Heritage - Crystal Clean's (HCCI) CEO Joseph Chalhoub on Q2 2016 Results - Earnings Call Transcript

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

Q2 2016 Earnings Conference Call

July 28, 2016 09:00 AM ET

Executives

Joseph Chalhoub - Founder, President & CEO

Greg Ray - COO

Mark DeVita - CFO

Analysts

Ryan Merkel - William Blair

David Manthey - Robert W. Baird

Kevin Steinke - Barrington Research

Gerry Sweeney - Roth Capital

Sean Hannan - Needham & Company

Michael Bunyaner - TLF Capital

Michael Hoffman - Stifel

Operator

Good morning ladies and gentlemen and welcome to the Heritage Crystal Clean Incorporated Second Quarter 2016 Earnings Conference Call. Today's call is being recorded. At this time, all callers' microphones are muted and you will have an opportunity at the end of the presentation to ask questions. Instructions will be provided at that time for you to queue up for your question. We ask that all callers limit themselves to one or two questions.

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 risk factors, some of which are beyond our control. These forward-looking statements speak as of today and you should not rely on them as representing our views in the future.

We undertake no obligation to update these statements after this call. Please refer to our SEC filings, including our annual report on Form 10-K as well as our earnings release posted on our website for a more detailed description of the risk factors that may affect our results. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website.

Also please note that certain financial measures we may use on this call such as earnings before interest, taxes, depreciation and amortization or EBITDA and adjusted 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 www.crystal-clean.com.

With us today from the company are the Founder, President, and Chief Executive Officer, Mr. Joe 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 Mr. Joe Chalhoub. Please go ahead, Sir.

Joseph Chalhoub

Thank you and welcome to our conference call. Last night we issued our second quarter 2016 press release and posted it on the Investor Relations page of our website for your review. This morning we will discuss the financial statements and our operations in the second quarter and we will respond to questions you may have relating to our business.

Our second quarter revenues were $80.6 million compared to $82.9 million in the second quarter of 2015; a decrease of 2.9%. Year-to-date revenue decreased 4.8% to $159 million from $167 million in the first half of 2015. The majority of the year-over-year revenue decline is due to the lower selling prices for our oil products primarily driven by lower crude oil prices in 2016 compared to 2015.

Our 2016 second quarter EBITDA was $7.5 million or 9.3% of revenue in the second quarter compared to EBITDA of $8.2 million or 9.8% of revenue in the second quarter of fiscal 2015. Our second quarter EBITDA represents a 263% increase compared to our first quarter EBITDA of $2.1 million.

During the second quarter, the Environmental Service revenues decreased $0.5 million or 1% compared to the second quarter of fiscal 2015. The environmental services revenues decreased $1.1 million or 1% for the first half of 2016 compared to the first half of 2015. The revenue decline was primarily due to the downturn in activity as customers engaged in oil related to the energy sector as well as lower energy surcharge revenues. We are working on several initiatives to improve our revenue growth in this segment. We continue to focus across our cross-selling initiatives to better leverage our existing customer relationships.

We also have opportunities to expand geographic coverage in the Western U.S. and in Canada. In addition, we are adding field sales resources in completing tuck in acquisitions to stimulate our environmental services growth.

During the second quarter of fiscal 2016, oil business revenues decreased by $1.9 million, $28.1 million from $30 million in the second quarter of fiscal 2016. During the first half of fiscal 2016, oil business revenues decreased $6.9 million to $54.2 million from $61.1 million in the first half of 2015. The revenue decrease was mainly due to lower selling prices for our base oil and RFO products which was partially offset by higher base oil sales volume.

The decline in revenue was further upset by increased revenue from used oil collection charges of almost $5 million during the first half of 2016. We are very pleased that we were able to achieve positive operating margins in our oil business during the second quarter which was ahead of our earlier forecast. We were able to achieve this result by increasing the price we charge our customers for the collection of the used oil, while also experiencing an increase in the selling price of our oil product during the second quarter compared to the first quarter of fiscal 2016.

Furthermore, I'm pleased to share with you that crude oil prices continued to improve as we entered the third quarter and this has further extended our spend. We also enjoyed the record production at our re-refinery during the second quarter.

Our chief financial officer, Mr. Mark DeVita, will now further discuss the financial results and then we'll open the call for your questions.

Mark DeVita

Thanks Joe, I appreciate the opportunity to discuss HCCI's second quarter 2016 results with our investors today. In the Environmental Services segment, revenues decreased $5.1 million in the second quarter compared to the second quarter of 2015. Of the 80 branches that were in operation throughout both the second quarter of 2016 and 2015, same branch revenues decreased 1.9%.

For the first half of the year, revenues decreased $1.1 million or 1% in the segment. Same branch revenues for the first half of fiscal 2016 decreased 0.4% compared to the first half of fiscal 2015. As Joe mentioned earlier, a slight decrease in revenue was primarily due to diminished activity of customers in and around the Energy sector as well as lower energy surcharge revenue.

For the second quarter, our average revenues per working day in the Environmental Services segment decreased slightly from $900,000 in the second quarter of 2015 to approximately $890,000 in the second quarter of fiscal 2016.

Our profit before corporate SG&A expense in the Environmental Services segment during the second quarter was 28.8% which was slightly lower than the year earlier quarter; our profit before corporate SG&A expense for the first half of fiscal 2016 was 27.6% which represents an improvement of 1% over the first half of fiscal 2015.

In the Oil business segment, revenues for the second quarter were down $1.9 million from the second quarter of 2015 mostly as a result of lower oil product prices. For the first half of fiscal 2016, revenues were down $6.9 million compared to the first half of fiscal 2015. The impact on revenue from the lower selling price of our base oil and RFO products was $5.8 million and $2.6 million respectively during the second quarter of fiscal 2016 compared to the second quarter of fiscal 2015. The overall decrease in revenue year-over-year was partially offset by higher collection charges and stock fees.

In the second quarter, our Oil business experienced profit before corporate SG&A of $0.4 million compared to a loss before corporate SG&A of $2.9 million in the first quarter of 2016. The increase in profitability in the second quarter of fiscal 2016 was driven primarily by the increase of $0.04 per gallon and the price we charge our customers for removal of their used oil and $0.08 per gallon increase in the selling price of our lubricating base oil compared to the first quarter of fiscal 2016.

Corporate SG&A was 14.3% of second quarter revenues, up from 12.8% in the year-ago quarter. In the first half of the year, SG&A expense was 14.9% of revenues compared to 13% in the first half of 2015.

SG&A expense for the second quarter of fiscal 2016 was $11.5 million compared to $10.6 million in the year-earlier quarter. For the first half of fiscal 2016, SG&A expense was $23.7 million compared to $21.7 million of the first half of fiscal 2015. The increase in SG&A expense was due to unusually high legal expense of $1.8 million during the second quarter and $3.3 million for the first half of fiscal 2016.

The majority of these legal expenses pertain to matters stemming from our acquisition of FCC Environmental including compliance issues that predate our acquisition and an arbitration that we initiated against the sellers to resolve certain routine post-closing matters and to recover related legal expenses as governed by the stock purchase agreement.

At the end of the quarter we had $68.1 million of total debt and $25.3 million of cash on hand. We had very strong cash generation of $14.4 million in cash flow from operations during the first half of fiscal 2016 which represents an increase of 52.8% compared to the first half of fiscal 2015. We incurred $451,000 of interest expense for the second quarter of 2016 compared to interest expense of $408,000 in the year ago quarter.

For the first half of fiscal 2016 we incurred $969,000 in interest expense compared to $962,000 in the first half of fiscal 2015. For the second quarter we experienced income of $1.8 million compared to income of $2 million in the second quarter of 2015. Our basic and fully diluted income per share for the quarter was $0.08 compared to $0.09 in the year-ago quarter. Our year-to-date income was $0.1 million compared to income of $1 million in the first half of fiscal 2015.

Earnings per share for the first half of the year were zero compared to earnings of $0.05 per share in the first half of fiscal 2015. We appreciate your continued interest in Heritage-Crystal Clean and at this time I will turn control of the call over to our operator to advise you of the procedure to submit your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Ryan Merkel of William Blair, your line is open.\

Ryan Merkel

Hey, good morning everyone.

Mark DeVita

Hey Ryan.

Joseph Chalhoub

Good morning.

Ryan Merkel

So you said if current market conditions continue you expect to have increased profitability for the remainder of 2016 in the Oil business. Could you explain that just a bit further, what you meant by the current conditions? Was that the conditions we see entering the third quarter where the spread is a little better?

Mark DeVita

Yes, well Joe and Greg can add something Ryan to what I'm going to tell you. I'll take it from a quantitative standpoint. If you look at what drove the results is if you look at what the average pricing was, and I'm just going to use the spot prices approximately for what our actuals are but it will give you certainly more than just directional guidance.

There was the average stock price in Q2 was about $152 and it's about $0.30 higher now and that's even with the last two weeks there's probably been $0.02 a week peel back in spot so, that tells you there's $0.30 of pent up pricing based on today's conditions. Obviously the quarter is far from over but hopefully that will give you an idea and we don't know what if crude continues to come down, what that might do to base oil prices, there's certainly a little headwind based on the spot coming down a tiny bit the last couple of weeks but there is a lot of pent-up upside based on what I just told you in the base oil price potentially for Q3 versus what we experienced in Q2 on average.

I don't know Joe if you have anything more to add or Greg?

Joseph Chalhoub

Yes, we clearly have entered the third quarter with a wider spread, base oil and the charges and what we were, on an average, for the second quarter.

Ryan Merkel

Got it, okay. And then just an update on charging customers, how has the progress been versus what you thought it would be and then is there a percent of customers that you could share with us that you're actually charging to remove oil at this stage?

Joseph Chalhoub

We're basically charging the vast majority of our customers and so with the price of oil having gone up, here now recently with a pullback but starting in the first quarter we kept putting the charges up pretty aggressively and we've reached a certain level where we've had that level as base oil prices start moving up and today we charge the vast majority of our customers.

Mark DeVita

Yes, and Q1 I think, and Greg might have an updated number it was 97%. I think it was an overwhelming majority, I don't know.

Greg Ray

I don't have a better number but it's higher than it was in Q1 now, so it's such a small number that's not being charged, we're not really measuring it.

Ryan Merkel

And then as you look forward, are you planning to increase the charge in the second half a bit further?

Joseph Chalhoub

Well, with the significant improvement in the spread, and as we enter the third quarter, we're watching the situation. I would say that if we see any pullback on lube oil or if we see any weakness on crude that will further affect the RFO market, then we would seriously consider increasing the charges. So, we're -- we've got to maintain the spread, the key part of the profitability for our business.

Overtime, we'll be improving that spread, but I think that we moved it pretty substantially this year and, as I said, with -- we like where we are as we enter the third quarter.

Ryan Merkel

Yes, you've made really nice progress here ahead of where we were thinking so it seems things are trending up at this point which is as good thing. I guess if lastly, in the energy, or the Environmental Services business, energy is still the issue there. Do you think you've seen the worst of the energy hit in that business? Are you willing to call maybe a bottoming at this point?

Joseph Chalhoub

What I would tell you our -- that's how our sales organization views it and that's how we see it compared to where we were a year ago so on a comparative basis we, we think we've bottomed there and at least if anything happens it's not going to be much of an impact and now really our job is to, go in and we started that a while ago to look at other ways to create and generate more service revenue with our customer base and we've shared some of the initiatives I think in here.

Ryan Merkel

Right, very good. Thank you so much.

Mark DeVita

Thanks Ryan.

Greg Ray

Thanks Ryan.

Joseph Chalhoub

Thank you Ryan.

Operator

Our next question comes from David Manthey of Robert W. Baird. Your line is open

David Manthey

Hi guys, good morning.

Joseph Chalhoub

Good morning.

Greg Ray

Good morning.

Mark DeVita

Good morning David.

David Manthey

First of all, on the comment you made about the spreads getting better. You noted that the pricing is about $0.30 better sequentially and I believe you said that your charge for oil prices haven't changed or I guess potentially might have even gotten better sequentially. Am I hearing that right that you're saying your spreads might have gotten $0.30 better than the second quarter in the third quarter?

Mark DeVita

I was quoting what the change in spot price has been and effect if you consider what the -- if the Street charges were flat then that would equate to what your change in spread is. And we didn't go so far as to say, really make a hard forecast on the Street charges, that's one, as Joe mentioned we're watching and you have the decrease in crude that's happened over the past week or so, so that could improve to give us an opportunity to improve or how our market lags, the actual pricing on the Street does lag some of the commodity movements. So, we've -- a couple of weeks before that there was headwinds or pressure to try and get the increases that we did get so it's always fluid.

David Manthey

Yes, definitely encouraging though wow, that's pretty remarkable. So as it relates to the environmental business then, if you set aside the energy related customers where you're seeing weakness and I assume based on how your revenues attract you'll lap those comparisons by the time we hit the fourth quarter. What type of trends are you seeing among the other, the all other customer category that you serve?

And then if you could separately address the fuel surcharge removal, was the impact of that low single digit type percentage?

Mark DeVita

Yes it was -- that -- I'll go backwards. Yes, that was one percentish rounded on the surcharge and we don't look so much at industry verticals but if we look at the branches that the overall 80 branch network that we're currently running at, the non-energy sector impacted ones, I guess if you strip out the Texas, Louisiana, those type of branches, we'd had -- what we would traditionally say is that what we normally get on price overall for the segment, a little more than 5% has been the growth there and it's just been brought down by obviously some pretty big negatives. In those other branches it's close to 18% decline year-over-year basis for Q2.

David Manthey

So Mark you're talking there about pricing, is that to say that the -- you're not seeing a material unit change like people aren't sending back parts washers in Texas, Louisiana, or is that not true?

Mark DeVita

No, no, that's not true. There's volume decline in those, that's what's driving the big revenue decrease that I mentioned and... --

David Manthey

[Indiscernible]

Mark DeVita

Yes, that's all in. That's all in and so was the other number. So it's like it is every quarter with our different lines of business, some grow faster than others. So it's a mixed bag with how much is volume versus price.

David Manthey

All right and then one last question if I could. The $1.8 million for legal fees, again, this quarter, it is a normal level a few hundred thousand and this is just elevated, is that the situation and then secondarily, I believe you sort of indicated last quarter that this would impact first quarter and second quarter. Are we at the end of this do or do you estimate that we should be through those elevated legal fees at this point?

Mark DeVita

Well -- go ahead Greg.

Greg Ray

Yes, the first statement Dave you're right is a normal level of legal spending in a quarter would just be a couple hundred thousand, $200,000 or $300,000 so we're well above that. In terms of how much longer we're going to continue with these rates, we refer to a couple of different matters in the narrative and one of those matters we're nearing the end of so we'll see a substantial reduction in legal fees but another matter we can't neatly predict how long it's going to take and so we'll probably still be running at a higher level of legal spending, I would guess, for a couple more quarters would be likely.

David Manthey

Okay. When you expect resolution here, what is the goal, what do you end up getting back? Is there some lump sum that you would register if you indeed win or prevail or what's at stake here?

Greg Ray

Yes, there's multiple matters that are the subject of our arbitration and at least one of the elements is something where we just would expect to get a lump sum that's related to the purchase price post-closing adjustments and so we're hopeful that we'll accomplish that. We obviously think we have a strong argument because we initiated the arbitration to try and recover these amounts.

David Manthey

Okay

Greg Ray

We're looking forward to clearing out this along with the lower cost of market adjustments and let that underlying business, which seems like it's doing a lot better, show through. That will be good as soon as we get to that point.

Joseph Chalhoub

Same here Dave.

David Manthey

All right guys, thank you.

Greg Ray

Thank you David.

Operator: Our next question comes from Kevin Steinke of Barrington Research, your line is open.

Kevin Steinke

Morning.

Mark DeVita

Hi Kevin.

Kevin Steinke

Yes, in the ES segment you mentioned you anticipate returning to growth in the fourth quarter. Is that just based on the fact that the comps get easier or is there more to it than that?

Mark DeVita

It's mostly that. We don't think there's been any fundamental changes in our approach to gaining business using our sales and service reps and it's not as if we've tapped out and we own the market and there's no more share to gain. So we just think it's mostly a comp story, as you said, and we continue to do what we've normally been doing it's just that those comps even through Q3 are tough to overcome.

Kevin Steinke

All right and I think Joe mentioned in his prepared comments potential tuck-in acquisitions and environmental services. Just wondering how aggressively you're pursuing those and what the pipeline might look like, what sort of businesses you're looking for.

Mark DeVita

Typical to us and we always are looking at acquisition, we don't comment on any specific ones but if we can leverage -- Joe mentioned it earlier, trying to bring more services to our customer base, that's usually a priority for us and we use that whether that's in existing geographies, new geographies, I don't know Joe or Greg or if you want to add to that?

Joseph Chalhoub

Yes, the bulk of the growth historically has come in outside of the FCC acquisition and has come in from organic growth and that's what's going to drive us here as we move forward but we have a couple of tuck-in acquisitions we're looking at; not a long list but that piece will help reach our growth goals.

Kevin Steinke

Okay, okay, sounds good. And so with the $0.04 gain in the per gallon charge for used oil, are you around $0.40 per gallon now is that a good approximation?

Mark DeVita

Yes, that's probably a little high and we don't want to get into much more specifics but...

Kevin Steinke

Okay. So you also mentioned record base oil production at the re-refinery, what was the capacity utilization in the quarter?

Mark DeVita

It was a little more than 96%.

Kevin Steinke

Okay, do you still see room for potential improvement there or are you happy with how everything is running as it stands now?

Joseph Chalhoub

Well we see room for -- definitely, we see room for an increase, further increase, and we're going to see that in the fourth quarter. We've got certain issues on our plate here in the third quarter, some we worked on, we've got in operation or the re-refinery but we should see stronger than these kind of levels in the fourth quarter.

Kevin Steinke

All right, good. Just lastly, do you have the number, I guess either for gallons of base oil produced or sold in the quarter?

Mark DeVita

Yes, we produced about ten million.

Kevin Steinke

All right, perfect. Thanks for taking my questions.

Operator: Our next question comes from Gerry Sweeney of Roth Capital, your line is open.

Gerry Sweeney

Good morning gentlemen. Thanks for taking my call.

Joseph Chalhoub

Good morning.

Mark DeVita

Good morning Gerry.

Gerry Sweeney

In Q1 you quantified, I believe you quantified how much the oil-related customers were a headwind. I think you said about 6%. Do you have a similar number or can you quantify for the second quarter?

Mark DeVita

Yes. On an apples-to-apples basis that figure that you're referring to would be a little higher, it was more like 7%.

Gerry Sweeney

Okay. And then, you did say I think surcharges were another drag of 1%?

Mark DeVita

Yes.

Gerry Sweeney

So, I mean, just on the math basis, that's probably we're looking at 7% to 8% drag, but we're down 1% year-over-year. And that shows that you're probably getting some decent underlying growth from some of the cross-selling initiatives, et cetera. Is that fair to assume?

Mark DeVita

Yes. We're definitely getting growth, I mean, that's part of that combined a little more than 5% growth in some of the -- it's a little cleaner to see in the non-energy impacted, if you want to use that phrase, branches.

Gerry Sweeney

So, on a go-forward basis, this anniversary we should -- there's a high degree of comfort level here that we're going to see some of that organic growth starting to show up in the fourth quarter?

Mark DeVita

Yes.

Gerry Sweeney

Okay, perfect. And then, switching gears a little bit to the oil business. Just wanted to see what maybe the tone of the market is in terms of charges, charging for oil even with the -- even with I would say competitors. Are they still charging, if my memory serves correct, there was certainly a lag on that front, probably some of them were lacking ability to even charge, this is probably small players, charge because they didn't have systems in place, but it seems like they've gotten over that hump. Are they sort of closing the gap on you as you take a pause? Any idea on that front?

Joseph Chalhoub

Yes, this is Joe here. The market as we view it is relatively stable at this time. We always get noises from the field but it's a very competitive business. We all get noises on the field that we've lost this account because somebody came in and -- but that put lower charges or pay for oil, but we have the same phenomenon when people were paying $0.80. Somebody comes in and pays $1.20.

But I would say overall the market at this stage is relatively stable and we're watching crude and the loop prices. Not all of our sales are loop, so we are also influenced in the RFO with a reduction in the price of crude. But I think our objective is very central and very basic. We have restored our margins and as we enter the third quarter we're enjoying better margins than we've had. We had restored it at the end of the second quarter and so we're watching, we're determined to maintain these improved margins and over a period of time in our oil segment to expand that spread.

Gerry Sweeney

Got it. Well, I mean what I was trying to get at, it sounds like Heritage is generally a leader on the pricing side then you guys take a pause, curious if during that pause the customer, competitor, you see a little bit of a lift. Granted, you see competition, I'm just trying to get a little bit more feel for the tone and as you pause today sort of play catch up a little bit of the extended, etcetera, but…

Greg Ray

This is Greg speaking, I can respond to that. I think that you have a pretty good understanding of what we went through as we broke past the zero point and began to charge that it took people a while to follow in that respect and I would say that we still have between our pricing and the competitive market average a significant differential.

The degree of that difference depends on the competitor and which market we're talking about and the scale of the competitor. Our pricing isn't that far away from some guys and other people it is further away from, but I think from our point of view one of the positives for our current situation is that we believe that virtually everybody for most of their volume is charging rather than picking up for free or paying. And so we're in an environment where customers are comparing different prices and taking into consideration service quality. We think we've got excellent service quality and so we tend to do fairly well in that situation.

What we're nervous about, what we watch closely is the possibility that oil prices move back in the other direction, in other words crude prices go down – go up and fuel prices go up and some of these competitors who today are having to charge to break even may shift into an environment where they decide that they can pick up oil for free or begin to pay for it again and that will be a difference that's not just sort of simply quantitative, it's sort of a psychological difference and that would put more pressure on us.

But we don't see that happening right now and recent oil prices in the last three or four weeks have been moving the other direction, so it's not putting a renewed pressure on us on the Street. And as I think we answered an earlier question, we're continuing to watch to see if there may be an opportunity for us to further raise Street prices but it would be too early to come to that conclusion.

Gerry Sweeney

Just one other quick point and then I'll jump off but, I mean, that was the going to -- now that you're paying, I mean, I would imagine from a psychological standpoint it would be somewhat stickier for your competitors not to go back to paying for oil since they got over that hump and maybe put some systems in place, et cetera, I would imagine now that they're chasing some of that, maybe a little bit sticker before they went back the other direction.

Joseph Chalhoub

Yes, exactly. And I would say that's the case for the majority.

Gerry Sweeney

Okay.

Joseph Chalhoub

The small independent guy that does his own thing for his local market and -- but that's the majority of the market. We went through a tough couple of quarters, the fourth quarter of last year and the first quarter of this year when we had to get to a charts and people were shy about getting -- but that's all behind us and at this stage our objective is simple, we're enjoying a better margin getting into the third quarter and over a period of time I think we can build on the spread that I should say the spread is what we've improved significantly as we entered the first quarter and we want to build on that over the next few quarters.

Gerry Sweeney

Got it. I appreciate it. Thank you.

Greg Ray

Thanks, Gary.

Mark DeVita

Thanks Gary.

Operator

Our next question comes from Sean Hannan of Needham & Company, your line is open.

Sean Hannan

Yes, good morning folks and thanks for taking my question here. And sorry to beat on a dead horse, I just want to get back into growth opportunities within the environmental services, the parts cleaning side. So, if we get beyond the surcharge and the energy-related customer headwinds, some of those branches, and we get back to growth in the fourth quarter, can you help me to understand really how to think about this for how this growth could perhaps layer in?

It almost seems like there could be some strong arguments in terms of more of an impairment of the growth opportunities within that segment which has been really more of a double-digit grower. We know that there's been at least commentary out there for Safety-Kleen I think making better headway than they had in the past and arguably recapturing some share and not to say that that's occurring head-to-head, but perhaps from an opportunity cost standpoint that can be affecting your growth opportunities. So I just want to understand how to think about that moving forward because it's been a pretty good driver in the grand scheme of things? Thanks.

Joseph Chalhoub

Yes, there are a lot of pieces. This is Joe. I'm going to try to answer this. Yes. There has been some noises about Safety-Kleen, but when we look at our components in our ES and press release that's one of the pieces. We've got parts cleaning. We've got the drum waste business. We've got the vacuum services. We have antifreeze and absorbent and so on.

We haven't -- when we follow our count on spot cleaning, we haven't lost any business there and total counts, there's a regular turn, we pick up some customers and they pick up some and we haven't seen any change in the trend, or historical competitive pressures between the two companies. So, what we want to do, and we are doing is look at every other area where we can add the revenue.

We talked about adding branches, we've in the past have added branches at the higher rate and we slow down. We didn't add any during the FCC acquisition and integration because we are getting into new branches that way so we've now got some of these horses out and we're in the mode of adding branches, that's going to help us.

We don't have vacuum services in all of our branches, but we're looking at that. We talked about growth cross-selling and we had done a couple of small acquisitions in the antifreeze business, people that have recycling capabilities. We've got a large customer base that generates antifreeze and we like that, that's a relatively new business for us. It's small but it just enhances our menu and so these are the kind of things we're doing.

We've added sales resources. We were relatively flat last year as we're integrating, as we see acquisitions, so we've added that starting in the beginning of the year and these will all bear fruit and help us to get to the single -- high single-digit growth.

Sean Hannan

Okay. And is that something that you think we should be able to get back to that type of momentum by say 1Q, 2Q next year or based on the nature of the initiatives that you would want to undertake to reinvigorate that? Is that more of a longer-term scenario before you can get to those numbers because obviously you have to make some investments there?

Greg Ray

Right, Sean. This is Greg. I think that our expectation would be to be back in the growth range that Joe was talking about by the early part of next year. And, again, that's lots of assumptions there, but I think that the big thing is getting the weakness of the oil patch behind us on a comparative basis, and you'll start to see that that combined with what we imagine our typical price increases and sort of the typical expected results we get when we put more sales resources out there all are going to contribute to that. So we haven't sort of changed our view that ES is still an important growth opportunity for the company and we're continuing to invest in it on that basis and expect to see the results in a reasonable timeframe.

Sean Hannan

Okay. Thanks for taking the question.

Greg Ray

Sure. Thank you.

Operator

[Operator Instructions] Our next question comes from Michael Bunyaner of TLF Capital. Your line is open.

Michael Bunyaner

Good morning gentlemen.

Mark DeVita

Hey, Michael.

Joseph Chalhoub

Good morning.

Michael Bunyaner

I just wanted to make sure I heard you correctly that the cash flow from operations was up 52.6% or $14.4 million, is that correct?

Mark DeVita

Yes. Yes, we had a good quarter especially that was for the first half of the year and specifically since we've pretty much finished our spending in Q1 for the expansion, our free cash flow was over $4.5 million in Q2, so it's good, it's what we expect, we're building cash and as we start to get clarity from the rough patch Joe mentioned, a lot of it driven by what oil did and our breaking the psychology of going from paying, the charging for oil, the last couple of quarters, we're starting to see the benefits there.

Michael Bunyaner

Should we continue to expect that the free cash flow will grow as we continue to execute for the second half of this year?

Mark DeVita

Yes, I don't know if we're going to throw off $5 million a quarter, that's probably aggressive, but we didn't spend a ton of CapEx in the quarter and that helped. But just in the grand scheme of things without getting too detailed in our capital plan, what we had seen over the previous couple of years being through, having been through the expansion, it won't be as light as it was in Q2 in an average quarter but where we were the previous three or four quarters, whatever, was too low. So it's probably somewhere in between those two would be what we would expect.

Michael Bunyaner

And just to clarify because there were several numbers mentioned in terms of environmental services, the revenue in the nine branches was down in the second quarter 18% year-to-year, was that correct?

Mark DeVita

You heard correctly.

Michael Bunyaner

And the rest of the branches were up 5%?

Mark DeVita

Yes, little more but basically 5%.

Michael Bunyaner

Okay. And the question that was raised in terms of the competitive nature of the industry and/or the environment that we're in, in terms of environmental services, Joe is there any change that is positive or negative that you're seeing out there? And is the consolidation of the industry going to continue in which you obviously have been a major force behind?

Joseph Chalhoub

Well, there are two segments regarding the consolidation. The ES and Oil. There's a -- there has been a lot of reduction [ph] in oil over the last few years and I think that has a tendency in my mind to continue putting these event [ph] very high capital and there's less and less local, fewer markets for the used oil. So this is a good thing and there is less consolidation in the ES but it's still some that has happened. Mark or Greg do you want to add on this?

Greg Ray

Yes, I think that's well said Joe.

Michael Bunyaner

Thank you so very much and…

Greg Ray

Thank you, Michael.

Michael Bunyaner

And [Indiscernible] the second half.

Greg Ray

Thanks.

Joseph Chalhoub

Thank you.

Operator

Our next question comes from Michael Hoffman of Stifel. Your line is open.

Michael Hoffman

Thanks for taking my questions Joe, Greg and Mark. On the capital spending, what did you spend in the quarter and what's the target now for the full year?

Mark DeVita

A full year depending on other projects is probably in that $13 million-ish range that you and I have previously talked about. If you -- I think it was about $2 million, $3 million in the quarter, I've got a first half number right in front of me but I think it was in that $2 million-ish.

Michael Hoffman

Well, I know what the first quarter is so what's the first half?

Mark DeVita

Yes.

Greg Ray

$8.7 million.

Michael Hoffman

$8.7 million, okay, yes so that's $2.2 million. Okay, and then, and you would expect to then -- if we're talking about $13-ish then we're looking at about $4.5 million for the rest of the year, $4.5 million, $5 million and that splits relatively evenly?

Mark DeVita

Yes.

Michael Hoffman

Okay. And then with regards to ES, well I guess I want to ask a high level question. I hear a tempering in you all's presentation, but I have this sense that you feel pretty good about the state of business. It was a good quarter and you have a good outlook and you're just being cautious that you don't let the Street get run away with our forecasting, am I reading that correctly?

Joseph Chalhoub

Well, I feel pretty good about the business overall. I think if you – this is again a high level comment because we like where we are with our margins in the end. We're pretty healthy. We were a bit careful last year, didn't add resources, we were going through this integration of the two companies, so we actually cut resources on both sides and we -- and there were some low pricing in the FCC environmental services so we're cautious.

We wanted to not weaken our contribution margin in the ES and we were very pleased to see how strong that contribution margin has been and now starting earlier this year we said let's put resources, additional sales resources into our branches to grow our ES business and some of these things take a little bit of time but there's nothing magic in here with all of the pieces that we put in, we expect to start growing again our ES business.

Michael Hoffman

Okay. To that point, if everybody has been digging around these numbers and clawing at it like a dog on a bone but just let me take one crack at it. If you went back a year ago and looked at this time in 2015 and stripped away Texas and Louisiana, what's the organic growth of the rest of the environmental services business?

Mark DeVita

Well, we were reporting that, not quite apples-to-apples to what you describe, but remember how we were reporting a non-FCC environmental impact at branches and if their footprint it obviously encompassed most of the energy patch that has been a negative downturn. So, I think for the first two quarters that number was 12% and it was, I think, for Q3 10%. So that was our growth rate and, again, it's not completely clean with what you ask but its close enough.

Michael Hoffman

Okay. And I realize that you're not going to hockey-stick this, but you're talking about moving back into that direction, X the energy branch network?

Joseph Chalhoub

Yes.

Michael Hoffman

Okay. I just wanted to make sure that that's what the message is that we can get back there by doing the cross-selling, adding more multiple services in a branch, taking the average branch revenue up, X the pressure from the end markets and if we get a recovery in the energy markets that will be another catalyst of growth?

Joseph Chalhoub

Yes.

Michael Hoffman

Okay. Can you frame, since you've added the new capacity, what's the proportion on a percentage basis or pennies per gallon on the controllable part of this spread which is transportation, logistics and the actual processing cost. What's been the benefit from the capacity expansion to-date and what do you think is left proportionally? Has there been a 5% improvement, 10% improvement and what do we have left?

Mark DeVita

This is Mark, Joe and Greg can add if they want. But we haven't done all of the work to break that out. I can tell you actually in some of the areas of the overall results we've had some challenges in areas like in Q2 anyway in areas of transportation. So it's -- there's been a benefit but there's enough moving pieces that unless we actually do the analysis intentionally, which we haven't done, I can't give you a good number and I don't want to give you a guess.

Michael Hoffman

Okay, without a percentage, it's improved though, in the aggregate?

Mark DeVita

Yes.

Michael Hoffman

I get there's puts and takes; one might be up and something else is down, but that cost basis is part of the help in the spread besides base oil going up and charge for oil going up?

Mark DeVita

There's a positive impact to our added capacity.

Joseph Chalhoub

Yes, on a cost basis, yes, definitely has a lower cost cents [ph] per gallon for the plan [ph], but that's one piece of that. The other piece is you're getting more volume uptick from the used oil coming in – coming if from other plants to the loop besides and there is a significant uptick in the value of the products feeding the plant. So every million gallon you put in, it has a significant impact to the bottom line. So, we have some more room to grow at the 75 million gallon capacity? Yes we have.

And my earlier remark indicated that we should be able to see the benefit in the fourth quarter because we have some work happening in the third quarter, but starting the fourth quarter we should see this improvement and Michael, there's no magic for us at the 75 million. We always look at ways of debottlenecking without spending a lot of capital to go beyond that in the next years.

Michael Hoffman

Okay. Fair enough. And then, [Indiscernible]. The base oil price increase, the theory here is the posted price is some number you guys get paid a discount to that, but if the price goes up, you in theory should capture the majority if not all of that price change because you're already -- the discount is already embedded in what you were starting from. That theory still holds, right?

Joseph Chalhoub

Yes.

Mark DeVita

Yes.

Michael Hoffman

Okay, okay. All right, great. Well, terrific news on the direction this is moving and good luck with the second half.

Greg Ray

Thank you, Michael.

Joseph Chalhoub

Thank you, Michael.

Operator

Our next question is a follow-up from Sean Hannan of Needham & Company. Your line is open.

Sean Hannan

Yes. Thanks for taking the follow-up here. I'm sorry if I had missed this here. So, where do we stand in terms of your pricing today through four weeks of the third quarter on the oil business side? How is that comparing to your average from 2Q and how is that comparing to a year ago? Thanks.

Mark DeVita

And this is Mark. We've just talked about relative to – or talked about spot, what it was, average spot price and the average for Q2 versus where it is now and it was in the high $0.20 a gallon improvement. So from a rough average of around $1.50, $1.52 to around $1.80, spot has come down a couple of cents a week the last couple of weeks. So, -- but it obviously had been going up considerably. So there's clearly some upside in pricing and the spread as long as the collection side of the business is constant in what we can expect for – I mean, what we've seen so far for Q3.

Sean Hannan

Right. Okay. So, when you say the $1.80 though is that -- we're saying that that is also reflective of being down slightly from some of the activity you've seen in spot last few weeks meaning that three weeks ago we were at about $1.85, $1.90.

Mark DeVita

Maybe not as high as $1.90 but…

Sean Hannan

Right.

Mark DeVita

In last year Q2 it's still $0.30 lower than where we were.

Sean Hannan

Right. Okay. Thank you.

Mark DeVita

Thank you, Sean. Thanks.

Operator

There are no further questions. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.

Joseph Chalhoub

Thank you.

Operator

You're welcome.

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