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Quality Distribution, Inc. (NASDAQ:QLTY)

Q4 2012 Earnings Call

February 21, 2013 10:00 am ET

Executives

Robin J. Cohan – Vice President, Corporate Controller and Treasurer

Gary R. Enzor – Chief Executive Officer

Joseph Troy – Executive Vice President and Chief Financial Officer

Analysts

Alex Johnson – JPMorgan

Kevin Sterling – BB&T Capital Markets

David Tamberrino – Stifel Nicolaus

Jack Atkins – Stephens Inc.

Ryan Cieslak – KeyBanc Capital Markets

Operator

Please stand by. Good day, everyone, and welcome to today’s Quality Distribution Fourth Quarter Year-End 2012 Earnings Conference. As a reminder today’s call is being recorded. At this time for opening remarks, I would like to turn the call over to Robin Cohan, VP Controller. Please go ahead.

Robin Cohan

Thank you, operator, and good morning, everyone. We’re delighted to have you join us today for our fourth quarter and year-end 2012 earnings call. Our speakers today are Gary Enzor, our CEO; and Joe Troy, our CFO.

Before I turn the call over to Joe, I’d like to caution all participants that comments made by Quality’s employees during this conference call may contain forward-looking statements. Actual results could differ materially from those projected or expected in these forward-looking statements. Listeners are urged to carefully review and consider the various disclosures made by the Company in this conference call and the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2011, as well as other reports filed with the Securities and Exchange Commission.

Copies of the Company’s Annual Report on Form 10-K and other SEC reports are available on our website at www.qualitydistribution.com and on the SEC’s website. The Company disclaims any obligation to update any forward-looking statements after this conference call. At this time all participants have been placed in listen-only mode. The forum will be open for questions following the presentation.

With that, I would like to turn the call over to our CFO, Joe, Troy.

Joseph J. Troy

Thank you, Robin, and good morning, everyone. Before we begin, I want to remind you that we refer to certain non-GAAP measures such as adjusted EPS and adjusted EBITDA the management uses to evaluate the business and to help provide additional measurements of earnings and cash flow that may be important to the investment community. I’ll begin by briefly discussing our fourth quarter earnings and then Gary will provide a near-term view of Q1 and our outlook for 2013.

Our fourth quarter results issued yesterday were consistent with expectations we shared during our third quarter call and at the midpoint of the range of EPS and other operating estimates we pre-released last week. On a GAAP basis, we reported net income of $0.21 per diluted share for Q4, compared to $0.22 in Q4 of last year. On an adjusted basis, our net income was $0.11 per diluted share, compared with $0.15 per diluted share in Q4 of last year.

As described in our release, adjusted results this quarter excluded several non-operating items, including the independent affiliate termination and related conversion costs, acquisition expenses, hurricane impacts, and the non-cash earnout benefit mentioned in the release, none of which we expect to recur in 2013.

Excluding fuel surcharges, fourth quarter consolidated revenues were up 22.8%, compared to the fourth quarter of last year, driven primarily from our Energy Logistics acquisitions and organic growth in both our Chemical and Intermodal Logistics businesses.

After adjusting for certain of the items I mentioned, fourth quarter consolidated operating income was $12.9 million, a decrease of $0.4 million versus the prior year quarter. Our operating margin fell 140 basis points overall as improvements at Intermodal were offset by higher lease expense, lower asset utilization, and increased depreciation and amortization’s from the recent acquisitions. We also incurred higher insurance expense primarily due to elevated costs, although our expense levels remain within our target range of 2% to 3% of revenues.

Consolidated and adjusted EBITDA adjusted for the same non-operating items was $20.3 million in the fourth quarter, up 13.4% from last year, driven primarily by incremental income from our Energy Logistics acquisitions and increases in our Intermodal business.

Turning to our segments; Chemical Logistics revenues in Q4 rose 3.2% versus last year, primarily as higher driver accounts led to volume increases. While the recruiting environment remains challenging, our driver turnover ratios continue to improve in our approaching historical norms.

Revenues in Q4 also improved despite a sluggish economy and the organizational strain of a significant affiliate conversion. Operating income of chemicals after adjusting for $1.6 million of affiliate conversion and acquisition charges was down $1.2 million due to higher lease expense, higher insurance costs, and increased depreciation expense from the affiliate asset acquisition in the fourth quarter.

As a reminder, corporate overhead and certain shared service charges are reflected in the Chemical segment. And there were higher environmental and professional fees in the quarter that also impaired Chemical segment margins.

Intermodal segment revenues, excluding fuel surcharges were up $2.2 million, or 8.6% primarily due to continued strong import/export demand, increases in depot storage and repair business, as well as higher revenues from Boasso’s brokerage business. These improvements were modestly offset by lost revenue from Hurricane Sandy, which primarily affected our Newark, New Jersey facility.

Operating margins at Intermodal, excluding the $0.7 million of lost profitability from Hurricane Sandy expanded 260 basis points, primarily on strong expense control and higher revenue generation. As we expected, the management team at Boasso successfully addressed and resolved cost issues that hampered their performance in Q3, which was reflected in their 360 basis point margin enhancement on a sequential basis.

Energy Logistic segment revenues were $39.1 million, an increase of $29.4 million over the prior year quarter, resulting from our 2012 acquisitions of Bice, Trojan, and Dunn’s, partially offset by a sharp decline in revenues from the Marcellus shale region as continued low natural gas prices kept a lid on drilling activity.

On a sequential basis, revenues were up 1.7% versus Q3, which was better than we anticipated, primarily as our Woodford shale operations in Oklahoma, increased significantly from a slow start after the Dunn’s acquisition. We also recently added a new oil hauling affiliate in Oklahoma who has been growing nicely.

Our company owned an affiliate operations in Texas continue to be our strongest top and bottom line producers in the Energy segment, as increases in oil drilling activity boosted our revenue in Q4 versus Q3. Revenues in our Bakken shale business fell in Q4 versus Q3, due to expected seasonal declines in drilling activity, which negatively impacted our freshwater and saltwater disposal business.

However, looking forward, oil hauling opportunities in the Bakken continue to escalate, which has more stable characteristics than the waterside of the business and should allow us to more fully deploy our underutilized equipment in the region.

After excluding $0.4 million of affiliate conversion costs, operating income at Energy was $0.8 million in Q4, a decline of $0.3 million on a year-over-year basis, as incremental profitability from the acquisitions was more than offset by significant expenses associated with equipment leases, depreciation and amortization, new shop expenditures, and costs associated with repositioning assets.

We also experienced a moderate loss in our Marcellus operation in Q4, reflecting a $1.2 million decline in operating income versus Q4 of last year. These adverse impacts on profitability also hurt sequential results from Q3, where adjusted operating income on a comparable basis declined $2.5 million.

Adjusted EBITDA energy for the fourth quarter was $3.4 million, up $1.9 million versus Q4 of last year. While we are behind our EBITDA targets for the Energy Logistics business, we are taking aggressive actions to reduce costs and optimize assets across our footprint, which we expect to result and higher levels of profitability and margins in the coming quarters.

On a consolidated basis, cash flow from operations was $8.4 million in Q4, as we had strong cash collections, which are typical during the fourth quarter. Capital spending for the fourth quarter was well contained and that trend has continued into Q1.

As discussed last quarter, we are comfortable that we can manage 2013 net CapEx in the range of $10 million to $15 million as we will continue to rationalize our asset base, sell underutilized equipment and real estate, sell a number of trailers to our chemical affiliates, and focus on higher levels of overall productivity.

As discussed in our release, we have spent approximately $6.9 million to purchase a little over a million shares of our stock, under our open market program.

As we move forward into 2013, we will continue to evaluate the best uses of our free cash flow with a primary focus on debt reduction and additional share repurchases. We also have organic growth opportunities across all of our business segments, which we will pursue provided the expenditures meet our required rates of return on invested capital.

That concludes my prepared remarks. And at this point, I’ll turn the call over to Gary.

Gary R. Enzor

Thanks, Joe. I think the biggest takeaway from Q4 as compared to Q3 was at our Chemical and Intermodal segments performed much better, which was consistent with our expectation, as opposed to Q3 when all segments had issues. As we move into Q1, the Chemical segment revenue was up 11%, excluding fuel surcharge in January. The Intermodal segment was up 13%, excluding fuel surcharge and Energy contributed $14 million in January revenue, which is trending a little better than Q4.

One month doesn’t make a trend and we stated our top line growth expectations for these three businesses over the next few years are mid single-digits, high single-digits and double-digits respectively. We just completed our monthly operating reviews with the Chemical and Intermodal segments and believe those businesses have the right trajectory and action plans and are starting the year well.

We also believe our Energy segment now has their arms around the entire operation, but still has a lot of heavy lifting to do. They will be working very diligently to move assets between the shales, such as converting 110 barrel combo units in the Marcellus to day cabs for oil hauling in Oklahoma and Texas. This will really help the P&L in a couple of quarters, but we will still create a near term drag as we work to place revenue on those assets and take costs to move them around.

However, Energy has solid plans to optimize utilization, reduce fixed costs in a couple of shales where it makes sense, and capitalize on additional revenue opportunities in shales where demand for oil hauling exceeds supply. Although Q1 and Q4 are typically very similar quarters due to seasonality, we started better in Chemical and Intermodal and still have a lot of work to do in Energy, having said that, there is potential for favorability in Q1 versus Q4. Overall, we’re looking forward to getting back on track and delivering a good 2013 results for our shareholders.

Operator, we’d now like to open for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We’ll go first to Tom Wadewitz of JPMorgan.

Alex Johnson – JPMorgan

Good morning. It’s Alex Johnson on for Tom.

Gary R. Enzor

Hey, Alex.

Alex Johnson – JPMorgan

Good morning. I wanted to ask first of all if we can get an update on utilization levels, excuse me, Chemicals and Energy, perhaps we can get both of those, I know you talked a bit about that last quarter. Just wanted to see if you can tell us where utilization levels are currently?

Gary R. Enzor

With respect to Chemicals, we continue to employ more assets within our Chemicals group. We are rationalizing some assets. We sold a good number in Q4 and continue to sell assets in Q1. So our asset utilization levels there are improving.

Within Energy, we are employing more assets, so we are from the third quarter to the fourth quarter, which is probably the more comparable period. Our assets employed there were about up 10%, but it’s really the trending that’s more important. So even if we had some assets employed in the fourth quarter that weren’t employed in the third quarter whether they are continuing to ramp, so we weren’t really optimizing the assets. But the goal is to get all of the idle assets today employed and then having them ramp up into higher levels of productivity.

We are seeing good productivity out of the Energy assets that are fully employed for a quarter. And we are seeing levels there that are consistent with what we historically say, which they generally can generate about two to three times the revenue that a Chemical trailer can produce.

So the more we employ them the more we get more capacity out of them. They can generate better levels of revenue and profitability. So we still have the ways to get there. It’s going to take another couple of quarters before we get really good full utilization of those assets.

Alex Johnson – JPMorgan

Okay. And then another question, I think, Gary, you mentioned some near-term drag from converting the 110 barrels to day cabs. Can you quantify that in someway what is the drag and where do you expect that number to go?

Gary R. Enzor

Yeah. I can’t really quantify specifically. We really don’t want to provide that level of detail. But we have approximately 80-year so units in the Marcellus that can get turned into revenue producing day cabs with oil. And when they are all producing revenue hauling oil, you can easily get $200,000, $300,000 of revenue on those 80 units, so that will give you a directional number.

Alex Johnson – JPMorgan

Okay, thanks. I’ll give someone else a chance and I’ll get back in queue. Thanks.

Gary R. Enzor

Okay, thanks.

Operator

We’ll go next to Kevin Sterling of BBT Capital Markets.

Gary R. Enzor

Hey, Kevin.

Kevin Sterling – BB&T Capital Markets

Good morning.

Gary R. Enzor

Good morning.

Kevin Sterling – BB&T Capital Markets

Hey, let me follow up on that last question, Gary, about converting some of those trailers on the Marcellus to some of the oil shales. I guess maybe what I’d like to get at is, what’s the cost of converting those trailers and how much work has to be done or maybe are they already well ready?

Gary R. Enzor

Yeah, they’re not that extent to be converted Kevin. Basically, you take the barrel off and you modify the frame, and it’s roughly $15,000 a unit. And now they’re not well ready, we’re just running them all through the shops now.

Kevin Sterling – BB&T Capital Markets

How long did that process take as a fairly quick process?

Gary R. Enzor

I mean it takes a couple of weeks a unit. So by the time we get the total amount we want them moved and we’re deciding whether that’s 40 or 80 right now, but how many of the total amount moved, it will be a couple of months.

Kevin Sterling – BB&T Capital Markets

Okay, all right. Well, thank you. That helps a lot. And Gary for modelling purposes, I just want to make sure I understand how we should think about Q1? It sounds like Q1’s look more like Q4 than the first quarter a year ago, because if I recall, I think Q1 a year ago was quite strong. Am I thinking about this is right?

Gary R. Enzor

Yes, Kevin. I mean I think Q1 a year ago was probably approximately $0.18 and coming out of Q4, we had a $0.11, but changes in the business. What I’m saying is, Q1 starting a little better than Q4, but really the comparatives are more sequential now than year-over-year. So again, we would expect to do better than Q4, but we’re not really comparing back to Q1 with all the changes in the business right now.

Kevin Sterling – BB&T Capital Markets

Gotcha. That makes sense. Thank you very much. And then, I think you touched on some of the Boasso issues that played you last quarter, which is additional lift requirement, but all these issues largely behind you now in Boasso?

Joseph Troy

Yeah, the controllable issues Kevin are behind us. One of the issues that played them in the third quarter was some elevated healthcare costs and benefit costs. Those are things you really – it’s hard to control and you never know when things pop. So of the controllable items, they get a very good job containing cost.

Kevin Sterling – BB&T Capital Markets

Okay, great. Thank you, Joe. Would you say that EOBR issue is largely behind you, and if that’s the case, should we expect to see some driver growth this year?

Gary R. Enzor

Yeah, Kevin. The EOBR issue is largely behind us kind of year-over-year right now, we’re up approximately 40 drivers, which is a couple percent in the QC business, where we had a bulk of the issue. And the turnover had gotten into the 70s back in the middle of that implementation and now it is back in the 40s today. So I would say all the indicators tell us that’s behind us.

Kevin Sterling – BB&T Capital Markets

Okay, great. And Gary, as I look at the next few years, you guys are really down and back to CapEx this year. You don’t have the ability to generate strong free cash flow. What are your priorities with that cash? Is it maybe calling some of your bonds, buying back stock, or maybe the combination of both? How should we think about that?

Joseph J. Troy

Yeah, I think in the prepared remarks, we said that we would balance our free cash flow uses with share repurchase and debt reduction, Kevin. So the other part of the equation is liquidity and to make sure that we’ve always got ample liquidity to manage the business on a day-to-day basis.

And in the circumstance where revenues would raise, we could potentially have some working capital needs that would be a good problem to have. So we’ve always got to make sure that liquidity is nice and strong, which it is right now and we would expect that to continue to grow.

So we see opportunities in this year to potentially buying some bonds and purchase some more stock and those will be the priority. There is also some good growth opportunities out there. We’re just going to be very judicious about those were the good organic opportunities, non-acquisition related. But they could potentially take some investments. So we’re going to look very hard at those well.

Kevin Sterling – BB&T Capital Markets

Okay great. And Joe can you just remind me the structure around your bonds, your ability to call a portion early with that penalty?

Joseph Troy

Yeah, so between now and say November of this year, we can call in 10% of our bonds at 1.03. And then we could do that again for another 12 month period after November of 2013, before the first call period hits. So theoretically this year it’s $22.5 million plus the 3% premium, we could call in those bonds anytime between now and then.

Kevin Sterling – BB&T Capital Markets

Okay, great. Thank you very much and Gary, Joe, thanks so much for your time this morning.

Gary R. Enzor

Thanks Kevin.

Operator

And next from Stifel, we’ll go to David Tamberrino.

David Tamberrino – Stifel Nicolaus

Thanks. Good morning, gentlemen.

Gary R. Enzor

Hi, David.

David Tamberrino – Stifel Nicolaus

Hey, just wanted to focus in on the Energy Logistics segment for a minute. Specifically with the margins kind of since 2Q of last year, we’ve seen margins coming up and part of that’s been with the acquisitions and the utilization of assets as you repurchased into some expected growth. I know you’ve given some anecdotal comments earlier in the call based on improving some assets around. But when do you think you will kind of see your operating ratio decline back to 95% level and lower in that Energy Logistics segment?

Joseph Troy

I think it’s going to take a couple of quarters. I said as now that we are operating on a pro forma basis is approximately under $70 million of revenue. And we got our arms around all of it and we kind of know, which asset needs to go which shales and where there is a company model in particular shale we need to align fixed costs better. I think we know what to do and it’s going to take us couple of quarters to do all that.

David Tamberrino – Stifel Nicolaus

Okay. But is that 95% really a real good target if you’re looking at or would it be lower, say, in the 90% range, which we saw in Q4 of 2011 and 2Q of 2012?

Joseph Troy

Yeah, I mean it should be lower than 95%. When it’s running properly, it should be 90% or better. But again, we’re just working in that direction.

Gary R. Enzor

I think David; you should also be looking at our EBITDA number two, which tends to be a little more reflective since we’re running a lot of amortization through because of the acquisitions. So if you were to look at and you could even forget depreciation, just look at EBITDA and add back the amortization and then you should get a better feel for what the operating ratio would be.

David Tamberrino – Stifel Nicolaus

Okay, thank you. I’ll jump back in a queue.

Gary R. Enzor

All right, thanks.

Joseph Troy

Thanks.

Operator

(Operator Instructions) We’ll go next to Jack Atkins with Stephens.

Jack Atkins – Stephens Inc.

Good morning, guys. Thanks for taking my questions.

Gary R. Enzor

Good morning.

Joseph Troy

Hi, Jack.

Jack Atkins – Stephens Inc.

So I guess first of all just going to back to Energy Logistics in the quarter. Gary, we saw, I guess the better than what you expect seasonal results on the top line, but you had a pretty significant deterioration in margins. Just sort of curious if you could sort of walk us through why an incremental revenue didn’t fall to the bottom line?

Gary R. Enzor

I’m going to let Joe, because he has got all the details in front of him.

Joseph Troy

Sure. So we have to really kind of break it down shale by shale, which – therefore I’m not going to get too granular about it. But our Texas operations did very well. Oklahoma did well revenue wise, where the revenues came down was in our Bakken shale, as well as the Marcellus. And the Marcellus incurred a loss, so that when you look on a year-over-year even a sequential basis, we are having some difficulties with our margins. And so, the decline in revenues were converting pretty heavily into reduced profitability in Marcellus.

In the Bakken, there is a bit of a dual LED source, so as revenues come down, especially on the waterside of the business if there is not a lot of drilling activity going on that also hurts our saltwater disposal well business. So revenues were – in the Bakken were down, but profitability was down even more so.

And then when you layer on top of that the repositioning of the assets, we had several new repair shops that were coming on stream both in Texas, as well as in North Dakota, and we were having to ramp that up, we’re paying some overtimes for some people to get that moving in that startup type base, we were having a lot of expenses running through the P&L. So it put a big squeeze on margins in Q4 that will probably be some lingering effect of that into Q1 as Gray alluded to in his prepared comments. And then we would expect to see some benefits starting to flow through in Q2.

Jack Atkins – Stephens Inc.

Okay, okay, that’s really helpful. And then, Gary, you mentioned in January you saw – I think you said the Chemical Logistics business was up a 11%, excluding fuel. Could you maybe talk to us about what’s driving that strong results in the month of January, anything in particularly there?

Gary R. Enzor

Yeah, I think on the demand side, we’ve seen a pretty decent level of demand. Automotive units are at a pretty solid level, housing starts, the current data says roughly $950,000. So it’s been pretty good overall demand and now with EOBRs behind us in a couple more points of driver capacity, we’re able to handle that and we were able to pretty strongly improve the utilization. If I said we were up a couple of points on drivers, but volume was up roughly 11% then a lot of that’s productivity. So guys are doing a good job, utilizing the assets as well.

Jack Atkins – Stephens Inc.

Okay, great, great. And then Gary, you mentioned in your prepared comments or maybe Joe did. I know you guys have talked about this publicly over the last couple of weeks about looking to maybe sell some trailers to affiliates to improve the financial health of some of these guys. Could you maybe talk to us about how since of that program is of selling the trailers back to the affiliates and then is it something that you’re going to be looking to do on a go forward basis more broadly?

Gary R. Enzor

Yeah, Jack, I think between Q4 and Q1 we probably sold and will sell approximately $4 million or $5 million to them. And they could very likely take another $5 million plus in the remainder of the year. So we kind of manage it based on their appetite. It allows them to build equity. We don’t think it’s our business model at all and lets us get asset lighter. So we kind of manage the appetite with them. But my expectation will be $10 million or so this year.

Jack Atkins – Stephens Inc.

Gotcha. And then what sort of earnings impact do you expect that to have given that you guys did incur some revenue benefit from leasing them of the trailers?

Gary R. Enzor

I think it would be very modest, because if you took to $10 million that you were going to buy the trailers with and you required against the 10% bonds. You were able to mitigate most of the earning damage with that, so very nominal.

Jack Atkins – Stephens Inc.

Okay, okay. And then last question from me is with regard to the balance sheet. You talked about uses of cash for this year, just sort of curious if you all have a target leverage ratio for the end of 2013, if you could share that with us?

Gary R. Enzor

We don’t have an exact target number for the end of the year, Jack. What we said is more of a longer-term perspective of being at 2 to 2.5. So we’re going to continue to moderate. We do want to see leverage come down this year. Right now pro forma leverage is right around 43, actual leverage is around 49. So as the acquisitions catchup, actually we’ll start moving down towards pro forma. So I think maybe the closure we get to the four range is probably a pretty good near-term target. But the 2 to 2.5 long-term is really what we focus on.

Jack Atkins – Stephens Inc.

Okay, great. Thanks, guys. I appreciated the time.

Joseph Troy

Thanks.

Gary R. Enzor

Thank you, Jack.

Operator

From KeyBanc Capital Markets, we’ll go next to Ryan Cieslak.

Ryan Cieslak – KeyBanc Capital Markets

Hey, guys, good morning. Thanks for taking my questions.

Gary R. Enzor

Hey, Ryan, go ahead.

Ryan Cieslak – KeyBanc Capital Markets

The first question I had is on the Energy segment, I just wanted to go back to sort of the expectation or where margin should trend here going forward. Maybe I just wanted to get an idea of how much – if you’re going to put it in bucket, how much of – getting those margins that will be hosted that 90 OR is related to what you guys are doing there internally in terms of improving utilization from the management employment you guys made versus some just overall pickup in market activity in drilling activity?

Gary R. Enzor

I think the majority of improving the margin is controllable as we either eliminate some of the assets that were idle or move those as I said when the better opportunities far more liquid to move them. The majority of its controllable, but we also do things that are pretty substantial oil opportunities in the Bakken. We’re in the middle of coding a few decent opportunities right now.

So you bring that additional revenue on, that also will enhance the margins. The majority is in our control, but there are also some incremental revenue opportunities that will help drive it.

Joseph Troy

Yeah, so Ryan, more specifically when as we were buying the Bice operation in North Dakota. We bought a number of oil trailers in anticipation of that. And there were also purchases in the queue that haven’t really been fully deployed. And as we are headed into the fourth quarter, we’re starting to put those assets in the play as the oil markets continue to firm in that area. We should see better and better oil trailers deployment in that area.

So instead of being long assets, these will be utilized assets; so the market is certainly has help a little bit, because after we bought Bice, it did deep of that and put us in some one of the whole maybe kind of digging out of it. So the market can certainly help.

Ryan Cieslak – KeyBanc Capital Markets

Okay, that’s helpful. I appreciate that. And then on the Marcellus, you mentioned, I think you said operate at the loss in the quarter and a lot of it’s depends on your ability to preposition some of the equipment there, but how should we think about the Marcellus here in the first quarter? Do you still expect that to operate in a loss? So is that something you guys can get back to break-even or start to generate some earnings again near-term?

Gary R. Enzor

It’s a little granular, we pointed out because of the nature of the significant change from last year to this year. So I can’t really tell you whether it will be in the loss position or profitable position. What I can tell you, we’re doing as we are trying to maximize the assets and move them around, our 3PL operation there continues to make money for us. So it’s really the idle assets that are earning us.

We consolidated some operations that had a little bit of overlap when we acquire Dunn’s. So we’re doing some cost related management issues to try to get it more in line. And we would expect some benefit from that. But there is still some work to do?

Joseph Troy

And I think, strategically in the Marcellus, if you’re going back and with the 2011 financials we were ramping that business and that was purely a 3PL. It would throw a five points or six points in margin with no investment. So our worst case in the Marcellus is approximately $30million or more million of revenue with five, six points of margin if we move everything out and preposition it back to a 3PL. So it got asset heavier as we had to takeover that affiliates assets. But we’ll get it back, so it doesn’t really impact the business at all and we’ll spend our Energy on oil and the liquid rich shales.

Ryan Cieslak – KeyBanc Capital Markets

Okay. And then just as you’re sitting with the Energy here the mix of your affiliates versus having the company model it sounds like you guys have added a couple affiliates within the Energy and obviously you’re doing things internally or doing deploy assets. How should we think about that mix as 2013 progresses? Should it be more asset-light and affiliate base as we get to the time next year or should be relatively steady year going forward?

Joseph Troy

Yeah, I mean I think roughly it’s probably, approximately a quarter affiliate and over time our goal would be to move it more affiliate. But that probably over the next 24 months and we want to increase that number we just can’t tell you where that lands right now because we don’t know.

Gary R. Enzor

I think from growth along Ryan that we’re expecting out of the existing affiliates that we have. We would expect the percentage to increase a little bit. But we’re not going to go yet and say that we can affiliate some of our company operations just yet. We still have some run rate to go on earn outs and the likes. So in 2013 you shouldn’t expect us to necessarily take a company operation and affiliate it yet. But somewhere down the road, we would be looking to do that.

Ryan Cieslak – KeyBanc Capital Markets

Okay.

Joseph Troy

But between, affiliates and the 3PL and the very heavy on our operator mix that advice in the Bakken, I would still say the overall entity is approximately 60% to 70% asset like today. In over time, we’ll continue to improve that.

Ryan Cieslak – KeyBanc Capital Markets

Okay, that’s helpful. And then on the Chemical side, up a 11%, if I heard you right in January. I’m just trying to get a sense of, did the comps year-over-year, how do those trend here, I guess for the balance of the quarter, up a 11% assuming the markets stay stable. Is that doable for the full quarter?

Gary R. Enzor

Yeah, we don’t guide not like forecast the quarter, I try to give you the best data, I can give you which is actual spread, I don’t want to forecast the quarter.

Ryan Cieslak – KeyBanc Capital Markets

Gotcha, fair enough. The last one I had is, Joe, it looks like there was gains in the quarter of roughly a $1 million or so, I know you guys are still sort of looking at disposed assets. Is that a good number to be thinking about into the first half of this year or how should that trend I guess sequentially?

Joseph Troy

Those are real harder to comp. It really depends on the asset mix of what we sell. We sell older assets, we tend to have gains, we sell newer assets then they’re having them trying to be depreciated. So it really just depends on the types of assets, whether it’s equipment, or whether it’s real estate.

So I’d rather not kind of give you a hard number. All I can tell you is, the activity will continue and the focus is on continuing to reduce our asset base when those assets are not being as productive as we need them to be.

Ryan Cieslak – KeyBanc Capital Markets

Okay. Thanks, guys. I appreciate it.

Gary R. Enzor

Thank you.

Joseph Troy

Thank you.

Operator

And that concludes our question-and-answer session for today. I would like to turn the conference back over to Gary Enzor for closing remarks.

Gary R. Enzor

Okay, we would just like to thank everyone for participating in our Q4 earnings call. We’ll talk to you in next quarter.

Operator

And that concludes today’s conference. We thank you all for joining us.

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