Heritage-Crystal Clean's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.21.14 | About: Heritage - (HCCI)

Heritage-Crystal Clean, Inc. (NASDAQ:HCCI)

Q4 2013 Earnings Conference Call

February 21, 2014 10:30 a.m. ET

Executives

Joseph Chalhoub - Founder, Chief Executive Officer, President and Director

Mark DeVita - Chief Financial Officer and Principal Accounting Officer

Gregory Ray - Chief Operating Officer and Secretary

Analysts

David Mandell - William Blair

Luke Junk - Robert W. Baird

Sean Hannan - Needham

Kevin Steinke - Barrington Research

Michael Hoffman - Wunderlich

Operator

Good morning, ladies and gentlemen, and welcome to the Heritage-Crystal Clean, Inc. Fourth Quarter 2013 Earnings Conference Call. Today's call is being recorded. (Operator Instructions)

Some of the comments we will make today are forward-looking. Generally, the words aim, anticipate, believe, could, estimate, expect, intend, may, plan, project, should, will be, will continue, will likely result, would and similar expressions identify forward-looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward-looking statements.

These risks and uncertainties include a variety of factors, some of which are beyond our control. These forward-looking statements speak as of today and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. Please refer to our SEC filings, including our annual report on Form 10-K, as well as our earnings release posted on our website for more detailed description of the risk factors that may affect our results. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website.

Also, please note that certain financial measures we may use on this call, such as earnings before interest, taxes, depreciation and amortization, or EBITDA are non-GAAP measures. Please see our website for reconciliations of these non-GAAP financial measures to GAAP. For more information about our company, please visit our website at www.crystal-clean.com.

With us today from the company are the Founder, President and Chief Executive Officer, Mr. Joseph Chalhoub; the Chief Operating Officer, Mr. Greg Ray; and the Chief Financial Officer, Mr. Mark DeVita.

At this time, I would like to turn the call over to Joe Chalhoub. Please go ahead, sir.

Joseph Chalhoub

Thank you, and welcome to our conference call. Last night, we issued our fourth quarter 2013 press release and posted it on the Investor Relations page on our website for your review. This morning, we will discuss the financial statements and our operations in the fourth quarter and for fiscal 2013. And we will respond to questions you may have relating to our business.

Our fourth quarter sales were $92 million, compared to $77.6 million in the fourth quarter of 2012. Fiscal 2013 sales increased 12.1% to $283.1 million from $252.5 million for 2012. On November 1, 2013, we purchased certain assets of t Northern Territory of RS Used Oil Services, a subsidiary of Universal Lubricants. The acquisition allows us to add more service routes to our existing business in Indiana, Ohio, Wisconsin and part of Illinois.

We're pleased with the progress to-date, and we're integrating these new routes into our branch network. And we have seen growth in our used oil collection volume as a result of this transaction.

As a result of the ongoing expansion project at our (inaudible), we were able to increase nameplate capacity from 50 million to 60 million gallons per year as of the end of third quarter 2013.

In the fourth quarter, we produced 10.4 million gallons of re-refined base oil, which represents 94% of our current nameplate capacity. This volume represents an annualized run rate of base oil production of 33.7 million gallons per year.

We expect to complete our current expansion project towards the middle of 2014. After completion of this project, the new nameplate capacity of our re-refinery would be 75 million gallons of used oil input per year.

Our oil business was negatively impacted during the quarter by a contamination incident affecting the feedstock at our re-refinery. The financial impact of the incident was approximately $2.4 million, which includes (glass) production, clean up and disposal cost and increased transportation cost.

If not of this incident, the oils business would have delivered a profit before corporate SG&A for the second quarter in a row. Following this incident, we have taken steps to extend some of our controls to reduce the chances of similar incidents in the future.

Despite this incident, and despite lower market prices of base oil, we were able to show improved profitability in our oil business segment during the second half of fiscal year 2013, compared to the second half of fiscal 2012. We improved the efficiency of our used oil collection routes and we collected used oil at an annualized rate of approximately 37.8 million gallons, annualized rate of 37.8 during the quarter.

In the Environmental Services segment, we experienced solid same-branch sales growth. At the beginning of the year, we established a goal of improving our margins in this segment. As a result of the focus and hard work of our team, we continued to improve our margins through the year, achieving superior margins, while at the same time delivering record revenues in the Environmental Services segment.

Our growth in revenue was aided by our ability to continually add new customers. As of the end of the fourth quarter, we served over 96,000 individual customer locations from 74 branches. Conditions in the used oil industry have been challenging for over a year. The industry has failed to control collection costs and bring down prices paid in generators in parallel with the declining value of the recycled oil products.

The published stock market prices for the site of Group II base oil, we said, decreased by approximately $1.14 per gallon from the first half of 2012 to the fourth quarter of 2013. Yet, used oil street prices are largely unchanged.

HCC is committed to correcting this. Starting in March, we're taking a new more systematic and structured approach to lowering our average pay amount for used oil. While this won't have much of an impact in our first quarter, we hope to see an improvement in the second quarter of 2014.

The market pricing for base oil is not showing signs of improvement in the short-term and the additional capacity of Chevron new lube plant raised on the market. We expect the decline in price trend experienced in the fourth quarter of 2013 to continue. And this would be a headwind in the first quarter of 2014.

Fortunately, our very strong Environmental Services segment should continue to provide stability to our overall business. Our Chief Financial Officer, Mr. Mark DeVita will now further discuss the financial results, and then we will open the call for your question.

Mark DeVita

Thank you, Joe. I appreciate the opportunity to discuss HCCI's fourth quarter 2013 results with our investors today. During the fourth quarter, we produced solid results in our Environmental Services segment and saw a volume growth in our oil business segment, compared to the fourth quarter of fiscal 2012.

In the Environmental Services segment, revenues grew $5.5 million or 12.4% in the fourth quarter, compared to the fourth quarter of 2012, and 18.1 million or 13% for the year, compared to 2012.

Of the 70 branches that we are in operation throughout both the fourth quarters of 2013 and 2012, the growth in same-branch sales was 8.8%. However, if we exclude the impact of those existing branches, which gave up territory and customers to new branches, the growth in same-branch sales was 9% for the fourth quarter.

For the year, same-branch sales in our Environmental Services segment increased 10.3%. These revenue growth figures for same-branch sales exclude revenues generated as a result of acquisitions made during fiscal 2013.

Our average revenue for working day in the Environmental Services segment increased to approximately $650,000 compared to $625,000 in the third quarter of 2013, and compared to $570,000 in the fourth quarter one year ago.

Operating cost in the Environmental Services segment increased approximately $1.4 million in the fourth quarter compared to the fourth quarter of 2012, and $5.5 million for fiscal year 2013, compared to fiscal year 2012.

We are pleased that our operating margin in this segment was 30.1% for the quarter, which was a substantial improvement compared to 25% in the year ago quarter, and compared to 23.8% in the third quarter of this year. For fiscal 2013, operating margin in this segment was 26.6% versus 21.2% for fiscal 2012.

In the Oil Business segment revenues for the fourth quarter were up $8.8 million in the fourth quarter of 2012, as increased production driven by increased capacity at the re-refinery offset lower product prices.

For fiscal 2013, Oil Business segment revenues were up $12.5 million over fiscal 2012, similar to the quarterly results higher volumes offset lower prices.

In the fourth quarter, our Oil Business experienced a loss before corporate SG&A of $0.3 million entirely due to the contamination incident mentioned previously. For fiscal 2013, the Oil Business experienced a loss before corporate SG&A of $1.7 million.

As was mentioned earlier, during the year, lower base oil selling prices negatively impacted our operating margin, compared to 2012.

Corporate SG&A was 10.4% of revenues, down from 11.1% in the year ago quarter. For the year, SG&A was 10.7% of revenues, up from 10.4% in fiscal 2012.

At the end of the quarter, we had $21 million of total debt and $22.6 million of cash on-hand. We incurred a $107,000 of interest expense for the fourth quarter of 2013, compared to interest expense of $140,000 in the year ago quarter. We incurred $417,000 of interest expense for fiscal 2013, compared to $585,000 of interest expense in fiscal 2012 when we were drawing in our revolving loan.

For the fourth quarter, we experienced net income of $2.6 million, compared to a loss of $0.3 million in the fourth quarter of 2012. Our basic earnings per share for the quarter was $0.16 compared to a loss per share of $0.01 in the year ago quarter.

If you exclude the negative impact of the contamination incident at our re-refinery, we estimate our basic earnings per share would have been $0.22 per share for the fourth quarter.

For fiscal 2013, our income was $4.5 million, compared to $2.3 million in 2012. Our basic earnings per share were $0.25 for the year, compared to basic and fully diluted earnings per share of $0.13 in fiscal 2012.

Looking forward to fiscal 2014, our team continues to focus on becoming more efficient in the Oil Business with the goal of improving the overall results in this segment. We are also very excited that we've been able to improve our margin in our Environmental Services segment.

Moving forward, we'll strive to continue to deliver revenue growth while maintaining margins in the mid 20% level in this segment.

Thank you for your continuing interest in Heritage-Crystal Clean. And at this time, I'll turn the control of the call over to our operator, and she will advise you of the procedure to submit your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of David Mandell from William Blair.

David Mandell - William Blair

Good morning, guys. On the Environmental Services margin this quarter, was there one specific thing that drove the strong results?

Mark DeVita

Not one specific thing. I'll mention; if you go back to Q3, by the way this is Mark, if you go back to Q3; our margin was a little less than 24%. And one of the items that -- probably the second largest item from our percent improvement basis a little more than 1% was this inventory variation from machine expense. So these are things, machine expense and some other inventory items from time to time will swing back and forth. So this is probably an item that I wouldn't say it was probably a little -- margin is a little understated in Q3 and might have ongoing margin slightly, (mainly) I overstated it, but a little higher than you would normally expect. And really if you add 1.2 back to the 23.8 in Q3, you get 25%. So that's roughly around where we've been year to-date at that time. And we do see improvements from things like antifreeze business, from typical Q4 items like reversing vacation accruals, other true ups. But for the most part the only thing that might have a back and forth effect, if you will, would be about a little more than 1% or 1.2% from that machine item.

Gregory Ray

I'll add to that. The price increase that we did this last year was effective not only in parts cleaning, but for the first time we were getting more effective at raising prices in our drum waste business and in our vacuum service business. And so, that's had a continuing effect of improving our margins in Environmental Services through the course of the year. And I think Mark mentioned, maritime we bought the American business really at the start of fiscal 2013. And that's given us better margins in our (inaudible) parts cleaning business going forward, because maritime supplies us with all of the chemistry we use for that important growth business.

David Mandell - William Blair

All right. And then on the topic of pricing, I think you guys usually implement your pricing in December for the following year. How would your price increases go this year? Any change from strategy from what you've done in the past?

Mark DeVita

No, not much of a change. The magnitude is slightly muted last year. I'll describe the increase as both on what we went outwards, and what we realized as above average or above normal or probably shooting for something what we would call more in normal historical range this year, and the early signs because we do implemented in November, actually it's when we typically start to do it. But the early signs of that were going to effective. We wouldn't expect it to be realized as much simply because we are going to the market with a lower figure this year, something more in line with what we typically do. And in last year was above average.

David Mandell - William Blair

All right, thanks for taking my question.

Mark DeVita

Thanks, Dave.

Operator

Thank you. And our next question comes from the line of Luke Junk from Robert W. Baird.

Luke Junk - Robert W. Baird

Good morning, guys. Thanks for taking the question.

Mark DeVita

Hey, Luke.

Joseph Chalhoub

Good morning.

Luke Junk - Robert W. Baird

First question would be on what you mentioned as the new structured approach to used oil generator pricing. Just wondering if you could give a little more detail on the process there, obviously there are some mechanisms to increase price in the Environmental Services business, you take some shared best practices to implement for structural pricing as to what you're obtaining on the Oil Business as well?

Joseph Chalhoub

Yes. This is Joe here. And we have been, first of all, a bit of a background. We have been attempting to reduce our cost for the used oil repurchase from the generators for a certain period of time here, in the last couple of quarters. And when we have implemented some measures to move this number down, and fortunately some of the larger volumes came in at -- coming in as we're trying to improve the efficiency of our route at the higher price and the net result is we didn't really get where we wanted to go.

Half of that 50 large structured organization has now branches. And so we've decided to maybe go down deeper on the oil focusing on the routes and down to the reps and provided management tools to the organization at the rep level and at the branch manager level, and at our regional sales, regional management level to track, visiting a lot more close. It's not going to be an easy task. The industry is now well organized to be with this, and our corporate margins. I mean we are not the only one in the used oil recycling that is not happy with the margin. And so, we are quite confident that we are going to see results of how steeper it is. We will be able to see that in the next couple of quarters.

Luke Junk - Robert W. Baird

That's helpful. And then maybe a little bit of a longer term question on the Oil Business. In past we were nearing the completion of the expansion and while that's going on obviously you can see the pressure as it relates to Group II pricing. Just curious looking out over the next, let's say, five to ten years, what are your thoughts as it relates to further potential expansion in this business? And then just your view of pricing for Group II specifically realizing, obviously there is a lot of noise related to the Chevron plant right now, but maybe just your structural view of Group II pricing in the market?

Joseph Chalhoub

Yes. We see the market pretty plentiful here with the start up of Chevron. So we don't see any relief on the pricing for this year and to be for the next couple of years. We are quite familiar with the cost structures of producing base oil with conventional crude refining. And as a result of today's pricing, in the lube market there are a lot of players, especially, Group I, players that are suffering. And we are expecting over the next couple of years in Europe in particular, but also possibly also in the United States some shutdown of existing facility -- these prices remain as they are.

And as we speak today, there is not much of the spread between lube oil and the raw material used to produce lube oil from conventional crude, VGO pricing. And it's really hard to foresee what two or three large players are going to do in the market in the next year or two. Over the longer term, we have seen this cycle before. It's not the first time that a measure is really put in place, the last time I'll say parallel to what we have seen here is in -- into mid to late 90s. And that cycle lasted a couple of years. So this is going to be a couple of years here or more than that. It's pretty hard to forecast. And eventually the margins went up for the people that were making new board whether it's re-refiner or major companies enjoyed a great five-year run that finished in the middle of 2012.

Luke Junk - Robert W. Baird

And then, just to put the final point on that, would it be fair to say that, given that you've seen this before, it doesn't really change your long-term attitude towards investing in the market. Would that be fair to say?

Joseph Chalhoub

Yes. I'd tell you for the short-term -- on the short-term, it's going to be very difficult for us to specify a grass root facility to re-refine oil. However, adding incremental capacity as we are now doing in Indianapolis branches is something we would continue to look (inaudible) they are doing.

Luke Junk - Robert W. Baird

Okay. Thank you so much.

Operator

Thank you. And our next question comes from the line of Sean Hannan from Needham & Company.

Sean Hannan - Needham

Yes. Thanks, good morning. Can you hear me?

Mark DeVita

Yes, Sean. Good morning.

Joseph Chalhoub

Yes, Sean. Good morning.

Sean Hannan - Needham

Good morning. All right, so a couple of questions here. So first, I guess a little bit more administrative, how much revenue or oil production did we miss from that contamination incident? What exclusively are we thinking about it as what was lost in the top line there?

Mark DeVita

Top line was -- sorry, the loss production piece?

Sean Hannan - Needham

Yes.

Mark DeVita

It probably was the biggest pieces. It was probably over -- it's about a million gallons of production. So that's -- I don't know, about 40% of that number, I think.

Sean Hannan - Needham

Bottom line effect?

Mark DeVita

Yes.

Sean Hannan - Needham

Okay. And then, in terms of the -- when I look at SG&A, even when I adjust for the fact you guys had a 16-week quarter, the level seemed a bit higher than I expected. And the overall line I think as a percentage certainly was higher in '13 versus '12. So, is there a way perhaps market, if you can hit on the SG&A piece a little bit more in terms of why we are not getting a little bit more revenue leverage out of that? And perhaps in the quarter, just in general, I don't know if there was some distracting cost related to that contamination incident, or what is kind of kept at a little bit elevated? What kind of leverage should we start to get this year?

Mark DeVita

There are several things going on. One of the bigger things is we started to have some of these acquisitions. We are starting to amortize more intangibles. And that will have somewhat increased impact, customer lists and whatnot, because some of these acquisition, I mean, one was made day one of the year, but others were made middle of the year and one in the quarter as Joe referenced in his statement, if you remember.

That's a piece of it. We didn't have any -- due to the poor performance in 2012, we didn't have any payout or expenses related incentive comp for management last year compared to this quarter or this year. And that's a big piece of it. We also have move that we make to bring in some people that were more field-based and had their cost through employees, the labor e cetera being recorded in items above the line in operating expense, especially focusing on used oil, and we have a lot of challenges there trying to grow the efficiency and whatnot. So some of it is just a reclassification of expenses to below the line and the SG&A line as opposed to above it in operating expenses.

Those are some of the big things. In the quarter as well, we were a little over accrued for or a little conservative than our bad debt alone. So we brought some of that back in effect. Or another way to say, we didn't record a whole lot of bad debt allowance because we had a fair amount of (quotient) or conservative in that number, and a lot of that just goes back too, Sean.

Getting into the Oil Business, we're back into it, obviously our team has experience, but 2012 is really our first year with dealing with the current set of customers in that business. And on a per customer basis, there is a much larger share of any accounts receivable than our normal Environmental Services business where you are doing $200 invoices at a time.

So we took a while and we wanted to be conservative in tracking the potential allowances we would need in that business. But now that we have had basically two, four years under our belt or around the beginning of the quarter, almost two full years, we decided that what we had been experiencing, which was a lower rate than we have been accruing for, we are starting to get closer to what the actual was. So that's hopefully some color there.

Gregory Ray

And if I could add, our incentive comp, we record the expense for that when it becomes probable that we are going to meet our targets and have a payout. And in 2013, we were having a fairly soft or weak year with three quarters and things got better in Q4 relative to our plan. And so if I am not mistaken, I think we have booked more than half of the full year cost for our management incentive compensation plan all in the fourth quarter as we saw the rapid improvement in the bottom line. And so that's not sort of a proportional or straight line expense that we book to SG&A during the quarter.

Mark DeVita

Yes. Greg is right. There is a little bit of catch-up. We plan a conservative accrual and with the (hockey stick), so to speak in our performance, based on the oil business, adding capacity, and you have seen outside of the contamination incident, the impact that it can have. We didn't have all of that full performance. But we ended up achieving reflected and solving end of the year and the catch-up so to speak is definitely in the quarter number.

Sean Hannan - Needham

Okay. So I were to step back from all those comments, they were all very helpful, and think about how to consider normalized SG&A. It's probably an elevated base if we were to look at the December quarter. It seems that we should in fact get a little bit more leverage here in '14. I think (typically) front-end loaded, so that should move down as we progress through the year, maybe not gang busters, but at least that should be a trend, correct?

And then how should we think about any type of a percentage change around that SG&A spend? Thanks.

Mark DeVita

I don't think -- I think we are at 11.1 or 11, I think for the quarter. I wouldn't plan on much of the decline simply because you're going to have a lot of reasons, yes, you are right, you will have a decline depending on the performances. The incentive comp might not be aside, but the amortization that we talked about for customer list and intangibles, which is a decent chunk of consideration in some of these acquisitions. You have to think of the timing in the deals. One was day one of the year, but two of them were in the middle of year, and one was in the fourth quarter. So you don't even have a full year there. So that's going to offset a lot of your leverage that you get in that. So it's not going to be much different, we don't think from where it is.

Sean Hannan - Needham

Okay. Thanks very much.

Operator

Thank you. And our next question comes from the line of Kevin Steinke from Barrington Research.

Kevin Steinke - Barrington Research

Good morning.

Mark DeVita

Good morning.

Joseph Chalhoub

Good morning.

Kevin Steinke - Barrington Research

Hi. Just one other follow-up on the ES margin, and it was really strong at 26.6% for the full year. And you talked about last quarter when you get kind of above that 25% level there that's a signal to invest more in growth. So just wondering what your plans are in terms of new branch openings in 2014 or other investments in the ES business?

Joseph Chalhoub

Obviously now that we've reached improved margin, in the ES, we have begun the process of increasing our investment in several areas. We have the branch, additional branches is one, but more important now that we have 74 branches already in place is resources that we put at the branches to support growth in business line such as our Vacuum business only covers a certain number of branches. Now, we have added entry fees as it's another line of business. So we are looking at putting more energy in this and additional sales forces and we grant it to make sure that we continue to grow the double-digit.

Mark DeVita

Yes. This gives right the same-store or same-branch sales. Obviously, we have a bigger and bigger denominator or base that we have to go often. And in addition to what Joe said, we have incubation stage program, Kevin that we don't talk it kind of about individually. But we continue to look at those to make investments again in the branches and in the networks that's already established. I think going forward, we are still probably in the three to five branch range, I think will be before 2014 probably be in that range. So that probably won't change or it won't ramp up and that later will be throughout existing legacy networks.

Kevin Steinke - Barrington Research

Okay, that's helpful. On the RS Used Oil acquisition, what's kind of the timing to where you start to see real benefit to your margins in the oil business I made, and it would take some time to consolidate their routes in the years. I mean, is that -- are you already seeing a benefit to your margins from that?

Joseph Chalhoub

Yes. We haven't seen benefits yet from these margins. And there has been some consolidation and we are tending to put this in place in the first month or two, but in this quarter we are implementing some of these changes, and throughout the rest of the year from an efficiency point of view on one side.

On the other side, when we knew this, when we got involved in looking at this acquisition typically to what we have seen in the past, we were paying very dearly for those used oil. And so they together with the rest of our customers are going to be targeted for adjustments. And we are going to do that very carefully. And the big advantage here for us on the long-term is these volumes are pretty close to re-refining thing. So we are going to gain some efficiency from the freight versus bringing stuff in from further distance.

Kevin Steinke - Barrington Research

Okay, thanks. That's helpful. And also, how many used oil collection trucks did you end the quarter with? And do you have plans to rollout more in conjunction with the expanded re-refining capacity?

Mark DeVita

I think we are at 150-ish -- you took around the 140 number. They are roughly 10 or 11 routes that we had from the UL RS acquisition. Joe mentioned, we started to make those changes, but at the end of the quarter we hadn't started to rationalize the fleet yet, but those changes have -- lot of them have been done and they're ongoing in the quarter. I don't know longer term, Joe, if you want --

Joseph Chalhoub

Yes. For 2014, we are not looking at rolling out additional route trucks at our existing branches. And we would be relying at purchasing third-party oil from other collectors to fill in the gap.

Kevin Steinke - Barrington Research

Okay. Is this cost of buying from third-party is still cheaper than collecting internally? And if so, is that benefiting your margins right now on the oil business?

Joseph Chalhoub

Well, today, the cost for buying oil from third-party is cheaper. And that goes up and down. But over the last couple of quarters, it has been lower than our own cost. We will see when we implement our pricing and how successful we are and we will re-evaluate that -- we are not planning in 2014 to aggressively rollout more truck.

Kevin Steinke - Barrington Research

Okay. Well, one last one from me, just on the contamination incident. I don't know if you could expand any more on exactly what happened, and then what sort of controls you put in place to prevent that in the future?

Gregory Ray

Yes. This is Greg speaking. What happened to us is that we received some used oil into our facility that was -- that contaminated with polychlorinated biphenyls. And that's a material, which is regulated differently from normal used oil. And that's what caused the situation where we have to divert that to other facilities. And the root cause as we've analyzed that was really human error. We did have control procedures in place, which have followed properly, would have avoided our getting of that contaminated material into our facility. Although the problem does start with the generator or customer who gave it to us under a certification that they didn't have any chemical like that in their used oil. But we have controls in place that are expected to identify and touch that. They didn't work because of an error, human error in our laboratory. And we are basically implementing added control systems to kind of double up on our systems and (abject) and balances, so that hopefully a single person making an error will now not lead to the same kind of a problem or exposure.

Kevin Steinke - Barrington Research

Okay, great. Well, thanks for taking my questions.

Mark DeVita

Thanks, Kevin.

Gregory Ray

Sure. Nice talking with you, Kevin.

Operator

Thank you. And our next question comes from the line of Michael Hoffman from Wunderlich.

Michael Hoffman - Wunderlich

Thank you all for taking my question this morning. Can you help us with the percent change, maybe it's the way to think about it, from an average in the fourth quarter to what it looks like in the first quarter on base lube, so we sort of factor that inaccurately as we think about our modeling?

Mark DeVita

From a market price standpoint, let me back up, we look at like most people on our industry. There is publications that were published, not only posted prices which is readily available, but with some of the subscription services stock prices. And if you look week-to-week as we think they are normally published, there has not been in Q1 2014, there has not been a whole lot of change from where we were at the end of Q4. I mean you're talking couple of cents here or there, so it's gotten up few cents worse which on a percentage basis isn't a big deal. But the trends throughout the fourth quarter, especially remember our fourth quarter, Michael, with our quirky year you loved so much ended in September 7, I think was the exact date.

So, we've had a steady ride downward throughout the quarter. And we had averages and what not, certainly we are at, even as we ended it, the last day would be much below that, and we're probably tippled a nickel or so less. I think published numbers, because -- I don't know skeptical is the right word, but these published spot numbers I think as I described before a compilation of whatever research, informal research these companies do to publish them. So they're only published in range and there is a lot of potential variability in actually what's on an invoice that someone is getting. Who is ever -- but it show Chevron whoever they are getting their information.

So it's gotten a little more negative. I don't know if Greg or Joe wanted to add anything more to that as far year-end for us versus what's happened in the last month.

Gregory Ray

The postings, which is where that's a major kind of start the discussion about pricing, the last change in the postings was a downward change. And that occurred maybe two months ago or so. And I don't remember, Joe, its $0.20 or $0.25 decline.

Joseph Chalhoub

Yes. It was 25 --

Mark DeVita

I think it was by January.

Joseph Chalhoub

I thought towards the end of the year, some --

Mark DeVita

That decline happened in the context of a market where spot or real prices were already discounted significantly below postings. And so when they brought the posted price down by $0.25, there is an expectation that the discounting will lessen. And that the real price won't move the full $0.25, but maybe it will move past that far. And that's sort of what we have been perceiving in the market based on reports with spot prices. Spot prices and actual transacted prices have probably moved down in the $0.10 to $0.15 a gallon range compared to where they were through most of Q4.

Michael Hoffman - Wunderlich

Okay, that's terrific help. And then, on capital spending, can you give us a sense of what your capital spending will be for '14 and can you break it up between maintenance and growth?

Mark DeVita

Well, usually, we will look at it by segments. We're probably going to fit where our point is to finish our re-refinery that's fine as about another $10 million or $11 million less in it. So the expansion, typically, your spending, in addition to that, maintenance CapEx of a little less than two. So that's your oil and if you take ES and everything else you're between five and 10, depending on -- from our Environment Services standpoint of parts cleaning business if we continue or turn more towards (inaudible) parts cleaning. It could be towards the higher end. Those machines are little more capital-intensive than our traditional mineral-based or solvent-based machines. That non-oil figure includes information systems and technology spent and other spent as well. But the single biggest piece of that would be parts cleaning.

Gregory Ray

So parts cleaning has growth in oil business expansion or the oil plant expansion is growth, really that's the true maintenance fees was $2 million or $3 million a year.

Michael Hoffman - Wunderlich

Okay. So, if I'm adding all that up at the high-end, that's about $25 million?

Joseph Chalhoub

At the high-end, quarterly.

Michael Hoffman - Wunderlich

Yes. At the high-end, okay. That helps great. And then, can you help us a little bit about where you think that working capital impact of 10 million gallons that came on in the second half? And is it fair, if you give us -- if we have that total number, is it fair just sort of go to a main gallon per change in their working capital looking what the second half of '14 would be?

Mark DeVita

It really depends on the pricing environment, and depending on where the pricing is you don't have the expansion in working capital that you would normally have. Let's say you have an increase in pricing environment or a steady, there you will have one, but if you are in a decreasing pricing environment, taking on more used oil and all that works through your working capital, really isn't that much -- it really doesn't increase that much.

Gregory Ray

Yes. I think we are buying the used oil from generators. So we get a payable on the books and that mitigates the increase and other working capital requirements. So big thing that I think about when I think of working capital and more volume isn't the normal working capital from the day-to-day activity, but inventory swings. And so, to the extent that we end up with more volume at certain peak point and inventory more of that; that will queue up working capital. But given the way that we're expanding the plant, doesn't seem likely that the acquisitions going to add a lot of inventory.

Joseph Chalhoub

Well, it's going to have some, I mean your receivables are 50 days or so, and so, from that deductible -- payables for the used oil. So there is going to be some. You know roughly where the price of lube oil is in the $3 range and 30 days, we got to deduct the table as we think.

Michael Hoffman - Wunderlich

Okay. Actually, you are including the expansion of the lube oil?

Joseph Chalhoub

Yes. So, that was the question.

Mark DeVita

Okay, yes.

Gregory Ray

(Inaudible) about buying a collection business --

Michael Hoffman - Wunderlich

Yes. Then I was thinking about the expansion. I was really trying to get my hands around -- you had 10 million gallons of expansion in the second half where that just came in and --

Joseph Chalhoub

Yes. I assume we got on an average 30 days (inaudible) reducing or this sometime will be better in the oil, and if you got -- we are buying the used oil on the street, that's also 30 days or buying it from third-parties, which is about 30 days payment.

Michael Hoffman - Wunderlich

Okay. So, on that wane, when I think about 2014, you've had a pretty nice top line growth in ES, low double-digit and the underlying organic growth is high single or very bottom of that low double manufacturing some of (inaudible) activities? How do I think about that in '14? Should I think about it as a high single and maybe it pushes into the low double or is it still a double-digit revenue growth in Environmental?

Mark DeVita

I think it's still double-digit. When we look at our same-branch sales, it's playing quirky. Let's say, it's not a huge part yet, Containerized Waste business, it's really not reflected in any of that. It's stripped out. And because it's again in some ways it's operating, some are standalone and otherwise it's not. But we still think it's in the double-digit. I don't know if Greg and Joe have any other comments?

Gregory Ray

I just think that there an earlier caller asked the question about investment in growth opportunities and reminded us what we've said before, that is our margins got better, we could open this widget a little bit and do more. And we're certainly thinking that way. And so, we will hope that those efforts continue to stimulate the branch sales growth at a good clip. And that remains our goal on a medium-term basis to be a double-digit growth in the Environmental Services.

Michael Hoffman - Wunderlich

Okay. And then on the used oil side, how do I think about the roughly -- run rate 38 million gallons that you're collecting, is that number up 5 million, 10 million, on your own or is it not -- don't grow that at all and focus on third-party to manage margins?

Joseph Chalhoub

So, our target has simply improved for activity on the existing oil truck. And the productivity improvements, we were looking at perhaps a 10% improvement, 10% to 15%. And (inaudible) trying to get back and affecting the payment for the used oil, and the rest would be coming in from third-parties.

Mark DeVita

I think our priority in the short-term is going to be on the pricing side rather than on the volume gains, and so, it's hard to say how long it will take us to get comfortable that we made the progress we want in pricing. But I would think at least a few quarters had a fair minimum before we would start to shift our focus more to volume or efficiency in the fleet.

Michael Hoffman - Wunderlich

Okay.

Gregory Ray

Yes. I would add especially in the first quarter there has been weather challenge. So, it's usually seasonally down in the winter months anyway, and January and February obviously both in our quarter. So quarter-over-quarter, Q4 has some better weather months in it, since its more period long. So, relative to that, I think accentuates that price is going to be the main focus and if we were to step back a little bit there, I don't think its necessarily going to be an alarm to us.

Michael Hoffman - Wunderlich

Fair enough. And then last question, the fourth quarter had a full benefit of the 10 million gallon incremental increase. And we saw a clear margin improvement in 3Q and when you strip out the noise of the contamination further margin improvement. How would you characterize the total operating leverage -- I kind of figure how to word this, where you were in capturing the full operating leverage of that 10 million gallons in the context of the margin. Did you get 80% of it, 100% of it, but based on at a full quarter, but you have that auditing of the contamination issue?

Joseph Chalhoub

Yes. As we reported for the quarter, we went out; we brought up the nameplate capacity to 60 million. In reality, we processed, we run it 94% of that number. And so, if you want 60 million, (inaudible) the full nameplate capacity everything has to line up to do it. There is room eventually, efficiently get very close to the nameplate capacity. And so, 6% is still a sizeable improvement. And it's hard for me to quantify, but there is room for improvement in margins due to the run rate of the plant and it's one of the peer in the second half previous year and the second half of this year when we really make the move and finish the expansion, 75 million gallons.

Michael Hoffman - Wunderlich

Okay, that's helpful. Thank you very much for taking my questions.

Joseph Chalhoub

Thanks, Mike.

Operator

Thank you. And our next question comes from the line of (inaudible).

Unidentified Analyst

Hi, guys.

Joseph Chalhoub

Good morning, Charles.

Unidentified Analyst

Congratulations on a great quarter and a great year.

Joseph Chalhoub

Thank you.

Unidentified Analyst

I was just hoping, just for modeling purposes, a little bit of a prior point on the recent Group II base oil price decrease. I understand you just walked through the math a little bit with Michael Hoffman, but we're seeing posted prices down $0.30 and I'll just take that again through nameplate capacity of 60 million gallon, there will be a $20 million impact on the P&L in '14. Do you have any (inaudible) there or am I thinking about that incorrectly?

Mark DeVita

Well, first the math isn't quite right, because the 60 million gallons is our input. And our group output is about 40 million gallons. So you would say if our post, if our realized wood price came down $0.30, then you would be right, it would be $12 million to do the math, $12 million (gap) on revenue and margins.

One of the things we commented on that realized prices haven't moved down nearly as much as postings because really the market had preceded that posted price decline by dropping spot or transacted prices well below the posted level. And so when postings came down $0.25 or even $0.30 depending on which major you are looking at, real prices moved down somewhat less than that.

In terms of how to mitigate, the price decline, our view is that there is really long-term -- a couple of things that we have available to us to maintain our acceptable profitability in the phase of declining wood prices. One of them is changing our cost of feedstock, which we can do by changing what we paid third-parties and more importantly by changing what we pay on the street. We've talked about really -- both of those with an emphasis on driving down what we pay on the street.

And the other is to get better operating economics in the recycling process by driving more volume through the plant, which is a high fixed cost operation. And we've shown that we can do that in the last year because we've raised the nameplate from 50 million to 60 million gallons a year. And we hope to do that in the coming year with a further increase in nameplate from 60 million to 75 million gallons.

So those things will allow us to improve the overall profitability of the business or mitigate the negative impact of the price decline for as long as we have to live with what we consider unattractive prices for lube oil until the market recovers. Did that help?

Joseph Chalhoub

Yes. And I would add one more thing we've discussed in the past and that our current fleets for oil collection is running at significantly below its capacity. And we look at efficient route trucks (inaudible) much high levels than what we have right now, but the delicate balance at this stage, we are trying to reduce our raw material cost. And over long run that's going to be another important factor to improve the profitability of the business.

Unidentified Analyst

Okay, great, very helpful. And then, a quick question on the ES segment, it seems like you're growing much faster than the market, would you attribute that to higher quality service? How exactly are you taking the share?

Mark DeVita

This is Mark. Charles, I think certainly quality of service we believe well, it's some more less tangible to some, so really quantified, we think that's one of the main reasons we think our approach in this type of structure we created, responsibilities we give to our people who are in the trucks and on the streets wear the uniforms and how we intend them leads to good service or better service. But certainly taking share, I mean most of the markets we are in are plus or minus a couple of percent GDP type range growers. So we think service is one of the main things. I don't know if Joe and Greg have other comments?

Gregory Ray

Well, I think that's an important point. And I think we also have a handful of innovative service offerings that are not matched competitively. In parts cleaning, we are very proud of our (inaudible) which is growing faster than how parts cleaning business is growing and much faster than the industry is growing where we have patented technology for machines in our portfolio. And we have proprietary chemistry that we can do better than the competitive offer. So that business is growing very nicely. And we're proud of that. There is a few other things we have (right passed it) where we think we've got better service programs and better offerings that allow us to grow our share more quickly.

Unidentified Analyst

Okay, great. Thanks for the clarification, very helpful.

Gregory Ray

Pleasure talking to you guys.

Operator

Thank you. And our next question is a follow-up from the line of Sean Hannan from Needham.

Sean Hannan - Needham

Yes, thank you. So I just wanted to actually follow-up on the environment you're seeing within Environmental Services, so I think that there is a competitor that has talked about kind of a longer term strategy to try and recapture some share, not specifically or exclusively targeting you folks but I think ultimately it's going to have some type of an impact within the market. So I just wanted to see if we can get a little bit of kind of an updated view from you folks around, are you seeing any impacts in the market today. How are you positioning for that type of dynamic? What are your general expectations? Thanks.

Joseph Chalhoub

Yes. We have seen that often. And of course a quick answer, we haven't seen anything that has affected it on a month-by-month or peer-by-peer basis here in the recent past, the last few months since it was announced. And then, you really need to look at -- our concern will be competing with the major player, we have been able to grow the business from where we are, where we, for the -- we were and where we are now. And we have -- as Mark indicated, busy, strong (inaudible) in our branches. And we are focusing on the small customers.

We have decided earlier on that we will not focus on the large focus account via services. We have the key services. But we don't have our share of the Fortune 500, and which segment has been historically very competitive and then it's no matter who comes into this business, it's very hard to duplicate alternative for market when we grew to $100 transaction.

So, we are seeing the -- we don't feel popular, we feel pretty comfortable that we won't see much of an impact. And then, we are lucky enough to have pretty good margins. We don't want to (fight) income prices; it's really never a big issue at that (inaudible) level in any case. But how do we capture something that has been lost or slowdown somebody that has been capturing a piece of the market?

As Greg said, we are very happy with our parts cleaning (inaudible) system, which is growing in a healthy manner. And we have technology that we look back and the customer's love, we just keep placing.

Sean Hannan - Needham

That's great feedback. Thanks so much.

Mark DeVita

Thank you, Sean.

Gregory Ray

Thank you, Sean.

Operator

Thank you. And our next question is a follow-up from the line of Kevin Steinke from Barrington Research.

Kevin Steinke - Barrington Research

Hi, just one follow-up. You said there was potential to possibly improve from that 94% utilization level at the re-refinery. But on the short-term as you complete the expansion to 75 million gallons, is there any significant downtime that you expect to impact production over the next couple of quarters as you put new equipment in place or anything like that?

Joseph Chalhoub

Nothing on the outside beyond an impact of capacity of 60 million until we finish up the expansion, we are going (to harvest) the low-hanging fruit already in place of the 60 million gallon. And I also don't want to leave an impression that we're on a consistent basis on the nameplate, and typically these units are affected by lot of factors. We surely in the first quarter had a lot of issues in many of our branches, and specifically Indianapolis was basically higher compared to its typical history. And as we keep -- as we finish the project, then we'll get another step-up in production capability.

Kevin Steinke - Barrington Research

Okay, thank you.

Mark DeVita

Thanks, Kevin.

Gregory Ray

Thanks, Kevin.

Operator

Thank you for your time and interest. We are grateful for your support. We invite you to join us for our next conference call.

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