Heritage-Crystal Clean, Inc
Q3 2013 Earnings Call Transcript

Published: 17 Oct 2013

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Heritage-Crystal Clean, Inc. Third 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 third 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 statements and our operations in the third quarter. And we will respond to questions you may have relating to our business. Our third quarter sales were $67.6 million compared to $62.1 million in the third quarter of 2012. The year-to-date sales increased 9.3% to $191.2 million compared to $174.8 million for the first quarter of 2012. In the third quarter of fiscal 2013, we produced 7.8 million gallons of re-refined base oil at our re-refinery. This volume represents an annualized run rate of base oil production of 33.8 million gallons per year, which exceeds our original design capacity of 30 million gallons per year. We were able to run at a higher rate towards the end of the third quarter due to our progress with the planned expansion initiative. We are pleased with the improved results of our oil business. During the third quarter, our revenue in this segment increased from the third quarter of 2012, and we recorded segment profit before SG&A of $1.2 million. These results were achieved due to improved efficiency as we increased throughput at the re-refinery. In addition, we also improved the efficiency of our used oil collection routes and our transportation in the Oil Business during the third quarter. We collected used oil at an annualized rate of approximately 38 million gallons during the quarter. We experienced solid same-branch sales growth in the Environmental Services segment. We continue to focus on our margins in this segment. Although our margins were lower in the third quarter than the second quarter, we are pleased with the improvements we've delivered, so far, this year, compared to 2012. Our growth in revenue was aided by our ability to continually add new customers. As of the end of the third quarter, we served over 93,000 individual customer locations from 74 branches. We continue to take steps to improve our efficiency in the Oil Business segment in order to help mitigate the negative impact of current market pricing, and we're pleased that this segment is now contributing a profit before corporate SG&A. The strength of our Environmental Services segment continues to provide stability to our overall 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. I appreciate the opportunity to discuss HCCI third quarter 2013 results with our investors today. During the third quarter, we produced solid results in our Environmental Services segment and improvement in our Oil Business segment compared to the second quarter. In the Environmental Services segment, sales grew $4.5 million or 14.1% in the third quarter, compared to the third quarter of 2012; and $12.6 million or 13.3% for the first 3 quarters of the year, compared to the first 3 quarters of 2012. Of the 70 branches that were in operation throughout both the third quarter of 2013 and 2012, the growth in same-branch sales was 9.7%. However, if we exclude the impact of those existing branches which gave up territory and customers to new branches, the growth in same-branch sales was 9.9% for the third quarter. For the first 3 quarters of the year, same-branch sales in our Environmental Services segment increased 10.9%. These revenue growth figures for same-branch sales exclude revenues generated as a result of acquisitions made during fiscal 2013. Our average sales per working day in the Environmental Services segment increased to approximately to $625,000 compared to $600,000 in the second quarter of 2013 and compared to $555,000 in the third quarter 1 year ago. Operating cost in the Environmental Services segment increased approximately $1.8 million compared to the third quarter of 2012 to $4.1 million compared to the first 3 quarters of 2012. We are pleased that our operating margin was 23.8% for the quarter, which was a substantial improvement compared to the 18.9% in the year-ago quarter. While the third quarter margin was not as high as the second quarter, our margin in this segment was 25% on a year-to-date basis. This represents an increase of 5.5% compared to the 19.5% operating margin for the first 3 quarters of 2012. In the Oil Business segment, shares for the third quarter were up $1 million from the third quarter of 2012 as increased production at the re-refinery more than offset lower product prices. For the first 3 quarters of 2013, Oil Business segment sales were up $3.7 million over the first 3 quarters of 2012. Here, too, higher volumes offset lower prices. In the third quarter, our Oil Business experienced income before corporate SG&A of $1.2 million, which was an improvement of $1.7 million compared to our second quarter loss. In the first 3 quarters, the Oil Business experienced a loss before corporate SG&A of $1.4 million. As was mentioned earlier, lower base oil selling prices negatively impacted our operating margin compared to the third quarter of 2012. We have seen positive results from our effort to reduce costs and increase efficiency. We reduced both our internal cost of used oil collection and our transportation cost, on a per gallon basis, during the third quarter compared to the second quarter. Corporate SG&A was 10.4% of sales, up from 9% in the year-ago quarter, but down from 11.1% in the second quarter of 2013. At the end of the quarter, we had $21.5 million of total debt and $30.9 million of cash on hand. We incurred $97,000 of interest expense for the third quarter of 2013 compared to interest expense of $112,000 in the year-ago quarter. We incurred $310,000 of interest expense for the first 3 quarters of 2013 compared to $445,000 of interest expense in the first 3 quarters of 2012 when we were drawing on our revolving loan. For the third quarter, we experienced income attributable to common stockholders of $1.3 million compared to $1 million in the third quarter of 2012. Our basic and fully diluted earnings per share for the quarter was $0.07 compared to $0.06 in the year-ago quarter. For the first 3 quarters of 2013, our income attributable to common stockholders was $1.9 million compared to $2.5 million in the first 3 quarters of 2012. Our basic and fully diluted earnings per share were $0.10 for the first 3 quarters compared to basic and fully diluted earnings per share of $0.15 in the first 3 quarters of fiscal 2012. During the remainder of 2013, we expect to continue to take advantage of enhanced economies of scale at our re-refinery, which should improve profitability as we ramp up and expand our re-refining capacity. Our team continues to focus on becoming more efficient in the Oil Business, with the goal of improving the overall results in this segment. We are also very excited that we have been able to restore our margin in our Environmental Services segment to the mid-20% range. We will focus on continued revenue growth in this segment. Thank you for your continuing interest in Heritage-Crystal Clean. At this time, I will turn control of the call over to our operator, and she will advise you of the procedure to submit your questions.

[Operator:]

[Operator Instructions] And our first question comes from the line of a Ryan Merkel from William Blair.

[Ryan Merkel:]

So wanted to start with the Oil Business and why operating profit was up sequentially. I think you mentioned that you lowered that internal collection cost, but was it primarily due to volume offsetting price? Is that how I'm understanding it?

[Mark DeVita:]

Yes, that was the biggest piece. It's just leveraging some of the labor and benefits, our catalyst cost, we had improvement over the previous quarter as well. We didn't do any major changes there, but you basically have the story.

[Ryan Merkel:]

Okay. And then as I think about the fourth quarter now, do you think we'll see further improvement in operating profits and what do you think the capacity utilization will be?

[Mark DeVita:]

Well, we should see continuing leverage as we run at higher rates than the traditional nameplate capacity. I don't know, Joe, if you want to give a little more color on that.

[Joseph Chalhoub:]

Yes. I mean, that part, we should enjoy this higher capacity that we were able to achieve towards the end of the third quarter. And we need to recognize then at period [ph] #13, basically the month of December, sales are not as strong as the -- in the rest of the year, and so we'll see here how this would impact us. And also, the oil collection tends to drop in -- towards the end of the year, as well as in the month of January. But in any case, the increased capacity is a major issue here for our improved profitability.

[Ryan Merkel:]

Okay. And then can you give us a sense of where the base lube spread is today?

[Mark DeVita:]

On a spot price basis and, again, it depends on where you look at it, it was below -- well, I guess, the numbers I have in front of me are for our quarter, and Joe or Greg can chime in if they have something a little more recent, but, for the quarter, it was bouncing around a little bit. But from a spot basis standpoint, it was still under $0.80. It was in the 60s and then in the 70s for -- at different points in the quarter. So...

[Gregory Paul Ray:]

And to be clear, Mark, that's the spread between crude and post -- and market spot base lube prices.

[Mark DeVita:]

And yet, that's true, Greg. And market spot, to give a little more clarity, for those of us who follow this a little closely, spot is probably the best published, again, on a subscription basis, but published insight into where some pricing is, from a market standpoint. But there's been, I would say, additional clarity, recently, into what that really means versus -- what spot and posted really means versus actual selling price. And some of the publications we get have reinforced some of the things that I have spoken with, Ryan, yourself, and a lot of people on this call, which is, there's great -- usually the last year or so, to the downside, but there's a lot of difference between a price that business actually gets conducted at, and even spot price, much less posted, they've been quoted in some of the industry periodicals as being as high as $0.60 lower the actual selling price in some of these talked about market indicators. I don't know, Greg, if you want to add anything to that.

[Gregory Paul Ray:]

No, I think that's fine. I think that our analysts understand that there's not -- well, there's a lot of published information on lube prices. There's not one index that everybody really follows and tracks that neatly describes where the real pricing is. The trends that we've seen in the last couple of months have been, of all the reported indices, have been a very slight downward trend. Industry reports have talked about how the buyers have been, in general, been willing to live with lower inventories of products than they normally would at this time of year, which seems to suggest that buyers of base oil may be waiting to see if the new Chevron plant opening or other factors are going to put more cheaper supply into their hands. So pricing remains choppy and directionally not moving up in the last few months.

[Ryan Merkel:]

Okay. And then last one for me and I'll jump off. Just a hypothetical here, if you are running the plant at 75 million gallons annualized, with the current lube spread and with some of the efficiencies you probably still have, what would you estimate the operating margin would have been?

[Mark DeVita:]

We could definitely expect to see improvement from where we're at, measurable improvement. I don't know if we have that number handy, as far as what the actual number would be at x%, but we could definitely assume upside, even at these current conditions.

[Ryan Merkel:]

Okay. Yes. I mean, I guess what I'm getting at is, as we all think about our models for next year, this is one of the biggest variables and if I'm just trying to get a sense of, is 10% appropriate? I know 20% was the original target, and I think that's takes time, we need the lube price to recover. But just any direction or any help there would, obviously, help all the analysts here on the call.

[Mark DeVita:]

And that's something, as we probably get deeper into absorbing where we think things are going to go, we'll have a better idea. And if we have more information to share with the market at that point, we probably will share it. I'm sure you can appreciate, with all the factors that are out there, and especially the biggest one being base oil selling price, even what current condition is today is a moving target. Today could be, is it today's price, last 4 weeks' price?

[Operator:]

And our next question comes from the line of David Manthey from Robert W. Baird.

[David J. Manthey:]

First off, just wondering if there were any -- was there any inventory revaluation in the Environmental Business this quarter?

[Mark DeVita:]

Yes, there was a piece of that. It wasn't the biggest piece, but we did have some of that with the portion of our solvent inventories that we resell into the marketplace. Part of our, what we call or you know as, our Reuse Program. I think, the really good story there, though, is going into what we would call, for that market, the off-season, which is the winter months. It's somewhat near the used oil collection seasonality, as far as there's not as great a demand for this product. We've done a great job of lowering our inventory, which is a goal of ours, probably by 30% versus last year, or roughly 30%. So that's -- we've been a little bit more aggressive on pricing to hit that goal and we did have a small lower cost to market adjustment in there for that. But we did have other things where we had some onetime costs, some of it related to our acquisitions that we did in the antifreeze space early in the quarter. So there were some onetime things and then there's some of the typical noise that we see in areas like disposal and drums, just our usage on drums being higher than normal, but a lot of times, that's something that is not a -- we don't see anything as a permanent change. We think part of that is just a blip.

[David J. Manthey:]

Okay, but you said that the inventory revaluation was not the biggest component of the sort of sequential delta in profitability, in ES?

[Mark DeVita:]

That's correct. Most of it was our typical noise that we have in the rate we're consuming different things. Whether that's disposal dollars, solvent, drums, those types of things.

[David J. Manthey:]

Okay. And then, as it relates to the profitability in the Oil Business, I think when you started up the original re-refinery, the new capacity was mostly sort of intermediate product. And it sounds like, this time around, either the profitability on that is much higher, or you're able to convert to straight to lube oil. Could you answer the question, just in terms of the product that you're producing on the new capacity, and then, second, are there any shakedown costs that are related to the new capacity, or is that strictly a function of the new facility, the new re-refinery altogether?

[Gregory Paul Ray:]

I'll take the first part of that, Dave. This is Greg speaking. And you're right to recall that, when we first built the re-refinery, we built the front-end of the plant first, and then months later completed the back end of the plant, which was necessary for us to produce the base lube oil that's our principal product. And so we had an intermediate product that was produced and sold in some quantity while we were working on that. The expansion doesn't have quite the same phenomena, or it hasn't thus far. We're really in the first step of our expansion that was executed in the third quarter. We were, really, effectively, able to increase the capacity of both the front end and the back end, roughly, in parallel. So we weren't producing a substantial incremental VGO, that had -- or intermediate product that had to be sold, really all the capacity expansion flowed through to the base oil, which is our principal product. As far as shakedown or start-up costs, or things like that, in the quarter and as we go forward, we will probably have slightly more or slightly longer shutdowns that are done for what are called tie-ins, as we connect new portions of the facility, or implement new equipment. Those aren't huge costs, but they are embedded in the economics. And as we have a little bit longer shutdown, quarter-after-quarter, as we're putting in new equipment to allow us to expand that capacity, it will look very smooth. I don't think you'll see -- we don't expect you'll see any really big spikes of incremental cost. It'll just be slight headwind on our production volumes as we slow the plant down or stop it in order to make these connections, until we get up to the new design capacity sometime in the middle of next year.

[David J. Manthey:]

Okay. And just a last question, just kind of theoretical here, but are you hearing about end customers switching from bunker fuel to natural gas? And the reason I'm wondering is that, longer term, the guys that are out there collecting waste oil for fuel, it would seem that, that business model will be severely damaged, if that were a longer-term trend. And that would also improve your spread, I mean, that'll lead to an increased supply of product, to reduce the price and increase your spread versus the refiners that are using crude oil as an input. Could you just talk a little bit about that? Is that something you're seeing at all?

[Mark DeVita:]

Yes, that's a really good question. And I'm going to suggest that, years ago, as we were first looking at this business, we would've had that same expectation that you've articulated, that cheap natural gas prices could depress the value of used oil fuel and could result in sort of an advantage for re-refining. I think that what we've seen over several years is that the vast majority of fuel burners, who are able to switch to cheap natural gas, have made that transition already, and were doing that 2 years ago. And so the used oil collectors who used to sell their used oil to a very large fuels market, have found that they can't compete with natural gas. But what they've also found is that there are enough customers who don't have natural gas as a fuel alternative, and the amount of used oil collected nationally is not that huge a volume. They've been able to sort of rotate their customers or market to a degree and find places where they can continue to sell their fuel, where a customer needs liquid fuel and can't connect a pipeline. Whether that's, for example, a mobile asphalt plant that's moving down the road, putting down asphalt and can't, obviously, be connected to a pipeline for natural gas supply, or whether it's shipping the fuel offshore to public utilities in the Caribbean, and you can't ship natural gas that same way, there are still enough markets for used oil collectors today, that we don't think that any of them really are existing by selling their liquid fuel in a price competitive way against natural gas. The gas is just too cheap, they'd go out of business, but they've found other markets. Now there's more competition in those other markets. We think that it has been somewhat disruptive to some of the used oil collectors, and that -- there have definitely been instances where they've lost customers and not immediately replaced them, and scrambled, and there have been temporary gluts of supply. And that trend may continue. But it hasn't resulted in sort of a wholesale abandonment of their market or their need to discount all their used oil down to natural gas prices. Does that makes sense?

[David J. Manthey:]

It does. Thanks, Greg. That's great.

[Operator:]

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

[Sean K.F. Hannan:]

So I wanted to just see if I could follow up around the pricing environment on the oil side. So as we had concluded the second quarter and then moved through the course of the third quarter, from a posted basis, we saw some price increases. In reality, for what you recognize in pricing per quantity, the conclusion is that, where you exited the quarter, still on a blended basis, directionally, there was no change in terms of pricing, as well as where we are now, a few weeks removed from the end of the September quarter, is that accurate?

[Mark DeVita:]

Well, I -- this is Mark, and Joe and Greg can chime in. But if you look at where we exited Q2 and where we exited Q3, I think from a posted standpoint, you told the story properly. If you look at the way we calculate spot price, and a lot of people on the call realize there's not an exact equivalent, so we do a calculation, get a proxy of what our spot price would be. It's actually down a couple percent. It went negative in, not only at the end of the quarter, but, basically, that somewhat mirrors the change on weighted average basis for Q3 versus Q2. So, yes, we've seen softness.

[Sean K.F. Hannan:]

Okay. And part of this is, we believe, or suspect, that this could be a consequence of customers really managing their inventories ahead of the Chevron opening.

[Mark DeVita:]

Well, I think, Greg...

[Sean K.F. Hannan:]

Or that's one suspicion.

[Mark DeVita:]

Yes. And Greg added just in general, there's this tighter approach, and Joe can speak to it, he's been at conferences recently, where people are just managing things a little tighter. If it's a, overall, they believe, a declining environment, they don't feel the need to have a lot of inventory on hand.

[Joseph Chalhoub:]

Yes, that's a correct statement.

[Sean K.F. Hannan:]

Okay, that's helpful. And then, in terms of -- I think there was a question a little bit earlier, and I had something similar, when you think about the 113% -- operating at 113% of nameplate capacity, how sustainable should that be in this quarter? It sounds like that number should move up as a consequence of some of the expansion that's been underway and really kind of getting a full quarter as we run through that, how should we think about that?

[Joseph Chalhoub:]

Well, our basic -- this is Joe here. Our basic -- the plant, before the expansion, was designed to process 50 million gallons, and then we're targeting here, for the middle of next year, to be up at 75 million. We've put some early equipment, easier delivery and relatively lower in capital first, obviously. And so we move this from the 50 million gallon mark to 60 million gallon mark. We will not realize, substantially, more than that new capacity of 60 million until the middle of next year. It's not going to be continuing to inch up to get to 65 million and 70 million by the end of the first quarter. We have a couple of large pieces of equipment, a long delivery that will be installed early next year. And so we're hoping to have it all wrapped up by the middle of the year.

[Sean K.F. Hannan:]

That's helpful, Joe. But I guess, did you run at that full 60 million run rate through the course of the entire quarter? Or is that where we exited?

[Mark DeVita:]

That's where we exited. We did not run at that rate, on average, through the quarter. It was really only the back half of the quarter that we began to get additional capacity.

[Sean K.F. Hannan:]

Okay, that's helpful. And then switching over to the Environmental Services side. So we have the year-over-year growth having improved from June on an overall basis. Same-brand sales, though, were still kind of in that upper 9% range. So I'm looking to see if I can get a better understanding of how much of the growth is a result of pricing year-over-year? And then, separately, is there any change to how you're pursuing business here? And what should we expect for organic growth rates looking forward versus consolidated growth?

[Mark DeVita:]

I'll take the first part of your question. More than half of it was price. Probably 60 to 2/3 of it was price. There was some volume, a lot of it price in the parts cleaning price, and a lot more of a price volume balance on the other main services in that segment, being Containerized Waste and Vacuum Services. And as far as growth, I don't know...

[Gregory Paul Ray:]

Well, let me clarify. So when, Mark, when you say more than half was price, you're talking about more than half of the 9-plus percent, same-branch growth.

[Mark DeVita:]

Yes.

[Gregory Paul Ray:]

Another way to describe it, of the total year-over-year growth in Environmental Services, which was in the 14% range, 4% or 5% was due to acquisitions that we made this year, then the same branch figure of about 9%, as Mark said, was weighted a little bit more than half, maybe to 60% towards price and 40% towards volume. As we think ahead, the same-branch growth that we're talking about here, historically, is sort of something that we'd expect to continue to be able to deliver, both on the price and on the volume side, and we don't really project or predict future acquisitions.

[Sean K.F. Hannan:]

Okay. So same-branch sales, we expect general consistency, but on a consolidated basis, due to a reduced acquisition strategy or a little bit more tempered, that blended number that blended growth number might come down from that 14% level, is that appropriate?

[Gregory Paul Ray:]

That's possible, yes. Again, I don't want to suggest we won't to make acquisitions, or that we're not looking. That wouldn't be right. We are looking all the time. We just view acquisitions very opportunistically. We don't build them into our growth strategy, just the way we manage the business. And so it's really not part of our forecast thinking. It's sort of, I know I'm leaving you to your own devices to guess what we'll do in acquisitions, but that's sort of what we're doing ourselves, is we're saying

[Operator:]

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

[Kevin M. Steinke:]

So I believe on the last call, you talked about gearing up for your usual annual price increase in the Environmental Services segment in the November timeframe. Would you expect that the level of price increase to be similar to what you did last year? And -- or are you still doing that to recoup costs or was that just a function of maybe charging more for the value that you're providing?

[Joseph Chalhoub:]

Yes, this is Joe here. When we set up the price a year ago, we were looking at where the market is and where our margins were. And we did put a relatively more aggressive price increase in our Environmental Services. We expect to get a pretty decent increase this year, but not as aggressive as we did a year ago. And that should cover all of our past increases and get us our objective if the market allows it, to also improve our margins. We've been improving our margins by basically 2 ways

[Mark DeVita:]

And I think, Joe, our increase this year will be more in line with what our traditional -- not only the rate we went out at, but we would expect our realization rate to be what we've traditionally, over most of our history, have experienced. With maybe a slight upturn in some of the Environmental Services segment businesses like Vacuum and Containerized Waste, where up until last year -- or this year, I should say, we hadn't been -- done as good a job. So we might, versus that traditional number, might have a tiny bit of upside due to the getting better at those things.

[Kevin M. Steinke:]

Okay. And so, I guess, you talked about price increases helping your margin. And so if we look at the first 9 months of 2013, the ES margin running at roughly 25%. So if we assume that's kind of the margin for 2013, then price increase could provide you some modest upside to that next year, is that the way to think about it?

[Joseph Chalhoub:]

Well, I think, generally speaking, directionally, this is how the math would end up. Keep in mind that part of our objective is to sustain some long-term growth, as high as we can, without sacrificing our margins, and whether we're adding new branches, or we're adding existing services into branches that don't have the services, and so we cannot try to balance that with -- our objective is to maintain margins in the mid-20s and look at the long-term growth. But in theory, if we don't invest in these other areas, yes, the margins will increase, but it's a balancing act.

[Gregory Paul Ray:]

Yes, I can add to that. I agree with everything Joe just said. And functionally, part of the way we manage the business is that we feel we have lots of different paths for attractive growth opportunities. And as Joe said, we balance that against having what we think of as an acceptable income stream. And as we see our margins in ES get materially above the 25% range, that's just a signal for us that we can entertain further reinvestment in the business in the form of adding additional people, adding -- expanding service coverage, opening more branches, things like that. That'll help accelerate the top line growth rate, sometimes not in the same year that we're making those investments, it can be a de minimis improvement. But on a longer-term basis, it can be a significant support for continued growth in the business. So that's sort of how we're balancing it and how we view the margins and what we want to do if our profitability improves as we invest.

[Kevin M. Steinke:]

Great, that's helpful. And I think you've talked about, say, in the last 12 to 18 months, you did make some investments in some branch sales managers. Are those investments paying off? Or what are the result that you're seeing from those investments?

[Mark DeVita:]

Definitely that's part of our same-branch sales growth and the overall growth as well. So those have been starting to pay off and we really stopped making those additions over 12 months ago. It was really at the beginning of 2012. So it's been a little more than a year since we added our last person there, but they do have a longer lead time. A lot of the white collar positions that we add are targeting somewhat larger, I mean, still in our small- to medium-sized target market, but they're a little bigger opportunity, so there's a little longer lead time, but we are starting to see the payoff there. And we've had decent volume growth in our Containerized Waste business and a lot of that is a function of one of the particular positions, our branch sales manager position, that's really one of their main areas of focus is growing that business.

[Kevin M. Steinke:]

Okay, good. Just a couple on the Oil Business. In terms of the margin benefit from improving the transportation cost of used oil, has most of that benefit now been wrung out? Or is there more room to go there?

[Mark DeVita:]

Well, Greg and Joe can chime in, but we -- this is a constant question that Greg and I pose and we work through with our operations and logistics staff. There's not much. I think there's a little more to wring out. It wasn't a big part of our improvement story on margin, it was part of it, as I mentioned. But we're getting close to where we're probably at -- based on our current level of material, or volume of material, that we're getting close to being optimized, but I think there's still a little room left.

[Gregory Paul Ray:]

Yes, I'd add and say, if we just focus on our transportation costs for the first part of the conversation, that we're getting to where we feel we're pretty efficient, by the exit of Q3, the average of Q3 was higher than the exit point. And so, if we can keep it where we ended the quarter, we could see a little sequential improvement. But that's just on transportation. If we flip over now and talk about another area that we've discussed in terms of efficiency opportunity, which is more densely loading our route trucks and getting more productive there, we still have lots of runway to continue to improve in that respect. And the improvements that we've made there in the last half year, or even year have been only very modest improvements. And so we're going to continue to work on that, in improving the route density of those trucks, which will leverage and make our internally collected gallons cheaper for us over time, assuming market prices remain constant.

[Joseph Chalhoub:]

I think our challenge, if I may add -- this is Joe here. In attempting to increase our route density and productivity of the oil collection, we need to -- and we work on this thing and are quite sensitive about how this could impact the average price that is being paid for the used oil. And I think we're looking at what -- where the market is. We're pretty proud where we are compared to where our -- the market competitors are, as far as pricing payments for the used oil. So we tend to try to sell the service rather than just buy the -- just mainly buy the oil from our customers.

[Kevin M. Steinke:]

Right, good. Did you see any incremental improvement on what you paid for used oil in the quarter?

[Joseph Chalhoub:]

It's pretty steady.

[Mark DeVita:]

Yes, pretty flat. But when you balance it with what Joe said, we did grow volume, so that was helped. That was part of when we -- we said in our opening remarks, the efficiency we gained was not so much in lower street price, but it was in putting more volume to the trucks at -- and not a higher price.

[Gregory Paul Ray:]

And Kevin, as you'll remember from prior conference calls, we feel that we're at the low end of the spectrum of what people are paying generators for used oil. And we think that, overall, the industry is still paying too much and struggling with the thin margins, all the collectors that we compete with and when we see acquisition opportunities, we see that people are struggling with inferior margins and inadequate return on capital. And so we think that, directionally, if people get smart, they'll move prices down. We know some public companies have talked about that and we're still waiting to see that show up in any meaningful way in market conditions. But we think we're leaders in that initiative. We're just not seeing anybody else match it right now.

[Kevin M. Steinke:]

Okay. Just a couple other quick housekeeping. How many used oil collection trucks were in operation during the quarter or at the end of the quarter?

[Mark DeVita:]

141.

[Kevin M. Steinke:]

So basically flat.

[Mark DeVita:]

Yes, we've been pretty much flat all year, of one -- or one truck maybe different, but we've been around 140.

[Kevin M. Steinke:]

Okay. And how many gallons of base oil did you actually sell in the quarter?

[Mark DeVita:]

It was at an annualized rate, it was -- of 33, it was 7 -- hold on a second, let me get that.

[Joseph Chalhoub:]

We basically said what we produce. We have a little bit of inventory.

[Gregory Paul Ray:]

I think maybe 7.1 million?

[Mark DeVita:]

Yes. It was 7.3 million.

[Operator:]

[Operator Instructions] Our next question comes from the line of Michael Hoffman from Wunderlich Securities.

[Michael E. Hoffman:]

I'll try to keep this really tight. With regards to the density question, how would you frame the amount of basis points of margin that are latched [ph] when you get your density to a level that you're satisfied with?

[Mark DeVita:]

Do you want to answer that?

[Joseph Chalhoub:]

I would -- we would say that we should be able to -- to get at the high level of density, reduce our collection, used oil route truck collection cost by about $0.20 a gallon. And so, we're collecting in the mid- to high-30s. And so that gives you a feel of where the improvements are going to be.

[Michael E. Hoffman:]

Okay, that's terrific. And then, as I think about the incremental costs that are incurred with this serial [ph] lengthening of these turnarounds to affect the plant's expansion, can you frame for the third quarter, dollars or basis points, what that added to cost? And then how should we should think about those 4Q, 1Q, 2Q as you bring the incremental 15 million on with the -- for that midyear start-up, at 75 million.

[Joseph Chalhoub:]

Well, the cost is 2 pieces. When we go through these regular shutdowns, we do the regular maintenance, and as Greg said earlier, we usually extend this by a couple of days to do the capital pieces to -- eventually gets us to the 75 million gallons. And the cost, obviously, the capital is capitalized.

[Mark DeVita:]

Yes. And maintenance for the quarter, we were about 0.5% negative to the last -- to Q2, to frame Joe's point.

[Joseph Chalhoub:]

All right. And really, the biggest issue for us from -- when we go through these shutdowns, are -- the loss of production by 1 day or 2, and which we try to recapture by running at -- as high of a practical rate when the unit is -- has been newly put in service after a maintenance shutdown. So, Michael, we -- at the end of the day, maybe the answer here is, we don't think these costs are material. And so we don't anticipate this to be an -- really, an important issue for us.

[Michael E. Hoffman:]

Well, and I just -- I didn't mean to question or sound like I was critical, it was more of a, I think, the business was actually more profitable in the third quarter because you have -- and correspondingly, 4Q, 1Q, 2Q, it will, in fact, on a run-rate basis, be more profitable, if I were to adjust for those 2 extra days of expense, in length and turnaround. That's what I'm trying to understand. That's sort of getting that hand around a -- you have a goal to be 20% margins in used oil, you're at 6.5% roughly, and you've given me a sense of what the density will do to that number. I'm trying to understand how much -- what's the level of profitability, all things being equal, if you didn't take any added downtime beyond normal, of being at 60 million gallons, say, versus 50 million? And all the other conditions stay the same, your base lube price is unchanged, should that be a 10% or 12% margin business on the 10 million gallons? Or is it -- that's what I'm trying to understand.

[Joseph Chalhoub:]

Yes -- no, we would pick up a little bit more, 1% or 2% more, but it will be not significant. I think our margin factor for the future is to take us from that -- I know there was a question earlier, we didn't give you a specific answer here, that could take us from the 50 million to the 75 million, that's going to be the biggest factor. And the second biggest factor is, over the next several years, increase the density and the maturity of our route trucks and get these at the rate we'd like to see them. These are the 2 biggest factors. The third one, which is, really, market-driven, rather than us driving it, is the price of used oil paid to the generators.

[Michael E. Hoffman:]

Okay. All right, that helps me, at least, understand sort of timelines as well. And then, last question, what are the chances we could convince you, you should switch to a normal quarterly reporting cycle instead of the 12-12-12-16 [ph]?

[Gregory Paul Ray:]

We think we have a normal quarter reporting cycle. We're waiting for everybody else to catch up.

[Mark DeVita:]

Michael, I'm somewhat on your side, I'll be honest, but -- I know our accounting staff is.

[Michael E. Hoffman:]

Well, as one person in the markets, I would argue, do it. It would be -- it'll accrue to your benefit.

[Operator:]

And that concludes our question-and-answer session for today. Thank you for your time and interest. We are grateful for your support. We invite you to join us for our next conference call.