Heritage-Crystal Clean Inc (HCCI) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Heritage-Crystal Clean Incorporated 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.

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 statement and our operation 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. 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 the higher rate towards the end of the third quarter due to our progress with the planned expansion initiative.

We are pleased with the improve 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 route 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 have 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 prices. And we are 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.

Thank you, Joe. I appreciate the opportunity to discuss HCCI's 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 three quarters of the year compared to the first three 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 three 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 $625,000 compared to $600,000 in the second quarter of 2013 and compared to $555,000 in the third quarter one year ago. Operating costs in the environmental services segment increased approximately $1.8 million compared to the third quarter of 2012 and $4.1 million compared to the first three 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 three quarters of 2012.

In the oil business segment sales 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 three quarters of 2013 oil business segment sales were up $3.7 million over the first three 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 three 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 costs 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 three quarters of 2013 compared to $445,000 of interest expense in the first three 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 three quarters of 2013 our income attributable to common stockholders was $1.9 million compared to $2.5 million in the first three quarters of 2012. Our basic and fully diluted earnings per share were $0.10 for the first three quarters compared to basic and fully diluted earnings per share of $0.15 in the first three 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 question.

(Operator Instructions) Ryan Merkel, William Blair.

Thanks. Good morning, everyone. Wanted to start with the oil business and why the operating profit was up sequentially. I think you mentioned that you lowered the internal collection costs, but was it primarily due to volume offsetting price; is that how I am understanding it?

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

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

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.

Yes. I mean that part we should enjoy this higher capacity that we were able to achieve towards the end of the third quarter. We need to recognize that [for number 13], basically the month of December, sales are not as strong as the rest of the year and so we will see how this will impact us. And also the oil collection tend to drop towards the end of the year as well as in the month of January.

But, in any case, to increase the capacity is a major issue here for our improved profitability.

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

On a spot price basis -- again it depends on where you look at it. It was below -- 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 $0.60s and then in the $0.70s at different points in the quarter.

And to be clear, Mark, that is the spread between crude and market spot base lube prices.

That is 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 has been, I would say, additional clarity recently into what that really means versus what spot and posted really means versus actual selling price.

Some of the publications we get have reinforced some of the things that I've spoken with, Ryan, yourself and a lot of the people on this call, which is there is great -- usually the last year or so to the downside. But there is a lot of difference between the price the business actually gets conducted at and even spot price, much less posted.

There has been quoted in some of the industry periodicals as being as high as $0.60 lower, the actual selling price, than some of these talked-about market indicators. I don't know, Greg, if you want to add anything to that.

No, I think that is fine. I think that our analysts understand that there is not -- while there is a lot of published information on lube prices, there is not one index that everybody really follows and tracks that neatly describes where the real pricing is.

The trends that we have 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, in general, 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 in their hands. So pricing remains choppy and directionally not moving up in the last few months.

Okay. Then last one for me and I will jump off; just hypothetical here. If you were running the plant at 75 million gallons annualized with the current lube spread and with some of the efficiencies you probably still have, what do you estimate the operating margin would have been?

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

I guess what I am getting at is as we are all thinking about our models for next year this is one of the big variables. And I am just trying to get a sense of is 10% appropriate, because I know 20% was the original target and I think that 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.

That is something, as we probably get deeper into absorbing where we think things are going to go, we will have a better idea of. And if we have more information to share with the market at that point, we probably will share it.

I am sure you can appreciate with all the factors that are out there, and especially the biggest one being base oil selling pricing, even what current condition is today is a moving target. Today could be -- is it today's price, last four weeks price?

Okay.

David Manthey, Robert W. Baird.

Good morning, guys. First off, just wondering if there were any -- was there any inventory revaluation in the environmental business this quarter?

Yes, there was a piece of that. It wasn't the biggest piece, but we did have some of that with a portion of our solvent inventory 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 somewhat mirrors the used oil collection seasonality as far as there is not as great of demand for this product.

We have done a great job of lowering our inventory, which is a goal of ours, by 30% versus last year, or roughly 30%. So we have been a little bit more aggressive on pricing to hit that goal. We did have a small lower cost to market adjustment in there for that.

But we did have other things where we had some one-time costs, some of it related to our acquisitions that we did in the antifreeze space early in the quarter. So there were some one-time things.

Then there is 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 is something that is not a -- we don't see anything as a permanent change. We think part of that is just a blip.

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

That is correct. Most of it was our typical noise that we have in the rate we are consuming different things, whether that is disposal dollars, solvent, drums, those types of things.

Okay. 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. It sounds like this time around either the profitability on that is much higher or you were able to convert straight to lube oil.

Could you answer a question just in terms of the product that you are producing on the new capacity? Then, second, are there any shakedown costs that are related to the new capacity or is that strictly a function of a new facility, a new re-refinery altogether?

I will take the first part of that, Dave; this is Greg speaking. You are 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 is 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 phenomenon or it hasn't thus far. We are 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 substantial incremental [VGO] or intermediate product that had to be sold. Really all the capacity expansion flowed through to the base oil, which was 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 are putting into equipment it will allow us to expand that capacity.

It will look very smooth. I don't think you will see -- we don't expect you will see any really big spikes of incremental cost. It will 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.

Okay, thanks, Greg. Just last question, it's kind of theoretical here, but are you hearing about end customers switching from bunker fuels to natural gas? The reason I am wondering is that longer term the guys that are out there collecting waste oil for fuel it would seem that that business model would be severely damaged if that were a longer-term trend.

And they would also improve your spread. I mean that would lead to 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 are seeing at all?

That is a really good question. I am going to suggest that years ago, as we were first looking at this business, we would have had that same expectation that you have 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 have 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 we are doing that two years ago.

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 have also found is that there are 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 have been able to sort of rotate their customers or market to a degree and find places that they can continue to sell their fuel where a customer needs liquid fuel and can't connect to a pipeline.

Whether that is, for example, a mobile asphalt plant that is moving down the road putting down asphalt and can't obviously be connected to a pipeline for natural gas supply, or whether it is 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 would go out of business; but they have found other markets.

Now there is more competition in those other markets. We think that it has been somewhat disruptive to some of the used oil collectors. That there have definitely been instances where they have 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 make sense?

It does. Thanks, Greg. That is great.

Sean Hannan, Needham & Company.

Good morning. Thank you. So I wanted to just see if I could follow up on 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 September quarter. Is that accurate?

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 have told the story properly.

If you look at the way we calculate spot price -- and a lot of people on the call realize there is not an exact equivalent so we do a calculation to get a proxy of what our spot price would be -- it is actually down a couple of 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 have seen softness.

Okay. 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. Or that is one suspicion.

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

Yes, that is a correct statement.

Okay, that is helpful. 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 to some of the expansion that has been underway and really kind of getting a full quarter as we run through that. How should we think about that?

This is Joe here. Our basic plant before the expansion was designed to process 50 million gallon and then we are targeting here for the middle of next year to be up at 75 million. We have put some early equipment, easier delivery and gradually lower in capital first obviously, and so we moved 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 is 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 on delivery that will be installed in early next year, and so we are hoping to have it all wrapped up by the middle of the year.

That is helpful, Joe, but did you run at that full 60 million run rate through the course of the entire quarter or is that where we exited?

That is 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.

Okay, that is helpful. 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-branch sales, though, were still 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.

Then, separately, is there any change to how you are pursuing business here? And what should we expect for organic growth rates looking forward versus consolidated growth? Thanks.

I will take the first part of your question. More than half of it was price by -- 60 to two-thirds of it was price; there was some volume. A lot of it price in the parts cleaning -- a lot more of a price volume balance on the other main services in that segment being containerized waste and vacuum services. As far as grow --.

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

Yes.

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 60%, towards price and 40% towards volume.

As we think ahead, the same branch growth that we are talking about here historically is sort of something that we would 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.

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

That is possible, yes. Again, I don't want to suggest we won't make acquisitions or that we are 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 is really not part of our forecast thinking. It is sort of -- I know I am leaving you to your own devices to guess what we will do in acquisitions, but that is sort of what we are doing ourselves is we are saying we don't know if we will make any. If we do, they will supplement that 9% or 10% or 11% ES growth.

But we don't have a clear model to forecast when we will find good acquisition opportunities out there, so when we think about our planning process we really are focused on our same-branch sales kinds of numbers driving the pricing that we can get, which obviously leads to margin expansion. And continuing to get volume from adding net new customers, which we have been successful at doing on a very long-term basis, and on improving penetration and cross-selling to add to our volumes. Those are all continuing to be facets of the business plan.

Okay, very helpful. Thank you.

Kevin Steinke, Barrington Research.

Good morning. 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? Are you still doing that to recoup costs, or is that just the function of maybe charging more for the value that you are providing?

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. We didn't 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 cost increases and get us our objective if the market allows it to also improve our margins. We have been improving our margins by basically two ways -- one is the pricing and the other one is just higher density and customer obtainment into the existing branches.

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 have 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 done as good a job.

So we might -- versus that traditional number might have a tiny bit of upside due to getting better at those things.

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

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 are adding new branches or we are adding existing services into branches that don't have the services, so we kind of try to balance that with -- our objective is to maintain margins in the mid-20%s and look at the long-term growth.

But, in theory, if we don't invest in these other areas, yes, the margins will increase. That is the balancing act.

I can add to that -- I agree with everything Joe just said. Functionally, part of the way we manage the business is that we feel we have lots of different paths for attractive growth opportunities. As Joe said, we balance that against having what we think of as an acceptable income stream.

As we see our margins in ES get materially above the 25% range that is just a signal for us that we can entertain further reinvestment in the business in the form of adding additional people, expanding service coverage, opening more branches, things like that that will help accelerate the top-line growth rate. Sometimes not in the same year that we are making those investments. It can be a de minimus improvement, but on a longer-term basis it can be a significant support for continued growth in the business.

That is sort of how we are balancing it and how we view the margins. And what we want to do if our profitability improves is reinvest.

All right, great. That is helpful. And I think you have talked about 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 results that you are seeing from those investments?

Definitely that is part of our same-branch sales growth and the overall growth as well. 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 has 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 -- still in our small to medium-sized target market but they are a little bigger opportunities so there is a little longer lead time. But we are starting to see the payoff there.

We have 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 is really one of their main areas of focus is growing that business.

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 rung out or is there more room to go there?

Greg and Joe can chime in, but this is a constant question that Greg and I pose and we work through with our operations and logistics staff.

There is not much. I think there is a little more to bring out. It wasn't a big part of our improvement story on margin. It was part of it, as I mentioned, but we are getting close to where we are probably -- based on our current level of material or volume of material that we are getting close to being optimized. But I think there is still a little room left.

I would add and say if we just focus on our transportation costs for the first part of the conversation that we are getting to where we feel we are pretty efficient -- by the exit of Q3 the average of Q3 was higher than the exit point -- and so we can keep it where we ended the quarter, we can see a little sequential improvement. But that is just on transportation.

If we flip over now and talk about another area that we have 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 have made there in the last half year or even year have been only very modest improvements.

And so we are going to continue to work on that and 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.

I think our change, 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 listing and are quite sensitive about how this could impact the average price that is being paid for the used oil.

I think we are looking at where the market is. We are pretty proud where we are compared to where the market competitors are as far as the pricing payments for the used oil. So we tend to try to sell the service rather than just merely buy the oil from our customers.

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

It is pretty steady.

Pretty flat.

Okay.

But when you balance it with what Joe said, we did grow volume, so that helped. That was part of when 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 through the trucks at not a higher price.

Kevin, as you will remember from prior conference calls, we feel that we are at the low end of the spectrum of what people are paying generators for used oil. We think that overall the industry is still paying too much and struggling within margins, all the collectors that we compete with.

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 will move prices down. We know some public companies have talked about that. We are still waiting to see that show up in any meaningful way in market conditions.

But we think we are leaders in that initiative, we are just not seeing anybody else match it right now.

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?

141.

So basically flat.

Yes, we have been pretty much flat all year. One truck maybe different, but we have been around 140.

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

It was at an annualized rate. It was 33 or -- hold on a sec, let me get that.

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

It was 7.3 [million].

Okay, great. Thanks a lot.

(Operator Instructions) Michael Hoffman, Wunderlich Securities.

Good morning and thank you for taking my calls. I will try and keep this really tight. With regards to the density question, how would you frame the amount of basis points of margin that are left when you get your density to a level that you are satisfied with?

We would say that we should be able to get the high level of density reduce our collection, used oil route truck collection costs by about $0.20 a gallon. And so we are collecting in the mid to high 30s [basis points] and so that gives you a feel for the improvements are going to be.

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

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

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

All right. Really, the biggest issue for us when we go through the shutdowns are the loss of production by a day or two, which we try to recapture by running at as high of a practical rate when the unit has been newly put in service after a maintenance shutdown. Michael, 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 these to be really an important issue for us.

And I didn't mean the question to sound like it was critical. It was more of I think the business was actually more profitable in the third quarter because you had -- and, correspondingly, 4Q, 1Q, 2Q it will in fact on a run rate basis be more profitable if I were to adjust for those two extra days of expense and lengthen turnaround.

That is what I'm trying to understand. That is sort of getting that hand around you have a goal to be 20% margins in used oil. You are at 6.5 roughly and you have given me a sense of what the density will do to that number.

Now I'm trying to understand how much -- what is the level of profitability, all things being equal, if you didn't take any added downtime beyond normal of being at 60 million gallons versus 50 million? And all the other condition stay the same. Your base lube price is unchanged.

So should that be a 10% or 12% margin business on the 10 million gallons, or is it --? That is what I'm trying to understand.

No, we will pick up a little bit more, 1% or 2% more, but it would not be significant. I think our margin factor for the future is to take us from -- I know there was a question earlier. We didn't give you a specific answer here. To take us from the 50 million to the 75 million that is going to be the biggest factor.

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 would like to see them. These are the two biggest factors. The third one, which is really market-driven rather than us driving it, is the price of used oil paid to generate.

Okay, all right. That helps me at least understand timelines as well. 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]?

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

Yes, you know --.

Michael, I am somewhat on your side, I will be honest, but --. I know our accounting staff is.

As one person on the market side, we would argue do it. It would accrue to your benefit. Thank you very much for taking my call.

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.