Heritage-Crystal Clean Inc (HCCI) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Heritage Crystal-Clean, Inc. third-quarter 2015 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 the 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 -- 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 Operating 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.

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 statements 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 to $77.9 million in the third quarter of 2014, an increase of 6.1%. Year to date, the revenues increased 12.5% to $249.7 million from $222 million in the first 3 quarters of 2014.

This increase is attributable to our 2014 acquisition of FCC Environmental, or FCCE, as well as organic growth in our environmental services segment and was partially offset by decreased revenue in our oil business segment 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 a new record of EBITDA in a quarter. This marks the second straight quarter of which we have generated record EBITDA.

For the first 3 quarters of fiscal 2015, EBITDA increased 62% to $20.7 million compared to the first 3 quarters of 2014. Adjusted EBITDA was $12 million for the third quarter of 2015, an increase of 63% compared to the third quarter of 2014.

In our environmental services segment, the revenue increased 24.7% compared to the third quarter of 2014 and 29.1% compared to the first 3 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 the FCCE acquisition. We also experienced strong organic growth in this business.

In our branches that were not affected by the acquisition, in 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 margin in this segment in the third quarter on a year-over-your basis, despite the fact that the acquired FCCE business was generally lower margin than the legacy HCC business.

We are pleased that we recorded a positive operating margin in our oil business segment during the quarter. This result was achieved despite a decline in our oil business segment revenues due to lower pricing for our oil products and an inventory write-down of $1.9 million. Revenue decreased 15.4% from the third quarter of fiscal 2014 to the third quarter of fiscal 2015.

During the third quarter of fiscal 2015, the average spot market price for the Group II base oil we produce declined 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 lubricating base oil, RFO, and our re-refinery byproducts. During this period of change, we have focused on three 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 routes; 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 their used oil. As we've 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 locations.

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 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 or 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 basis.

All of our oil business segment improvements I just mentioned will help us reach our goal of continuing to make our oil business more profitable, even in a difficult business environment. Looking forward, all else equal, 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, all else equal, each $0.10 per-gallon improvement in base oil selling price should result in an approximate annual EBITDA improvement of $4.5 million. So as we can see here, there's a potential here for the future as we move in that direction we've 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 the somewhat lower-margin FCCE business. In addition to the synergies we've 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 total Company revenue and continues to show steady, predictable growth in both revenues 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.

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 costs 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 of 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 3 quarters of the year, revenues increased $35.6 million or 29.1% in this segment. Same-branch revenues for the first 3 quarters of fiscal 2015 grew 19.5% compared to the first 3 quarters of fiscal 2014.

In branches with no impact from the FCC Environmental acquisition, same-branch revenues decreased approximately 10% during the third quarter compared to the prior-year quarter. For 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 from the third quarter of 2014 as a direct result of decreased product prices. For the first 3 quarters of 2015, revenues were down $7.9 million compared to the first 3 quarters of fiscal 2014.

We are pleased that our profit before corporate SG&A in the 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 3 quarters of fiscal 2015 was 27.3% compared to 26.6% through the first 3 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 3 quarters of fiscal 2015, the oil business experienced a loss before corporate SG&A of $1.7 million compared to a loss of $0.5 million in the first 3 quarters of fiscal 2014.

The operating margin in our oil business was negatively impacted by the continued low prices for our oil products and by a $1.9 million write-down in 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 3 quarters of the year, SG&A was 12.6% of revenues compared to 11.4% in the first 3 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 2 quarters, we have achieved a $1.2 million reduction. SG&A expense as a percentage of revenues had 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 costs for FCCE, bringing our total for the first 3 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 of 2015 compared to interest expense of $24,000 in the year-ago quarter. For the first 3 quarters of fiscal 2015, we incurred $1.4 million in interest expense compared to $110,000 in the first 3 quarters of fiscal 2014. The increase in interest expense was the result of increased debt used to finance the FCC 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 3 quarters of fiscal 2014, which represents an increase of 37%.

Earnings per share for the first 3 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 3 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 will turn control of the call over to our operator, and she will advise you of the procedure to submit your questions.

(Operator Instructions) Ryan Merkel, William Blair.

Congratulations; you are definitely executing well in a tough environment here. So for my first question, I want to focus in on the EBIT margin in the oil business.

If we did the calculations right, I am coming up with an adjusted EBIT margin about 8.4%, which would be a nice improvement sequentially and year over year. So my question is how sustainable is this lift? And now that you are actually charging for oil, what could this be in the fourth quarter?

Well, 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 with that improvement is we saw almost a 3% benefit from quarter to quarter in catalyst. And Greg or Joe maybe can explain a little bit more in detail, if you want, about that. But that relates to some of our changes that coincide with the expansion that we are moving through and expect to finish the quarter that we are in now, the fourth quarter.

We benefited on the cost side, although it was somewhat offset by the write-down. But third-party bulk oil -- which, again, that should be something, given the current crude environment today and 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.

No, no. The catalyst -- I think you covered it well. That represents about $1 million a year of savings. Really, it's hard for us to give you an estimate, 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 our posted price of $0.10 to $0.12 a gallon for the blue boy. And yet, the spot price hasn't moved much. So we are hoping that that continues for the quarter.

So crude can also go up, and that affect us in almost half of the volume we sell because we sell RFO and we sell byproducts of the refinery that are tied into crude. So if crude goes up, even if the lube oil doesn't move up, we benefit. So sorry I couldn't give you any more clarity on the oil segment.

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

No, it's not much of -- it doesn't reflect much of a change. We do have the benefit of -- well, you already talked about the extra four weeks. But we do expect before the quarter is over, we will be running at a higher rate. Again, depending on what happens with commodity prices, that should help us -- a higher rate at the re-refinery, I mean. So that should help us marginally there.

But there's not much built-in as far as improvement beyond where we are 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, or the actual price that most of the transactions are done at in base oil. There might not be much of a decline. We will 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. The ES business is fairly predictable.

Right. Okay. Maybe one more here. 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 fairly broad-based, but I'm wondering are you starting to see any signs, particularly in the heavy manufacturing space -- I'm not sure how much exposure you have there.

But are you seeing signs that maybe some customers are taking down shifts or slowing down production? Because I recall the last time we saw the industrial complex slow, you had a one- to two-quarter lag before it really impacted your business. So just curious if you are seeing anything, any signs of slowing.

I would say that in general across the broad manufacturing segment, we are not seeing a general slowdown. What we are seeing and we have been seeing for more than a quarter is that manufacturer and our industrial customers that are dependent or related to the petroleum industry or oil patch have been slowing down. And that's not a surprise to anybody.

But we have quite a few customers that are involved with drilling rigs 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 work through our branch system. And in the south-central and south parts of the country, we've seen some slowdown 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 the last time we went through a significant recession. And I think we learned some things as we went through that. The most dramatically lagging part of our business is our drum waste management because there, we're picking up the hazardous waste that are customers produced a quarter ago or two quarters ago. And so that's really the slowest or last place we see a change.

In parts cleaning and some of the other services, we think that a change is 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.

Got you. Okay, very good. Nice quarter. Thanks.

David Manthey, Robert W. Baird.

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? The reason I'm asking -- I'm just wondering how sensitive your charge-for-oil situation will be relative to Group II 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 in reference to that question?

In driving our costs down for what we pay for used oil, when we were paying for used oil now that we have an average to charge and driving that further, there's a lot factors we look at. And lube oil is just one factor.

The market for -- the demand for used oil is split between the lube oil and the production of vacuum gas oil. There is quite a bit of volume of oil production in the United States that goes into the VGO market. And then we track that. And then we also track the price of the number six, the fuel, the RFO, the conversion product. And the recycled product goes as a percentage of it.

So these are the factors. And we look at competitive forces. If 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 mode and increase the charges of these customers.

We have been working hard at getting every week. Statistically here, more and more customers we charge more without losing per activity on our route trucks. It's a very fine line. And so we are happy, as we said, by 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 a stop fee.

I could add that we've talked about wanting to have our oil business be stronger and more successful even in a difficult environment. And we are not there yet, and one way we improve on this is to increase the amount that we are charging.

Over a very long period of time now, the decline in product prices for our whole industry has been more significant than the decline in the cost of this used oil. We have not moved our price to generators as far as what we have suffered in reduced prices. And that's led to this 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 giving up everything we are gaining on an economic basis. And as I think we've spoken about in prior calls, around the zero point, it's very delicate in pricing. If we are charging a small amount and our customers 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 are 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's a return on capital.

Greg, that speaks to the question here. I'm 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 these 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're severely disadvantaged as it relates to staying in business. And just wondering if you can give me a read on -- have you seen some of your smaller competitors evaporate in the markets you are competing in?

We've seen in the last couple of months third-party collectors knocking on our door to supply volume, or people 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.

Yes, this has been an evolution over the last several years, even before the price of crude collapsed. Just the natural gas prices being lower, a lot of these local [ashflow] plants decided to move away from used oil burning into natural gas. So that has been evolving over the last several years and continues in this difficult market.

So we feel good. It's taking time, but we feel good that we can improve our spreads. 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.

Another comment, Dave, that Joe has pointed out in the past is that when you think about exits or barriers to exits for competitors in the used oil collection business, while some of the larger, more consolidated guys have obviously transacted and sold -- as we bought FCC, as Clean Harbors bought Thermal Fluids.

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 march on forward. And they don't take a dividend or a salary. They have family members working for the company that take less money, and they continue in business rather than exiting. So they are sort of -- because it's quite entrepreneurial at the small scale, there is some inherent barrier to exit.

Now, you would 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 wait it out and hope that crude goes back to $100 and they can sell their business for a much more attractive price.

So we don't often see people just packing it in and saying, we are done, unless there is such a dramatic downcycle that people get caught in liquidity crises or have too much inventory and a problem that way. But other than that, there's a pretty solid, sustaining sort of trend to just stay in the business and work through the tough times. So I don't know if that's helpful color for you.

Yes, it is. Thanks, Greg. Just last question on the increased capacity here. Where there any startup or shakedown costs in the third quarter? Do you expect to see some in the fourth quarter? Then could you tell us how you expect that capacity to come online? Will you 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?

Well, definitely, the first quarter of 2015, it's clear that -- 2016 -- that the capacity will be -- they will be 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.

In the third quarter, we had commissioned the hydrotreater, a new hydrotreater -- well, expanded hydrotreater. And that's why we made a comment about our reduction on catalyst costs. That's already in place and is capable of running at the higher rate.

And in the beginning of the fourth quarter, we've taken a regular shutdown and expanded it to make all of the tie-ins that are 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, quite frankly, in the quarter. So we see between the shutdown and the expanded role and where we end up in the quarter, but definitely by the beginning of next year, the first quarter, we should have it full at the full 75 million gallon rate.

Yes. And we will have -- I don't have the exact number here. And if I can't get it now, we can touch base later. But in Q3, it wasn't a big CapEx item for the expansions. 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.

Okay. All right, perfect. Thanks a lot, guys.

Sean Hannan, Needham & Company.

A question going back to the 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 as the understanding from the generators in terms of feedback or resistance?

And then observations of what competitors are doing, how uniform that is occurring, and the pace they are making changes. So just a little bit more context with those embedded questions around the charge-for-oil environment.

Good question, Sean. I'll 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.

What we have seen when we got -- and this has -- we have been doing out here for several, two or three months, trying to put the charges in place. You get different size generators acting differently. And basically you go to a small customer and you are going to get 100-gallon, 150-gallon pickup. And his tank is not full.

And so he could tell you -- there is a relationship between the rep and the customer. In some cases, they would agree to have a charge. In other cases, and you don't need to have a lot of these cases. If a third of the customers tell you no, don't pick this up, come in when my tank is full, I don't want to pay the stop fee or cents per gallon. Well, it's really more of a stop fee, in our case of what we've seen. So you've really lost for activity. You got an expensive truck with a route person going in and getting no volume.

But as we go back to the same customer four weeks later and explain our situation, eventually when you get more and more people into a charge moat, this becomes a new reality. And the larger customers have always had the luxury to negotiate. I'm talking about a QuikLube that has 10 locations that generates 100,000 gallons a year.

So these are a little bit more tricky and take a little bit more time. But we are focusing on the small customers and that is the vast majority of our volume. So we are working this as we are moving ahead.

Greg?

Yes. I think you started, Sean, asking how much we are willing to lose. And I think I'd put this in the context that there is some price for playing the leadership role that we played on the price side.

Over a year or a year and half, as we have been driving price down, we've 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 we feel that we've done enough there and we've given up enough and we are 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 have worked hard to deliver.

So we are not in a position with an expanded plant to say we are going to give up a lot more volume to keep pushing price lower. Having said that, we think that recently, we don't feel like we are way out ahead of the market and that as we've been driving our price in this direction, we think that others are behaving in a similar fashion. And our volumes seem to be fairly stable.

So we are not worried or 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 ourselves forced to respond in kind. But we are not there today.

Our customers are gradually going to get used to the reality that the pricing has shifted into the charge environment. And once they get acclimated to that, then after a period of time of six months of being in that zone, then customers stop being less price-sensitive again. And a few pennies difference between a company and a competitor stops being quite as important and determinative. And we will have more flexibility on getting prices or margins where we think they should go.

And keep in mind our argument for customers, which really does resonate with many accounts: that they may not like the fact that their used oil is not worth as much to us or two other collectors. But there's 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 aftermarket. They are car dealerships and QuikLubes and people that are doing truck maintenance. And many of them are still implementing and maintaining charges to the vehicle owner for oil disposal, for proper management of used oil, that date back 20 years to the last time that the typical norm for our industry was paying to get rid of used oil.

So they have been charging those fees and have not done away with them. And now they are in a situation where they need to use that source of revenue that they have had all along to pay for proper disposal of the used oil.

Secondly, anybody who is involved in the whole closed loop and is buying and changing lubricants knows that the cost of new lubricants is down dramatically, by a lot more than the fees that we are imposing for picking up the used oil. And that mitigates the fact that we've had to charge something to provide the service.

So we've got strong arguments. Customers will generally accept those arguments. And the limiting factor will be some competitor who says, well, I still want to pay 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 are not too worried.

As you know, we've got hundreds of trucks now. We are operating in 80 branches and so we don't worry too much about what a guy does in a single local market.

So it sounds like right now, outside of any extreme 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 scenario. Do you think that we have officially crossed over that line in a sustainable fashion? It certainly appears that we have. I wanted to get your thoughts.

Yes. In our mind, we clearly -- we have enough representation out there in pickups that I can clearly say that we have crossed that. 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 in from a consistent pay-for-oil to a charge.

At the end of the day, the oil -- our industry -- is a service industry. Yes, we sell a commodity product. But the removal of oil is a service industry. And then the oil -- the service in the mid-1980s that stayed on for 15 or so years of increased charges back in the late 1980s and early 1990s.

That's helpful. All right. Let me ask a question on the environment services side and I'll hop back in the 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 has been a very good anchor piece of the business -- of the overall business for you? Thanks.

We feel pretty good about sustaining this double digits, in the 10% 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 are growing in really every environmental service line of business within that segment, whether it's parts cleaning or drum waste or vacuum service or antifreeze services.

And now after the FCC acquisition, we are offering field services remediation at our branches. And that's not a big business, but it's a growing business and quite profitable. So we are happy with that then, the additional branches. And not every location has offered all of these services. We have room to add services.

And then we have the mix or change on the parts cleaning, our biggest block of business, from solvent to aqueous. And this has started several years ago. The aqueous business is growing faster. And then finally, price increases.

Mark, do you want to add --?

I would say also it's somewhat deep in the weeds. But when you look at even what we have reported the last couple quarters when we say branches that weren't affected -- we did a great job in integration as a Company, I believe, with the FCC Environmental deal.

But even to get that done, there were many branches that weren't in the region or geography of overlap that didn't maybe acquire a lot or even any FCC environmental customers. But our focus 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 and 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 have been, probably to 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've started to get back -- since the integration is over, we are 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.

You asked about M&A. I think that while it's a complex measure that doesn't -- that we don't report and doesn't show up neatly, but one reason that we've had steady good growth in environmental services and have kept it in the 10% range and expect to continue to do that is that it's not unrelated to our oil business. Many customers want the full menu of services that we offer. And so we are 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 our Universal RS transaction, our [lawyer] transaction, we have added thousands and thousands of customers who are primarily used oil accounts, and we continue to prospect and develop that captive customer base to add other environmental services.

And so that has all been a nice tailwind for us to keep growing environmental services and sustain this growth rate. 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 in a 12-month time horizon.

That's great feedback. Thanks, folks.

Kevin Steinke, Barrington Research.

Wanted to follow up on the used oil discussion a little bit more here. I know last quarter, you were talking about how you were really leading the industry there. But it seemed you had run into a bit of a point there where others weren't following along.

And now we're at the point where end of September you are achieving a small average charge per pickup. And that happens to coincide with the announcement at the end of August by your largest competitor that they were going to go to a charge-for-oil across their entire customer base. So I'm just wondering, relative to that specific competitor, your largest competitor, if you've seen the follow-through on that announcement and that is what is really starting to change the dynamic in the environment overall.

Yes. We would rather really not -- sorry, Kevin -- to get into the specifics for people who see our announcement and see the other player's announcement. I think we answered the question. Maybe I'll give you a little bit more color. It's a fine line in here.

We've answered earlier by the other question we had earlier that we have seen the industry shifting to that mode. Maybe not everybody -- as Greg expanded, there's a lot of small independents that haven't followed. But I think the industry in general, some of the larger players have done that. That's what we are seeing in the marketplace.

So I -- and this is a needed thing for our industry. We haven't restored the spreads. And we are confident that it will be restored.

The other thing to say is -- to be brutally frank about it. It's very hard for us to gauge average price levels of competitors in the market. We are talking about 100,000 customers we serve and competitors servicing a multiple of that.

And we hear every day from our reps in the field about accounts that they lost to competitor who is still paying a lot for used oil. And they will identify the competitors, and we will look at it and we will say, well, we know that maybe they are paying somebody and maybe they are charging somebody else. It's hard to ascertain where they are on average, other than if we start to see substantial net volume losses, we might conclude that we were not priced at the market level.

But it's a very active market and we probably don't have as good an idea as you would 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 inexperienced companies do that all the time and say, oh, I just heard we lost an account to this price. And so I'm going to respond accordingly.

But it's a big market 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 that is their effort to set a general price level that we should be responding to.

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 costs?

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

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

Well, there's very little. I think overall, the message 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 weeded those out of our database, you would see that they are 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, whether 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 addition. And outside of a big program, which we don't have any plans to do at this point, we have done back, let's say, at the beginning -- or mid-2011 we did, through early 2012, we had significant investment in some of these sales resources.

But we are probably going to be sticking to the more incremental approach that we've done. And while that is really not capital investment but investment in operating losses and will, if we went to the extreme, might have a negative impact, we think we're going to do it at a pace we can balance, still get the top-line growth but not have margin deterioration, should have incremental margin improvement. Because that's on top of our normal program of annual price increases, which at this point we would expect to have something in this quarter.

It's a discipline we've put in place several years ago to fuel the growth by adding incremental resources. And the beauty of the ES business, we can do that branch by branch, area by area, business lines or business within the segment. And so our objective is to continue to grow, but also not lose our margin as we are adding that step.

Okay, perfect. That's helpful. And in terms of just the overall regulatory environment driving demand for your environmental services business, have you seen any meaningful changes? Are things tightening and making customers more willing to outsource? Or is it steady-state?

I'm wondering just how much of a driver regulatory environment or enforcement actions are helping you. Or is this just pretty much same as it's been for awhile?

The quick answer is it's pretty much the same as it has been for a long while. In the early stages of the development of our environmental industry, regulatory drivers, and enforcement actions that you are talking about, as well as circular or Superfund liability were all things that woke up generators and make them really think about how they were managing their waste. But that's not a big driving force in the last decade and nothing is really changing on the horizon.

The other corollary observation is that from time to time, as they are reviewing and rewriting their regulations, EPA at the federal level -- or more rarely, states -- decide to address something that was previously diverted to landfills and to make it something that needs more careful management. When those situations arise, that creates opportunities for us in our business.

So 15 or 20 years ago, it was oil filters that all used to go to the landfill that now we pick up a lot of oil filters. 10 years ago, it was florescent light tubes that used to go to landfills that contain mercury and now we pick up and send off to recycling a lot of light tubes.

And maybe in the last five years, the new small but growing slice of the pie is discarded electronics. And we pick up more and more of that every year. But it's a 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 gives us one more service that we can potentially offer to 100,000 customers. So we like it. But we don't play any significant role in trying to influence the development of those regulations. We take what comes.

Okay. Just last for 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?

Yes. So I'll go reverse order. Our base oil sales were a little more than $8.6 million in the quarter. We really operated -- and again, we've talked before, Kevin, about how we determine our nameplate capacity. It's a little bit of a moving target. But technically, based on the 65 million gallon, we were over 100% at about 107% utilization in the quarter. So it was a great quarter from an execution standpoint.

Okay, great. Thanks for taking my questions.

(Operator Instructions) Michael Hoffman, Stifel.

Thank you for taking my questions. If we could start with environmental services, there was an ever-so-slight dip in revenue sequentially. What's accounting for that?

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 at the tail end of the FCCE integration, yet 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 were probably -- and we've restarted that now. But we were probably -- and again, it's a tiny, tiny difference. But that could be part of the reason we were in between that, still getting 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 the things that are in the oil patch and affecting us. But other than small things like that, we really don't see any big difference.

Okay. So following through with that, and you set up my second part of that question. I was somewhat anticipating that now that the integration is done that we would 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.

I would agree. And I did speak in error -- there was one less working day -- I apologize -- in Q3. Again, it's minor, as you said.

No, this is a tiny number. I just wanted to understand it. The 15.7% year-over-year growth number -- how do I think how that's calculated so I understand what it's telling me?

For the same-brand sales in the quarter?

Yes. It's the one that includes F -- sorry.

As we try and 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 they have been in place for more than 13 periods or one full year by our reporting or accounting cycles, then we take all those branches and we just measure their revenue from the prior, in this case, third quarter of 2014 versus the revenue they did in third quarter of 2015.

Okay. So how many branches would fall into that pool versus the 70 --

I think it was 73 we said. Yes.

Okay, that 73? Okay. So it's a smaller number that's just old legacy, then. It has no FCCE that has the 10%, then? It's less than 73?

Yes, yes.

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

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

Okay. And then on the RFO sales, how many gallons of sales were that?

It was about 7 -- it was a little heavier than normal. It was about 7.7. We had an issue where we load some of our large volume RFO sales. Down in New Orleans at the end of the second quarter, there was an incident where a third party's ship had damaged our dock.

So we actually got -- Q2 sales were a little lower than they would have been. We missed one barge at the end of the quarter. So that flipped into Q3, and thus that's why the number is a little bigger.

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

We haven't seen -- Greg, I don't know how you see -- we haven't seen. We have heard about this. We haven't seen dramatic -- mind you, these things are never dramatic in any case. But recently, a number of small collectors have approached us. And I think this is perhaps part of this. We have some long-term arrangements ourselves in that market. And that appetite continues.

So -- but I see on -- maybe not here in 2015. But historically, that trend has been there. There's less and less burning in many states of not only residual [user], but even residual [bunker seats].

Right.

Or putting restrictions, like the state of New York and so on. So some of the stuff has been going overseas. Anyway, it's a trend line that we are seeing, but nothing dramatic to say here in the fourth quarter or in the first quarter something has happened or will happen. Greg?

I agree with Joe, that we see it as part of a much longer-term trend that has been going on for more than a decade with reduction in the number and types of outlets 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 a little.

The biggest factor probably through that period of time is the decline in natural gas prices, which set the bar for cheap BTUs. And for a period of time, it caused a traumatic rotation in the types of customers that small used oil collectors could sell to. Where they used to have two or three nearby asphalt plants, all of a sudden they had 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 consumption of BTUs and hydrocarbons is immense. So while one slice of that pie may, from time to time, be difficult to get to, the innovation of the entrepreneurs is they are going to find another place that needs BTUs. And if they can blend their used oil into those other streams, they still have these massive pools of hydrocarbon to blend into and can keep selling a lot of product. There's just not that much used oil compared to huge volumes of other types of fuel sold.

You thesis may be right. Eventually, we may get to the last existing slice of the pie, where when that slows down, the other collectors say, gee, now what do I do with my used oil? But it doesn't seem like they have run out of options or ideas yet. And of course, there has been some small increase in the capacity of re-refiners and of VGO producers who can take that used oil.

And so there are still places for a collector to go with their collected material. It's not like they are out of options. But 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 the potential to get better for people who have a vertically integrated business.

Fair enough. Although the anecdote of third parties showing up is interesting, isn't it, that you can fully supply yourself and yet you've got third parties calling. So clearly their options are narrowing.

Yes.

Yes. 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 roll-ins? Should we just use 65 and assume 100% for the moment? Or will you in fact do better than the 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 million to $360 million, is -- it's the timing of when some of that hits?

It is tough. We told you what we expect, Michael. By the way, this is Mark.

Hi, Mark.

I would use a 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 I would peg it.

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

We have this -- the selling price was roughly around -- I think we had it in the press release -- from year-over-year. I don't have it from Q1. It's probably a little more; it's probably a little different or a little more of a decrease than the 40% I think we had in there. But I don't have that -- this is Mark. I don't have that exact number or we don't have it right now.

Okay. So obviously, my sense is is you did better, meaning you have managed the spread better. That's why the business is starting to show some profitability versus on that --

Well, part of this, Michael, is in this process since late last year is we've also improved the efficiency of our routes with the FCC, integration of the FCC. So we were expecting and we are expecting a better spread than what we are seeing now because of this efficiency improvement on the routes.

That's why we said earlier, now that we are in that mode of service fees and we got a pretty efficient plan, and we shouldn't be looking at these kind of relatively weak margins. And so -- but to give you a specific answer, maybe, Mark, you can look at this and get back -- Mark can get back to you.

Yes.

Yes, I think we are talking in an hour or so. And last question. Now that you have shifted to CFO, how is the accounting world going to make you treat that? Is that an offset to a cost or do you going to have to show it is a revenue?

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

Okay. So does that account also for part of the difference between $345 million and $360 million is as you continue to walk up, call it, 17-18 million gallons to being charging that shows up in helping that be GAAP, that difference between $345 million and $360 million?

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

All right. Last question, then. What is the driver of why you would do $360 million versus $345 million?

Depending on where oil goes and our success. We think we are at or just past, hopefully, an inflection point with PFO. And so that could be part -- or [charge for]. That could be part of it. And where base oil goes, depending on the reaction to some of the posted price moves. And there could be other moves. We have a long fourth quarter. Seasonally, typically we'd see a downturn in our periods 12 and 13 or near the end of the year from a base oil standpoint. But it's hard to predict.

Okay. Because if you take this overly simple rule and take 3Q divided by 12, multiply it by 16, you get to like $359 million. So that by definition suggests that you are concerned about some macro issues mostly around oil related to what you've just suggested.

Yes. We do have on the ES side, our price increase you got to factor in there as well.

Yes, okay.

Now that comes in at the end of the quarter or kind of near the end that factor.

Okay. All right, great.

And on ES, we don't typically, because of the working day issue -- you are right in your math on the two-thirds or three-quarters and multiplying by four. But you get to Christmas and New Year's and we've got fewer working days. So the quarter is not quite as linear as we wish it was.

Right. Fair enough. I just wanted to understand because it's wide at the sales, tighter in the EBIT and EBITDA. And I just wanted to gain a better appreciation. Thank you for the questions.

And then Joe, I think it's terrific you took a leadership role on talking about the landed price change. I think that is a big help for the market because there's 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 that landed price looks like. So thank you.

Okay. Well, you are welcome. Michael, I don't know where the market is going to be; it changes all the time. But we thought we needed to clarify.

We will try and nudge it a little bit here and a little bit there. We'll see what happens. Thank you.

Thank you. I'm 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.