Heritage-Crystal Clean, Inc
Q2 2015 Earnings Call Transcript

Published: 21 Oct 2015

[Operator:]

Good morning ladies and gentlemen and welcome to the Heritage Crystal Clean Incorporated third quarter 2015 earnings conference call. Today's call is being recorded at this time all callers' microphones are muted and you will have an opportunity at the end of the presentation to ask questions. Instructions will be provided at that time for you to queue up for your question. We ask that all callers limit themselves to one or two questions. Some of the comments we will maker today are forward looking, generally the words aims, 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 invite or include a variety of factors, some 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 10K 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 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, adjusted EBITDA and free cash flow are non-GAAP measures. 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, Chief Operating Officer Mr. Greg Ray and Chief Financial Officer Mr. Mark DeVita. At this time I would like to turn the call over to Joe Chalhoub, please go ahead.

[Joe Chalhoub:]

Thank you and welcome to our conference call. Last night we issued our third quarter 2015 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 third quarter. And we will respond to questions you may have relating to our business. Our third quarter revenues were $82.7 million compared $77.9 million in the third quarter of 2014, an increase of 6.1%. Year to date revenues increased for 12.5 to 249.7 million from 222 million in the first three quarters of 2014. This increase is attributable to our 2014 acquisition of FCC Environment, or FCCE as well as organic growth in our environmental services segment, and was partially offset by decreased revenue in our oil business segments due to lower oil product pricing. We are excited to report that our 2015 third quarter EBITDA was $9.2 million, which represents a 32% increase over the year-earlier quarter, and the new record of EBITDA in a quarter. This marks the second straight quarter of which we have generated record EBITDA. For the first three quarter of fiscal 2016, EBITDA increased 62% to $20.7 million compared to the first three quarters of 2014. Adjusted EBITDA was $12 million for the third quarter of 2016, an increase of 63% compared to the third quarter of 2014. In our environmental services segment, revenue increased 24.7% compared to the third quarter of 2014 and 29.1% compared to the first three quarters of 2014, as we have achieved additional sales to legacy FCCE customers in all of our environmental services lines of business. Revenues in our vacuum services line of business more than doubled from the third quarter of 2014 to the third quarter of 2015 due to the volume added from FCCE acquisition. We also experienced strong organic growth in this business. In our branches that were not affected by the acquisition, environmental services same branch revenues increased by approximately 10% during the quarter. We are also very excited that we were able to maintain our operating margins in the segment in the third quarter on a year-over-year basis despite the fact that acquired FCCE business was generally lower margin than the legacy HCC business. We are pleased that we recall that a positive operating margin in our all business segments during the quarter. This result was achieved despite a decline in our all business segment revenues due to lower pricing for our all products, and an inventory write-off of $1.9 million. Revenue decreased to 15.4% from the third quarter of fiscal 2014 to the third quarter of fiscal 2016. During the third quarter of fiscal 2015, the average spot market price for the Group to-date we produced decline over 40% compared to the third quarter of fiscal 2014. The decrease in revenues due to pricing pressures was partially offset by sales of recycled fuel oil or RFO. We have recently seen significant changes in this industry, particularly the drastic decline in the price of crude oil and as well as the beginning base oil, RFO and our re-refinery by-product. During this period of change, we have focused on key goals; number one, managing the price paid or amount charged to generators for collection of used oil; number two, improving the efficiency of our used oil collection route; and number three, efficient operation of our re-refinery. Over the past two years, we have led the industry in lowering amounts paid to generators for the used oil. As we stated many times before, moving from a pay for oil to a charge for oil model is a significant adjustment for used oil generators and collectors; although, it is something that our team has done before. As of the end of September, we were able to achieve a small average charge for our used oil collection service across our customer base. This is a significant step for our Company in our effort to restore spreads in this business. Our integration of the legacy HCC and FCCE used oil collection routes has greatly increased our productivity. As a result of the integration process, we were able to increase the efficiency of our transportation and logistics for delivery of used oil to our re-refinery and our RFO sales location. As a result of our efforts, to move from pay for oil to charge for oil and improve the efficiency of our used oil collection routes and the related logistics, we have reduced the landed cost of used oil at our re-refinery and that includes the transportation from the collection areas to the re-refinery. We have landed the cost, reduced the cost by almost 70% since the end of fiscal 2014 and today that cost is below $0.75 per gallon. We operate the second largest re-refinery in North America and we expect to complete our expansion to 75 million gallons of nameplate capacity during the fourth quarter. Completion of this expansion will make our already efficient re-refinery even more efficient on a per gallon base. All of our core business segment improvement just I mentioned will help us reach our goal of continuing to make our core business more profitable, even in a difficult business environment. Looking forward [indiscernible] each $0.10 per gallon improvement in our charge for oil program should result in an approximately annual EBITDA improvement of 7.5 million. Similarly or as equal each $0.10 per gallon improvement in based wholeselling price should result in an approximate annual EBITDA improvement of $4.5 million dollars. Though as we can see the potential for the future as we move in that direction we set. We are pleased with the performance of our environmental services segment which has delivered consistent margin performance compared to the year ago quarter. Even after the addition of somewhat lower margin FCCE business in addition to the synergies we realized we believe we can continue to deliver growth and increase profit from this segment. Our environmental services segment now accounts for about two thirds of our company, total company revenue and continues to show steady predictable growth in both revenue and profit. This remains a solid and successful foundation for our company and provides us with continuing opportunities to add value in the years ahead. 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:]

Thanks Joe, I appreciate the opportunity to discuss HCCI's third quarter 2015 results with our investors today, we continue to realize synergies from the FCC Environmental acquisition during the quarter. During the third quarter we estimate that we generated approximately 4.6 million in cost saving synergies and 0.6 million in business improvement synergies for a total of 5.2 million of gross synergies. We also incurred 0.1 million in cost to achieve synergies which resulted in an estimated total net synergies of 5.1 million during the third quarter of fiscal 2015. We ended the quarter generating synergies at an annualized rate of approximately 23 million. In the environmental services segment revenues grew 10.3 million in the third quarter compared to the third quarter 2014. Of the 73 branches that were in operation throughout both the third quarter of 2015 and 2014 the growth in same branch revenues was 15.7% for the first three quarters of the year revenues increased 35.6 million, or 29.1% in the segment. Same branch revenues for the first three quarters of fiscal 2015 grew 19.5% compared to the first three quarters of fiscal 2014. In branches with no impact from the FCC environmental acquisition same branch revenues increased approximately 10% during the third quarter compared to the prior year quarter. Of the third quarter our average revenues per working day in the environmental services segment increased to approximately $900,000 compared to 720,000 in the third quarter of 2014. In the oil business segment revenues for the third quarter were down 5.5 million in the third quarter of 2014 as a direct result of decreased product prices. For the first three quarters of fiscal 2015 revenues were down 7.9 million compared to the first three quarters of fiscal 2014. We are pleased that our profit before corporate SG&A and environmental services segment stayed strong at 28.7% of revenue, which was slightly higher than the third quarter of 2014, even considering the impact of adding FCCE volume which was traditionally lower margin than our legacy business our profit before corporate SG&A in the environmental services segment through the first three quarters of fiscal 2015 was 27.3% compared to 26.6% through the first three quarters of 2014. Our environmental services segment benefited from lower solvent costs which tracked the lower crude oil pricing. In the third quarter our oil business achieved a profit before corporate SG&A of 0.6 million compared to profit before corporate SG&A of 1.3 million in the third quarter of 2014. For the first three quarters of fiscal 2015 the oil business experienced the loss before corporate SG&A of 1.7 million compared to a loss of 0.5 million in the first three quarters of fiscal 2014. The operating margin in our oil business was negatively impacted by the continued low prices for oil products and by a $1.9 million write-down and the value of our inventory during the quarter. Without this write-down, our profit before corporate SG&A in the oil business segment would have been 8.3% or approximately $2.5 million. Corporate SG&A was 11.9% of third quarter revenues, up from [10.5%] in the year ago quarter. In the first three quarters of the year, SG&A was 12.6% of revenues compared to 11.4% in the first three quarters of 2014. Now that we have worked through the FCCE integration, we are pleased to see evidence that our efforts to control SG&A expense are paying off. From the second-quarter to the third quarter of fiscal 2015, SG&A expense decreased by $0.7 million or 7%. This comes right after a decrease of $0.5 million in SG&A from the first quarter of fiscal 2015 to the second quarter of fiscal 2015. So over two quarters, we have achieved $1.2 million reduction. SG&A expense as a percentage of revenues has decreased from 13.2% in the first quarter of 2015 to 12.8% in the second-quarter and down to 11.9% in the third quarter of fiscal 2015. During the third quarter, we incurred an additional $0.1 million in integration cost for FCCE, bringing our total for the first three quarters of fiscal 2015 to $1.5 million. At the end of the quarter, we had $73.6 million in total debt and $20.5 million of cash on hand. We generated $7.6 million in cash flow from operations during the third quarter of fiscal 2015, which represents an increase of 73% compared to the third quarter of fiscal 2014. During the third quarter, we generated free cash flow of $5.3 million, which marks the second straight quarter of positive free cash flow generation for the Company. We incurred 404,000 of interest expense for the third quarter 2015 compared to interest expense of 24,000 in the year ago quarter. For the first three quarters of fiscal 2015, we incurred $1.4 million in interest expense compared to 110,000 in the first three quarters of fiscal 2014. The increase in interest expense was a result of increased debt used to finance the FCCE environmental acquisition during the fourth quarter of fiscal 2014. We are pleased to report that for the third quarter we set a quarterly earnings record with net income of $2.7 million compared to income of $2.4 million in the third quarter of 2014. Our basic and fully diluted income per share for the quarter was $0.12 compared to $0.13 in the year ago quarter. Our year-to-date income is $3.7 million compared to $2.7 million for the first three quarters of fiscal 2014, which represents an increase of 37%. Earnings per share for the first three quarters of the year are $0.17 compared to basic earnings per share of $0.15 and fully diluted earnings per share of $0.14 in the first three quarters of fiscal 2014. To update our full year guidance, we now expect our total revenue for fiscal 2015 to be in the range of $345 million to $360 million, our unadjusted EBITDA to be in the range of $30 million to $35 million and our adjusted EBITDA to be between $40 million and $45 million. Thank you for your continuing interest in Heritage-Crystal Clean. At this time, I want to turn the call over to our operator and she’ll advice you of the procedure to submit your questions.

[Operator:]

Thank you [Operator Instructions]. Our first question comes from the line of Ryan Merkel with William Blair. Your line is open.

[Ryan Merkel:]

Thanks, good morning everyone. And congratulations, you’re definitely executing well in a tough environment here. So my first question I want to focus in on the EBIT margin in the oil business. If would the calculation is right, I am coming up on an adjusted EBITDA margin, or EBIT margin of about 8.4%, which should be a nice improvement sequentially and year-over-year. So my question is, how sustainable is this left? And now that you’re actually charging for oil, what could be this in the fourth quarter?

[Mark DeVita:]

If we look from Q2 to Q3, I can give you a little insight into what the movement was. One of the things that we believe will be permanent to help us in that -- with that improvement is we saw almost a 3% benefit from quarter-to-quarter in catalyst. And Greg or Joe maybe you can explain a little bit more in detail if you want about that. But that relates to some of our changes that co-inside with the expansion that we’re moving through and expect to finish the quarter that we’re in now, the fourth quarter. We benefited on the cost side although with somewhat offset by the write-down. But third-party bulk oil, which again that should be something given the current, if the current crude environment stayed where it’s at, that we should continue to see. And then there were -- those were really the two big items going forward. I don’t know Joe if you want to talk about the catalyst, or just any forecast?

[Joe Chalhoub:]

No, the catalyst I think you covered as well that’s just about $1 million a year of savings. The real impact for us to give you an excellent Ryan because we really don’t know what going to happen with crude, and the other thing that has happened here recently is there has been a reduction in posted price of $0.10 to $0.12 a gallon for the lube oil and yet the spot price hasn't moved much and so we're hoping that that continues for the quarter so crude can also go up and that affects us in almost half of the volume we sell, we sell RFO and we sell byproducts of refineries that are tied into crude, so crude goes up even as the lube oil doesn't move up we benefit, so sorry couldn't give you any more clarity on the oil segment.

[Ryan Merkel:]

Well sure and just a follow up, I think your guidance for the full-year for adjusted EBITDA did you say was 40 to 45 million. So that sort of implies I believe that the EBITDA margin will be up sequentially in the fourth quarter from the third quarter, now I know that's your sales quarter for you but that also reflect improvements in I guess the margin in both businesses.

[Joe Chalhoub:]

Well it's not much, it's doesn't reflect much of a change we do have the benefit of you already talked about the extra four weeks, but we do expect before the quarter's over we will be running at a higher rate again depending what happens with the commodity prices that should help us high rate it through the refinery I mean. So that should help us marginally there, but there is not much built in as far as improvement beyond where we're running. Because there could be offsets we don't know as Joe said how the $0.10 decline in posted price that might not lead to much spot price so the actual prices most of the transactions are done at and [indiscernible] there might not be much of a decline. We'll have to wait and see it's still fresh for some of the people who just followed I think in the past week. So that's really the big variable and the reason for the range. You know the ES business is fairly predictable.

[Ryan Merkel:]

Right, okay maybe one more here, you know the industrial economy here in the US has slowed quite a bit over the last couple of quarters and I know that your exposure there is really broad-based. But I'm wondering you starting to see any signs particularly in heavy manufacturing space, I'm not sure how much exposure you have there, but you're seeing signs that maybe some customers are now taking down shifts or slowing down production because I recall the last time we saw the industrial complex slow you sort had a one to two quarter lag before it really impacted your business. So just curious if you're seeing anything any signs of slowing.

[Greg Ray:]

This is Greg speaking Ryan, and I would say that in general across the broad manufacturing segment we're not seeing a general slowdown. What we are seeing and we've been seeing for more than a quarter is that manufacturers and industrial customers that are dependent or related to the petroleum industry are well past of them slowly down and that's not a surprise to anybody but we have quite a few customers that are involved with the going rate and pipe yards and things like that. Those customers have seen dramatic cutbacks in activity and it's a rather regionally focused phenomenon so we worked through our branch system and in the south-central and south parts of the country we've seen some slow down in those kinds of accounts. But beyond that the statistics we look at still seem to show a healthy and robust climate. I think that you talked about the lag we saw last time we went through significant recession and I think we learned some things as we went through that. The most dramatically lagging part of our business is our [indiscernible] waste management because there we're picking up the hazardous waste that our customers produced a quarter ago or two quarters and so that's really the slowest or last place we see a change. And parts cleaning and some of the other services we think that changes visible more quickly and we just haven't seen anything yet that shows up on our radar that looks like things are deteriorating out there so we remain cautiously optimistic that the customers we service are still doing okay other than those that are dependent on the oil industry.

[Ryan Merkel:]

Got you, okay, very good, nice quarter, thanks.

[Greg Ray:]

Thank you, Ryan.

[Operator:]

Thank you, our next question comes from the line of David Manthey with Robert W. Baird, your line is open.

[David Manthey:]

Thank you, good morning. First off on the fact that your pay for oil situation has changed to charge for oil in September, should we assume that in coming quarters that will continue to be the case and the reason I'm asking I'm just wondering how sensitive the your charge for oil situation will be relative to group two prices going forward and I don't know if you have any comment on local demand dynamics for used oil over the past year you could talk about it in reference to that question.

[Joe Chalhoub:]

Yes, in driving of our cost down for what we pay for used oil when we were getting for used oil now that we have an average, the charge in driving that further, lot affect as we look at and lube oil, that’s one factor the market for -- the demand for used oil is split between lube oil and the production of vacuum gas oil. There is a quite a bit of volume of oil collected in the United States that goes into the geo market. And then we track that and then we also track the price of the number six the fuel, the RFO version product and the recycled product goes as a percentage of it. So these are the factors, and we look at competitive forces. The price of oil stays the same where we are right now regardless of where the lube oil is going. Our plan is to continue to put more customers into a charge more and increase the charges of these customers. We’ve been working hard at getting every week statistically here more and more customer and to charge more without losing productivity on our track and it’s a very fine line. And so we’re happy as we said about the end of September that our weighted average volume we collect is already at a charge. But we have a very meaningful percentage of our customers that are paying for it stock fee.

[Greg Ray:]

I can add that we’ve talked about wanting to have our oil business would be stronger and more successful even in difficult environment and we’re not there yet. And one way we improve on this is to increase the amount that we’re charging over very long period of time now. The decline in product prices whole industry has been more significant than the decline in the cost of this used oil. We’ve not moved our price to generators as far as what we’ve suffered and reduced prices and that’s why it is margin compression. So we’re committed to trying to change the price further. But as Joe said, we don't want to suffer material market share losses that hurt our efficiency. It’s not about ego it’s about just not getting up everything we’re gaining on economically. And so I think we’ve spoken about in prior calls, around the zero point that’s very delicate and pricing for charging the small amount and our customer are presented with an offer from a competitor who is picking up for free or even paying a small amount that has an appearance psychologically of a big difference. And so we’re going to keep pushing pricing and hope that the rest of the industry does continue to be disciplined, and like we do want to improve the margins of the business to where there is a return on capital.

[David Manthey:]

And Greg that speaks to the question here, I am wondering about that competitive environment. It would seem to me that given where used oil prices have gone, the smaller players out there that are just collecting and then reselling this product for Btu value. That has to be a failed business model at least prices. And I'm wondering the longer this persists I would imagine more of those small players will go out of business. But it would just seem to me that at these levels if you don't have a re-refinery, you are severely disadvantage as it relates to staying in business. And just wondering if you can give me a read on, and it seem to me the smaller competitors you’d be half way in the markets you’re competing in.

[Joe Chalhoub:]

Well, we’ve seen in the last couple of months, third-party collectors knocking on our door to supply volume, we haven’t seen for some time. But answering your general statement about the current market is a difficult market for the collectors that are in the fuel. This has been an evolution over the last several years, even before the price of crude collapsed just the natural gas prices being lower and lot of these local actual plans decided to move away from used oil burning into natural gas. So that has been evolving over the last seven years, and continued into difficult markets. So we see good -- it’s taking time but we feel good that we can improve our spread. So remember we came down from a price of the $0.90 a gallon paid down to where we are now. And as we said earlier, every $0.10 a gallon improvement is $7.5 million of EBITDA for us.

[Greg Ray:]

Another comment Dave that Joe’s pointed out in the past that when you think about sort of exits or barriers exits for competitors in the used oil collection business, while some of the larger more consolidated guys have obviously transacted and sold as we brought FCC as they cleaned harbors, bought thermal coolers. But a lot of the smaller local regional mom-and-pop kind of guys, even when their business gets to breakeven or small losses, just marks on forward and they don’t take a dividend or a salary and they have family members working for the Company that take less money and they continue in business rather than exiting. So there is sort of -- because it's quite entrepreneurial at the small-scale, there is sort of some inherent barriered access. You think that transaction prices if you want to go out and buy these people are more attractive to buyers and I think generally that's true but they also have been through cycles in this business before and are inclined to weighted out and hope that crude goes back to $100 and they can sell their business for a much more attractive price. So you wouldn’t often see people just packing it in and saying we are done unless there is such a dramatic downside cycle the people get caught in liquidity crisis or have too much inventory and no problem that way but other than that there is a pretty solid sustaining sort of trend to just stay in the business and work through the tough time. So I don’t know if that's helpful, call it for you.

[David Mandell:]

Yes, it is, yes thanks Greg. And just last question on the increased capacity here. Were there any startup or shakedown costs in the third quarter? Do you expect to see some in the fourth quarter then? And could you tell us how you expect the capacity to come online? Will get some incremental capacity in the fourth quarter or is it just you are planning on full run rate in the first quarter of 2016?

[Gregory Ray:]

Well just as in the first quarter of 2015 it's clear that -- 2016 that the capacity will be there, we will running at the higher capacity. Just to give you a little bit of a flavor in the third quarter that we just finished there are two sections of the plant, we had in the third quarter we had commissioned, the hydrotreater, new hydrotreater, it's like the expended hydrotreater and that's why we made a comment about our catalyst, reduction catalyst cost. So that’s already in place that and capable of running at the higher rate. And in the beginning of the fourth quarter we have taken a regular shutdown and expended it to make all of its kind required to complete the expansion and our current plan is to be able to get some higher production run in the second half of the quarter. And so that's not too many weeks we are franking a quarter. So we see between the shutdown and the expended volume where we end up in the quarter there but definitely by the beginning of next year, the first quarter we should have it full, at the full 75 million gallon rate.

[Joe Chalhoub:]

Yes. And we will have I don’t have the exact number here and if I can't get you know we can touch base later but in Q3 there wasn’t a big CapEx item for the expansion, there will be more in Q4 and that's when we will probably spend the bulk of what's left to get the expansion completed.

[David Mandell:]

Okay. Alright, perfect. Thanks a lot guys.

[Joe Chalhoub:]

Thank you, Dave.

[Gary Ray:]

Thanks.

[Operator:]

Thank you. our next question comes from line of Sean McHannan with Needham & Company. Your line is open.

[Sean Hannan:]

Thanks. Sean McHannan here.

[Joe Chalhoub:]

Sean Hannan

[Sean Hannan:]

Good morning. A question going back to oil side, what are you assuming in terms of any lost customers or volumes as you continue to implement the charge for oil effort and then what are you seeing or getting at the understanding from the generators in terms of feedback or resistance and then observations of what competitors are doing, how it's uniform that's appearing and the pace they are making changes. So just a little bit more context I guess with those embedded questions around the charge for oil environment.

[Joe Chalhoub:]

Good question Sean, I will -- this is Joe I will answer it and Greg can add anything more that I haven’t well defined. This is an interesting question and also a pretty complex because it depends on the nature of the generators and what we have seen when we got and this is -- we have been moving now here for it's been a several two, three months time to put the charges. In place we got different sized generators acting differently and basically you go to the -- you go with more customer and you are going to do it a 100 gallon, 150 gallon pick up and the tank is not full and so you would, it could tell you, I mean there is a relationship between direct and the customer, in some cases they would agree to have a charge, in other cases you don't need to have a lot of these of cases if it's surge of the customer tell you don’t pick this up, my tank is full, I don’t want to pay the stuff fee or expense the gallon and well freely more the stuff feed. And in our case that's what we have seen and you have really lost productivity because expense of truck was a rough person going in and getting more volume. And so but as we go back to the same customer before they’ve done, and expand our situation eventually when we get more and more people into a charge mode, this becomes the new reality. And where larger customers have always has the luxury to negotiate I am talking about a quick lube that has 10 locations, that generates hundred thousand gallon a year, so these are little bit more tricky and take a little bit more time. But we’re focusing on the call customers and the vast majority of our volume. So we’re working this as we’re moving ahead. Greg?

[Greg Ray:]

I think that you started Johnny asking sort of how much we’re willing to lose. And I think I put this in my context that there is some price for playing the leadership role that we’ve played on the price side. Over a year a year and a half as we’ve been driving price down, we probably given up approximately 10% of our total combined volume to people who were willing to try and chase improving market share instead of bringing the margins back to where they should be. And I think that we feel we've done enough there, and we’ve given up enough and we’re not interested in giving up any more market share because at some point as we’ve said that starts to deteriorate the efficiency of our trucks and routes that we’ve worked hard to deliver. So we’re not looking -- we're not in a position with an expanded plant per se we’re going to give up a lot more volume to keep pushing price forward. Having said that, we think that recently we don't feel like we’re way out ahead of the market, and that as we’ve been driving our price in this direction, we think that others are doing, behaving in a similar fashion. And our volumes seem to be fairly stable. So we’re not -- we're ego-panicked right now. But we can never predict how competitors will behave, and if one of them decides that they want to chase market share all of a sudden at the expense of margins then we may find our sales force to respond in time, but we’re not there today. Our customers are gradually going to get used to the reality that the pricing is shifted into the charge environment. And once they get acclimated to that, then after a period of time, six months of being in that zone, then customers stop being as price sensitive again and a few pennies difference between a company and competitors stops being quite as important and permanent and we’ll have more flexibility on getting prices or margins where we think they should go. And keep in mind our argument for customer, which really does resonate with many accounts that they may not like the fact that their used oil is worth as much to us or to other collectors, but there is two things for them to be reminded of to mitigate that. One of them is many of these customers are in the vehicle aftermarket, service after market, they are car dealerships and quick lubes and people that are doing truck maintenance. And many of them are still implementing and maintaining charges to the vehicle owner for our oil disposal for proper management of used oil, the deep back 20 years to the last time that the typical norm for our industry was paying and get rid of used oil, so they’re then charging those fees and have not done away with them and now they’re in a situation where they need to use that source of revenue that they had all along to pay for disposal of the used oil. Secondly, anybody who is involved in the whole close loop and is buying and changing lubricants knows that the clock for the new lubricants is down dramatically by a lot more than the fees that we’re imposing for picking up the used oil. And then that mitigates the fact that the charge something to provide the service. so we kept strong arguments, customers will generally accept those arguments and the limiting factor will be some competitors who says well I still want to pay just for used oil and if that happens on a broad scale, we’ve got a problem. If it happens in a small local area, we’re not too worried as you know we’ve got hundred of trucks now, we’re operating in 80 branches. And so we don’t worry too much about what a guy does in a single local market.

[Sean Hannan:]

So it sounds like right now outside of any extremely circumstances that could otherwise shock the dynamics around collections that there has been the official fundamental paradigm shift within the industry to move back to traditional charge for that dirty oil scenarios. Do you think that we have officially crossed over that line in a sustainable fashion? It certainly appears that we have, and wanted to get your thought.

[Greg Ray:]

We clearly, in our mind, we clearly we have an after representation out there and the pickups. But I can clearly say that we have crossed that, and that’s for the people that haven’t been in this industry for a long time. This is a scenario that occurred roughly 30 years ago where the industry went from a consistent pay for oil to a charge. And at the end of the day, the oil our industry is the service industry. Yes we sell a commodity product but with removal of oil as a service industry and then the oil service in the mid 80s which stayed on for 15 or so years, out of increased charges back in the late 80s and early 90s.

[Sean Hannan:]

That's helpful. All right, let me ask a question on the environment services side and I'll hop back in queue. Can you talk more about the efforts in terms of same branch sales growth and the ability to keep that going in double-digits? At what point or how far out does that start to really become difficult in terms of comparisons without you folks notably expanding route territories and perhaps adding a larger group of branches perhaps even M&A as a part of that. Can you give us some context around that thought because it's been a very good anchor you know piece of the business of the overall business for you. Thanks.

[Greg Ray:]

Well we feel pretty good about sustaining this double digits in the same percent range that we experienced this quarter and 12%, 9% in that range and it's not one single bullet we got still plenty of room to add resources in our existing branches and we're growing in really every environmental service line of business within the segment, whether it's parts cleaning or drum waste, or section service or antifreeze services and now with, after that we see, have to see acquisition. We're offering field services remediation at our branches and that's another big business but it's a growing business and quite profitable so we're happy with that and the additional branches. Not every location has offered all of these services but we have room to add the services and then we have the mix or change from the parts cleaning, our biggest block of business from solvent to [indiscernible] and this has started several years ago. It was businesses is growing faster and then finally price increased. Mark, you want to add.

[Mark DeVita:]

You know I would say also it somewhat [indiscernible] but when you look at even what we've reported the last couple of quarters and we see branches that weren't affected. We did a great job in integration of the company I believe with the FCC Environmental deal but even to get that done there weren't, there were many branches that weren't in this region or geography of overlap that didn't maybe acquire a lot or maybe even any FCC Environmental customers but are focused on getting the integration done, sometimes took some of those people temporarily to help and then in addition to that we didn't, we weren't on our standard I would say rollout plan with some of our incubation stage businesses or even some of our businesses like vacuum or whatnot so that statistic that we quote with branches that weren't affected really they are again it wouldn't have taken that 10% or 12% where we've been 15 or 20 by any means, but that has been tempered because our focus to try and make sure we did a great job with FCCE. So we started to get back since the integrations over we're starting to get back in that mode of adding at the incremental rate the new resources that we were doing prior to the FCCE transaction. We, asked about M&A and the I think that while it's a complex measure that doesn't, we don't report and doesn't show up neatly for one reason that we had steady good growth in environmental services and have kept it in the 10% range and expect to continue to do that as, it's not unrelated to our oil business. Many customers want the full manual services that we offer and so we're more successful in selling when we can deliver all environmental services. And over the last several years as you know not just with FCCE but prior to that with or universal RS transaction our Warrior transaction we've added thousands and thousands of customers who primarily used all accounts and we continue to prospect and develop that captive customer base to add other environmental services. And so that's all been sort of a nice tailwind for us to keep growing environmental services and sustain this growth rate. And you know so we think that the 30,000 customers we added from FCCE is going to give us a lot of room to keep expanding environmental services in years to come not just the in a twelve month time horizon.

[Sean Hannan:]

That's great feedback, thanks folks.

[Mark DeVita:]

Sure.

[Operator:]

Thank you, our next question comes from the line of Kevin Steinke with Barrington Research, your line is open.

[Kevin Steinke:]

Good morning everyone, wanted to follow-up on the used oil discussion a little bit more here. I you know last quarter you were talking about how you were really leading the industry there, but it seem you had kind of run into a bit of point there where others weren’t following along. And now we're at the point where end of September you’re achieving a small average charge for pickup and that happens to coincide with the announcement at the end of August of your largest competitor that they are going to go to charge for oil across their entire customer base. So I am just wondering relative to that specific competitor, your largest competitor, that you’ve seen the follow through on that announcement and that’s what is really starting to change the dynamic in the environment overall.

[Joe Chalhoub:]

Yes, I would rather be not, sorry Kevin I can’t get into the specifics. But people see our announcement and see the other players announcement. I think we answered the question maybe I think little bit more color as the fine line in here. We asked earlier by -- other question we had earlier that we have seen the industry shift in that mode, maybe not everybody as Greg has explained, there is a lot of small independents, but haven't talked to follow. But I think the industry in general some of the larger players have done that, that’s what we’re seeing in the marketplace. So this is a needed thing for our industry. I mean we haven’t restored the spreads and we are confident that it would be restored.

[Gregory Ray:]

The other thing to say is to be literally frank about it. It’s very hard for us to gauge average price levels competitors in the market. We’re talking about 100,000 customers we serve and competitors serve a single multiple of that. And we hear every day from our reps in the field about accounts that they lost to a competitor who is still paying a lot for used oil, and they’ll identify the competitors and we’ll look at and we’ll say well we know that maybe they’re paying somebody and maybe they’re charging somebody else and it’s hard to ascertain where they’re on average other that if we start to see substantial net volume losses we might conclude that we were no priced at the market level. But it's a very active market and we probably don't have as good an idea as you were about what the average price level of a competitor is out there right now. And we've learned over the years not to overreact to the anecdotal information because it's very easy to do that and it experience company through that all the time. And so I just heard we lost some account at this price. And so I am going to get our respond accordingly. But the big markets with lots of dynamic effects, sometimes competitors might pay a high price for the used oil because other aspects of the account are really important to them and we don’t want to presume that is there our effort to set a general price level that we should be responding to.

[Kevin Steinke:]

Okay, thanks, that’s helpful color. In terms of the environmental services business, how much of a year-over-year benefit were lower fuel and solvent cost?

[Mark DeVita:]

It was in the 2% to 3% range, similar to last quarter.

[Kevin Steinke:]

Okay, and so we discussed this a little bit already. But I guess going forward, excluding that benefits, do you feel like you can continue to drive the growth and still maintain the underlying margin excluding that benefit? Or I mean are there significant investments in sales headcount or something that you feel like you have to make say over the next years or so to sustain the growth or gain greater penetration of the FCC customers? I mean just trying to get a sense for how much investment is needed to sustain ES growth and sustainability of margins ex the fuel benefit?

[Gregory Ray:]

Well, there is very little. I think overall the messages is it is sustainable, continuing the top line growth while not only sustaining the margins but as we leverage our infrastructure, more we would expect to see continued improvement in margin. Remember when we acquired some of the lower margin FCCE business, we didn't go to those customers and if you read at those out of our database, you would see that they’re probably not delivering the same margin that the legacy HCC customers are delivering yet. And that’s a multiyear story in some cases that gradually it’s through price adjustments or other means to get that business there. I also mentioned as part of an answer to another question that we had held off but are starting to rekindle our normal incremental resource and outside of a big program which we don't have and any plan to do at this point. We have done back let's say at the beginning or mid of 2011 we did through early 2012 we had significant investment in some of the sales resources but we will probably going to be sticking to the more incremental approach that we have done and while that is really not capital investment but investment in operating losses and will, and if we went to the extreme, might have a negative impact we think we are going to it in a pace we can balance still get the top-line but not have margin deterioration, should have incremental margin improvement because that's on top of our normal program of annual prices which at this point we would expect to have something in this quarter.

[Joe Chalhoub:]

This is discipline we have put in place several years ago to fuel the growth as it incrementally results the beauty of the ES business we can do that branch-by-branch, area-by-area business, lines of business within the second and so our objective is to continue to grow but also not lose our margin as we are adding that.

[Kevin Steinke:]

Okay, perfect. That's helpful. And in terms of just the overall regulatory environment driving demand for your Environmental Services businesses. Have you seen any meaningful changes, I mean are things tightening and making customers more willing to outsource or is kind of steady-state? I am wondering just how much of a driver regulatory environment or enforcement actions are helping you or is it just as pretty much the same as it's been for a while?

[Greg Ray:]

Yes, Kevin, this is Greg speaking. The quick answer is it's pretty much the same as it's been for a long while in the early stage of the development of our environmental industry, regulatory drivers and enforcement actions that you are talking about as well as circa our Superfund liability we are all think that woke up generators and make them really think about how they were managing their ways but that's not a big driving force in the last decade and nothing has really changing on the horizon. The other corollary observation is that from time-to-time as they are reviewing and rewriting the regulations, EPA at the federal level or more rarely states decide that to address something that was previously diverted the landfills and to make it something that needs more careful management and when those situations arise that creates opportunities for us and our business. And so 15 or 20 years ago was oil filters that all used to go to the landfill that now we pick up a lot of oil filters, 10 years ago was fluorescent light tubes that used to go to the landfills that contained mercury and now we pick up and send off for refraking a lot of light tubes and may be in the last five years sort of a new small. But growing slice of the pie is the start of electronics and we pick up more and more bed every year but very small slice of everything that we do when the regulations are expanded in that way and we can help with the reverse distribution the collection and proper recovery and recycling of these things, it just expands our business capabilities and give us one more service that we can potentially offer to a 100,000 customers so we like it. But we don't play any significant role in trying to influence the development of those regulations that we kind of take what comes.

[Kevin Steinke:]

Okay. Just last from me a housekeeping question if you have these numbers on hand just the capacity utilization of the re-refinery in the quarter as well as the number of gallons of base oil that you sold in the quarter?

[Mark DeVita:]

Yes, our base -- I will go reverse sort of, our base oil sales were a little more than 8.6 million in the quarter. We really operated and again we talk to 4x7 about how we determine our needs like capacity, it's a little bit of a moving target but technically based on the 65 million gallon we lower 100% at about a 107% utilization in the quarter, so it was a great quarter from an execution standpoint.

[Kevin Steinke:]

Okay, great. Thanks for taking my questions.

[Mark DeVita:]

Thank you, Kevin.

[Operator:]

Thank you. [Operator Instructions]. Our next question comes from the line of Michael Hoffman with Stifel. Your line is open.

[Michael Hoffman:]

Thank you very much, Joe, Greg, Mark, thank you for taking my questions. And can we just start with Environmental Services, represent ever so slight dip in revenues sequentially, what's accounting for that?

[Mark Devita:]

Yes, revenue was pretty consistent when you look at our working days, they are relatively consistent. I think really what's happening is we mentioned that we were kind of at the tail end of the FCCE integration that we hadn’t continued for the past year or so our investment in some of the new resources in an incremental way like we traditionally had done. So we are probably -- and we have restarted that now but we are probably and again it's tiny, tiny difference but that could be part of the reason we're kind of in between know that still getting the some of the last boost from the FCCE investment and gearing up for this additional incremental investment that again we typically made on an ongoing basis every quarter up until we did the deal. But we don't think there's anything. Greg mentioned a tiny bit about some of things that are in oil patch and affecting us, but other than small things like that, we really don't see any big difference.

[Michael Hoffman:]

Okay, so following through that and you sort of set up my second part of the question. I was somewhat anticipating that now that integrations done and we’d start to see this focus on incremental growth in the aggregate. And so we could see some of that walk back up as people's energies are redirected?

[Mark DeVita:]

I would agree. And to speak in there, there was one less working day I apologize in Q3. That again it’s minor as you said.

[Michael Hoffman:]

Yes, I know this is tiny number. I just wanted to sort of understand it. The 15.7% year-over-year growth number, how do I think how that’s calculated just so I understand what it’s telling me?

[Mark DeVita:]

So, for the same branch sales in the quarter….

[Michael Hoffman:]

Yes, it’s the one that includes that…

[Greg Ray:]

Yes, as we try to try to articulate. So if we take all the branches that were established, whether they had new FCC business or not, if they weren’t a new branch and they hadn’t been, or didn’t in place for more than 13 periods, or one full year by our reporting or our accounting cycles and we take all those branches and we just measure their revenue from the prior and this case third quarter 2014 versus the revenue they did in third quarter of ’15.

[Michael Hoffman:]

Okay, so how many branches would fall into that pool versus the 70?

[Greg Ray:]

I think there’s 73 we said.

[Michael Hoffman:]

That’s 73, okay. So it's a smaller number that’s just to legacy that has no FCC that has the 10% then. It’s lessens on these three?

[Greg Ray:]

Yes.

[Michael Hoffman:]

Okay, just want to understand how to put all those numbers together. And then shifting to oil, how many gallons did you collect in the quarter?

[Greg Ray:]

We’re collecting at a rate of almost 76 million, so it was about 17.5.

[Michael Hoffman:]

Okay, and then on the RFO sales, how many gallons of sales was that?

[Greg Ray:]

It was about 7 -- little heavier than normal, it’s about 7.7. We had an issue where we load some of our large volume RFO sales in down in New Orleans at the end of the second quarter there was an incident where a third-party shift that damaged our dock. So, we actually got -- Q2 sales were a little lower than they would have been. We missed one large at the end of the quarter, so that slipped into Q3 and thus that’s why that number is a little bigger.

[Michael Hoffman:]

Okay, and then is it an accurate statement Joe, Mark, Greg, that the RFO market is getting long supply for a couple of reasons. There is less residuals blend. There is a movement towards Mexico moving to a pipeline away from RFO. And that's one more factor that helps the case may take time, but helps the case and continuing to shift to. This is a regulated industrial waste and I need to charge you for it.

[Joe Chalhoub:]

We haven't seen, I mean Greg got, I don’t know how. We haven’t seen, we’ve heard about this. We haven't seen dramatic non-existing with that never dramatic in any case. But a number recently, a number of small collectors have approached us and I think this is part of -- has part of the three. We have some long term arrangements our sales in that market and at the day continue so -- but I see on the -- maybe not here in 2015. But historically the plan has been there. I mean less and less burning in many states of [4.19] residual used oil. But even residual bunker seats or putting the fictions like we said of New York and so on with some of that has been going overseas. And anyway the trend line that we’re seeing but nothing dramatic here in the fourth quarter or in the first quarter something has happened or will happen. Greg?

[Greg Ray:]

Yes, I agree with Joe that we see it as part of a much longer current trend that has been going on for more than a decade with reduction in the number and types of that that want to burn used oil and a corresponding increase in the cost to get to market to the remaining places that want the used oil, which changes the competitive cost structure little bit. But they gets factored probably through period of time it’s the decline in natural gas prices, which is sort of set the bar for cheap Btus. And for a period of time, caused dramatic rotation in the types of customers that small used oil collectors could sell through where they used to have two or three nearby asphalt plants all the sudden they have zero and they had to find new markets and ship their oil further and change their margin structure. But we have to keep in mind that the world’s consumption of Btus and hydrocarbons is immense. And so, while one slice of that pie may from time to time be difficult to get to, sort of the innovation of the entrepreneurs as they’re going to find. Another point that needs be to used and if they can blend their used oils into those streams, they still have the natural pools of hydrocarbon to blend into and keep selling a lot of product which is not that much used oil compared to huge volumes of other types of fuels. So you're thesis may be right eventually we may get to the last existing you know slice of the pie where when that flows down the other collectors say gee, now what do I do with my used oil, but it doesn't seem like they've run out of options or ideas yet and of course there's been some small increase in the capacity of re-refiners and of BGL producers who can take that used oil and so there's still places for a collector to go with their, their collective material, not like they're out of options. But just every time that this happens the options become slightly less attractive economically it seems and it's a little bit tougher and the margins have a potential to get better for people who have a vertically integrated business.

[Michael Hoffman:]

Fair enough, although the anecdote of third-party showing up is interesting isn't that, that you can fully supply yourself and yet you've got third parties calling, so clearly they're options are narrowing.

[Greg Ray:]

Yes.

[Michael Hoffman:]

On, how should we think about the gallon number we should be using as the input for 4Q based on the timing of the tie-ins and Rowlands should we just use 65 and assume 100% for the moment or and will you in fact do better than 65 because it came online. How do we think about that so we. I'm assuming that's why the range given on the guidance 345 to 360 is it's sort of the timing when some of that hits.

[Greg Ray:]

It is tough, we told you what we expect. It's Mark.

[Michael Hoffman:]

Hi Mark.

[Mark DeVita:]

I would use the number somewhere between 65 and 70, I certainly wouldn't assume 75. We can't sit here and tell you right now it's done. And other than that I can't give you much guidance but that's where, that's where I would peg it.

[Michael Hoffman:]

Okay, fair enough and then Joe thank you very much for giving the data point about what happened on your landed price in the, since the beginning of the year. And then you gave us a comparison for the selling price in the period. Could you frame this selling price difference over the same period as the landed price difference?

[Greg Ray:]

We have this, selling price is roughly around, I think we had in the press release from year-over-year, I don't have it from Q1. It's probably a little more, probably a little different, little more of a decrease than the 40% I think we had in there.

[Mark DeVita:]

I don't have that, this is Mark. I don't have that exact number we don't have it right now.

[Michael Hoffman:]

Okay so obviously my sense is you get better meaning you've managed the spread better that's why the business is starting to show some profitability versus on that.

[Greg Ray:]

Well parts of this Mike, in this process since late last year is we've also improved the efficiency of our routes with FCC and divisions of FCC, so we were expecting, we are expecting a better spread then what we're seeing now. Because of this efficiency improvement number on the route and that's why we said earlier now that we're in that mode but of service fees and we're. We got a pretty efficient plan and we shouldn't be looking at these kind of [indiscernible]. And so, but to give you a specific answer maybe Mark you can look at this and Mark can get back to you.

[Michael Hoffman:]

I think we touching an hour so, last question on the, now that you've shifted to CSO how's the accounting world going to make you treat is that is that an offset to across or do you have to show it as a revenue.

[Greg Ray:]

We will plan on showing it as revenue and we been there in a small way when we really weren't into used oil collection but even at times back in, before we built the re-refinery, we generated some revenue. So that will be a revenue item for us.

[Michael Hoffman:]

Okay, so does that account also for part of the difference between 345 and 360 as you continue to walk up, call it 17-18 million gallons to been charging that, shows up in helping that gap that difference between 345 and 360.

[Greg Ray:]

That would be a small piece, but that would be part of it.

[Michael Hoffman:]

All right, last Question then, what is the driver of why you would do 360 versus 345.

[Greg Ray:]

Depending on where oil goes and our success, we think we're adding in or just past hopefully an inflection point with PFO and you know, so that could be part of charge of oil, that could be part of it, and where base oil goes, depending on the reaction to some of the positive moves, and it could be other moves we have a long fourth quarter. Seasonally it's, typically we see a downturn in our periods 12 and 13 or near the end of the year, some of [indiscernible] standpoint but target per day…

[Michael Hoffman:]

Okay, if you take this overly simple rule and take 3Q divided by 12 multiple and by 16, you get to like 359? So that by definition suggests that you’re concerned about some macro issues mostly around oil related to what you suggested.

[Mark DeVita:]

Okay, we do get on the ES side our price increase we get effect in there as well. So, that consumption at the end of the quarter timing near the end that factor.

[Greg Ray:]

And we don’t typically, because of the working day issue, you’re right in your map on the two third the three quarters and multiplying by four. But you get the Christmas and New Years and we’ve got fewer working days and sort of quarters, quarter is not quite as linear as we wish it was.

[Michael Hoffman:]

Fair enough, I just wanted to understand because it’s wide at the sales tighter in the EBIT and I just wonder I am gaining at full better appreciation. Thank you. And then Joe I think it’s terrific you took a leadership role on talking about the landed price change and I think that is a big help for the market because there is a base oil number every week if we want to look at it as a trend and there is no frame of reference to what the landed price looks like. So, thank you.

[Joe Chalhoub:]

You’re welcome, market I don’t know where the market is going to be, it should be before the time but we might not have to do it again. But we thought we needed to clarify.

[Michael Hoffman:]

Well, we’ll try and get a little bit here and a little bit there, we’ll see about that.

[Joe Chalhoub:]

Thank you.

[Michael Hoffman:]

Thank you.

[Operator:]

Thank you. I am showing no further questions at this time. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect. Everyone have a great day.