Heritage-Crystal Clean's (HCCI) CEO Brian Recatto on Q4 2017 Results - Earnings Call Transcript

Heritage-Crystal Clean, Inc. (NASDAQ:HCCI) Q4 2017 Earnings Conference Call March 1, 2018 10:30 AM ET

Executives

Brian Recatto - CEO & President

Mark DeVita - CFO

Analysts

Ryan Merkel - William Blair & Company

David Manthey - Robert W. Baird & Co.

Sean Hannan - Needham & Company

Brian Butler - Stifel, Nicolaus & Company

Kevin Steinke - Barrington Research Associates

Operator

Good morning, ladies and gentlemen, and welcome to the Heritage-Crystal Clean Inc. Fourth Quarter 2017 Earnings Conference Call. Today's call is being recorded. [Operator Instructions].

Some of the comments we will make today are forward-looking. Generally, the words aim, anticipate, believe, could, estimate, expect, intend, may, plan, project, should, will be, will continue, will likely result, would and similar expressions identify forward-looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward-looking statements. These risks and uncertainties include a variety of factors, some of which are beyond our control. These forward-looking statements speak as of today, and you should not rely on them as representing our views in the future. We undertake no 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 at www.crystal-clean.com.

With us today from the company are the President and Chief Executive Officer, Mr. Brian Recatto; and the Chief Financial Officer, Mr. Mark DeVita.

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

Brian Recatto

Thank you, Ashley, and welcome to everyone joining us this morning. Last night, we reported our fourth quarter 2017 results. Our diluted earnings per share during the quarter was $0.51 compared to $0.15 in the fourth quarter of 2016. Our revenues for the fourth quarter increased 8.5% compared to the fourth quarter of 2016 to $115.8 million, driven mainly by 9.4% growth in our Environmental Services segment. Mark will provide more financial details in a moment, but I would like to talk about various aspects of our business.

I would first like to discuss the results in our Environmental Services segment. From a revenue standpoint, I'm proud of the fact that we delivered on our projection of high single digit growth by the end of fiscal 2017. We, again, saw growth in almost all lines of business in the segment on a year-over-year basis, with the majority of the revenue growth coming from our aqueous parts cleaning, vacuum services and containerized waste businesses. This growth has been aided by continued focus on industrial customers, cross-selling initiatives and additional sales and service resources.

During fiscal 2017, we added 5 new branches. We also added sales and service resources such as branch sales managers, antifreeze sales and service reps, vacuum sales and service reps, ESP specialists and field services reps throughout 2017. The total cost associated with the new branches and resources added during 2017 was approximately $4 million from which we generated approximately $3.4 million in revenue during the year. We expect these resources will generate approximately $6 million in revenue and an able amount of cost during fiscal 2018.

Looking forward, we plan to continue to add new branches as well as sales and service resources in this segment. We estimate that we will incur almost $3 million of new cost for resources to be added during fiscal 2018. We anticipate these additional resources will generate almost $2.5 million of revenue during the year.

Our Environmental Services' operating margin in the fourth quarter of 2017 was down to 27.2% from 30.7% compared to the same quarter a year ago, in part because of the investments in new branches and sales and service personnel, which I mentioned earlier. These new resources contributed to the growth we achieved during 2017, and we expect an increasing amount of revenue as well as improved profitability from the same resources during fiscal 2018 and the years to follow.

Now I would like to talk about our Oil Business. While the fourth quarter provided higher base oil selling prices compared to the year-earlier quarter, our street price for used oil collection retreated for the fourth consecutive quarter. During the fourth quarter, our base oil netback increased $0.02 per gallon, but our street price declined approximately $0.05 per gallon compared to the third quarter of 2017. We continue to battle our competition for used oil collection in various geographic markets. During the fourth quarter, used oil collectors who sold into the RFO market benefited from continued tightness in the bunker and fuel oil markets. While the price of #6 oil relative to the price of WTI crude was flat during the fourth quarter compared to the third quarter, it was still above the range of 80% to 85% of WTI, which was more typical in the years past.

As a result, the higher price of RFO relative to crude oil allowed collectors who do not re-refund the used oil they collect to continue to be more aggressive than they might otherwise have been. During this competitive pressure, the efficiency of our used oil collection routes increased approximately 6% during the quarter compared to the fourth quarter of 2016.

We operated the re-refinery at a rate of 96% of our nameplate capacity during the fourth quarter compared to 91% during the third quarter. The increase in operating rate was due to the fact that during the third quarter, we had a planned extended shutdown to implement capital improvements to the re-refinery. We did not have a similar planned extended shutdown during the fourth quarter. As a result of the improvements implemented during the third quarter, at 100% capacity, the re-refinery is now capable of producing approximately 47 million gallons of base oil per year.

Due to this increase in capacity, we were able to produce a record 13.8 million gallons during the fourth quarter. This represents a 9.1% increase compared to the year-earlier quarter. While we are pleased with our operation of the re-refinery during the fourth quarter, the first quarter of fiscal 2018 has been challenging. As you may be aware, weather conditions in Indianapolis have been historically cold levels during the early part of 2018. These conditions have caused mechanical issues and unplanned downtime at the re-refinery. The unplanned downtime will lead to lower production and put downward pressure on our operating margin and the Oil Business segment during the first quarter. We estimate the negative impact will result in lower revenue between $2 million and $2.5 million during the first quarter and operating margin in this segment approximately 4% lower than the first quarter of 2017.

Fortunately, we've made the necessary repairs and improvements to the re-refinery, which allowed us to return to maximum production rates and should provide us the opportunity to make up for most, if not all of the production shortfall during the remainder of 2018. We have also improved our re-refinery staff by adding refining industry experience at both the management level and several supervisors who are already having a positive impact on our day-to-day operations. Combine this with lube-crude spread, which is at its highest level in approximately the last five years, and you can see why we are optimistic about our Oil Business performance moving forward.

Looking back on my first year as President and CEO of the company, I'm thrilled with the record-setting financial performance we achieved during 2017. Such a performance would not have been possible without the willingness of our employees to embrace change and work hard to further improve what was already a very successful company. It is this commitment and improvement that will propel us into continued growth and success during 2018 and beyond.

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

Mark DeVita

Thanks, Brian. For the fourth quarter, we recorded net income attributable to common shareholders of $11.7 million compared to income attributable to common shareholders of $3.4 million in the fourth quarter of 2016. As Brian mentioned earlier, for the fourth quarter 2017, we recorded diluted earnings per share of $0.51 compared to diluted earnings of $0.15 per share in the fourth quarter of 2016. Our fourth quarter earnings include a onetime adjustment of $0.27 per share, which was the result of the Tax Cuts and Jobs Act signed into law in late 2017. I will discuss this in more detail in a few minutes.

On a non-GAAP basis, excluding the impact of the income tax benefit recorded and adding back our onetime charges for site closure cost incurred during the quarter, our adjusted diluted earnings per share was $0.26. Please refer to our reconciliation of GAAP to non-GAAP supporting schedules in our press release.

In the fourth quarter of fiscal 2017, Environmental Services revenues increased by approximately $6.4 million or 9.4% from $68.3 million in the fourth quarter of fiscal 2016 to $74.7 million in the fourth quarter of fiscal 2017. The increase in revenue was due to increased activity at all the segment's businesses, except field services. The majority of the increase was due to favorable pricing and mix in our parts cleaning business and an increase in volume in our Containerized Waste and vacuum services businesses.

In the fourth quarter of fiscal 2017, Oil Business revenues were up $2.6 million or 6.8% compared to the fourth quarter of fiscal 2016. The revenue increase was due to higher selling prices for our base oil product, partially offset by lower used oil collection charges. Oil Business segment operating margin was 7.9% in the fourth quarter of 2017 compared to 4.1% in the fourth quarter of fiscal 2016.

During the fourth quarter of fiscal 2017, we sold approximately 13.6 million gallons of base oil compared to 12.7 million gallons in the fourth quarter of fiscal 2016. We sold approximately 3.8 million gallons of RFO during the fourth quarter, which was down 36% or 2 million gallons compared to the fourth quarter of fiscal 2016.

Turning now to income before corporate SG&A expense. Oil Business income before corporate SG&A expense increased $1.7 million in the fourth quarter from $1.6 million in the fourth quarter of 2016 to $3.3 million in the fourth quarter of 2017. The increase in the income before corporate SG&A was mainly due to higher revenue and lower maintenance cost due to less downtime at the re-refinery, partially offset by higher cost for the purchase of used oil feedstock. The fourth quarter of 2017 marks the seventh straight quarter of operating income in this segment.

Profit before corporate SG&A expense in the Environmental Services segment is $20.3 million. Our fourth quarter operating margin percentage was 27.2% compared to operating margin of 30.7% in the fourth quarter of 2016. Despite this year-over-year decline, operating margin in this segment was flat compared to the year -- compared to the third quarter of 2017. The factors which led to the decline in operating margin compared to last year were higher labor cost from the addition of sales and service resources, higher health and welfare cost as well as higher solvent and transportation costs, driven by the increase in crude oil price.

Our overall corporate SG&A expense as a percentage of revenue was 12.7% compared with 15.5% from the year-ago quarter, driven mainly by higher revenue, lower severance costs, lower incentive compensation cost and a decrease in our sales tax expense accrual, partially offset by higher salaries and wages. We continue to explore corporate SG&A expense cost-driving initiatives, and we expect to drive this expense lower as a percentage of revenue during fiscal 2018.

The company's effective income tax rate for 2017 was 17.3% compared to 31.8% in fiscal 2016. The decrease in tax rate reflects the impact of the accounting for the Tax Cuts and Jobs Act. As a result of the lower rates, which are part of the new tax law, the value of our deferred tax items was positively impacted, resulting in a onetime noncash increase to income of $6.2 million or $0.27 of diluted share during the fourth quarter of fiscal 2017. We continue to evaluate the impact of the Tax Cuts and Jobs Act on our company, and we expect that our future effective income tax rate will be in the mid-20% range. Fourth quarter EBITDA of $14.2 million was $2.8 million or 25% higher than year-ago quarter.

Turning to the balance sheet. Cash on hand at the end of the quarter stood at $41.9 million compared to $36.6 million at the end of the fourth quarter of 2016, and total debt stood at $28.7 million compared to $63.5 million 1 year ago. The increase in cash and decrease in debt is due to our record-setting cash flow generation over the past year. Our cash flow from operations for fiscal 2017 was $45.3 million, which represents the 19% increase compared to fiscal 2016.

We intend to use our excess cash balance to seek acquisition opportunities as well as pursue capital projects to help drive revenue growth and improve operational efficiency. We are currently pursuing multiple tuck-in acquisition opportunities, and we hope to close on several opportunities during 2018. We expect to increase capital investments to the mid- to high-$20 million range during fiscal 2018 to support various initiatives across the business.

I want to thank everyone for their interest in Heritage-Crystal Clean. Now 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.

Ryan Merkel

So I want to start off with the Environmental Services business. The growth there has been really solid. Can you just talk about sources of growth? How much did the auto end market grow? And also how much did the industrial end market grow?

Mark DeVita

Brian, this is Mark. We typically don't have that kind of detail by those areas, but I can tell you, within our lines of business, and we touched on this just generally, but give you more background. In parts cleaning, it was mostly price, and that's, again, are going to be clearly, well, equal across both automotive and industrial segments. We had basically about a 7% increase or 7.5% in parts cleaning business. We had much larger increases in our Vacuum and Containerized Waste businesses. Those were over double digit growth, and both of them is pretty much all volume. And Containerized Waste is a little more weighted towards the industrial segment versus the automotive. And vacuum service, again, would be fairly -- pretty much in between the parts cleaning and Containerized Waste businesses as far as mix of industrial versus vehicle maintenance. So hopefully, directionally, that at least gives you a little information.

Brian Recatto

And then, Ryan, it's very consistent with what we've talked about on prior calls. We've made a significant investment in resources to grow our industrial account base, and I take that as paying off. We added 20 sales professionals during 2017 mainly focusing on industrial customers.

Ryan Merkel

Got it, okay. And then for 2018, would you expect to get price in the Environmental Services segment again? And what would be the range?

Brian Recatto

Yes. We expect to get some price in 2018. We're shooting for a 4% to 5% price increase, this deck, in 2018. And we'll continue to add resources, as we talked about in our prepared remarks, and we're still pursuing that high single digit growth rate into 2018.

Mark DeVita

Yes. And across the lines of business, we'd expect it to reflect the distribution, at least the qualitative distribution I just gave as far as more in the parts cleaning side of the business and less in the 2 Waste, the Vacuum and Containerized Waste businesses.

Ryan Merkel

Okay. And then just lastly, just stepping back on the Oil Business. As you look at 2018, do you see the economics improving, ignoring the onetime impact in the first quarter?

Brian Recatto

Yes, we certainly see the economics improving. I mean, you're well aware of the recent virgin loop producers raising base oil pricing, which we're going to benefit from that. Typically, in the first part of the year, we see soft demand for base oil, we're not seeing that. You have the effect of the hurricanes, and last year, with the storms, the flooding. We've also had a pretty robust export market for base oil. So we're seeing supply/demand being fairly tight right now, which is leading to some strengthening of pricing, and we feel pretty good about where base oil is headed. Now on the flip side, as we talked about in our prepared remarks, used motor oils are going to be difficult, but we do see and expect that to ease up as we enter the busier seasons for oil changes. We also think we're beginning to see a lengthening of residual fuel on the Gulf Coast, which should strengthen our ability to hold our used motor oil price in a little more firm than we have, as you've heard in our prepared remarks, 4 consecutive quarters that we changed the pricing on used motor oil in a negative fashion. But we feel like it is going to begin to flatten out because crude is range-bound. So I'm very optimistic on the Oil Business going forward unless we get past these plant issues.

Mark DeVita

And if we did past our specific performance, Ryan, in base oil in Q4 2017, you can -- if you look at what the spot market did and how that moved, it actually moved up a fair amount more than the meager increase we had. And we've already kind of narrowed that gap, although they're temporary, a lot of it was contractual due to some of the force majeure that -- our pricing defect that was tied to some of these producers that couldn't change price. So long story, not as long, we didn't nearly demonstrate in Q4 what we can on the base oil side, not just in Q1, but as long as these -- the general conditions hold, there's a fair amount of upside to the base oil price.

Operator

Our next question comes from David Manthey of Baird.

David Manthey

First off, the $622,000 add back per site closure cost, is that you said was an unplanned shutdown over the re-refinery in the fourth quarter? Is that correct?

Mark DeVita

No, no. That relates to a facility that we're closing down, that we're closing our operations at. It's not the re-refinery, it's a facility on, on the East Coast.

Brian Recatto

And David, that was legacy FCC site that we acquired through the acquisition that we've decided to close, it wasn't strategic.

David Manthey

Okay. All right. So I think the last time you've added back a charge for the re-refinery was the fourth quarter of 2014. And when you look at the first quarter shutdown, was that significant enough that we would expect a charge add back in the first quarter? I know the fourth quarter '14 shutdown was like two weeks net of an insurance claim, but do you expect that in the first quarter? Or is it inconsequential?

Mark DeVita

I would think it's likely we'll call that out.

David Manthey

Okay. And then you said you plan on getting back -- yes, I'm sorry?

Brian Recatto

So David, we are operational. I mean, we shut down for a 20-day stretch but the plant is back operational today and performing well.

David Manthey

I didn't get that. So the re-refinery was down for almost 3 weeks?

Mark DeVita

Well, it was limping along. It wasn't down, down for that time, so it was just was underproducing. It works sometimes where it actually wasn't operating at all, but for much of that time, it was just not operating optimally.

Brian Recatto

In our prepared remarks, we talked about the weather issues. I mean, we had 10 days below 10 degrees Fahrenheit. We had multiple days below zero, so very tough conditions to operate a refinery. If you follow the industry at all, there were quite a few that were shut down during the first quarter due to weather issues.

David Manthey

Okay. And Brian, I think you said that you plan to make up that volume through the remainder of the year. Is that because during that shutdown, you were able to do some maintenance that will help you skip a planned maintenance later in the year? Or how do you plan on making up that volume?

Brian Recatto

Yes, we pushed off our planned shutdown in Q2, so that's part of it. As you know, we made operational changes to the re-refinery in Q3 of last year, which increased our capacity. The plant -- its practical capacity today is 47 million gallons. And if you've been on the call the past few quarters, I think we've talked about our production for 2017 was roughly 43 million gallons. We think we will beat that number in 2018 in spite of the issues we've had in 2018.

David Manthey

Okay, that's helpful. And then just thinking about the business overall. It sounds like you're optimistic on both sides of the business. But if you're looking at acquisitions, is there -- are you more interested in ES-type acquisitions than OB? Or are you equally interested as it relates to external growth?

Brian Recatto

Yes, I think we've been fairly consistent that we're going to focus our capital on ES growth. We love the Oil Business, love what we are, and we'll certainly -- we're not oppose to oil collections if it includes a significant piece of Environmental Services revenue, so we're out there actively looking for acquisitions. As you know from Q3 and 4, our conference calls, we have a dedicated resource now. We have quite a few opportunities in our pipeline, and we do expect to close acquisitions in 2018. And they will be more environmental-focused. I mean, we love the wastewater business, we love the industrial waste business, we like antifreeze, all the core services that we've talked about on this call that have been growing at nice double digit rate, those are the areas that we're looking for acquisitions.

Operator

Our next question comes from Sean Hannan of Needham & Company.

Sean Hannan

Sorry if some of this might be a little repetitive, not sure. Environmental Services, just trying to get a sense of what degree you might be implementing price increases here in '18 that were in play in that fourth quarter? And to what degree could that be consistent with historical increases or any changes in dynamics there?

Mark DeVita

Yes, we went through our normal process. They're normal, but I guess, historically, normal process in Q4, near the end of Q4, implementing and going out with the price increase. Maybe into the lower mid-single digits. We've been maybe a couple percent higher in some of the years past, but it's in line maybe 100 basis points or 150 lower than what we normally would do. And it really comes down to what the realization rate is. So the action is going to be the same as it's been in years past. And we would expect to see more price in the more mature businesses and less price in the ones that are growing more, presenting more opportunity for us. So as I kind of went over briefly with another caller, that we'd be more in the parts cleaning higher because we got about 7% growth, and it was basically all price in that line of business. And then it was much more volume, almost all volume in our Waste businesses, Containerized Waste and Vacuum. So we would expect to have still some price in those last two in 2018, that's certainly our goal, but more price in parts cleaning.

So I think the numbers were going out was around that 5% range. So we'll see what we realize. But to us, and just like it was in 2017, it's all about -- we're going to achieve high single digit top line growth. And we're not -- it's not as if we're not concerned or not aware of what that mix is, but we will balance that to make sure we achieve the growth while making sure we have margin targets. And I don't think we may be said it in our prepared remarks, but our view really hasn't changed from what we said more than a quarter ago, which is we're going to target to keep margins here especially since we're continuing to add resources or even the ones we've added last year are still in an immature phase that our margins will be in that flattish range borrowing, I don't know, big commodity swings that might make solvent cheaper or more expensive.

Sean Hannan

Understood. Very helpful. Yes. And some of that, I have gotten there, Mark. So then switching over to comments on re-refined oil. Brian, we heard the directional impacts of these, I suppose, the limping along per se. What would we be looking at here if we didn't have those hiccups? I mean, presumably, resin and margins should both be up here in the first quarter, although not sure to what degree. But I was hoping to get maybe a little bit of context as to where you're kind of setting the tone here for '18.

Brian Recatto

Yes, I'll let Mark talk to the numbers, but directionally, you're very accurate. I mean, obviously, our production is going to be off, and you're selling at a pretty good netback today, base oil selling prices are high, so it's definitely going to impact our first quarter. And you saw in our prepared remarks, we suggested that our Oil Business will be a little bit below where it was in Q1 of 2017 in spite of the fact that all the fundamentals are very positive in our favor today. So a little bit frustrating for us, but a bit of that plant quite a bit. It's an unbelievably difficult environment to operate a plant in when it's that cold. And as you heard from our prepared remarks, we made some nice additions to the plant. We're also going to bring in a world-class maintenance person to help us manage the day-to-day of that operation, to make sure that we continue to be as ratable as possible. And we had a very good year last year in terms of our base oil production, 43 million gallons in a great year, 45 million gallons is going to be good this year if we can get there, on a maximum capacity of 47 million gallons, understanding that you have to have scheduled downtime. We budget 35 days of scheduled downtime a year. So obviously, with impact of that in Q1, and we're going to try to make it up.

Mark DeVita

Yes, from a numbers standpoint, if you look at last year, Q1, and you know this is a seasonal business, and it's about -- I'll remind you that we had about 3.5% operating margin. And I would say, in optimal conditions for the Q1 season, that we would have expected to be a couple hundred basis points better than that. But clearly, we're unfortunately going to be going several hundred basis points the other way, as Brian alluded to, at least at what we estimated at this point. But if you go back and just think of, again, it's seasonally adjusted, but the dynamics of what's going on commodity-wise, our margin could have been north of 12% from a base oil standpoint if we would have been able to take more advantage of some of the spot price opportunities. Again, we had, with some force majeure and the way some of our larger contracts were written, which we fixed, by the way, we were kind of de facto tied to one producer instead more of a market price. So we fixed that. And I think that really gives you a glimpse of -- no again, that's Q4 seasonality, but that gives you a glimpse of, in the market conditions where we're at, what the business is capable of.

Sean Hannan

Okay, that's helpful. And then last question here following on in the spirit of the Oil Business. It sounds like there have been some comments here this morning where there are perhaps some glimmers of hope that -- and some of it might be in terms of -- well, tied to #6 pricing, whether we look at where some inventories of used oil might be and so forth. That relief didn't materialize in the fourth quarter. It sounds like there's hope that perhaps we are able to sustain a chart for oil. Two months into the year now, what evidence are you seeing of that? Is there perhaps any upside in being able to manage that input side of the equation and better the spread here, and particularly as we -- I suppose is we would lead into them this second quarter? But any more feedback we can get on that impact that's going to tie into the spread economics.

Mark DeVita

Yes. I think, again, it's thematically pretty similar to what we talked about as far as the production at the plant or even the base oil conditions. You can look at the same thing for #6 and its relation to some of the crude, for instance, is that it is improving, but this is a business you've covered us long enough to know that it's a business of lags. So we see that improving into the rest of 2018. But in Q1, again, that improvement, it didn't happen the first day of new year, number one; and number two, even if it did, usually there's a several months lag, as you know. But those lags are, they're pretty predictable, so we're very optimistic. So you got better operation post -- early Q1 at the re-refinery. You've got, I alluded to, the improved base oil market that we can now take better advantage of because of some of the changes we made contractually. And then we'll start to have tailwinds as far as pricing, we should on the Street, due to the outlet for our full markets getting a little more rational. So when you add those three together, it really is -- if you look forward, again, and forward meaning beyond at least the first two months of Q1, it really is a pretty good story. Certainly, a great story historically versus the way that segment's performed.

Sean Hannan

Got you. So as all that converges, the quarter-to-quarter uptick for June beyond just getting past the unplanned or issues in the production at plant, all this comes together, it's going to be a -- it's lining up to be a very substantial uptick for June results then potentially?

Mark DeVita

Yes.

Brian Recatto

Yes.

Operator

Our next question comes from Brian Butler of Stifel.

Brian Butler

First one on the fourth quarter results, did you see any benefit or any catch-up revenues associated with the hurricanes from the third quarter kind of getting pushed out? And could you just give some color on that, if there was any?

Mark DeVita

No, we had identified that in our third quarter call because, obviously, we're a month in into it then. It was -- it really turned out to be a loss for us especially from an Environmental Services standpoint because while there were some opportunities which we captured kind of post-hurricane and most of this is Harvey-related, there were branch shutdowns and downtime when the storm hit and was going through. So it really was a net zero effect pretty much for us.

Brian Recatto

Yes, we have not seen the residual effects into the first couple of months and this quarter from -- yes, I've heard on a couple of other calls that some manufacturing has shut down, but we haven't seen it. I mean, our branches that operate in a hurricane-affected areas have rebounded nicely.

Brian Butler

Okay. And then also on the Environmental Solutions, when you think about the target of bringing five new branches or new locations on, kind of an '18, how should we think about the pace of that timing-wise? Is that just going to be evenly, is the right way to think about it? Is it front and/or back-end weighted?

Mark DeVita

It's more back-end weighted. It's a good question for modeling purposes. So I would definitely put it at the back-end and we didn't even think of our branch count that we had in '17, a couple of those were basically had hardly an immaterial activity. So hence, the big -- if you go back to Brian's prepared remarks, obviously, you'd expect revenue to go up. But that's why some of the costs are going to be going up materially as well because they -- yes, there was barely anything in, the 2017 figures or some of these 2017 adds because they were [indiscernible] so it will be a similar [indiscernible].

Brian Butler

Okay. So do you do like a little bit of a benefit in the first half from the projects that were put in place in '17? And then, again, am I -- maybe I'm just thinking about it too much, but...

Mark DeVita

No. Yes. So the ones we just added at the end of '17 really had no benefit or impact, I'd say because, obviously, new branches are more negative than anything, you're getting revenue, but you have all the cost upfront. But you'll start to see them being more material certainly right out of the gate.

Brian Recatto

But certainly more toward the end of the year, as you know, starting up a new location , it takes some time to generate revenue.

Brian Butler

Okay. And then on the Oil Business, so your charge for oil, you're still in the positive and that you're still collecting fees, is that the right way to think about it? And how did the spread in general kind of end 2017 versus kind of the average you saw over the whole year? I mean, are you up -- is that spread benefit up, 10%, 15%? If I can get some color on that context.

Brian Recatto

Yes. I'm not going to talk to where we are specifically on our oil charges, but we expect -- if you're talking about what we expect to see in Q1, where we expect to see the spread improve, we're not going to give the range. We historically don't do that.

Mark DeVita

Well, it's going to be driven mostly by the top end [indiscernible].

Brian Recatto

Yes, base oil change.

Mark DeVita

I mentioned how we -- and it's really unusual for us because we have a great sales team. It was more of a contractual issue, but we lagged the -- in Q4, our base oil increase was pretty tepid. We lagged the market there. So there's pent-up upside, which we're starting to see already. So that's going to really drive the improvement.

Brian Butler

Okay. And then just one last one on capital spending capital. Can you give a breakdown on 2017, what was maintenance and growth CapEx? And I think for '18, you said there was $20 million for growth, did I hear that, correct?

Mark DeVita

No, we didn't specify for 2018, and we can get into that later. There's a myriad of projects, somewhat with re-refinery is about 40% of that number, another 40% in -- for our ES business, parts cleaning, some facilities, antifreeze, whatnot troughs, trailers, actually. And then we'll have a couple of million bucks at least maybe closer to $4 million in some other IP and other kind of general corporate numbers. That's kind of the breakdown of what we expect in 2018. We only had, I think, it was $14 million. Yes, so we had about $31 million in free cash flow in 2018 -- in 2017 total. But well, that $14 million was fairly well split between maintenance and growth.

Operator

[Operator Instructions]. Our next question comes from Kevin Steinke of Barrington Research.

Kevin Steinke

So on your last call, you had talked about targeting about $7 million to $8 million of cost reductions within the Environmental Services business during 2018. So just wondering what the progress might be on those and the timing of those as we move throughout 2018.

Brian Recatto

Yes, I think what we talked about was achieving a run rate by the end of the year, reducing those costs to that level. I still think we're on track. You may be a little high with your $7 million to $8 million. I think we had a broader range than $7 million to $8 million, but we're still confident that we can get the cost reductions out. It's important to us, as you all know, we are seeing a little bit of inflation on commodities, so we've got to drive those cost reductions to maintain our margins, and that's our plan. And it's mainly around logistics from the branch to the hub and the hub to the branches and to our end disposal sites. And we've got a few additional resources in our logistics group that are working those cost reductions.

Kevin Steinke

All right. And with the weather issues in the first quarter affecting the re-refinery, what would you expect the re-refinery utilization rate to actually come in around in the first quarter?

Mark DeVita

Well, it's certainly going to probably be a low for the last couple of years from a -- especially using our new -- I'll get technical, our new denominator because of the capacity, we're going to -- that we're at now, thanks to our third quarter improvement. But without getting too specific intentionally, I would say it's going to be probably in the 90-ish range, probably lower.

Brian Recatto

Just focus on the headline number, comparing the year-over-year production, we think we're going to -- we have a shot of beating last year's production because of the changes that we made in Q3.

Kevin Steinke

Okay, right. All right, that's helpful. And on corporate SG&A continuing to come down as a percentage of revenue in 2018, do you see that -- the potential for corporate SG&A also just coming down a bit on an absolute basis in terms of the quarterly run rate or the period run rate or however you look at it?

Mark DeVita

I don't want to get too granular during the year. Certainly, early on, I don't know that we'd see that in the first quarter or two. I think that potential was a potential for that by the end of the year, we still have some changes we need to make. And to be quite honest, we have things going in both directions, so we have a big initiative to drive more efficient processing a transaction, automate that mark. We've been pretty paper-based and still part of our business, and that takes money out of operating expense. It really adds to it at least some to it in our corporate SG&A line item. So with that balance, it's possible, but we're comfortable saying that we're definitely going to reduce it, or our target is, anyway, to reduce it as a percentage of revenue.

Kevin Steinke

All right. And then just lastly, any color on what the geographic dispersion of -- was of the branch openings in 2017? And also what you're planning for 2018?

Brian Recatto

Yes. The bulk of the branch openings are going to be in the Western half of the U.S. I'd rather not get into cities on this call for competitive reasons but the bulk of it is going to be on the West half of the U.S.

Mark DeVita

It was pretty. It was some Central, some East, some West for '17.

Operator

Our next question comes from Sean Hannan of Needham & Company.

Sean Hannan

Just a follow-up on a prior issue. I think that you guys had some ties to a particularly large rail carrier that was having some challenge there at the back-end of '17. And I think some of that may have lagged a little bit here into '18. Just want to see if we can get a follow-up on that, to what degree that's still affecting you guys. Is there -- are there any actions you're taking to further mitigate that? What color can you provide on that topic?

Brian Recatto

Much better performance by our primary rail carrier. I mean, you're well aware that they made a CEO change, and they're certainly becoming more customer service friendly since that date. We haven't had any residual impact moving into the first quarter of 2018. Obviously, with the plan to have them, its challenges in January. We certainly have had to increase the shipment of used motor oil to some of our depots in order to better position the product to get it back into our re-refinery when it was open because I certainly wanted the volume, and that's one of our goals this year is to fill up the depots. So we'll have some impact from additional transportation costs in the quarter, but that's factored into some sort of our prepared remarks.

Mark DeVita

Yes, and that's not a [indiscernible] issue.

Brian Recatto

No, it's not.

Mark DeVita

[Indiscernible] in-house issue.

Sean Hannan

Sure, understood. I'm sorry, go ahead.

Brian Recatto

It's good performance by our rail carrier, they're doing a much better job.

Sean Hannan

Great. Okay. And then last modeling question here. Mark, what we should we be thinking about in terms of taxes? Sorry, if that's a comment that you had in the very beginning of the call. Not sure if that was called out.

Mark DeVita

Yes. No problem. I mean, we don't expect to be a cash taxpayer for a federal income tax other than in the past, we've paid alternative minimum tax, it's been the only tax we've paid. The last several years, we still have a large NOL. And so we expect with the 100% expensing for certain qualified depreciable assets that is part of the Tax Cuts and Jobs Act that we're going to not eat too much into that and that should carry us through probably 2019 or most of 2019 from an effective income tax rate. We're still learning, like most companies. I mean, it was a fire drill with the timing of the passage of the new regulation. But I said in my prepared remarks, we don't have any better information at this point that we think our effective tax rate will come down from -- it's been in the high 30s to the mid-20s percent range.

Operator

And I'm showing no further questions in the queue at this time. With that, we will close to call. 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.