Heritage-Crystal Clean Inc (HCCI) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Heritage-Crystal Clean Incorporated fourth-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 in those forward-looking statements. These risks and uncertainties include a variety of risk 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 a reconciliation 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, our Founder and President and Chief Executive Officer, Mr. Joseph Chalhoub; the Chief Operating Officer, Mr. Greg Ray; and our 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. I would like to welcome everyone to our conference call. Last night, we issued our fourth-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 results and our operations for the fourth quarter and for FY15, and we will respond to questions you may have relating to our business.

The final FY15 contained one less week than FY14. Therefore, the fourth quarter of FY15 had 6% fewer working days compared to our fourth quarter of 2014. Likewise, the FY15 had 2% fewer working days than FY14.

Our fourth-quarter revenues were $100.4 million compared to $117.1 million in the fourth quarter of 2014. FY15 revenues increased 3.2% to $350 million compared to $339.1 million for 2014. The decline in fourth-quarter revenues in FY15 as compared to FY14 is attributable to the significant decline of the market price of our oil products as well as the result of having less working days during the FY15 quarter.

Full-year revenues in FY15 increased from the prior year due to organic growth in the environmental services segment and from our acquisition of FCC Environmental. During the fourth quarter, our profitability was negatively impacted by the continued deterioration of commodity prices in our oil business segment. While our EBITDA and adjusted EBITDA were only $0.7 million and $7.4 million respectively for the fourth quarter of 2015, these figures represent a significant improvement compared to the fourth quarter of FY14.

For the full FY15, we generated EBITDA of $21.4 million and adjusted EBITDA of $37.4 million. The $37.4 million of adjusted EBITDA for 2015 represents $19.1 million improvement compared to our adjusted EBITDA for FY14.

Revenue in our environmental services segment increased 1.4% on an unadjusted basis for the fourth quarter. After adjusting for fewer working days in the fourth quarter of FY15, our growth was over 7% for the quarter.

During the fourth quarter of 2015, we experienced a downturn in activity at our customers operating within and around the oil industry. This decrease in customer activity had a negative impact on our ES revenue of approximately 3% compared to the fourth quarter of 2014. We believe the worst of this downturn is behind us, but we expect this weakness in the oil patch to remain a modest headwind for us on a comparative basis for the next few quarters.

We are pleased with the profitably of our environmental services segment both during the fourth quarter in which our operating margin was 29.9% and for all of FY15. During FY15, we performed 300,000 machine services despite the downturn I just described. Our aqueous parts cleaning program continues to grow driven by the combination of specialists, equipment technology, and superior and effective proprietary cleaning chemistry.

As commodity prices deteriorated during the fourth quarter of 2015, our revenue and margins suffered in our oil business segment. Revenue during the fourth quarter of 2015 declined by $17.7 million or by 36% compared to the fourth quarter of 2014. This decline was primarily due to a decline of approximately 55% in the price for number 6 fuel, which is commonly used to price RFO, our recycled fuel oil. And a decrease of over 40% in the market price for the cycle based on oil resale.

During the fourth quarter of 2015, the spread between the price of the products we sell and the amount we charge generators to collect their used oil contracted materially. We did anticipate that the quarter would be difficult as our industry was transitioning from mainly a free service to a charge for used oil collection and recycling.

For those of us with long experience in our industry, this is deja vu. We were dealing with a similar market transition about 30 years ago. Back in the early 1980s, generators were being paid for their used oil. And then as crude prices fell in the mid-1980s, the industry started to charge for oil collection services. This situation continued through the 1990s and for more than a decade until oil prices began to climb again.

And so, during the fourth quarter in response to lower oil prices, we started to implement widespread collection charges for used oil. We were hoping that market conditions would allow us to further increase our charges in order to restore our historical spread. Unfortunately, the industry and customer behavior did not allow us to increase collection charges enough to fully restore our spread.

It is important that we understand the expense of the compression and spreads throughout our industry. For re-refiners, base oil prices dropped by about $1.80 per gallon from mid-2014 until now.

For used oil fuel market, fuel prices dropped by about $1.45 per gallon during the same timeframe. These reductions in product values necessitated a significant service fee for used oil removal but our industry has been slow to react to these changes.

It was clear to us in the fourth quarter of 2015 that this spread compression was unsustainable. By the end of the quarter, we acted aggressively to increase our service fees. We also instituted several other revenue enhancement measures and cost reduction initiatives that I will describe shortly.

During the fourth quarter, our average charge for used oil collection was $0.014 per gallon and this reached $0.06 per gallon at the end of the quarter. But this doesn't tell the whole story.

We are pleased to report that as of now, our average used oil collection charges are in the mid-$0.30 per gallon range, and we continue to push these higher as we seek to restore our spreads. At this level, our service charges are generating revenue of approximately $15 per barrel on the used oil we collect.

We have been able to explain to our customers that these charges are needed to maintain our oil business. After all, our oil business is a service business and our customers understand the need to pay a reasonable fee for each one of our environmental services.

We are very proud of our branch sales and service representatives who have been able to communicate this message to our tens of thousands of customers in such a short period of time. We have been aided by a terrific IT group who is getting us real-time fuel pricing data on a daily basis.

We currently provide over 150,000 oil services annually to about 60,000 oil customers. And more than 97% of our oil stops are currently paying for our oil collection services, including not just small shops but many large corporate accounts.

This industry leadership has a cost. We are experiencing some volume losses in some markets, perhaps to competitors who are gambling that prices will soon rebound. As we lose volume, we expect to continually right size our operations to make sure we are not left with a bloated cost structure. Fortunately, our volume losses have been modest so far.

In addition to the used oil collection services charges, during the beginning of 2016, we have increased our separate fees for oil filter collection, spent antifreeze removal, and the incidental oily water services performed by our oil service representatives. When the price of crude was high, our industry was typically collecting used oil filters for free as both the used oil and the scrap steel had a significant residual value. This is not the case today.

Our Company collects over 100,000 oil filter drums per year, and today we are assessing an additional fee for this service over 90% of the time. Regarding the cost reduction measures I mentioned earlier, we have acted to consolidate or eliminate high cost service routes, streamline or shut down some of the former FCCE operations, and arranged to sell locally some used oil from branches that are in high cost transport lanes.

Assuming our oil product prices stay where they are today, with continued focus on the spread improvement initiatives, as well as the other revenue enhancement and cost reduction efforts I have described, we expect to reach a breakeven operating margin in our oil business segment by some time during the second half of FY16.

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. Good morning, everyone. In the environmental services segment, revenues grew $1 million or 1.4% in the fourth quarter compared to the fourth quarter of 2014, and $36.6 million or 19.3% for the year compared to 2014. Note that the fourth quarter of FY14 had 17 weeks while the fourth quarter of FY15 had only 16 weeks, which means that the fourth quarter of FY15 had 6% fewer working days than the fourth quarter of FY14.

Our average revenue per working day in the environmental services segment increased to approximately $900,000 in the fourth quarter of 2015 compared to $840,000 in the fourth quarter one year ago. This represents an increase of approximately 7%.

In the oil business segment, revenues for the fourth quarter were down 35.6% from $49.7 million in the fourth quarter of FY14 to $32 million as a result of significantly lower crude oil prices which impacted the selling prices our re-refinery products and byproducts as well as the price for our RFO.

For FY15, oil business segment revenue decreased $25.6 million or 17.2%. Oil revenue was mainly driven by a $39 million decrease in lube oil sales resulting from lower prices, $7 million from lower average selling prices for our byproducts, and $3 million from lower average RFO selling price, partially offset by higher volume.

During the fourth quarter, our operating margin in the environmental services segment was 29.9% compared to 22.4% in the fourth quarter of 2014. ES margins were aided by lower solvent costs due to much lower crude oil prices during the quarter compared to the year-earlier quarter. Our fourth-quarter results included non-cash inventory write-down of $0.3 million.

Our operating margin in the environmental services segment increased to 28.1% for FY15 compared to 25.1% in FY14. The 28.1% profit before corporate SG&A represents a record high figure for a full fiscal year.

Our full-year FY15 results in this segment include non-cash inventory write-downs of $2.6 million. In the fourth quarter, our oil business experienced a loss before corporate SG&A of $6 million. For the full FY15, the oil business experienced a loss before corporate SG&A of $7.7 million.

As previously mentioned, lower selling prices for oil products during 2015 negatively impacted our operating margins, which was only partially offset by higher charges for used oil collection services. In addition, in this segment, we incurred a non-cash inventory write-down of $2.1 million in the fourth quarter and $6.6 million worth of inventory write-downs for the full fiscal year as commodity prices declined.

Corporate SG&A was 13.7% of revenues versus 17.3% in the year-ago quarter. For the year, SG&A was 12.9% of revenues versus 13.5% in FY14.

During the fourth quarter, we performed an impairment analysis of our goodwill. As a result of our analysis, we recognized the charge of $4 million with a write-down of 100% of the goodwill in our oil business reporting unit.

At the end of the quarter, we had $70.9 million of total debt and $23.6 million of cash on hand. We incurred $513,000 of interest expense in the fourth quarter of 2015 compared to interest expense of $579,000 in the year-ago quarter. We incurred $1.9 million of interest expense for FY15 compared to $0.7 million of interest expense in FY14. The increase in annual interest expense during FY15 is due to the fact that additional debt taken on as a result of the acquisition of FCC Environmental was outstanding for all of FY15 as opposed to one quarter for FY14.

For the fourth quarter, we experienced a net loss of $2.5 million compared to a net loss of $9.7 million in the fourth quarter of 2014. As I mentioned earlier, our fourth-quarter 2015 results included a write-down of goodwill of $4 million and a write-down of our inventory of $2.4 million due to the decline in oil prices.

Our loss per share for the quarter was $0.11 compared to a basic loss per share of $0.51 in the year-ago quarter. After adjusting for the write-down of goodwill and inventory, non-cash compensation, and integration costs, our basic income per share during the fourth quarter would have been $0.07. For FY15, we experienced a net income of $1.3 million compared to a net loss of $7 million in 2014.

Our basic earnings per share was $0.06 for the year compared to a basic loss per share of $0.38 from FY14. After adjusting for the write-down of goodwill and inventory, non-cash compensation, and acquisition and integration costs, our basic income per share for FY15 would have been $0.50.

At the end of FY15, we believe we have a strong balance sheet. Our leverage ratio at the end of the fourth quarter of FY15 reflected debt at 2.1 times EBITDA as calculated in accordance with our bank credit agreement. And this ratio is well below our maximum allowed leverage. Furthermore, this leverage is calculated before considering a $23.6 million of cash on hand as of the end of FY15. During this period of volatility in oil prices, we are grateful to stand on solid financial footing, and to have a strong ES segment that continues to generate healthy profits before corporate SG&A.

Thank you for your continued 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)

David Mandell, William Blair.

Good morning. If you had been running your re-refinery at the new 75 million gallon annual capacity under the fourth quarter conditions, what would sales and margins have looked like?

Our production for fourth quarter from a lube standpoint based on what we did run at and then you can ratchet it up from there, was about 11.2 million. We didn't sell that much and often times our sales approximate production. It was a little lower in Q4 which isn't all that abnormal given the seasonality of that business. It was slightly lower at about 10.9 million.

We said our rate was 93% of our capacity at a 65 million gallon nameplate capacity in Q4. So you can do the rough math. If we are running at 75 million using the same rate, how much additional lube production we would have had. Unfortunately, due to the low price, base oil and its sales during the quarter, you wouldn't have had an extremely sizable uptick in revenue and our margins would have been marginally better but it wouldn't have helped us avoid the negative result we had, that's for sure.

Okay, that's helpful. And in then the environmental services business, did you guys increase prices coming into 2016?

We had our normal timing for our price increase, which almost every year since the Company's been in existence has been typically once a year, and the last seven, eight years at least, it's been around November beginning to implement it. So we don't often see full adoption of the price increase at the end of the fiscal year. In this case, at the end of FY15 because we do give some optionality or flexibility to our field sales and service people if they need to work with their customers to delay implementation by a service or so.

Usually, we'll see full impact of the price increase in Q1 of the fiscal year. So we did at roughly our normal timing and we would expect to see the normal improvements in top line that we traditionally have seen.

All right. Thank you for taking my question.

David Manthey, Robert W. Baird.

Hi. Good morning guys. I am really interested in the competitive landscape across both sides of the business. When you look at the ES business first of all, any changes in the competitive landscape as it relates to the parts washers or drum waste collection?

And I'm thinking SK under Clean Harbors ownership or PSC owned by Stericycle. Any changes in those two or anything else we should think about as it relates to the environmental side?

Yes. This is Joe here. I am going to answer your question. We haven't clearly seen anything from Stericyle or the PSC and they also really don't work in the same market area leading with the smaller and medium-size customers, and they're not in the parts cleaning in any measurable way. Relating to Clean Harbors Safety-Kleen, yes, we continue to complete with Safety-Kleen Clean Harbors but we don't -- we haven't seen any changes from the activities that we have typically enjoyed with our same pricing flexibility for the ES services and our typical growth level that we had for that business.

Okay. And then over to the oil business. When you look at the past two or three years and think about the capacity for collecting used motor oil, have you seen that decrease in any material way? And then as you look out over the next three to five years, could you talk about how you see that playing out given that I would assume that alternative uses for used motor oil will continue to diminish over time? Wouldn't that leave you and the remaining re-refiners that are also collectors as being more competitively advantaged as the guys that are collecting it up for fuel oil start to fall by the wayside?

We hope so. But looking at the history, we have had a first natural gas price dropping significantly a few years ago. Closed the door on a lot of local used oil being burned in the United States and asphalt plants and local industries. That I feel was a big factor in market forces.

And this resulted in the consolidation of several acquisitions and consolidation in our industry. And that has happened. We have acquired FCCE and then Safety-Kleen has done their own acquisition. Where we are today versus a few years ago, we have seen quite a change in landscape and that change is even greater when you go back to where the market was 20 or 30 years ago.

And in addition to this, we feel that offering multiple services to the same customer, the same type of customer is important today. And at the end of the day, there are not a lot of players that have been able to stay on top of the complexity of the parts cleaning business where in today's environment versus 20 years ago, there is a long menu of different machines. In particular, the aqueous chemistry development has made quite a bit of changes here in the United States over the last 10 years.

Greg, do you want to add anything more?

I think you covered it pretty well, Joe. The other part of the question -- the first question that David asked about in terms of competitive environment, you spoke about environmental services, and we didn't really -- you didn't touch on oil but clearly in the script, we talked about that and we've gotten out now we think significantly ahead of most of the rest of the industry in terms of charging for used oil. We understand the economics of the business pretty well.

We think that other people who aren't establishing charges somewhere near the level we are are probably hurting and are suffering more severe margin compression than we are. We are expecting them to figure that out. That's all I have to add.

All right. Thank you very much.

Kevin Steinke, Barrington Research.

Good morning. You mentioned expecting to reach breakeven in the oil business by the second half of 2016 based on current conditions. Just wondering I guess in terms of magnitude, how much more you would have to increase the average per gallon charge to kind of get to those breakeven levels that you are forecasting.

This is Mark. I'll let Greg and Joe add something when I'm done if they want. It's obviously a moving target, Kevin. But I can tell you even where we are now, Greg mentioned how we're leading the market. Joe did in his prepared remarks as well.

We have done a lot of work in Q1 so far to getting back spread or reduce the spread compression that was clearly evident in our in results for Q4. But there is more work to be done, and it's not by a couple cents a gallon, I can say that. But depending on how oil product prices, typically base oil but also a number 6 and our different RFO prices move, that can always change that equation. Where we are now and where Joe indicated we're at, if things didn't change, we expect to have improvement in that street price in order to get us to that point.

Okay. I guess you feel like you can balance increasing charge per gallon with maintaining reasonable collection volumes to feed the expanded capacity of the re-refinery. You feel good about balancing that out.

Yes, we continue to bring in third-party volume as well. It was about 17% of the feed for Q4, and that's in the same range it's been for a while.

So that is a component to it, needing to get the feed but Greg had mentioned earlier and I think Joe in his prepared remarks that we also need to be as nimble as we can on right sizing our infrastructure and that's something that is a little bit of a challenge because even though we get daily information, as Joe mentioned, which is fantastic as far as the Street conditions, you don't want to have a knee-jerk reaction to one or two days' information. You are talking about our sales and service reps, our employees that working really hard to make those decisions to right size operations is one we're prepared and already started to do. But it's got to be a continual effort, so there is a balancing act there.

Okay. Makes sense. On the environmental services margin, obviously a nice year, a record year in 2015. You did benefit somewhat from the lower solvent costs, lower fuel prices. What's your directional outlook as we go into 2016? I guess you might lap some of those benefits from lower fuel and solvent. How are you thinking about where you can maintain that as you look into 2016?

I think maintain is a good word to look at or good word to use. You'll have minor puts and takes on either side of it. I don't think you'll have the tailwind like you indicated anymore driven by lower crude prices as far as aiding the margins.

All the integration, you see some of that in the improvement from the Q4 2014 margin of 22.5% where we are at. The integration synergies and all the efficiencies gained there that step up, if you will, in efficiency and routing or whatnot will not repeat itself but we will have ongoing efficiencies.

Other than in the next couple quarters, the headwind, the impact that we saw in our customers in the oil patch on top line. And any time top line is not growing as much, you're not going to get quite the leverage on the overall business, so that would be a mitigating factor. As we downsize some oil operations, there is several sites in our network that are shared sites so you might have a tiny impact or headwind there if there are shared costs and the facility has three people but they still need [four], even though we have no oil operation there anymore if we would downsize it, but we still have to have an operation to support the ES business, you might have some costs that are allocated to ES be a little bit higher.

That could be a slight headwind as well. But I think being in the neighborhood that we have been at, and again, coming into Q1 as you probably remember, Kevin, it's always going to be several hundred basis points lower but we wouldn't expect huge improvement because of the oil industry impact and the other headwinds but staying in the general area is probably a good target.

I think part of our thinking and we'll obviously put additional price increases here in the fourth quarter. However, when we look at our margins, we are happy where we are. I think what is important for us as we move forward, we want to make sure that we continue to grow our ES business, and our target is to grow at double digit and so we are invested.

We continue to invest and opening up branches. We haven't totally saturated the landscape as far as branch locations, and we're adding additional environmental services in these locations, adding new staff, et cetera. Driving the top line at this stage where we are in the high 20%s margin is the guiding force for us.

Okay. Great. Thanks for that detail. And I was curious about the 93% capacity utilization at the re-refinery in the quarter. Was there any minor disruption to utilization just from getting the expansion completed and should we expect that utilization to tick up a little bit going forward?

Yes, we did have during this last phase of completion of our expansion to 75 million gallons. We did have the several shutdowns to do tie-ins and there have been some issues as we did this in addition to the regular maintenance of the refinery. That's why we produce at the rate of 93%.

Now that we have the capacity to 75 million, we are going to be guided by where we are with the oil spread improvement, and we also have an option to move oil from the southern branches that are going into the number 6 pure market to Indianapolis. We need to look at the relative economics of freight and the value of the lube oil.

We have got options we didn't even have 1.5 years ago. We will be guided with this and there's no question that we will eventually get to fully utilize the capacity of 75 million. Incremental capacity is economical to utilize on an incremental basis.

Okay. Thanks for taking my questions. Appreciate it.

Michael Hoffman, Stifel.

Hi, Joe, Greg, and Mark. Thank you for taking my questions. If we could start on the used oil business. The light end of the base oil market seems to be oversupplied. Do you see any activity on the generator side of potential shutdowns to do maintenance like Motiva did in January on one line to try and clear that inventory before we get into the seasonal stronger demand for base oil?

We see Group I plants -- first of all, lube oil today is international and follows international market and we have seen Group I announcement for Group I plant shutdown overseas. And I think that has been the issues in North America. The oil industry also where there are other choices between making lube oil and making distillates fuel and feeding this to further [crack it] to lighter products, and we also track -- for us, we track the spread between what is called vacuum gas oil and lube oil.

I would say, Michael, that this spread has been relatively consistent here the last year or so around $0.40 a gallon. We've seen an uptick prior to the last reduction in the price of lube, and today it's sitting at the same spread of about $0.40 a gallon.

Okay. And with regards to the breakeven commentary, if I read through Mark's comments about the outlook through the year, what I'm hearing is you need somewhere between $0.05 and $0,10 of incremental pricing all other things being equal to get to that breakeven. Is that the right way to interpret what Mark was saying?

(laughter) Michael, that's a good question. I'll let Mark answer the question.

I think you're in the ballpark.

Okay. Am I in the infield or in the outfield?

(laughter) Michael, obviously the big factor in here is where things are. For the last few days, Group seems to be firming up and it may take some time if it continues to firm up, it may take a month or two before we start seeing base oil moving upward.

I think the big message in here today we wanted to share with you is we have decided the end of fourth quarter that we are going to go in and take aggressive steps to restore the spread and the spread haven't been restored so there's more work to do. We track the spread on the lube oil but we also track the spread on the number 6 fuel because that's still a piece of the market in the United States.

Fair enough, which led to my next question. Candidly, at the end of the day, you really just need enough oil to fill the plant in Indianapolis and if you don't have anything left over for RFO, that's not necessarily such a bad thing if you can continue to drive the pricing up on the charge for oil side versus the offset of not having any RFO sales. We shouldn't be alarmed by that if that plays itself out because you are doing it because it's the best economic outcome.

Well, you've got a good point here, Michael, and it's what our thought process is there are other issues relating to some markets where we can get because of their freight and so on that some fuel markets we want to protect. But basically, large movement into the number 6 large shipments of product, we don't have that volume. It's not really going to hurt us from an economical point of view.

Okay, and then shifting gears to environmental services. If I again, understand the thoughts about guidance, I should look at the first half as having that same about 3% pressure on the oil and gas end markets, the remainder of the business seems to be growing low-double digits. And then as I get into the second half, I transition back to the overall business's low-double-digit growth.

Yes, I think that's right. The fine line is probably sometime in Q3, and we talked about it in our call in October that we had started to see something. It obviously got worse as the quarter because we were already in Q4 at that point. In general, I think you have a good feel for what we would expect.

Okay, and is it reasonable to assume then that you hit and breakthrough that $1 million average daily revenue number?

Well, you know where we are at based on what we just talked about. I think your comment as far as what we expect on top-line growth that you just laid out are good. They are pretty accurate so you could just apply that math.

Fair enough, and I just want to be clear on your leverage. You were giving us a leverage ratio that was not net debt; it was the leverage ratio on gross debt so it's better when I do the net debt calculation to pull the cash out. That's what I just wanted to make sure I understood. Thank you.

Exactly right. Exactly right.

(Operator Instructions)

Sean Hannan, Needham & Company.

Yes, hi. Can you hear me?

Hello, Sean.

I don't know what happened. I think somehow I was booted out of the queue. A few questions here.

There were some aspects of the commentary you guys provided that kind of went out on my phone a little bit. Administratively, just want to check on what were the gallons sold in the quarter. What did you observe as the average sales price of base oil during the quarter?

And what would you say is that price today? I know it's been near $1.70 and perhaps a little bit lower. Thanks.

Hello, Sean. This is Mark. I'll try to hit all those things. We typically don't give out what our actual selling price is or --.

Spot is fine in terms of your observation.

Okay. From a volume standpoint, we did about I think I mentioned a little earlier almost 11 million, about 10.9 million in volume on base oil. We had a little less than 3 million on our byproducts. RFO was about 9 million volume-wise. For base oil spot for the quarter you said you wanted, and what was the other one?

And where you are observing it now.

Yes, let me dig that up for you Sean. I don't know if you have any other questions you want to shoot them up.

I certainly do. So while you dig that up, can you folks help to explain to me on the environmental services side why we are seeing that pressure at the consequence of the oil fields. Obviously, that's been a [statistic] under pressure for some time, and I'm just trying to better understand how that relates to volumes or the activity you have on the environmental services. Thanks.

Yes, I'll be glad to take a stab at that one, Sean. This is Greg speaking. Think about some of our customers that are involved in the oil path related to drilling or fracking activity and they use cleaning solvent, parts cleaning services and generate waste when the business is going well. When their business, as happened in the last year, goes through a steep decline, they would generate less waste for us to pick up and need less parts cleaning services. Often there's a short burst of activity when they are in the shutting down or slowing down mode when they bring back a lot of equipment and actually generate more waste, so our observation of that dropoff sort of lags.

Their bringing back equipment, their cleaning things off, their putting it into storage, and we keep having decent business until they basically say okay, now all our rigs are in warehouses or something like that, and we're not doing any more of that work right now and then our activity goes way down. So we service companies that are related to fracking and oil field work. It's not a huge segment of our business but for them, obviously the dropoff in activity has been so severe that it really makes a dent in what we are doing.

And geographically, that's impacted us most strongly in the south central market area and we can sort of see it and measure it and have a good understanding that that's the dropoff in our business related to decline related to the oil drilling and production activity. Does that make sense?

Yes, sure. I think it was the degree of the lag that I had more questions around so I think your explanation around how your service then particularly has been shut down now connects the dots and makes better sense.

Sean, this is Mark. Real quick. For Q4, we get a couple -- we subscribe to a couple markets papers or newsletters and for our Q4, the spot market average was around $1.60. That's from one of the ones, the publications we look at. And from that same, if you look at some of the weekly published information from last Friday, that equivalent number and again, this is what they call spot which again, is a lot of that is just gauged from market inquiries.

I doubt they are actually seeing invoices or anything but it's a good indicator but that was down to around roughly $1.35 as of last Friday. If you take N100 and N200 averages, which approximates the material that we sell. Typically, re-refiners are going to sell at a discount to that number, as you know.

Right, and so as a follow-up to that and one of them is a question on the discount. I believe a lot of re-refiners typically would sell 10% to 15% discount to then spot. Is that still relevant today and perhaps is there a scenario given how low pricing has gone that you can maybe tighten that discount?

Well I think the discount range is still there. I don't know if Greg or Joe want to talk about the future prospects whether -- whatever the motivator might be to try and close that gap between the virgin producers.

The gap has shrunk when lube oil was being sold at $4 a gallon. That's 10% or 15% was a much higher number than what it is today when lube oil is less than half that price.

Okay. And then getting back to the spreads, I'm just trying to reconcile some commentary I've heard. So it sounds like I believe what I've heard that the spreads were really quite compressed in the quarter and were still looking to improve those spreads today, but it feels like I've heard that we're actually now on the spread expansion side of the game.

There was some commentary around spreads typically $0.40 a gallon. I almost thought I heard that it's similar to that today too. Not all of this is connecting dots for me. Maybe I took down the notes incorrectly but can you help me to understand that part better?

I'll give a little commentary first, Sean. This is Mark. Spreads were compressing, especially at the end of Q4 for us. We had continued headwinds and we still had I think in our remarks talked about so far through our first couple periods. Base oil was down, on a spot basis was down a little less than 10% but still down.

It depends where you measure from. Have we helped to restore some of the spread through our aggressive moves and charge for oil? Yes. But we still have more work to do and it depends where your starting point is. For us, if you look back to when we had roughly a breakeven and slightly positive operating margin and profit before corporate SG&A in Q3, we still have work to do to get back to those spreads.

Okay. All right. That's all that I have. Thank you so much.

And I'm not showing any further questions at this time. I'd like to turn the conference back over to our host for closing comments.

No further comments.

Ladies and gentlemen, this does concludes today's presentation. You may now disconnect and have a wonderful day.