joseph Chalhoub:]

We would be, this is Joe, we would be minimizing the shutdown. We have our typical shutdown 4x a year for regular maintenance, and we will be taking advantage of these to make the times and so that we can put this additional expansion with minimum additional interruption.

[Operator:]

And our next question comes from the line of Sean Hannan from Needham and Company.

[Sean K.F. Hannan:]

So just a question in going back to the lower pay for oil program. So as you look to implement price decreases, what's the process really that you're going through, number one? And number two, what are the results that you're seeing, or I mean, how are those results materializing in terms of some of the more localized regions? Are you having a little bit more success in some territories than others, or any color there would be helpful today.

[Joseph Chalhoub:]

We haven't, on a company-wide basis, we haven't seen, as you heard earlier, we haven't seen a change in here. There's some markets that are not as competitive than others. But at the end of the day, overall, what -- first, we're set up here, pretty well centrally controlled. We have our regions and branches that are out. They're trying to increase the productivity of the route trucks and pay as little as possible. And we have not -- as Greg said, we have not seen any changes, unfortunately, in the market, to allow us to do it. But we have our eyes open and as we see changes there, I'm sure we'll take advantage of it.

[Gregory Paul Ray:]

If I can add to that, I mean your question was a little bit about mechanics, too. And we do provide specific suggestions to our field reps, both in aggregate for what their price level is and how we'd like them to drive it down. And also on a customer-specific basis, as Joe said, we're centrally controlled, so we'll say to them, "We'll pay this much and not more. We want you to push the price down at this account." But we're in a delicate position, because as you understand, our trucks are relatively new and underutilized. And if you think about the cost to us of losing volume to a competitor, it's somewhat more expensive for us than somebody who's got a fully loaded and efficient route. And so we're willing to try and push prices down as we've been working on. But if our customers sort of push back and say, now you've gone too far below the market price and I'm going to leave you and go shop, I think I can get more money from somebody else. We don't necessarily want to lose a lot of customers, and so we give our guys a little attitude to try and hang on to business at the same time. It's a delicate balancing act. And we think that if the industry price level moves down, that we'll be well positioned to achieve our goals of dropping our street price as well.

[Sean K.F. Hannan:]

Okay, that's helpful. And Greg, you actually hit on an interesting point and something relative to a question that I do have for you. As you're looking at expanding the facility and getting some better leverage out of this facility. But then as you account for -- you now will have to be -- find a way to bring in more oil and the capacity of those trucks -- railcars are already not at the levels from the efficiency standpoint that you'd like them to be. So how does that improve without really derailing the model or are you going to have to find ways or are you in the middle of finding ways of extending partnerships for external providers?

[Joseph Chalhoub:]

Well, it's a good question, and it's a balance. Remember, we started with the facility with practically no oil a couple of years ago. And so we've ramped it up and we're currently applying the plant that's pretty close to its capacity of 50 million. And a combination of our own collection of volume and also third-party collectors. We've established these relationships, and today, we have adequate supply. As we continue to grow our collection and improve our route trucks' efficiencies, we will bring more volume to our own 140 route trucks. We also have the ability to add more route trucks, and this expansion is not something that will happen overnight. We were talking about the middle of next year, so we have a little bit over a year to do it. And together with third party supply, we should be able to accomplish that goal. Greg, do you want add?

[Gregory Paul Ray:]

Well I would just add it's obviously our goal to be able to collect our own oil and to supply the plant at its capacity both with our own volume and with third-party purchases. In a sense, I think we're going to feel a little bit less pressure to ramp it up to maximum rates because when we built the plant initially, we wanted to get it up to capacity very quickly. I think here we view this as more of an incremental exercise. So it took us 1.5 years or 2 years to build the volume from our own supply and third-party supplies. We're still getting system incremental improvement in profitability from each new gallon run through the plant. And it may even take us time to get all the logistics smoothed out, or the product sales in place, in order to keep ramping up to that volume. So I think there'll be a driver to move quickly, but we'll be balancing that, as Joe said, with the value of being methodical about where we get the oil from and the cost of that feedstock and making sure that we don't sort of overspend to buy feedstock just for the sake of running the plants at high rates.

[Sean K.F. Hannan:]

Okay, that's great. And then last question, if I may. You've talked about plans for moving toward a little bit more blended products. Just wanted to see if we can get an update there, and that'll be helpful.

[Joseph Chalhoub:]

We continue to look at this, it's going to be a long-term process. And one of the things we're looking at is getting a relationship with an existing blender and compounder that already have operations saved and plant capabilities rather than us starting this from a grassroot basis.

[Operator:]

And our next question comes from the line of Rich Wesolowski from Sidoti & Company.

[Richard Wesolowski:]

Would you mind dissecting to the amount -- to the degree that you like to, the environmental margin performance in terms of service price increases, changes to the fuel or your solvent cost and any solvent inventory valuation benefit or charge that may have been incurred?

[Mark Devita:]

Big part of it is price increase. We've been very successful in not only our particular range, as far as our parts cleaning business, but we've had renewed focus or new focus, if you want to call it that, in the other 2 named services or the ones we talk about, Vacuum and Waste Drum, our containerized waste in that segment. So that's been a big part of it. And then we've just been able to, with volume growth leverage, the existing network, and we saw improvements on an overall basis compared to the volume increase in disposal and transportation with the 2 biggest pieces to drive the margin improvement.

[Richard Wesolowski:]

I was under the impression that the Vac and the Drum price increases were something that were expected to benefit you if successful later in the year. Has something changed in either of those service lines that enables you to raise price now, whereas you haven't historically?

[Mark Devita:]

It's the focus. Typically, if we're doing things as we do it in the parts cleaning service, we would see the timing of it be exactly the same in those 2 businesses.

[Joseph Chalhoub:]

We have historically, as you noted, easier job in popping the prices for the parts cleaning because of the equipment and customers that we have. And, traditionally, we've had more difficulty with the Drum business. And we have put in place systems to support the price increases that we've put through on the Drum side that we do not have before. And we put also some additional staffing to help us make -- implement these different pricing for different type and size drums in the field, and rather than leaving it to the regional -- the branch at a regional basis. So we've provided some additional help from a system point of view and from staffing here at corporate. And that has been quite successful for us.

[Mark Devita:]

Yes, I mean we talked. If you want to get real deep in the weaves around this time, our first quarter 2012, there were some delays, but a lot of that was more just some lack of execution on our part to get -- we're maybe a month or so beyond what we normally would be. But typically, if we're doing what we want to do with the timing of the increase or the impact, should be felt at the same time across those 3 service lines.

[Richard Wesolowski:]

Checking your Oil Business, when you perform the capital budget analysis ahead of the investor decisions, I can't imagine the projected returns to meet your minimums at today's prices. So I'm curious, what returns do you target and how high would prices need to go and the products you sell in order to get there?

[Gregory Paul Ray:]

If your question is about the capacity expansion we've just announced, then we think that does meet our minimum recurrent criteria even at today's market conditions. The margins on incremental production are inherently better than our base of business. There's a significant fixed cost component with respect to operating the re-refinery, and so we're just not able to effectively leverage that with increased volume. And that's why the incremental capacity investment has a good return.

[Richard Wesolowski:]

That was actually part of our next question. I imagine the benchmark is quite lower for today's expansion than it would be for you to launch a new re-refinery.

[Joseph Chalhoub:]

Exactly.

[Richard Wesolowski:]

Okay. Is the company in the market or potentially in the market for West Coast re-refining assets that I've read of recent, come onto the market?

[Joseph Chalhoub:]

Well, we are looking at it, and we have some interest. And we are not in the West at all, with other than in the Los Angeles market, we have one branch. And we think there is a possibility of getting into the Environmental Service through that operation. And otherwise, it will be a longer road for us. So we are looking at it, and including the Oil Business. We're just not focusing on oil in California by itself.

[Richard Wesolowski:]

Right. A beachhead to extend the entirety of the business.

[Joseph Chalhoub:]

Yes, in California, especially in Southern California, is very strong with aqueous because of regulatory issues. And as we said in our discussion here, we have the best in the business and equipment combo with chemistry, and been very successful at growing that business and adding a nice -- better margins than typical solvents. And so we're intrigued about that possibility and we're looking at it.

[Richard Wesolowski:]

And then lastly, even for a limited period of time, would you remind us how high management is comfortable taking debt either as an absolute figure or a share of capital or in relation to your EBITDA?

[Mark Devita:]

You see us sitting on cash for a long time, so we're not rushing to spend the money and even with this expansion, the cash would be going out over a period of time, and as we're earning some cash from the business. We would look at debt if it makes sense, and working with our banks, and if we have these right ratios and it makes sense, we would consider it.

[Operator:]

And our next question comes from the line of Kevin Steinke from Barrington Research.

[Kevin M. Steinke:]

How many gallons of used oil did you collect in the quarter internally versus what you bought from third parties?

[Mark Devita:]

We were roughly 2/3, 1/3 as far as what we fed into the plant. 2/3 of it being from our collection and roughly 1/3 of it being from third parties. And that is up a little bit from previous quarters. But part of that is the ramped up feed we fed more in, not on a gross basis, because Q4 wasn't longer quarter but on a comparable basis. So that and the seasonality factor, I think you have to factor all those in if you really want to push back and take a longer-term perspective on where internal collection versus external needs sit or are.

[Kevin M. Steinke:]

Okay. Just to get a sense of the magnitude of the seasonality of collection. I think last quarter or the last couple of quarters, you were collecting at an annualized rate of about 36 million gallons. Do you know what that figure was in the first quarter on an annualized rate?

[Joseph Chalhoub:]

Well, it's tough -- it depends on when you annualize it. And usually, we were looking at, if you look at one of our accounting periods, we have these 4-week accounting periods. From a normal seasonality standpoint, you can debate what that is. But we're in the roughly 30, 31-million gallon range for the quarter, so you've got to adjust that down based on the normal seasonality factor and that could be 15%, 20%, it really depends.

[Gregory Paul Ray:]

Yes, I think just taking it a different way, we think that our sort of customer retention and account retention was fine. And we think that, that 15% to 20% decline or rather differential between Q4 and Q1 almost entirely reflects the normal seasonality we'd expect in the business. The seasonality is, in part, driven by when consumers typically change their motor oil, and you could get some similar information if you talk to people at Valvoline or Pennzoil. Their sales are typically quite high in the spring and fall months, and moderate in the summer and low in the winter. And so the used oil generation is going to a degree, mirror that pattern. It's not necessarily a seasonality that plays through our entire Oil Business segment because our plants can run at the same high rates even when we're not collecting high volumes of oil provided we can source it from other collectors who have it available. So we should be able to run the plants and sell lube oil, in general, at good rates with a little bit less seasonality than we experienced in our collection volumes is just what I'm trying to say.

[Kevin M. Steinke:]

Sure, that make sense. But obviously, the lower seasonal collection volumes will impact your margins in terms of just lower capacity utilization. But you can still run the plants at good rates, I guess, right?

[Joseph Chalhoub:]

That's right.

[Kevin M. Steinke:]

Okay. Well just lastly on this, do you have the actual number of gallons collected internally in the quarter?

[Mark Devita:]

The internal collection was -- on our web page, about 10.5. Total amount, that was total fed to the plant, it was about a little less than 7 internal, 6.7 million.

[Kevin M. Steinke:]

Okay. Thank you. Now I believe on the last call, you said you are planning to perhaps to roll out new used oil collection trucks in the second half of 2013 if the re-refinery expansion started up. Is that something you would still consider? Or given that you're consolidating routes and trying to improve efficiency, would you hold back on rolling out new trucks?

[Joseph Chalhoub:]

This is still on the table. The timing is as you described in here is based on how we see the improved efficiency coming along, and we're past the first quarter, and we're in the second quarter, we're seeing some nice trends. We look at it at the end of the quarter and decide how many trucks we want to add and where. Really, our main focus is we have 140 trucks and our main focus is to add productivity on this.

[Kevin M. Steinke:]

Okay. I guess moving on to the market price of base oil. As you said, it has come up a little in the last couple of months here, in line with your expectations. Based on your industry experience and knowledge and what you're hearing in the market, is that rate of improvement in line with what you would expect? Would you expect it to move more quickly? Or are there any factors out there that perhaps are holding back more price increases? I think you referenced last quarter perhaps crude oil refiners holding back on price increases to perhaps drive out some Group I capacity in the market.

[Joseph Chalhoub:]

Yes, we really haven't seen any, and let me just clarify, our expectation at the end of the day, we don't control the pricing or in some cases, we don't fully understand. But one thing we know for sure is that the spread between vacuum gas oil, which is a basic component produced from the refiner that can either be turned into gasoline and fuel, Number 2 fuel. And if I have an opportunity to either direct it to that -- the users or into their high capital lube. And we have not seen, in our experience, we haven't seen that margin drop to next to nothing. And to the fact that this now has widened, that spread has widened, and as a result of prices, base price has moved up, was not a surprise to us. How fast and how much is an unknown for us. And the same factors that were around a couple of quarters ago, they are still here. So it's really, and these are decisions by -- in our mind, a couple of big players

[Kevin M. Steinke:]

Okay, but it sounds like you did see improvement in the spread between VGO and lube, as well as perhaps some lessening of those abnormal spreads between posted and spot prices.

[Joseph Chalhoub:]

Yes, we have seen an improvement between the lube prices and VGO. And when things are tight in the market, the selling price compared to posting or spot, listed spot improves $0.10, $0.20 a gallon. So we're seeing that happening as we are right now and it's helpful compared to where we were at the bottom of the cycle.

[Gregory Paul Ray:]

Another way you might think about this. If we're trying to read the tea leaves of where prices are going is that as lube oil prices were dropping, customers demanded discounts off of posting that were quite large. And as the market started to turn and there was a sense throughout the industry that prices were recovering, those necessary reductions or spot price relative to postings, the gap closed there. And that gap has stayed fairly tight now for a couple of months, which I would say could be read that the market thinks that further price declines are less likely then further price increases.

[Kevin M. Steinke:]

Okay, that makes sense. Just lastly on the ES side of things. The 3 new branch openings in the quarter, any particular geographic markets that you would highlight there or -- I guess, you said you still only have one on the West Coast, is that correct?

[Mark Devita:]

Well, we have the one in Los Angeles. They were primarily in the Southeast. So all the openings were based on our traditional satellite model, as we call it, where we take an area or a branch that is established and start by sending one person to the outskirts of that area and beyond of the existing territory and build a branch over time. So there weren't any branches that were added where they were kind of a grassroots effort that didn't have a base of business already there. So it was a lot more our traditional approach.

[Operator:]

And our next question comes from the line of Michael Hoffman from Wunderlich.

[Michael E. Hoffman:]

The 6.6 million gallons sold, that was all base lube or did it include other byproducts?

[Mark Devita:]

That's all base lube.

[Michael E. Hoffman:]

So can you frame what the residuals in volumes?

[Mark Devita:]

Maybe go to your next question, we'll dig that up real quick.

[Michael E. Hoffman:]

Okay, and then could we talk about what you actually were able to get as an average price for the base lube sale in 1Q and how that compared to 4Q in actual dollars per gallon?

[Mark Devita:]

We don't typically express that information. It was, obviously, a negative trend just like the market was. So we saw a decline there. Again, I think I mentioned it in one of the earlier questions. With our somewhat unorthodox calendar, you have -- our Q4 goes all the way back 16 weeks back into the year. So you're going back into since there was a somewhat steady decline in base oil prices, you're getting into some parts of that where it was still a half way decent price, at least compared to now, we might not have thought so back then, but it's still lower, quarter-over-quarter.

[Michael E. Hoffman:]

Okay. So last thing in a different way, if I looked at the lube report trailing price [indiscernible] less that they gave, which category should we focus on as the number that most reflects the stats, the number you would get a discount to it and be able to sell to?

[Joseph Chalhoub:]

Yes, the spot, I would look at the spot prices for Group II.

[Michael E. Hoffman:]

In aggregate.

[Joseph Chalhoub:]

The 1 -- the 1 -- the 100, average of the 100 and 120 and the 200, 250. So if you take these and add these and divide it by 2, that's the average and our 150s can track that and...

[Gregory Paul Ray:]

You asked specifically about the lube report, which I think is the weekly online publication. Michael, excuse me, I think, that does not show the spot prices. Michael, we subscribe to a weekly publication that the lube report drives the data from. And it shows a much richer data set that includes indicative spot pricing, as well as the major posted prices. And so that's what Joe was referencing, that if you don't subscribe to that, you won't be able to see their published spot prices. I was talking earlier about the delta between spot and postings and how that's changed over time, it's not a uniform number where we can say spot is always $0.30 less than postings. There's times when spot price is $0.40 or $0.50 below posting, sometimes when it's $0.15 or $0.10 below posting. So it's sort of an important indicator and it's a number that they don't choose to put in a free weekly lube report.

[Mark Devita:]

. And adding to the confusion, even the spot information if you had it, it comes in ranges depending on -- no matter who actually you get the information from, there's a couple of publications you can subscribe to. And then business, spot price determination is usually just based on inquiries of people in the business. So it's not like they're showing them actual invoices or whatnot. So even that is, I wouldn't say fuzzy, but it's not something if you want to do perfect modeling, you'd ever be completely satisfied with.

[Joseph Chalhoub:]

But the trend is an important indication of where the pricing is. If you had that spot -- if you had that publication, you can track it that way through the spot prices. And when the market is tight, people get close to spot prices. And when the market is long and you can get further decline from the spot prices. But generally speaking, we can't lie and tell you where this is going.

[Mark Devita:]

And we do have, to your earlier question, we had about a $1.3 million in our asphalt extender byproduct and our other byproduct, distillate fuel was about 700,000 gallons during the quarter.

[Michael E. Hoffman:]

Okay. All right, that's great. Can I ask the price question differently, if I may. Just so I have an understanding of sort of how to think about what the discount might have been. Were you above or below $3 a gallon on base lube in 1Q?

[Joseph Chalhoub:]

That's pretty clever, Mike.

[Michael E. Hoffman:]

So you and I have known each other a long time, I'm doing this for 25 years. I asked you the same questions when you used to be a [indiscernible]. You can't fault a guy for trying. [indiscernible] prices, one of the public players has talked about a $0.90 number collection. Is that where your -- are you within or around that $0.90 number or higher or lower, per gallon?

[Mark Devita:]

Greg talked about us being lower than the market. And I think we're comfortable now that we get to survey the market every day on a macro basis, but based on when we talk to people, we think in general we're on the, I'd say, competitive end from what we have to pay to get oil. I don't know if Joe and Greg want to add any more color to that.

[Joseph Chalhoub:]

Mike, I'm going to leave it to Greg. He's wearing the legal hat in the company and I don't want to talk about the...

[Gregory Paul Ray:]

I mean, we're not as -- going to create a precedent here that we're going to kind of disclose our street prices, but as a one-time thing, I'll tell you that we're less than $0.90 a gallon.

[Michael E. Hoffman:]

Okay, that's helpful. Joe, you mentioned a 92% of nameplate. What's the practical -- that ratio given 4 shutdowns a year, whether it's a 50 million or 75 million gallons, what's the practical capacity utilization?

[Joseph Chalhoub:]

Well, the actual, which is really, you got the stream day and you got the calendar day production. And the 50 million gallons is for the calendar year. And so with the shutdowns, you can imagine that you need to run it above run rate of the 50 million gallons to take the shutdowns in and typically, we typically look at about 340 days of operation. During the year, some of it is scheduled to shut down for maintenance and some of it is power failures and power dips and mechanical. Not too many of these for us because we got spare equipment, pumps and so on. And so what we reported here is a typical quarter, as long as you have the supply and you move the product and the rest is plant operations. So we do expect our plant to do the 50 million on a calendar basis. And which would be a little bit higher on a stream basis because of the stream factor.

[Michael E. Hoffman:]

Okay, that's helpful. And then help me a little bit understand, you had a significant volume improvement. I get the price delta, but the volume improvement far outweigh the price delta. So why wasn't the business profitable? What can you do based on -- if nothing was any different 1Q going forward to run it differently? What can you pull out that gets the business profitable, this is on used oil.

[Joseph Chalhoub:]

Well, as we get to the run rate, the 50 million and get out of the first quarter as we said it from a collection point of view, it's seasonal, lower productivity a quarter. So we expect an improvement in the second quarter. And then as we said earlier that we have other measures, transportation that we're looking at and another efficiency factors.

[Mark Devita:]

Yes, when we measure our quarter-over-quarter, we didn't, I don't think we've reached our maximum benefit from some of the areas we said we improved. But we saw an improvement, sometimes, in many instances, it wasn't large, but improvement in many areas. There was one additional negative area basically other than base oil selling price. And we did have a write-down of one of the byproduct inventories, and some of that is a function of the seasonality of the asphalt extender, that was about $400,000 to the negative. And we'll recoup that since we are now the lower basis as we sell that. And that's a product that has a fair amount of seasonality to it as well. So we should be selling more of that here in the non-winter months, and will recoup the cost, the benefit from that lower tiering cost as we move through that material.

[Gregory Paul Ray:]

I'm going to try and amplify or try and expand on what Mark was saying about that inventory charge because we have times in our business with our hydrocarbon products and byproducts where we have inventory charges that are real and reflect an economic change. And this one I'll characterize a little bit differently because there's a seasonality to the sales of asphalt products that's linked to the road paving industry. And the paving is heaviest in late spring, early summer. And the product that we make our asphalt extender, this byproduct, is sold almost entirely into the paving industry. And so you can imagine that if you're supplying customers when they need it, it's valuable and they'll pay you a good price for it. Now If you try and sell it to them in October and November and December, they're only willing to take it at a discount because they're going to have to store it for 6 months. That's sort of a characterization of the industry. And so when we have to mark to lower of cost or market, for inventory we're largely holding. We do sell a little of it during the off months, but we're selling it at prices that we know are lower than we expect to get for the bulk of our production. And yet we have to markdown to lower of cost or market. This is what Mark was saying is that we expect that even though we took that charge, we should be able to sort of sell the product for better prices in coming months. And so we're going to get some recovery of that write-down. And if that makes sense. And so that's one reason that Q1 was particularly soft and one thing that we ought to get back in Q2 and Q3.

[Mark Devita:]

And to add to what Greg said, it's something a phenomenon that you might expect to reoccur in this timeframe, in 2 years.

[Joseph Chalhoub:]

Mike, I want to maybe try to make an additional statement regarding your question about where do you see profitability of the business. To a large extent, although we're making all of these steps to improve the profitability of the business and there are a lot of variables. By far, the biggest variable is that spread between crude and lube. We've got 30 million gallons of lube up [indiscernible] 60-million gallon plant, and it's $0.90 to $1.00 is $30 million. It's hard to feel the cold even with productivity. And our collection and so on. But we're working hard at getting into the black and expansion and incremental capacity of this facility will help us there. And the efforts on the collection will help us as well.

[Operator:]

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