Heritage-Crystal Clean Inc (HCCI) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Heritage-Crystal Clean, Inc. third-quarter 2017 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 obligations 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, and adjusted 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 are President and Chief Executive Officer, Mr. Brian Recatto; and Chief Financial Officer, Mr. Mark DeVita.

At this time I would like to turn the call over to Mr. Brian Recatto. Please proceed, sir.

Thank you, and welcome to everyone joining us this morning. Last night we reported our third-quarter 2017 results. Our diluted earnings per share during the quarter was $0.20 compared (technical difficulty) to $0.10 in the third quarter of 2016. The third-quarter results included a gain from a sale of property, which Mark will discuss in his prepared remarks.

Our revenues for the third quarter increased 1.8% compared to the third quarter of 2016 to $83.3 million, driven by strong growth in our environmental services segment. Mark will provide more financial details later, but I would like to talk about various aspects of our business.

I would first like to discuss the results in our environmental services segment. From a revenue standpoint, we continued to progress along the trajectory of growth we outlined during our last several earnings conference calls. Specifically during the third quarter, we grew environmental services revenue 7.3% compared to the third quarter of 2016.

We saw growth in almost all lines of business in this segment on a year-over-year basis, with the majority of revenue growth coming from our aqueous parts cleaning, containerized waste, and vacuum services businesses. This growth has been aided by a continued focus on industrial customers. We expect to achieve high-single-digit revenue growth on a year-over-year basis during the fourth quarter of this year.

During fiscal 2016, we have added sales resources, such as branch sales managers, antifreeze sales and service reps, vacuum sales and service reps, ESP specialists, and field services reps that we expect to add more of these types of resources during the fourth quarter. We also continue to expand our service area. During the third quarter, we added two service areas, and plan on opening a few additional service areas during the remainder of fiscal 2017.

Our environmental services operating margin in the third quarter of 2017 was down 2.2% compared to the same quarter a year ago. The largest single factor in the reduced operating margins was higher labor cost related to the new sales resources we've added during the year. As these new resources develop, they will help fuel continued revenue growth. On the positive side, we continued to benefit from a lower disposal cost during the quarter.

During the third quarter, we were faced with the challenge of dealing with multiple natural disasters, specifically Hurricane Harvey, which most directly impacted our facilities in the Houston, Texas, area; and at the end of the quarter, Hurricane Irma, which primarily affected our facilities in Florida.

I'm proud to say that while both of our branches in the Houston area were closed for multiple days, the can-do spirit of our employees was on display during the aftermath of the storm. While faced with personal hardship, our team managed to return to work with a determination to make up for lost time. And a result we did not see any material negative impact on our revenue during the third quarter due to the storm.

We will incur expenses to repair our facility in Baytown, Texas, but we expect this should cost us less than $200,000.

Hurricane Irma struck Florida as our third quarter was ending, which meant that other than closing our Fort Lauderdale site the last two work days of the quarter, there was little impact on our third-quarter results from the storm. During the beginning of our fourth quarter, we had multiple branches which were closed for a few days; as well as employees who were out even after our branches reopened, as they struggled to provide their families with basic necessities. Once our branches reopened, they were dealing with challenges such as wide areas in Florida without power, and many of our customers still closed.

While we experienced a loss of revenue in the short term, we believe the Florida market will recover throughout the remainder of the quarter, and we expect that it will be back to the normal for the beginning of fiscal 2018.

Now I would like to talk about our oil business. I'm proud of the way we performed during the quarter as we work through some short-term issues, which I will discuss in a moment. But first I will speak to the impact of some continuing factors which affected our results in this segment.

In the oil business, we have trends moving in both a positive and negative direction. From a positive standpoint our base oil netback was up $0.03 per gallon versus the second quarter of 2017. The increase in base oil price that has been driven by the continuing supply tightness of the type of Group II light-grade base oil we produce. The continued tightness was primarily due to unplanned shutdowns at virgin base oil refineries created by Hurricane Harvey during the third quarter. During our second-quarter conference call, it seemed likely we would see an increase in base oil supply, and thus lower pricing during the fourth quarter of 2017.

However, the situation has changed. And with current conditions supporting slightly higher base oil prices, we may not have -- we may not experience the declines in pricing which we typically see at the end of the year. While the third quarter provided higher base oil selling prices, our street price for used oil collected retreated for the fourth quarter in a row. During the third quarter, our street price declined approximately $0.03 per gallon compared to the second quarter of fiscal 2017.

We continue to battle our competition for used oil collection in various geographic markets. During the third quarter, used oil collectors who sold into the RFO market benefited from tightness in the fuel market, which had No. 6 trading above the price of WTI crude for a short time. In the past, No. 6 oil was typically traded in a range of 80% to 85% of WTI.

The resulting higher price of RFO relative to crude oil allows these collectors to be more aggressive than they might otherwise have been in a declining crude oil price environment. While our used oil collection route efficiency increased approximately 4% during the quarter compared to the third quarter of 2016, we continue to try to optimize the performance of these routes in the face of this competitive pressure.

We operated the re-refinery at a rate of 91% of our nameplate capacity during the third quarter compared to 94% during the second quarter. As we discussed during our second-quarter earnings call, we had planned an extended shutdown during the third quarter [through making] capital improvements to the re-refinery. Even with this extended shutdown, we only produced 300,000 less gallons of base oil than we did during the second quarter. We expect implementation of these improvements will allow us to increase base oil production at the re-refinery going forward.

During the fourth quarter, we estimate production increase by more than 1.5 million gallons compared to the fourth quarter of fiscal 2016. And optimal base oil production should now be in the range of 46 million to 47 million gallons annually. Between the improved leveraging of fixed cost and efficiencies, we expect to reduce our operating cost by approximately $0.06 to $0.07 per gallon versus before the improvements were installed.

Like many businesses who transport material across the central and eastern portions of the US, we were negatively impacted by changes in service model implemented by one of our primary rail transportation providers during the third quarter. Service disruptions caused by these changes impact several aspects of our business, including our ability to transport used oil throughout our network as well as the ability to ship finished products from our re-refinery to our customers.

These initial impacts had a cascading effect on our ability to collect used oil which impacted our ability to service our customers and generate service revenue. Additional impacts include the higher cost of alternative transportation and higher labor costs for loading at the re-refinery.

The inability to ship base oil produced at the re-refinery reduced oil business segment revenue by approximately $1 million during the third quarter. And the overall negative impact of these issues on operating margin for the Company was $25 million during the third quarter.

While the above issues continued into the fourth quarter, we have seen some improvement in the service level. We expect to recoup lost base oil revenue. And we also expect the overall negative impact during the fourth quarter related to logistics issues to be less than what we incurred during the third quarter.

We are also pleased to report that we recently obtained a Title V air permit for the re-refinery. Our team has worked very hard to obtain this permit, and we expect to realize a cost reduction of approximately $0.01 to $0.02 per gallon of base oil produced as a result of process changes this permit will allow us to implement.

As I have discussed, our third quarter brought us many challenges which impacted our results. However, I'm very proud of how our team responded. Whether natural disasters or industry issues, our team has once again proved what a competitive advantage they provide us. Through their hard work, I believe we are positioned to have a strong fourth quarter of continued growth in our environmental services segment as well as improved profitability in our oil business.

Mark will now walk us through our third-quarter financial results in detail.

Thanks, Brian. For the third quarter, we recorded net income attributable to common shareholders of $4.7 million compared to income attributable to common shareholders of $2.3 million in the third quarter of 2016. As Brian mentioned earlier, for the third-quarter 2017, we recorded diluted earnings per share of $0.20 compared to diluted earnings of $0.10 per share in the third quarter of 2016. Our third-quarter earnings included a gain related to the sale of a facility during the quarter.

On a non-GAAP basis, excluding the impact of the gain recorded, partially offset by severance costs incurred during the quarter, our adjusted diluted earnings per share was $0.15. Please refer to our reconciliation of GAAP to non-GAAP supporting schedules in our press release.

In the third quarter of fiscal 2017, oil business revenues were down $2.3 million or 7.5% compared to the third quarter of fiscal 2016. The revenue decrease was due to lower used oil collection charges and lower RFO sales volumes, partially offset by higher selling prices for our base oil products. Results were also negatively affected by rail service issues, which Brian discussed earlier.

During the third quarter of fiscal 2017, we sold approximately 8.9 million gallons of base oil compared to 9 million gallons in the third quarter of fiscal 2016. Base oil production of 9.5 million gallons during the third quarter came in flat compared to the third quarter of 2016. We sold approximately 3.9 million gallons of RFO during the third quarter, which was down 38% or 2.4 million gallons compared to the third quarter of fiscal 2016.

In the third quarter of fiscal 2017, environmental services revenues increased by approximately $3.8 million or 7.3% from $51.3 million in the third quarter of fiscal 2016 to $55 million in the third quarter of fiscal 2017. The increase in revenue was due to increased activity in all the segments' businesses, except field services. A majority of the increase was due to increases in sales volume in these businesses.

Turning now to income before corporate SG&A expense. Oil business income before corporate SG&A expense decreased $0.4 million in the third quarter from income of $1.7 million in the third quarter of fiscal 2016 to income of $1.4 million in the third quarter of fiscal 2017.

The decrease in income before corporate SG&A was mainly due to lower used oil collection charges, higher costs for third-party used oil feedstock, lower revenues and higher costs associated with the aforementioned rail logistics challenges, as well as higher costs of approximately $0.4 million from the planned extended shutdown at our re-refinery. Despite these challenges, this marks the sixth straight quarter of operating income, as this segment continues to demonstrate consistent positive results.

Profit before corporate SG&A expense in the environmental services segment was $14.9 million. Our third-quarter operating margin percentage was 27.2% compared to operating margin of 29.4% in the third quarter of 2016. The largest single factor in the decline in operating margin was higher labor costs from the addition of sales and service resources, along with higher solvent and workers' compensation expense, partially offset by lower disposal costs.

Our overall corporate SG&A expense as a percentage of revenue was 14.2%, which was flat from a year ago. Our corporate SG&A expense includes $1.2 million in severance costs related to the departure of our former Chief Operating Officer. We have opportunities to improve our corporate SG&A expense, and we expect to continue to drive this expense lower as a percentage of revenue over the coming year.

During the third quarter, we recognized other income, net of other expense items, of $3.1 million, which consisted of a $3.1 million gain recognized from the sale of a facility located in Pompano Beach, Florida. This facility was acquired as part of our acquisition of FCC Environmental and was deemed underutilized.

Third-quarter EBITDA of $11.8 million was $3.8 million or 47.3% higher from the year-ago quarter.

Turning to the balance sheet, cash on hand at the end of the quarter stood at $33.5 million compared to $25.2 million quarter over quarter. And total debt stood at $28.7 million. We intend to use our excess cash balance to seek acquisition opportunities as well as pursue capital projects to help drive growth and improve operational efficiency. In an effort to be more systematic in our approach towards acquisitions, we have recently created a position focused on this effort. This is in contrast to the team approach we utilized in the past.

I want to thank everyone for their interest in Heritage-Crystal Clean. Now I'll turn control of the call over to our operator to advise you of the procedure to submit your questions.

(Operator Instructions). Paul Dircks, William Blair.

So, just a couple quick ones for me. In environmental services, can you talk briefly about which geographic regions and markets relatively outperformed and underperformed during the quarter? Obviously 7% growth is quite strong, and the trajectory is looking positive here, going into the end of the year. Can you talk about which regions and markets were strong and maybe not so strong during the quarter?

Paul, as you may remember the last couple quarters, we have given a little color. And this actually goes back four or more quarters. We've given color that spoke to those branches that were in certain geographies that were more energy-sector-centric, and those typically were along the Gulf Coast or in Texas-Louisiana type markets. Since those markets have more than stabilized, we didn't cite it in our prepared remarks. But again, we saw positive activity there, and it is more in line, or getting more and more in line with the rest of the Company.

We really didn't see any region that stood above or below the overall performance of the Company, so it was really a team effort across all the markets. There was a little bit of noise in some of the areas that Brian mentioned that were specifically impacted by the natural disasters. But as he stated, it was pretty muted, even in those areas.

Okay, that's helpful. Perhaps then could you also maybe touch a little bit upon how progress has been thus far through the expansion of your branches out in the western part of the US? And maybe tie into that how you think about -- how we should think about the environmental services margin trajectory here, going forward, as you balance that expansion into new markets and changing some branch sales manager strategies and incentives to go out and win new business with obviously trying to balance the environmental services margin profile as you have.

This quarter, we saw obviously a pretty large step-up year-over-year in operating expenses in environmental services. Is this level of year-over-year increase what we should be expecting here, next quarter and into early 2018?

Yes, I think this impact is in line -- what we saw here was in line with the couple hundred basis points message we delivered for at least the last three quarters, that we were expecting the impact to be in that range eventually as we started to get to a rate. And again, it's been -- we haven't added all the resources, nor do we probably ever plan on doing it all in one slug, or in any one quarter.

So as we have ramped up into this plan, I think this is the level that we would expect it to be at, as long as we're continuing to add resources. We don't know that we'd see any further deterioration, at least related to the expansion of our sales resources and of our territories, but this should be the level we're at for a while.

Obviously whenever we would stop this, there is usually a probably 12- to 18-month ramp-up for these services. So, whatever you -- if you would get into [mobile, we'd stop it]. And we certainly continue -- or plan to continue this ramp-up through 2018 at roughly the same rate. So, I don't think you're going to see a big step back up any time soon, but this level is where we would expect it.

As far as the Western US, we are looking for some of our additional service locations to be in the Western US here in the fourth quarter, and more into 2018. Up till now in 2017, we haven't done a lot of new Western expansion. We had done a branch in the Northwest, Seattle area, back in 2016. But we really haven't planted any new flags, so to speak, yet in that area as part of this new expansion.

I don't know, Brian, if you have anything more to add.

Yes. Paul, we have added 18 sales personnel -- professional salespeople to our roster over the course of this year. We expect to add six more. And to Mark's point, we expect it will take 12 to 18 months for these people to begin producing contribution margin. So we're really right on track. And we have a line of sight on $7 million in annualized cost reductions that we are looking at that we think we will be able to achieve by the back end of 2018. We mentioned it before; it's related to our logistics cost. We're in the process now in terms of getting some of those costs out of the system. We think the full effect of it will be realized by the end of 2018.

We expect next year, as we look at growth, we're going to open five additional branches in 2018. That's our current business plan for now. And we'll end up with probably a similar number of additional sales professionals to fill out those new service locations and branches. So I think we're right on track with what we've been telling the market for the past couple of quarters.

The growth is there. We've got a very healthy balance sheet, as Mark talked about: $33 million in cash in the bank. We believe in ourselves, and would rather invest in organic growth, given the current conditions in the acquisition market. Obviously we're pursuing that, as well, but like our chances organically; and we've got a proven track record of being able to grow the business.

That's very helpful color. Thank you, guys.

Quinn Fredrickson, Baird.

Just curious if you guys could lay out what you see as the current US organic growth algorithm from a same-store sales perspective; and the various components of that, i.e., underlying volume growth, cross-selling, and share gains and price, plus new locations.

I think a lion's share of it -- well, first of all, the overall profile should be in that high-single-digit range. We think with the continued investment that both Brian and I alluded to in talking to Paul a second ago -- that will help support that. So that level of investment will help give us high-single-digit growth rates.

I think cross-selling is a big part of it. We think it's going to come across most of our lines of business in roughly the same rates that they exist now, with maybe containerized waste being a little more weighted than, let's say, parts cleaning, which is a more mature market. And then our anti-freeze business and some of our other, more early-stage businesses will be yet even higher, but a small overall percentage, because they are still in that 5% of total segment revenue range at this point.

Cross-selling continues to be, and has always been, a part of our program. If you look at where we're at from a cross-selling standpoint and you project it out on an annual basis, it's probably getting close to -- or through the first three quarters it was around $9 million. So, it has been very powerful for us; will continue to be part of our growth into the future.

Okay. Thank you very much.

Sean Hannan, Needham & Company.

Just want to see if I could follow up around the environmental service growth. It's nice to see you folks at least returning back into the upper-single-digit range. Just want to see if we can tease out a little bit more. As we think about the 7% achieved in this third quarter, and then looking at the expectations in a -- from a quasi-quantitative/qualitative standpoint, looking at those upper single digits 4Q and forward.

Can you perhaps characterize a little bit better for us if we think that we're just truly at a stable point? Or do you feel that you are being conservative? Is there a conservative aspect to this that there really should be some acceleration but we're only communicating what we know today? Any more color around that would be great.

Wait, I didn't hear the first part. Acceleration, and you're talking in the ES top line?

ES top line.

I think we are seeing acceleration in the path that we outlined basically a year ago, Sean, in that whether it ends up being a 9%, 8% -- whatever the number is, that with the types of investments we're committed to make, kind of almost finished for the quarter or the year -- not quite, obviously -- and then continue to make the same type if investments that -- you know. That's what we expect to see going forward here, at least into 2018 and for the year, and a lot of it's going to be volume. We're going to continue to get some price in certain lines of business are more -- will support that more.

But I think the growth rate we've been on, and where we're at is exactly what we planned. And we think we can repeat that, which is the high single digit, and keep that constant, keep that growth rate going.

Yes, so I agree with Mark. Absent any acquisitions, I think we're going to be in that high-single-digit growth rate area.

Okay. And then when you look into the margins, you folks acknowledged some of these new resources really create a little bit of an investment downdraft. We saw a little bit of compression and that's going to ultimately reverse at some point. Can you give us a little bit of -- some understanding around the timing of how you would expect perhaps at least to get back to what we had seen as margins in the second quarter?

And as you think about, and I don't know if there's any incremental comments where you can provide around how we should logically think about potential for price raises that may accelerate that path or perhaps provide a little bit more benefit in some of the future quarters.

Well, I think it comes down to -- it's a balancing act. We talked about that in the past. And we feel comfortable at this margin level as long as we're generating the top-line growth that we just alluded to; that at least for the next five, six quarters, that we will be in this general position. Because we're going to continue -- as long as we're getting that growth, we're going to continue to add resources.

We don't want to get too detailed about 2019 or anything like that. But as long as we're seeing the results that we're -- have been seeing in growth throughout these first three quarters and expect to see in Q4, then not only are we going to do the same thing in 2018, but it's [either] logical.

We usually don't plan that granularly more than a year out. But we're going to plan probably to add the same -- at that same rate, the same amount of resources. And then you'll probably see, as those resource adds become a smaller and smaller part of the base, you will see that march back up. But it could be before we get back to that high 20s -- 29s, I mean -- 30% range, that could be a year and a half.

Okay. That's actually very helpful. So, if I can -- sorry, go ahead.

(multiple speakers) summarize what Mark's saying. We expect our margins to remain flat. I think in a comment that I made a few minutes ago, we have line of sight on cost reductions going into 2018. We're in the process of implementing those changes.

In terms of how we move material around between our branches and our hubs, it's $7 million to $8 million in cost reductions that will be worked out of the system through 2018, which will offset the additional people that we will add in 2018 to achieve the single-digit growth. So I certainly think we can hold the margins flat in spite of the fact that we'll be adding the headcount to achieve the growth.

Understood, makes sense. Okay. Just shifting gears to the oil business side, just want to understand a little bit more the impacts from your rail partner. How limited are you today, at this point in time, in terms of your ability to ship to customers and get really some sort of recognition on those revenues, or revenue opportunities? And where do you stand, in current point in time, on then the cost of accomplishing that? A little bit more detail for where we are as of October 19 would be helpful.

Sean, obviously in our prepared remarks, we talked about a $0.5 million impact to Q3. We're expecting less in Q4. We're close to back to normal out in the field, especially on used motor oil collection. We are no longer having to ship used motor oil to our RFO plants via truck, and/or to our re-refinery via truck.

We're still 100% back to normal at the re-refinery. We have seen some delays in shipping, but much better than it was in Q3. I expect the impact to be, if anything, a couple hundred thousand for the quarter. But we're in much better shape in terms of delivering product to our customer.

We're not trucking product any longer. We're back to rail with all of our base oil customers. We're back to rail with all of our used motor oil supply that was traditionally being railed into the plant. So I think by the end of this quarter we will be back to normal.

Okay, so we're making good progress, and that sounds like that's really something we should maybe interpret as transitory.

Yes. I think Brian spoke to it. The effort of our team, we're having to send tanker trucks to pump down railcars because they couldn't get moved. It was a massive effort and a (multiple speakers) one, but I think it's important to understand how the team pulled through. Because it could have been a lot worse than $0.5 million.

Yes, that's right. We cut down used motor oil collection trucks that couldn't offload. It was a very difficult quarter logistically for us. But the worst of it is behind us, and we're getting close to normal now.

Okay, yes. And that's the key I was trying to drive at, so that's great. Last question here, I'll jump back in the queue. So when you look at street pricing right now -- and obviously you've called out a few viewpoints for why we've had some good support of pricing dynamics that's brought us to current point -- can you talk about the street pricing you are observing right now versus -- and then how that's tracking versus what was observed, say, as an average that impacted your top line in the third quarter? How does this compare, at this current point in time?

Yes, I think in our prepared remarks we highlighted that we were down $0.03 per gallon on street pricing. We are continuing to see some pressure. RFO -- the recycled fuel market --

I'm sorry, Brian. I'm sorry to interrupt you here. I'm getting at the street pricing for the finished product, the re-refined product. Yes.

Yes, we actually feel pretty good about re-refined base oil pricing. Obviously with Hurricane Harvey, we've seen a disruption in supply in the Gulf Coast market. We're down quite a bit in terms of base oil inventory across the US marketplace. We're probably at -- I know we are at our lowest point year-to-date for base oil supply.

I was at a conference this weekend, and the mood in general is very positive about near-term base oil pricing. Obviously we will see the seasonal slowdowns as we look into Q3. We expect some degradation in pricing Q1 of 2018. We will begin to see our seasonal ramp-up as we move into Q2 and 3. Overall, I'm very positive on base oil for Q4.

And we're also going to produce a lot more of it, given the changes that we made at the re-refinery, which we highlighted in our prepared remarks. Year-over-year we're going to produce 1.5 million gallons more than we did in 2016. So, a lot of positives relative to the re-refinery and base oil pricing as we move into Q4.

Okay. But at the point of transaction right now, are you and the industry getting better pricing than what you were observing on the average in the third quarter?

Yes.

Okay, great. Thank you very much.

Michael Hoffman, Stifel.

So, let me circle back to ES. You've touched on this; I just want to make sure I'm summarizing this right. So, historically when Heritage was growing through the branch network activity, by adding branches annually, you ran margins in a 25%, 27% range, and gradually they drifted towards that 27% as you were improving that cross-selling and leverage.

And then there was a period where we weren't doing that for a host of reasons, and it helped margins improve because you weren't investing. And you were still maintaining decent growth, then the oil business hits you and the growth comes down, but you drove better margins.

Now we're back to an investing cycle, and I understand this correctly, that the new margin reset is 27-ish while we go through this expansion mode. So that's better than your history, 200, 300 basis points better than history. And then as we get to the targeted 100 branches, which I think that's still the number is go from the low 80s to the 100, then you could see margins reassert itself as you stop that investment process. Have I thought through that correctly?

You're absolutely correct. And it's not inconsistent with what we've been saying the past couple of quarterly conference calls.

So, an observation I would be curious about. You have been talking about this, but -- so, obviously the stock trade is down today on, oh my goodness, margin compression. Where are you in the ability to look forward 90 days? So in coming out of Q2 have been able to say, hey, we've been telling you about this investment. It is going to happen in 3Q based on the rate of adds, as opposed to just high level, because none of us adapted our models for it. So, shame on us. You have been talking about it; none of us adjusted our models. But where are you on the ability to look forward and predict your business a little better that way?

Well, a lot of it comes down to we have a plan of how many we're going to add. As far as whether that's a certain sales and service position, the professional sales staff, a branch -- all those components of resource investment and growth process.

But to be quite honest with you, especially when you're talking about personnel, the variability in timing really means everything as to how it reflects in the results. And it still is hard for us, because we want to make sure we get the right resources, especially when you're getting -- you're going to be the first -- [VS] is our vacuum rep or whatever in branch X. So, when we get right up to it, it's -- then we know. But it is somewhat hard for us to say when these investments are actually going to come in within a year.

So I wouldn't say we have -- it is nowhere near 100% clarity. And we -- unless we can have that, it's hard for us to say and pound home, hey, look for it in August; I mean, if you had that granularity, that's when it's going to hit. Because we could be delayed for all types of -- you've got to have -- for most of these, you've got to have the truck, or you got to have that lease up at the new branch and there's a lot of components. Not complaining, but it just -- it's not easily predictable within a month or two timeframe sometimes.

Yes, I would agree with that. But Michael, we do have -- and I've said it three times on this call -- we do have visibility to cost reductions that we're going to be working as we continue to grow the professional sales organization. And we're fairly confident that we can offset those cost with the cost reductions as we move into our growth mode in 2018.

Which means that 27% is the right number for 2018, with some upside if the cost cuts come through early versus later in the year.

That's correct.

Yes.

Okay, okay. That's how we should think about it. Okay. So just so I'm clear, the bulk of these new adds occurred in the third period. Since I had favorable margin trends through the first half, I'm (multiple speakers)

Just started adding them pretty heavily on the back end of Q2 (multiple speakers) Q3.

Yes. Yes, exactly. So, in Q2, I think I even mentioned it. Even some of the adds we made there, it was near the end. So you only saw a glimpse of what the real cost picture was -- in the actual results, I mean.

Fair enough. And 100 branches is still the somewhat bogey is that's we're going from the low 80s towards 100. That's the way to think about?

Yes. We think that's a realistic number, given the fact that we want to be concentrated in the larger cities. 100 has been our number.

Okay. Switching gears to oil: are you back to a pace that's $2.5 million to sort of $2.75 million in revenue per week, or per reporting period? It ran slower than that, obviously, in 3Q. You were in the $2.2 million, $2.3 million range.

Yes. I mean, obviously, we were down for 9 1/2 days, and we talked about the shutdown in Q2. We did a capital project in Q3, and we're seeing dividends from that capital project now. We're going to be re-setting volume expectations for the re-refinery. We're seeing some pretty good numbers right now.

We're going to go from 44 million annual gallons a year of base oil to 47 million at this point. And we got the Title V permit. We've made the changes to how we manage our catalyst program. So we are seeing increased efficiencies as well. So not only do we have the additional production, but we've also got the cost reductions that are going to come along with it: high visibility to $0.07 to $0.08, and cost savings on the 47 million gallons of production. So we feel pretty good about the re-refinery.

Okay. And then obviously you answered this for Sean earlier, base oil prices are up sequentially. So we'll get another cents per gallon help there. But I'm assuming all of the selling prices -- whether it's RFO or asphalt extender or -- all of them are enjoying a little bit better price because the crude oil price is also up sequentially.

Yes, that's correct.

So that's more than offsetting, at this point, with higher utilization of the plant, which is -- that's a fixed cost lever issue; the pricing, average selling price of all of the things you're selling; and better throughput. I mean, we should see pretty decent operating leverage in 4Q. Is that a reasonable assumption?

That's absolutely our expectation.

Okay.

And it should be yours.

Okay, good. So last question: inventories went up in the third quarter. Is that due to the rail disruption, that you ended up --?

Yes.

Yes, it is. Yes, we could not get the product moved out. But we're going to catch up in Q4.

So that inventory number should come back down again.

Yes.

Okay. And is the rail disruption because equipment got displaced all over the country due to the storms, and that impacted you? Why was there a disruption?

No, it was just a change in business model by our primary rail carrier. They went to a -- their Canadian model. The CEO had exposure at a Canadian railroad, and he had a just-in-time system. They shut down some hubs. They brought down some power within the system, which impacted our ability to move cars. Very disruptive for a 90-day period, as we alluded to earlier.

They've been into this model now for roughly 6 months. We are beginning to see some progress, and it's been well documented in various publications. They've had some congressional hearings discussing the shortcomings of the Eastern railroad system. So it's been tough on a lot of manufacturers.

As Mark talked about, we've done a hell of a job servicing our customers. We didn't lose any business. It cost us $0.5 million because we had to do things differently to support our network. But it was worth it for us in terms of longevity with our customers.

Yes, I would tell you, Michael -- and, again, I know because of our quirky fiscal calendar, we're reporting earlier in the cycle in Q3 than a lot -- probably of your other companies. But anyone who has exposure in the Eastern-Central US to this very large provider, I'm going to -- unless they had slack to the point of inefficiency, they're going to be impacted by this.

And their worst hub in the US marketplace happened to be in Indianapolis, which was not good for our re-refinery.

Okay. So, you introduced it in 2018, should we expect a change in corporate structure? Had to ask, sorry.

What do you mean?

Four normal quarters instead of 12/12/12 (multiple speakers)?

(laughter) I don't know.

(multiple speakers) working out debate that every --

We're evaluating that.

I'm not a 13-period guy.

Yes, no. Okay. I just had to get it in there. Thanks for taking the questions. I appreciate it.

(Operator Instructions). Kevin Steinke, Barrington Research.

I think in your prepared comments, you mentioned that you launched some new environmental services -- some new service offerings. I just wanted to confirm that. And just maybe if you could discuss a little bit more about what you are moving into and what else is on the plate.

Yes, Michael, those were service areas, not service offerings. We expanded into a couple of new geographic areas during the quarter, and we expect to open three more service areas in Q4 of 2017.

Yes, so that's just the geographic expansion.

Okay, got it, got it. But you have been targeting industrial customers more aggressively. So you could just update us on how that effort is going, and are the new resources you're adding also targeted to industrial, in some respects?

Yes, Michael. The bulk of the people that we're hiring are supporting industrial growth. They are our branch sales managers. We've got a targeted, dedicated resource that's supporting the branch sales managers to pursue industrial accounts.

Mark talked about cross-selling. That's why we focus so heavily on industrial business versus, say, automotive, because it allows us the ability to sell multiple service lines into an industrial account. And we are seeing the growth from that effort.

Yes. And that -- if you really get granular within our ES segment on a percentage basis, the largest growth is in our containerized waste. That's at the real high end of single-digit in this past quarter. And that is where you see -- that's probably the biggest opportunity. If you are more industrial, as we define it, focused, is in that containerized waste business.

So that's a direct result of having these -- again, the key position we call branch sales manager -- that is focused on these things. And they are at the top of our list as far as number of new positions added have been in that area.

Okay, that sounds good. And Mark, I think you mentioned continuing -- that you continue to expect to drive SG&A expenses lower as a percentage of revenue over the next year. Are we still thinking about that more as a 2018 event, though, as you execute on the initiatives you're doing?

Yes, I agree. And a lot of it is we've had initiatives, even now; but it's the noise you get, let's say from severance, if you are making structural changes. So the principal results are probably a 2018 story. In 2017, [since] we only have one quarter left, that's going to be too early. I'm not saying we're planning on having a lot more in 2017. But our expectation is much higher for getting into, like, Q2, Q3 of 2018, that we'll have more tangible results.

Yes, I agree with that.

Okay, good. And you had started to mention, in response to an earlier question. that you were still seeing some pressure on used oil collection pricing. Any more -- can you expand on that a little bit more, where it stands today? If you feel you can stabilize that anymore, or what are the thoughts there?

Yes, we gave up $0.03 quarter over quarter. We're going to continue to see some pressure. I don't think we'll see much more erosion in street pricing. We've got a very tight market from a residual fuel standpoint. We had a refinery that was down in Mexico that produced fuel; a strong demand for Gulf Coast recycled fuel to feed power plants in Mexico, for example. We expect that will continue.

You've seen the spread between No. 6 and WTI be extremely tight. It has loosened up a little bit recently. We are seeing crude go up, though, which is going to impact what people want to be paid for used motor oil in the street. So in our Q4 forecast we are expecting another couple of pennies in decline, but nothing material. And we think we will make that up with pricing on base oil and certainly our increased production.

But that bunker/crude spread, if it would even get close to back to what we used to consider normal, even at a higher crude, assuming we get the pass-through benefit on the higher price on our products, should be an overall margin benefit. It's just been brutal the last two quarters, at least.

Heavy demand for used motor oil on the street right now. And I think you'll hear that from other people you cover.

Yes, okay. And lastly, you talked about being focused on organic growth and all the opportunities there, although you also mentioned creating a new position focused on evaluating acquisitions. So just kind of wondering what the impetus was behind that, and what sort of opportunities are out there that you are evaluating.

Well, obviously we've talked on prior conference calls, we really want to continue to grow our Western presence. It negatively impacts our ability to pursue larger corporate and national accounts, because we don't have a strong footprint in the western half of the US. I love our vacuum truck service line; got plenty of experience in that area. It's a significant piece of our ES business. So we're going to be actively pursuing growth in those areas because it ties into an industrial account. A vac truck customer is an industrial account. That gives us the ability to cross-sell.

So we're going to look for acquisitions in those areas, anything to deal with containerized waste. And, certainly, we're going to look geographically to the western half of the US because we want to expand our footprint.

But we've done enough deals, Kevin -- you've covered us long enough -- you know that we have, I think, demonstrated pretty well that we can acquire at decent multiples and integrate well. And having not only just the cash position, but having lived through the oil downturn and coming out the back end of it here now in pretty darned good shape, in my opinion, I think we have the mental bandwidth not to match the cash that we have to go after these things.

So, it's not in lieu of organic growth, as we've tried to stress on this call; this will be in addition to. So any acquisitions we can get done should drive higher growth rates than what we've talked about. So you can get into double digit growth rates.

That is really -- we don't want to say for sure we're going to do acquisitions. Obviously we have to -- if you want to be disciplined, you can't guarantee you're going to do any deal -- but that should be the thought that acquisitions are additive to that growth story.

And we added a dedicated resource, because obviously we don't want it to be a part-time function. We think it's important to our growth story. We have 84 branches, a tremendous amount of people out in the field right now that interact with potential acquisitions. We need one person dedicated to following up on those opportunities, and we intend to close some in 2018.

Okay, that's very helpful. Thanks for taking the questions.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.

Thank you.