HCCI (2020 - Q3)

Good morning, ladies and gentlemen, and welcome to the Heritage-Crystal Clean Incorporated Third Quarter 2020 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 your questions. If the 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 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 a reconciliation of these non-GAAP financial measures to GAAP. For more information about our company, please visit our website at www.crystal-clean.com. With us today from the company are 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 Re

Thank you, Mike. Good morning, everyone, and thank you for joining us today. This morning we will begin with a quick update on the impact of the pandemic, discuss our third quarter results, and cover our fourth quarter outlook. During the third quarter, we continued executing the company's pandemic response plan to combat the COVID-19 outbreak induced business downturn and remain focused on ensuring the health and safety of all of our employees and their families as well as those customers we have come in contact with. To safeguard the well-being of our employees and decrease the spread of the COVID-19 virus, we continued to execute the following steps during the third quarter, provided additional personal protective equipment and sanitizers, utilized staggered work schedules to increase social distancing, allowed high risk or impacted individuals to work from home when possible, thoroughly cleaned and disinfected our facilities as needed, closed facilities temporarily as needed to prevent contagion. These steps along with the cooperation of our employees have allowed us to limit the number of confirmed or suspected cases of COVID-19 amongst our employees. During the third quarter, total loss time from employees off the job due to COVID-19 related health issues was approximately 3700 hours company-wide. Increased activity at our customers’ locations during the third quarter compared to the second quarter provided us the opportunity to exceed our expectations for the quarter. The sound execution of the pandemic plan, along with the support of our hardworking employees allowed us to take advantage of this opportunity and produce very positive results in both of our reporting segments compared to our performance in the second quarter. In the Environmental Services segment, we saw strong sequential growth led by our containerized waste and antifreeze businesses, which both posted double-digit percentage revenue gains compared to the second quarter. And our Vacuum Services business grew by 8.4% or almost $1 million on a sequential basis during the quarter. This growth along with a full quarter’s worth of cost control measures, such as employee furloughs, the elimination of certain positions, management wage reductions, and reduced travel expense allowed us to produce operating margin above our expectations for the third quarter. I would now like to spend a little time talking about our Oil business. During the third quarter, the demand for crude oil and finished lubricants began to recover from the lows experienced in the second quarter. However, overall demand for finished lubricants and the base oil required to manufacture them are still below prior year levels. This oversupplied market continues to put pressure on the selling price for our base oil. While pricing has strengthened compared to the second quarter, during our fiscal third quarter, the netback for our base oil was down by $0.62 per gallon compared to the same quarter last year. The pandemic continued to push vehicle miles driven lower as they were down double digits on a percentage basis year-over-year for the majority of our third quarter. Similar to last quarter, this may made the challenging conditions in the used oil collection market, which led to a decline of approximately 13% in the volume of used oil we were able to collect during the third quarter. However, this volume did represent a 29% increase in used oil collection compared to the second quarter. From a pricing standpoint, we experienced increased pressure on our charge to collect used oil, as previously idled re-refining capacity came back online and other outlets for used oil reopened. This increased demand for used oil feedstock during the third quarter and contributed to a decline in our street price of $0.15 per gallon compared to the second quarter. However, our charge for oil during the third quarter did represent a significant $0.32 per gallon increase on a year-over-year basis. With the rebound in activity off of the pandemic-induced lows of the second quarter, we are happy to report that we're able to run our re-refinery at capacity during the third quarter, and produced 11.4 million gallons of base oil which was slightly above our expectations. As we move forward, we estimate that in the fourth quarter the Environmental Services segment will see a very slight revenue growth on a normalized basis compared to the third quarter. From an operating margin standpoint, we believe the fourth quarter will continue to be challenging, but we are hopeful margins will be consistent with Q3 levels, despite the fact that we have furloughed workers returning in the fourth quarter. From an oil business segment perspective, we're experiencing lower seasonal demand for base oil in the beginning of the quarter. These factors will limit our ability to raise our base oil netback in line with recent posted increases from virgin [ph] producers. However, we expect our base oil netback during the fourth quarter to remain in line with the third quarter results. From a used oil standpoint, we expect to experience a slight deterioration in our charge for used oil, which reflects typical seasonality. While we believe we have seen the worst of the impact of the COVID-19 pandemic on our financial results, we are monitoring the situation closely. We are aware that daily COVID-19 infection rate in the US has spiked over 50,000 new cases several times over the past week or two. Increased COVID-19 infection results - rates could result in newer additional shelter-in-place orders which could negatively impact the demand for our services, the health of our workforce, and our results of operations, financial conditions, and cash flows. Even though we have found stability in our business, our results for the remainder of 2020 and into 2021 are still hard to predict at this point. However, based on our performance over the past seven months, the one thing I'm confident of is knowing all of our employees are determined to continue to provide the high level of service our customers have come to expect from us at a safe manner as possible. I'm also pleased that we're able to maintain a strong balance sheet with what we believe was a low point of the pandemic induced downturn and are in a good position to take advantage of the current market conditions. With that, Mark will take us through our third quarter financial results.

Thanks, Brian. Good morning, everyone. Revenue for the third quarter of 2020 was $87.1 million compared to $104.8 million for the same quarter of 2019, a decrease of 16.9%. Net income attributable to common shareholders for the third quarter was $4 million compared to net income of $6 million in the year earlier quarter. Diluted earnings per share were $0.17 compared to diluted earnings per share of $0.25 in the year-ago quarter. As Brian mentioned, we saw significant improvement in our business during the third quarter. We are encouraged by the sequential growth produced in both of our segments, resulting in an increase of revenue of $7.6 million or 9.6% from the second quarter of 2020. Moving now to Environmental Services. For the third quarter, segment revenues were $62.4 million compared to $69 million in the third quarter of 2019. The 9.5% decrease was primarily due to COVID-19 related volume declines in most of our product and service lines, partially offset by favorable pricing variances in our parts cleaning and containerized waste lines of business. On a sequential basis, we saw a 4.4% increase in revenue from the second quarter as our customers began to recover from the effects of the pandemic. Environmental Services profit before corporate SG&A expense was $14.6 million compared to $17.8 million in the year-ago quarter, but was $8.2 million higher compared to the second quarter of 2020. Operating margin for the quarter came in at 23.4% compared to 25.7% in the third quarter of 2019. While we didn't quite equal last year's performance, our third quarter operating margin was 9.4 percentage points higher than our second quarter results. Overall, we are pleased with the operating performance during this quarter, as the cost control initiatives Brian mentioned help us minimize the negative impact of the pandemic-induced economic conditions. Our Oil business segment revenues decreased 31.1% to $24.7 million compared to $35.8 million in the third quarter of fiscal 2019. As the COVID-19 pandemic continued to drive decreased demand for finished lubricants directly impacting both the demand and price for our base oil products. However, revenue increased $5 million, or 25.2% quarter-over-quarter as economic activity improved from pandemic-lows. Another sign of recovery was our 76% sequential increase in base oil gallons produced in the third quarter from the second quarter of 2020, with production being in-line with the third quarter of 2019 as the re-refinery operated at 100.9% of capacity. Operating margin for the quarter came in at 3.4% compared to 10.5% during the third quarter of 2019. But the segment's margin increased 31.6 percentage points from the second quarter of 2020. From a base oil standpoint, we sold 9.9 million gallons during the third quarter, and our netback increased $0.08 per gallon compared to the second quarter of 2020. Our overall corporate SG&A expense of $10.5 million decreased $1.5 million compared to the third quarter of 2019. The decrease is mainly driven by lower compensation costs due wage reductions, partially offset by higher severance expense. SG&A expense as a percentage of revenue is 12.1% compared to 11.5% from the year ago quarter, driven higher by the decline in revenue. EBITDA for the third quarter was $11 million, compared to $12.5 million in the year ago quarter, but up considerably from the $2.5 - $2.9 million a year for the second quarter this year. Adjusted EBITDA was $12.2 million for the quarter, compared to $14.6 million in the prior year quarter. The third quarter results represented a $14.9 million improvements over the second quarter. The company's effective tax rate for the third quarter of fiscal 2020 was 42.7% compared to 27.1% in the third quarter of fiscal 2019. The rate decrease is principally attributable to the opposing assessment of tax rate from the changes in year-to-date earnings. For the quarter, we generated $5 million in operating cash flow and $1.6 million in free cash flow and in the quarter $1.9 million higher than the second quarter with $52.7 million of cash on hand. Despite the continued challenges presented by the COVID-19 outbreak, we maintained a strong balance sheet and net cash position as of the end of the third quarter, and do not expect the impact of the pandemic to force us to exercise any portion of our revolving loan in the coming quarters. During the third quarter, we restarted our acquisition related activity, and we continue to explore several opportunities as we look to leverage our strong balance sheet to execute on potential deals, we believe can create value for our shareholders. In conclusion, we are very pleased with the quarter-over-quarter improvement in both of our segments, despite the challenges presented by the COVID-19 pandemic. This improvement would not have been possible without the tenacious effort of our employees, as they continue to provide our customers with the excellent service they come to expect from Heritage-Crystal Clean. We are cautiously optimistic that the upward trend in this recovery will continue and help everyone stay safe and healthy during these challenging times. This concludes our prepared remarks. I will now turn the call back over to Mike to take your questions.

[Operator Instructions] Your first question comes from David Manthey from Baird. Please go ahead.

Thank you. Good morning, guys.

Hi, David. How are you?

I'm great. Thank you very much.

Good.

So first off, thinking back to the last quarter, you were expecting ES segment profit to be up 200 to 300 basis points. Can you outline the sources of outperformance that you realize to get to the 940? Just what were the biggest areas of outperformance relative to your expectations 90 days ago?

Well, when we look at where we outperformed, you know, revenue was a little bit better than we thought, so that obviously helps leverage our cost. Solvent was better. Our costs in labor were better, truck and fuel costs were better. So it was, you know, a lot of different contributing factors, but those were the biggest. There's other smaller ones like healthcare costs, continue to be low.

Wage - waste internalization helped a little bit.

Yeah, waste internalization. So there were a lot of contributors, but the solvent and better management of machines and drums, labor, and the truck related ones are probably the biggest levers.

Okay. And then on the Oil business, similarly you expected some improvement? I don't know if you were expecting to actually turn a profit there. And assuming that you didn't, could you talk there too about the main sources that surprised you? I know you went through the netback and the CFO. But any details on things that just sort of went -- how you did not expect them to go during the quarter positively?

Yeah, David, I think we guided - our hope was that we would get the breakeven for the quarter. If I remember, our comments in Q2 -- if you remember in Q2, we were down -- for three weeks, we had an extended turnaround. We only produced 6.5 million gallons. We exceeded our production for the quarter, we had 11.4 million gallons for the quarter. Our CPG at the plant was almost a record. It was our second best performance since I've been here, and that’s 3.5 years. So we had outstanding production. We had really good utilization on the reduced number of route trucks that we had out there. Like there was a record utilization number for the quarter with our route trucks, so that helped as well. And it was really just a very clean operating performance at the plant level, and I commend our guys for we had an outstanding cost control with the plant for the quarter, and they did a hell of a job. That's the primary reason. You know, from a macro standpoint, Mark talked a little bit about the work that we've done on the fleet side. And we've reduced our, - you know, we kind of changed, philosophically. We've reduced our truck count by 120. We're not - we don't have a lot of spare trucks laying around. We're doing a lot better job on routine maintenance, so we don't have to keep the extra spares, but that's helping our margin performance in these lower revenue periods. So, pretty happy with our fleet group for the work that they've done.

Okay, sounds good. And then one last one for Mark. Could you walk us through any key considerations we should think about relative to the fourth quarter? I believe you have 79 days there, and just any modeling aspects we should keep in mind relative to this even more unusual period for you?

You know, I would - you hit on the key one, a lot of the things that Brian mentioned, and I even alluded to a little bit in our prepared remarks, speak to, hopefully, even or near even performance across the businesses, but that is the one nuance. This is once every six years, we have the 17th week. But from a modeling perspective, if you want to get granular, I think the key is that with that week comes holiday. So you know, even here internally, we typically only model a fraction of a week as far as extra business days. So if you - depending on how detailed you want to get, you or anyone else's buy side or sell side, that's modeling. I wouldn't do a full week, I do some fraction of that. Because they're normally - it's normally seasonally a downtime. And then when you add the fact that there's literally are a day or two, we're not even going to be operating. It certainly wouldn't be, let's say the equivalent of a five-day week in Q2 or Q3, that's for sure.

All right. That and that's a sales comment. Obviously, you're - you'll have expenses related to those days?

Exactly. Yeah. So that that adds to our efficiency challenges, whether it's, you know, well, on any of the route based businesses. The plant is still going to be -- the plant is operating 24/7 anyway at the re-refinery, I mean, so that won't really have an impact on that.

You know, for modeling purposes at the plant level, we're forecasting production 14.5 million to 15 million gallons for the quarter. Last year, I think we're in the low 15s, 15.3 [ph] If I remember.

Yeah. And when you think about where we're going to be versus Q3, I mean, we have to – we went through the same process, you're going to go through this. How much is this close to and we really - didn't really have any turnarounds in Q3, so we are going to have some planned downtime in Q4, it's such a long quarter. And we're not going to have the real long turnaround that we typically have this time of the year, because we took it in Q2 on top of just added shutdown. But that's one of the reasons why if you look, you know, sequentially with more time, while the number that Brian is alluded to is a little bit higher.

In addition to our…

Okay. Thanks very much.

Yeah, David this is our normal cleaning, and we're going to be doing some tank inspections which will impact the plant a little bit.

Okay. All right. Yeah. Thanks, again.

Thank you.

Thank you.

Your next question comes from Jim Ricchiuti from Needham & Company. Please go ahead.

Hi, good morning.

Morning. How are you?

Hey, Jim.

Well, thank you. Hope you guys are well. I am wondering if you could frame the COVID-19 impact in the quarter, maybe relative to fiscal Q2, just from the standpoint, I don't recall the employee lost time in Q2? And just in general, the tone with respect to overall volumes with customers? Is there any way that you can frame that?

I'll let Brian get to the overall tone with the customers and give you that macro overview. But from a pure time standpoint, we had talked about, you know, this time last quarter that we had experienced about 5000 hours, we're down to 3700. So Q2 from an internal standpoint was definitely better. From a pandemic impact, I will tell you early Q4, you know, just with the rising infection rates, we - while we're very comfortable with and we're getting really good at our practices at our facilities, there is some risk, we have to stay vigilant. You can see people in their regular everyday lives, and there might be some carryover to our employees. Our employees are somewhat of a microcosm of the population that they - maybe we will get last, we certainly hope not. But there could be - you know, we could start to get closer back to what Q2 was then Q3, but the time will tell, that's why it is a little tricky, looking forward to Q4. But I don't know Brian, if you want to speak more to macro impact of the pandemic on the customer base.

Yeah, I mean, obviously, we're in contact with our branches on pretty routine basis. You read the economic indicators like we do. You know, manufacturing is down 7% compared to the pre-pandemic level. So that's certainly rolling through our branches. Customers are cautious. I mean, they're certainly worried about the potential - further slowdown because of increased COVID cases as we enter the fall season. But overall the mood at the branch level, at the customer level is positive. I mean, we'd love to see therapeutics and vaccines finally make their way into the marketplace as we get deeper into this. And we would love to start next year with renewed activity. But overall very positive, our workforce is positive. I think we had - as we put in our prepared remarks, 3700 hours of COVID case, our losses, but our employees as we said in our remarks, I mean, very gritty, they've worked extremely hard, they battled through this. I think we've been able to capture some market share from our customers, because we didn't furlough as many people early. We've not had any service failures. So overall, very pleased with where we are. And beginning to see some optimism from our customer base. You know, unemployment either [ph] you saw the numbers this morning, the numbers came at higher than we expected, we got 13 million [ph] people unemployed, let's hope that Congress gets up and pass and we could get the money flowing in the fall. PPP helps for sure. So we're a bit worried about that.

And I think some people have also mentioned Jim that - just found this out, was, you know, they alluded [ph] to or look at vehicles miles driven, we also look at that. I only been able to get through July numbers, but with our quirky calendar, that's a good chunk of at least half of our quarter. And you know, I think it was about 11% year-over-year only down. That is a little bit more, but is not too off of - too far off of what ES our business is off. We do a lot of non-vehicle maintenance customers. So it's not a complete apples-to-apples view. But you got producer [ph] price index, I think the last two months sequentially, July to August and August to September I think it's in total up close to three quarters of a percent. So it's, you know, I think going into its fall cycle, times are good, but there is still the specter of the pandemic.

And car sales are up quarter-over-quarter, you probably saw that number roughly 30% quarter-over-quarter, which is a good thing for us. I think the pandemic will certainly cause people to not utilize mass transit, at least until the vaccine and therapeutics are out there. And we'll see increase car traffic, as we move deeper into this, lot of people are traveling by car, I'm noticing that in our community, we're almost back to normal.

Got it. And follow up question is just I am wondering how we might be thinking about some of these temporary cost actions that you took Mark and how that begins to layer in the current quarter and maybe even early next year? I don't know if there's any additional color you could provide on how we think about that? Thank you.

Yeah, you know, as we've dug into it more, when we're preparing not just for our forecast, and the rest the year, our budget, whatnot, I'm pretty optimistic. We've done intentionally, what we've had at furloughs both in the support roles, corporate, back office stuff, and in our field personnel. We've done some things to try and keep people not literally home, but you know, protect their income. We have a lot of people in the fields that are commission based. And a lot of that commission obviously is tied to revenue. So when that's down there's a domino effect there. And when you really look at the actual dollars, that we’ve saved at least at the field level have - you know, we haven't had giant savings. In other words, they're not embedded in Q3 as it sounds, you know, fantasy land type result, that's ultra low cost. So we're pretty optimistic, the longer we looked at it that, those types of things aren't going to be as big a headwind to say, even though we are maybe bringing back few people or doing things to restore pay. On the support side, we also have formulas that we have changed that will probably start to morph back to what our normal commission formulas were. So, all in all, I think we're in decent shape. There's still going to be some headwinds, but they're not as strong as you might think.

Yeah. I agree with that. Structurally, we have made a few changes. We rationalized some antifreeze capacity, which will certainly be a permanent structural change. And that was something we plan to do, regardless of the pandemic. We had too much out of reach capacity with the recent acquisitions that we've done over the last 18 months. I mentioned waste internalization, I mentioned the rationalization of rolling stock, all that was in the works and it's starting to show up in our performance.

Got it. Thank you. Congratulations on the improvement versus the prior quarter.

Thank you. Thank you.

[Operator Instructions] Your next question comes from Kevin Steinke from Barrington Research. Please go ahead.

Hi, Kevin.

Hey, good morning.

Good morning.

I'm just wondering how you're thinking about price increases in the Environmental Services business as you know start to approach that time of the year, if they might be a little more muted than normal in this environment or what kind of - what's your thought processes there?

Yeah, I'll tell it from a macro standpoint and then Mark can maybe get into more specifics. We actually had a meeting to discuss pricing yesterday. Certainly with, you know, inflation we're seeing in it with our insurance cost, health care cost. We're certainly going to push a price increase to the marketplace. We're not going to talk specifics on this call. But we'll get that done in Q4. It will be probably a slightly muted compared to where we were in past years driven by the need to support our customers. I mean, there's a lot of angst out in the field at a smaller manufacturing level, especially given that we call on. So we're going to be – we’ll be muted, but we're going to get out of price increase, its certainly going to cover the inflationary pressures that we're going to feel moving into 2021. So it'll be a net positive to our performance.

And I think we're going to take from a tactical standpoint, take on approach that we haven't always taken, we did some of this last year, focused on those customers that may be we more aggressively priced in the past to try and target, maybe waited a little more towards those customers. I think it's instructive to think back during the Great Recession, and what, if you remember what we tried to do back then, I don’t know if we talked about it, but we tried to actually do to [ph] price increases. You've covered us long enough to know we have the normal cadence of around, you know, in the early November timeframe, typically, but definitely in the fall. We're typically doing something across the board. And we tried to do something mid-June then, and it didn't go so well. And we tried to be extra aggressive. So to reinforce you know, what Brian's comments really are informed by what's happened before what we have tried, and what has worked. So we're pretty comfortable with the strategy we have for this year.

Okay. That's helpful color. I wanted to talk too about the acquisition pipeline, you mentioned, you continue to pursue acquisitions. And just in this environment, if you know, what you're seeing in the pipeline and the willingness of targets to engage as things - are things kind of picking up in this environment? Are they slowed, or just maybe any characterization of the overall pipeline?

Yeah. They've certainly picked up. Obviously, April, May, very slow. I mean, with EBITDA, and free cash flow beginning to improve for the targets, we're certainly seeing renewed opportunities. We've got a long list of a great pipeline. And our hope is over the next six months we can close a couple of nice tuck-in deals that give us a little bit of route density in parts of the country where we need it. So we're optimistic and Mark is as close to it as I am. So he can comment if he wants, but very optimistic that we'll get some deals done. And the pipeline is good and lengthening. And we've got specific targets that we're looking for based on where we want to grow the business. And I think you guys know where my head is. We were very comfortable with our ability to go out and collect used motor oil organically. We're focused at our acquisition efforts on ES type services and then continuing to improve our route density in markets where we don't have it. It's tough for us to make money without it.

Okay. Yeah, that's great. That's all I had for now. Thanks for taking the question…

Okay, good. Thank you. Thank you for calling in.

Thanks, Kevin.

Sure.

Your next question comes from Michael Hoffman from Stifel. Please go ahead.

Brian, Mark, glad to hear you're doing well.

Yeah, we were wondering if you we're going to call in.

We were there, your operator gave me hard time. So everybody is been trying to work their way around how to model this at this point. And when we grossly over simplify, if we took 3Q and did the classic divide by 12, and then multiply by 16 times something, we're going to land in about where you think you're going to be, is that what we're hearing revenue wise…

Yeah. I think…

That way there's not too much brain damage for you and Brian.

No, no, but it's so - you know, we're simple people sale side [ph] guys, right.

I think you heard in our macro comments that we think we'll see some slight incremental revenue growth. We've been ramping up our quotas. It's going to become even more challenging. We're a bit worried about economic conditions, macro conditions, not knowing where this thing's going to go in the fall. Overall, the most positive we're seeing an improvement every period. So like, here you’re good the [ph] model of the way your model.

And then how do we think about the margin profile against this, your own efforts to manage your cost structure? There's nothing like a crisis to draw attention to costs and you pull things out that maybe you didn't think you could and now you have? How do we think about that margin profile as we move into the fourth quarter? Do we hold the margins from 3Q or do we have to give something back because you've taken some downtime or seasonal issues in oil? Help us out there a little bit?

Yeah, let me give you my perspective. And it'll be from a macro standpoint, Mark can chime in. And I'm certainly thinking flat when I look quarter-to-quarter. Obviously, we're going to see some increase costs as we begin to bring back employees. And we're bringing back employees because we're seeing improving conditions out in the field, improving route density in certain marketplaces. So we're being strategic as we bring these people back. So that'll be a headwind. But we'll also have a revenue on the flip side that's going to improve it. And I think as you look at us as a company, we've had some overall structural improvements that have been in the works for years and are beginning to show up in our performance. And, you know, even as you rationalize equipment, you have cost associated with rationalizing equipment, you ultimately get rid of the equipment, and that starts to flow through the income statement. I think we've done a better job on maintenance. We're doing a better job running our plants. We're doing a better job with uptime, you know, scheduled uptime and unscheduled downtime at the re-refinery, which improves our CPG. If you look at the structural changes in oil, we've seen a CPG improvement in 3 years that's meaningful, which allows us to make money in a shitty spread market that we're experiencing right now, which is - I can't tell you how proud we are that we were able to be gross margin positive at the re-refinery in some of the worst conditions we've ever seen, at least that I've seen as CEO. So I'm – we’re thinking flat quarter-over-quarter with the give and takes. And I'll let Mark, give some facts around that.

I mean, from and ES standpoint, I really think the ability to get to around the same margin is there. I mentioned that, you know, for all the initiatives we've done, part of the – are one of the best initiatives that we did do is trying to keep our people motivated and have modified programs, it wasn't just hey, you know, what you're on this pay program with just as much commission and the revenue goes down, you're going to lose every dollar of that. So the fact that we help, you know, flustered [ph] staff a little bit for them in the longest, then you can kind of peel that back and business comes back and that isn't that big a struggle, but it really is about the longer term benefits that are completely coincidental, as far as the pandemic is concerned, as Brian mentioned that as they continue to bear fruit, those you know some antifreeze out [ph] relations internalizing ways. Those are the incremental ones are our truck costs. Yeah, those are all contributors, and those are ones that can continue to contribute.

Okay. So…

And Mike, I’ll talk about oil. In terms of third party supply, I think, you know, we collect 75% plus of our own internal supply to the plant. We're seeing some improvement in third party gallons. RFO demand is down a bit. And I think from a macro standpoint or structural change standpoint, although we're not seeing any real benefit from IMO 2020. The whole complex is a mess. You don't need to dislodge [ph] You're not producing jet fuel. You don't have strong - real strong demand for these aggregators that are pulling together used motor oil to blend for offshore location. So I think we'll see structurally some improvement in our ability to collect gallons at a cheaper price from third parties as we move in the market. Hopefully, the industry will continue to be disciplined and will continue to charge for oil which we're going to have to do in this flat crude oil marketplace. And we can continue to see stable spread conditions. At some point base oil is going to move in a better direction, it has to.

Yeah, I mean, its the minor piece that Brian mentioned are all, I'll give you the numbers, year-over-year we're down about 38% in volume sales in Q3. And we're pretty much flat lived [ph] with what we told in Q2 is like 2.3 million gallons, so.

Okay. And then I understand hypotheticals are always a risk. If the world you live - we're going to live in 2021 is 90% of long-term average VMT. So, you know, that's where we're driving, that 10% less, and that's sustainable. Can we get back to a conversation of better than middle single digit organic growth in ES? And then, you know, the assumption is, the base oil market always does rebalance. It's a matter of time. And so by ‘21 we'll have found its rebalancing point. And whatever the spread is, it's always stable. And therefore that business will be easier to model as a result. Can that conversation actually happen in ’21 if it's 90% of VMT?

Yeah, maybe in the optimist, I'd like to think that we can get there. I mean, I obviously - we're worried, you certainly heard that in our prepared remarks. I mean, none of us can know what the future looks like in 2021, and where this pandemic is going to go. But I certainly think that we can go out and capture market share. It's not like the industry was growing all that much before we were able to get the double-digit growth in quarters. I’d like to think we can get to mid single digits. We've got a pretty motivated workforce. Our pay structure is geared toward helping us with organic growth, because our guys are commissioned. And we're going to work as hard as we possibly can to get back there. And then we'll layer in the organic, and we'll lay in the inorganic, the acquisitions, which we've been successful with and like we'll continue to have success with. So I'm pretty bullish on next year, you know, provided we don't see the pandemic eat back up, and we had more recessionary conditions.

And the bigger risk around that is government - state level government shutdown versus…

Correct…

People just getting ill. I mean, if we don't shut anything down, like we did in the spring, then we've hit some kind of status quo, at least some, you know, whatever the threshold is. That's the bigger risk is does somebody shut down your customer.

Yeah, I agree.

That severe, you know, it seems like the severity of illness, or the way we're able to treat it is getting better. And as long as that doesn't take a step back, because people are more comfortable, and no one wants to get it. But you get a sense that people are fearful, depending on if they have the existing conditions or a higher risk. That it’s an illness no one wants, but it's not life threatening for a mass majority of the population.

And, Michael, I don't think people are going to and made this comment earlier on, I don’t know if you heard it, but I don't think people are going to jump right back into mass transit. I know I haven't. And I think you'll see - you've seen car sales up. I think you'll continue to see that, which you know, a big piece of our business is automotive related. So a little bit optimism there. The number of cars will increase because families are going to have to buy and own. And I'm thinking about it.

Yeah, I mean, we were at long-term average car sales in September at almost $16 million, which is, you know, considering…

Yeah…

Up from 14 and change [ph] used car prices are as high as they've been in a long time. So all that speaks to what you're saying. Just to remind us in ES what's the rough percentage transportation driven, service intervals versus in manufacturing industrial service?

It's about 50-50.

Yeah.

Okay. Okay, thank you very much for taking the time.

Thank you, Michael. Thanks. Take care.

Your next question comes from Gerry Sweeney from Roth Capital. Please go ahead.

Hi, Gerry. How are you?

Good morning. I'm doing well. How you guys doing?

Good.

Brian, you sort of touched upon this and this was really my question, was just curious about the oil market. Obviously a lot of dislocations you know, less jet fuel. The whole as you said market is maybe in turmoil or disarray…

Yeah.

And you also mentioned taking market share, et cetera. Any insight as to any structural changes that may come out of this that may benefit you or i.e., maybe some small collectors going out of business, you can fill that gap or even negative headwinds that you may be facing with the market. Air travel could be down for an extended period of time, et cetera. And then you also have this you know, IMO 2020, I dare ask how that actually even fits into the equation anymore?

Yeah, I think structurally, we may have even mentioned it on the Q2 call. We have seen some smaller collectors, parked trucks and go out of business. I can tell you that they're not going to restart at market conditions, the RFO market improves. What we have seen some improvement, as I said in the third party supply, a lot less competition out there, less ability to move the RFO volume to other outlets. The aggregators are not playing in this space, because of what we think will be the long term impact of IMO 2020, and the ships not being able to burn that material anymore. So we do think structurally we'll continue to see improvement in that part of the business which will aid the re-refiners, so we haven't changed our thinking in terms of the long term benefit of IMO 2020. We just have to see the complex get back to more normal conditions. I mean, there's no shipping traffic out there. There's no demand for dissolute [ph] So a lots going to happen over the next six months. So I think, probably premature for me to answer that. But I do think that third parties are going to be hard that are not tied in the re-refiners because the RFO markets are tricky. And that will help us near term. And then I do think long term, we'll get some benefit out of IMO 2020. As we've consistently maintained because of what it's going to do to the aggregators, the people that were collecting to used motor oil and competing with us. I don't know if I answered your question.

No, it's helpful. I mean, it's tricky. It's hard to see if you had a little bit more insight than I do, obviously. And then another just high level question and this is just more out of curiosity to some degree. But you know, are any markets doing considerably better than others? And part of the reason I ask is, you know, almost a benchmark for going into the winter and maybe tracking how some of this COVID infections rise and fall, just curious if some areas are doing better than others, in terms of…

You know, it's funny, we talked about that, as we prepared our price increase, thinking and working on budgets. It's been bouncing all over the - we operate regionally. And it just all depends on where the COVID case count is increasing. That's where the markets are feeling the impact versus improving. You know, the early part of the pandemic, we were struggling in the northeast. Obviously, they did a great job of locking down and improved conditions in northeast picked up. We started seeing hotspots in the south and we started struggling in south. So it's kind of been bouncing around regionally. But overall, I mean, I think most people are becoming used to having to deal with it on a day to day basis and things have kind of leveled out regionally. I'm not seeing it bounce around as much as it was.

Yeah, that's helpful. I mean, it's very regional. And when you live in the northeast, it's hard to see what's going on Florida, California. And it's helpful to understand that perspective. So I appreciate it. That's it from my end.

Okay, good. Thank you very much.

That was our last question. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.