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Heritage-Crystal Clean Inc (HCCI)
Q3Â 2019 Earnings Call
Oct 17, 2019, 10:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, ladies and gentlemen, and welcome to the Heritage-Crystal Clean, Incorporated Third Quarter 2019 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 on 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, tax, depreciation and amortization, or EBITDA, and adjusted EBITDA are non-GAAP measures. Please see our website for 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'd like to turn the call over to Brian Recatto. Please go ahead, sir.
Brian Recatto -- President & CEO
Thank you, Catherine. And welcome to everyone joining us this morning. I will begin with a brief review of our performance during the third quarter and Mark will provide more details regarding our financial results. Following Mark's presentation, we will open up the lines to take your questions.
I'm pleased to share with you that we reported third quarter revenue of $104.8 million, which compares to $99.7 million in the third quarter of 2018, while net income was $6 million. From an earnings per share standpoint, we recorded diluted income per share during the quarter of $0.25 compared to diluted income per share of $0.27 in the third quarter of 2018.
Turning to our Environmental Services segment performance, I am pleased that we delivered 8.9% revenue growth compared to the third quarter of 2018. This marks the seventh consecutive quarter of at least high single-digit revenue growth in the segment. Overall Environmental Services revenue growth was 12.4% after adjusting our third quarter 2018 results for a large field services project.
One of the contributors to our revenue growth has been the addition of new sales resources and branches. Through the first three quarters of 2019, we generated $6.2 million of revenue, and incurred $5.2 million in operating cost related to investments in new field sales and service resources and new branches opened during 2018.
If we continue on our current pace, we would expect new sales and service resources and new branches added during 2019 to collectively add $8.7 million in revenue and $6.8 million [Phonetic] in costs for the full year 2019.
Our Environmental Services operating margin in the third quarter of 2019 was flat at 25.7% compared to the same quarter a year ago. While we were able to achieve cost improvement in a few operating areas, which Mark will explain in a minute, these improvements were primarily offset by unusually high healthcare cost incurred during the quarter.
Now moving on to our Oil Business. In the third quarter of fiscal 2019, Oil Business revenues were down $0.5 million or 1.4% compared to the third quarter of fiscal 2018. The decrease in revenue was driven by a decrease in the selling price of our base oil, partially offset by an increase in the volume of base oil gallons sold.
Our base oil netback decreased by $0.22 per gallon during the third quarter compared to last year, but increased $0.08 per gallon compared to the second quarter of 2019.
Our rerefinery continued operating effectively at 108.3% of base oil capacity, as we produced 11.7 million gallons of base oil compared to 11.2 billion gallons during the third quarter of fiscal 2018, an increase of almost 4.5%. On a weighted average basis, we were still in a pay for oil position for the third quarter as a whole. Our average pay for oil increased $0.02 during the third quarter compared to the second quarter of 2019 and decreased $0.17 per gallon compared to the third quarter last year.
Currently, the base oil market is oversupplied and all signs point to the situation continuing for the remainder of the year. Driven by the seasonal oversupply, we expect downward pressure on pricing by the end of 2019. The beginning of the fourth quarter has not provided any meaningful improvement in used oil collection cost. Even though the price of HSFO has been as low as 73% of WTI crude recently, there have also been times in the past month when HSFO pricing has been above the price of WTI.
As of yet, we have not seen any buildup of used oil inventories in the marketplace and the HSFO price volatility has not supported lower feedstock cost relative to crude pricing. However, we do expect used motor oil to lengthen as we get to the latter stages of the fourth quarter. From a rerefinery perspective, we continue to focus on improving our programs in the areas of mechanical integrity and the inventory of key spare parts and equipment.
The recent improvements we've made at the rerefinery should once again allow us to increase our nameplate base oil capacity to approximately 49 million gallons annually beginning in 2020. In regard to IMO 2020, we continue to believe this initiative will improve both the feedstock and finished product portions of our spread.
While we anticipate seeing some of the effects from IMO 2020 prior to the end of 2019, we are not certain as to the exact timing or magnitude of these impacts. For now, we will continue working diligently to operate the rerefinery efficiently and manage our spreads as effectively as possible.
However, if we do not see positive impacts from IMO 2020 before the end of 2019, we could see some spread compression during the fourth quarter in our Oil Business segment. This spread compression coupled with our schedule fall turnaround could increase pressure on operating margins in the quarter.
From an Environmental Services segment perspective, we continue to see momentum that we believe will support high single-digit organic growth during the fourth quarter. From an operating margin perspective, while we do not expect to incur multiple high-dollar medical claims during the fourth quarter as we did in the third quarter, we still need to work to overcome our property and casualty premiums to restore our margins back to the 27% level.
As we look toward 2020, we believe implementation of a price increase as well as capitalizing on cost improvement opportunities such as expanding our internal waste management capabilities and improving management of our internal fleet will help us produce annual operating margin in the 27% range for the year, despite expected higher healthcare premiums and other inflationary pressure.
With that, Mark will now walk us through our third quarter financial results in more detail.
Mark DeVita -- Chief Financial Officer
Thanks, Brian, and good morning everyone. I'd like to begin with our Environmental Services segment. In the third quarter, we posted segment revenues of $69 million compared to $63.3 million in the third quarter of 2018. The 9% increase in revenue was driven by growth in most of our product and service lines with vacuum, containerized waste, parts cleaning and antifreeze businesses all contributing to our growth.
The growth in our parts cleaning business was due to improved pricing compared to the year-earlier quarter. The growth in our vacuum business was volume driven and the growth in our containerized waste and antifreeze lines of business was result of both volume increases and price improvement.
Overall, antifreeze business growth was primarily due to an acquisition we made during the first quarter of 2019. Revenue from this acquisition was approximately $1.2 million during the third quarter. Our overall same branch revenues grew approximately 8.9% on a year-over-year basis during the third quarter. Organic growth after adjusting for the field services project Brian mentioned earlier was 10.5% during the quarter.
Moving on, profit before corporate SG&A expense in the Environmental Services segment was $17.8 million compared to $16.2 million in the year ago quarter. Operating margin came in flat compared to last year at 25.7%. Our segment operating margin fell short of expectations primarily due to higher-than-expected healthcare costs during the quarter, including [Phonetic] almost 1% of our operating margin.
We also experienced an increase in non-healthcare insurance related claims costs compared to the third quarter last year. This offset some improvements we realized in disposal costs and fleet related cost during the quarter.
In the Oil Business segment, we sold approximately 11.1 million gallons of base oil during the third quarter of 2019 compared to 10.5 million gallons during the third quarter of 2018, an increase of almost 6%.
Profit before corporate SG&A expense in the Oil Business segment decreased $0.6 million in the third quarter as our operating margin percentage fell from 12% in the third quarter last year to 10.5% this year. The decline was due in part to our base oil netback falling further than our pay for oil during the third quarter, which led to a compression of our spread.
Additionally, we experienced higher transportation and catalyst costs during the third quarter compared to the third quarter of 2018. Moving on to corporate SG&A expense, overall corporate SG&A expense as a percentage of revenue came in at 11.5% compared to 11.4% from the year ago quarter, mainly driven by higher bad debt expense, salaries, and employee benefits, partially offset by lower legal fees.
The company's effective income tax rate for the first three quarters of fiscal 2019 was 24% compared to 24.3% for the first three quarters of fiscal 2018. Third quarter EBITDA was $12.5 million compared to $12.7 million in the year ago quarter. Adjusted EBITDA for the third quarter was $14.6 million compared to $14.1 million in the third quarter of 2018.
As Brian mentioned earlier, income per share on a diluted basis was $0.25 during the third quarter. On an adjusted basis, excluding the impact of asset write-offs and others plant closure costs primarily related to former FCC Environmental locations we acquired back in late 2014, income per share on a diluted basis would have been $0.28.
From a balance sheet perspective, cash on hand at the end of the quarter was $59 million. We generated $11 million in cash flow from operations during the quarter compared to $10.2 in the third quarter of 2018. Total debt remained steady at $29 million year-over-year.
We continue to work on identifying opportunities to deploy our excess cash, focusing on potential acquisition targets and organic growth initiatives we feel will improve our business and help drive value for our shareholders. At the end of the third quarter, we hired a new director of M&A and are confident that filling this well will help us achieve our goal of producing more meaningful acquisitions in the future.
In conclusion, we're pleased with the solid third quarter results in our Oil Business segment and look to continue our strong revenue growth in the Environmental Services segment for the remainder of 2019.
Thank you for joining us today. I will now turn the call back to Catherine to take your questions.
Questions and Answers:
Operator
Thank you.
[Operator Instructions] Our first question comes from Michael Hoffman with Stifel. Your line is open.
Michael Edward Hoffman -- Stifel, Nicolaus & Company, Incorporated, Research Division -- Analyst
Hey, Brian, Mark. Thanks for letting me ask some questions.
Brian Recatto -- President & CEO
Hi, Michael.
Mark DeVita -- Chief Financial Officer
Hey Mike.
Brian Recatto -- President & CEO
How are you?
Michael Edward Hoffman -- Stifel, Nicolaus & Company, Incorporated, Research Division -- Analyst
Good. Can't complain, what's the point anyway. On the ES business, can you help us understand what is -- it was really confined to the third quarter because you had, I'm assuming claims based incidences and you're self-insured like lots of people, and so that's what drove that up to isolate it, so we see where your operating leverage was and then help us understand the point you're making Brian about you still got some work to do on property and casualty rates, so we figure out how to balance this out. That's question one and then I'll come back and ask an oil question.
Mark DeVita -- Chief Financial Officer
From -- as we alluded to in a little bit of detail, that the big, I would say miss versus getting in that 27% range as far as operating margin performance was mainly due to we had multiple cases that pierced all the way up into our stop-loss. So that's not something we're used to seeing. That was in the third quarter. So we don't think --
Michael Edward Hoffman -- Stifel, Nicolaus & Company, Incorporated, Research Division -- Analyst
Hey Mark, can you get closer to the speaker, you're really hard to hear.
Mark DeVita -- Chief Financial Officer
Oh, I'm sorry. How's this?
Michael Edward Hoffman -- Stifel, Nicolaus & Company, Incorporated, Research Division -- Analyst
That's all right. Better.
Mark DeVita -- Chief Financial Officer
Better, good. So we had multiple claims in one quarter that got up to our stop-loss loss coverage and pierced that which is not typical for us at all. And we don't expect that to recur based on our historical experience. We will see not so much until 2020, we will see higher premiums as a result of that, but there is somewhat of a bubble there as far as that portion of higher cost, the actual experience there. And then we had other insurance claims, nothing to do with healthcare, just for different recurring spills and other things that when you look at what the headwinds were with albeit much more -- or much smaller than the healthcare was probably the next biggest discernible piece of the headwind there. So are we going to continue to have occasional spills in this business? Yes, you're going to have that. So that's something that while worse on a year-over-year basis in Q3, is there improvement to be made there, probably, but it wasn't the big driver here as it was mostly the healthcare costs.
Brian Recatto -- President & CEO
Yeah, as we look out into -- as we look out into 2020 Michael, you're well aware that healthcare costs are going up. So our comment around 2020 was just to that impact. We do expect premiums will increase in 2020. We could drive some of that to our employees, but it's a tough higher-end market. We probably will not elect to do a lot of that in 2020. So we will have our healthcare costs and we will overcome that with the normal way that we do it and we'll pass those costs onto our customers. I mean we're going to see, you'll see inflationary pressure as we put our budgets together for 2020.
Mark DeVita -- Chief Financial Officer
Yeah, I mean in healthcare, you're probably aware of this, and most people on the call are but the look back as opposed to other types of claims, other types of insurance is not that far. So when you have some of the recent experience we had, it's going to hit you when your renewal and work, calendar year renewal.
Michael Edward Hoffman -- Stifel, Nicolaus & Company, Incorporated, Research Division -- Analyst
Okay. And just to be clear, have you quantified the stop loss impacts and the basis point basis, is it a 100 basis points, 150 basis points just related to the stop-loss loss issue?
Mark DeVita -- Chief Financial Officer
Yeah, it was about, it was about 1%.
Brian Recatto -- President & CEO
Yeah.
Michael Edward Hoffman -- Stifel, Nicolaus & Company, Incorporated, Research Division -- Analyst
100 basis points, OK. And then the used oil question --
Brian Recatto -- President & CEO
So Michael, we would have been right on track with our margin performance. So from an operating standpoint, I'm extremely pleased with the quarter.
Michael Edward Hoffman -- Stifel, Nicolaus & Company, Incorporated, Research Division -- Analyst
Yeah, that was the point I was trying to get at is you hit your numbers from an operating leverage standpoint. This is unusual incidents and therefore. Okay. So used oil, the interesting challenge is that you had exceptional productivity, you actually produced and a comparable basis to 2Q '19 a lot of things are similar as far as volume sold and volume produced and yet you gave up margin sequentially. Help us understand how we are to try and predict this because you've overcome your performance related things, that you're getting utilization. But -- where do we get to some comfort, I want a baseline level of margin is to be able to understand what the operating leverage of the business might be?
Brian Recatto -- President & CEO
I think, Michael, you're well aware the HSO -- HSFO was extremely volatile in the quarter, we really didn't get the IMO 2020 bump that we expected in HSFO. You saw it go from anywhere, 73% of WTI all the way to be in priced over WTI. And if I'm a collector out in the marketplace. I'm absolutely going to empty my tanks over the course of the quarter prepping for IMO 2020 knowing that used motor oil is going to lengthen as they get to the back end of the year as we implement IMO 2020.
You're going to have 60% less demand for HSFO as you look out into 2020, that's a significant amount of the one molecule that's not going to be needed anymore. So if I'm out there running trucks, I'm going to make sure the tanks are empty and what we're seeing in the marketplace is that the tanks are beginning to fill up. We expect we will begin to see the impact in the latter half of this quarter, you heard that in our prepared remarks and we still believe that. And in order to drive the spread expansion, we're going to have to do that with US motor oil. We expect base oil to continue to be soft -- seasonally soft in the fourth quarter.
We do expect VGO pricing, crude oil pricing to change in the early part of 2020 as the result of the need to produce a lot of additional distillate. That's going to drive the price of the feedstock up. We're fairly comfortable that base oil pricing will go up in 2020, but certainly not going to happen at the end of this year. So we expect to drive expansion in our spread through control and used motor oil as a result of IMO 2020, then getting a little bit of a bump in base oil pricing as we look out into 2020.
Michael Edward Hoffman -- Stifel, Nicolaus & Company, Incorporated, Research Division -- Analyst
Okay, thank you.
Brian Recatto -- President & CEO
You're welcome.
Operator
Thank you. And our next question comes from Gerry Sweeney with Roth Capital. Your line is open.
Gerry Sweeney -- Roth Capital -- Analyst
Hey, good morning guys, thanks for taking my call. How are you doing?
Brian Recatto -- President & CEO
Good.
Gerry Sweeney -- Roth Capital -- Analyst
I wanted to talk a little bit about the growth side on the Environmental Services. I think you were targeting about five branches this year and we're moving into the fourth quarter. What do you see in terms of growth branch wise next year as well as I think you have some opportunity to layer on additional services at different branches. Maybe could you parse that out a little bit? Thanks.
Mark DeVita -- Chief Financial Officer
Yeah. We are looking again to probably do four or five in 2020. We probably -- we've only did one through the first half of one new branch, the first half of this year. And quite honestly, we've had this history or cadence of doing additions in the second half, right at the end of the year. That timing probably isn't going to change. But realistically, we're probably only going to probably add one more at the end of the year. So it will be a down year versus what we originally thought for '19. But going to 2020, we're looking at four to five more and from a headcount standpoint, we certainly have already outstripped the headcount additions in 2018. We're not anywhere near with 2017. So we're in the middle there. But we would expect again, from a headcount standpoint, to get in that same range that we're going to be in '19 and 2020. So another probably 15 to 20 add.
Gerry Sweeney -- Roth Capital -- Analyst
Got it. And the down --
Brian Recatto -- President & CEO
We are --
Gerry Sweeney -- Roth Capital -- Analyst
Yeah, sorry Brian.
Brian Recatto -- President & CEO
We do expect to augment that growth as Mark talked about in his prepared remarks with acquisitions. We now have a full time M&A person on board and we've got lots of active targets that fit with our desire to continue to expand in areas where we don't have current route density and concentration. That would be in the western half of the US and we're actively pursuing a few now. So, I like the thought of balancing out the organic branches with the addition of acquisitions to help build our density and that's going to be our plan. We've got plenty of cash which you can see on the balance sheet. And we do think this will become more favorable as the market slows down for us to do acquisitions at the right multiple.
Gerry Sweeney -- Roth Capital -- Analyst
Got it. Yeah, all right, I mean, we've talked about acquisitions and I think the great opportunity. I would ask about it, but I know you can't talk about it much than more -- more than it's your targets, we got them in the back -- in the backlog we're looking at them. So, and then just the quick question on the -- you mentioned the down year -- I think you had target of five branches and it looks like there is going to be two. Is the driver behind that finding people to expand those branches or was it just other workload internally that's preventative.
Brian Recatto -- President & CEO
Yeah, it has been a difficult hiring market. We still have quite a few vacancies in our existing, more mature branches that we would like to fill those positions. Before we go out and do another Greenfield, we see more opportunities for quicker, more profitable growth. If we can fill out our roster in the more mature branches, that's the main reason why we didn't speed up the organic growth. We do think the job market is loosening up, we're beginning to see some success at placing people and that will allow us as Mark said, to get back on the trail of opening some organic branches with the addition of the acquisitions to speed up the density. We really want to speed it up versus the 2.5 years it takes to get a branch up to some level of profitability.
Mark DeVita -- Chief Financial Officer
And quiet frankly, something that again secondary or tertiary, but the fact that we're able to just get more production out of our existing people whether they were added '17 or '18 or a position maybe not take that person, but a position that's been in place for 10 years, we're able to still drive the high-single digit growth on a branch -- same branch sales basis or adjusting for some of the episodic stuff we had last year, technically, double-digit growth. So if we weren't in that range, I would venture to say we would probably be pushing a little harder, but why make that suspect higher if you're still getting to growth that we think is acceptable.
Gerry Sweeney -- Roth Capital -- Analyst
Got it. And one more just maybe follow up with that and then I'll jump back in line. But we've always talked I think 90 or so branches. How many of the branches are at say full capacity with available services?
Mark DeVita -- Chief Financial Officer
Well, I have the full menu. There's probably maybe 25% of the branches at the full menu. But I would say, and again you -- clarified your question with your last comment, but none of them are at full capacity, that might be crystal clear.
Gerry Sweeney -- Roth Capital -- Analyst
Got it. I meant full menu of services.
Mark DeVita -- Chief Financial Officer
Yeah,
Brian Recatto -- President & CEO
Yeah.
Gerry Sweeney -- Roth Capital -- Analyst
Yeah. Okay, perfect. Thanks. I'll jump back in.
Brian Recatto -- President & CEO
Thank you.
Operator
Thank you. Our next question comes from Quinn Fredrickson from Baird. Your line is open.
Quinn Fredrickson -- Baird -- Analyst
Hey, good morning guys.
Brian Recatto -- President & CEO
Good morning.
Quinn Fredrickson -- Baird -- Analyst
So maybe just starting off on the ES business, you mentioned the planned price increase for 2020. Can you give us just a sense for maybe the timing of implementing that -- I know last year, you said you guys implemented that a little bit earlier than normal. Would that be the case this year? And then also just a sense of magnitude you might expect that to contribute just given some of the inflationary pressures you're seeing
Brian Recatto -- President & CEO
Yeah. Our plans are to implement the price increase in period 12 this year, consistent with our prior year history.
Mark DeVita -- Chief Financial Officer
And, yeah, we're certainly going to see, I mean we're coming off of a very robust market condition. There's certainly going to be inflationary pressure. We haven't seen it in certainly our fuel cost because commodity prices in general have gone down, but we've seen when you have vacancies and everybody else vacancies, you've got a shortage of drivers, you certainly have seen some wage pressure. We will see other inflationary pressures but we certainly think we can get it back with our price increase. So we've done a very good job on the disposal end. As we talked about in our prepared remarks, we're going to do more internalization of some of our waste streams, utilizing our wastewater treatment operations we've been working on permits for a year and a half, we'll begin to see some of the efforts of our labor pay off in 2020 and that will enhance our margins we think and it'll help us overcome the inflationary pressure that we're going to see out there with a goal of maintaining this margin rate that we've been on, in spite of the fact that we continue to add resources. I mean that's been -- I have to say at a fresh off of a Board meeting, I mean they are challenging us to grow faster because we have a ton of cash on the books and acquisitions have been difficult because of multiple. So it's the best use of our money at this point.
Even if we give up a point or two on margins, preparing for the future. So, good use of capital.
Quinn Fredrickson -- Baird -- Analyst
Thanks, that's helpful. And then maybe near term here, just for the Oil Business expectations for utilization rates at the rerefinery. And then just remind us, I know you said you did your normal fall shutdown, any other shutdowns planned in the fourth quarter, either normal or more extended?
Mark DeVita -- Chief Financial Officer
Yeah, our comment was around our normal fall turnaround. It's typically our longer turnaround, but it's in our plan. Nine, 10 days of mechanical work that we'll do our normal cleaning operation. We do expect production to be up year-over-year because if you remember, we had a major construction project in Q4 of last year. So we had a larger turnaround. This will be more like our normal turnaround. So the gallons will definitely be up, absent any issues and right now not going to -- with [Phonetic] plants running great.
Quinn Fredrickson -- Baird -- Analyst
Got you. Thank you.
Brian Recatto -- President & CEO
Your're welcome. Thank you.
Operator
Thank you.
[Operator Instrcutions]
And our next question comes from Kevin Steinke with Barrington Research. Your line is open.
Brian Recatto -- President & CEO
Hey Kevin.
Kevin Steinke -- Barrington Research -- Analyst
Hi, good morning. So your commentary around Oil Business margins heading into the fourth quarter. I mean I think it sounds like it's safer to assume perhaps sequential contraction in Oil Business margin from the third quarter given some of the pressures on base oil pricing that you expect and the uncertainty of the timing of the benefit from IMO 2020. So I mean is that -- reasonable way to think about it.
Brian Recatto -- President & CEO
You're absolutely on track. I mean it's, every year we see seasonal declines in base oil pricing, it's no different this year. The difference for us was we expect to see a more positive impact from IMO 2020 on feedstock cost, but everybody in the industry did the right thing by emptying their tanks in preparation for the lack of demand for used motor oil outside of asphalt plants and we came off of a pretty good construction season. So everybody had a place to send the used motor oil. That's going to change now that the asphalt plants are no longer operating and then using used motor oil. So the tanks are going to fill up, used motor oil is going to lengthen, we're going to fight hard to get some spread back on used motor oil and then we'll begin to see the change again in base oil after the close of the year. That's our expectation. So yes, as we mentioned in our prepared remarks, we'll see some compression in Q4.
Kevin Steinke -- Barrington Research -- Analyst
Okay, got it. Yeah. That's helpful. And so, in regards to hiring the director of M&A, it seems like, obviously you're targeting more acquisition opportunities on the Environmental Services side. Would there be any areas of interest on the Oil Business side, perhaps something to get you more into the branded lubricant space or is that not anything that you would really consider?
Brian Recatto -- President & CEO
No, we're certainly going to focus our acquisition capital on ES opportunities. We're happy with where we are on the oil front -- I mean obviously it's a key component of our Environmental business because of the collection aspect of used motor oil. But we certainly don't feel the need, we've got some great wholesale partners that we sell base oil to. We're very comfortable with where we are in the marketplace. Our focus is going to be on growing the rail services business and expanding our Environmental clients which all generate used motor oil.
Mark DeVita -- Chief Financial Officer
Yeah, I mean Brian -- Kevin you might see a -- if we run across an opportunity where they have a part of their full menu is used oil collection, we're certainly not going to shy away from those, some of those are some of the best opportunities for us, but it's certainly not going to be a foot first on oil approach, far from it.
Brian Recatto -- President & CEO
Yeah, good point. I mean almost every acquisition we look at, they collect these motor oil [Phonetic].
Kevin Steinke -- Barrington Research -- Analyst
Right, OK. And just maybe expand on your increasing the capacity, the production capacity. I mean, I guess, your confidence in increasing the production capacity to $49 million, is just simply a matter of the effectiveness of how well the refinery has been running and so therefore you feel like the baseline capacity is now higher than it was in the past.
Mark DeVita -- Chief Financial Officer
Yeah, yeah, I mean, Brian -- Kevin, I'm sorry. I talked with you and most of the investors, certainly the analysts on this call, around beginning of last year, end of -- beginning of this year, end of last year about doing this and we said we needed to put together a few quarters of good performance. We obviously had some more rough patches in Q1 of this year and we're ready to do it because we need to demonstrate because of some of the improvements we made in Q4 last year that we really could do it and we have our -- again schedules and nowhere near as long as last year, but we do have, as Brian mentioned a somewhat longer quarter or somewhat longer shutdown in Q4 this year. So beginning in Q1, we will start to rate it at that higher output of base oil of $49 million.
Brian Recatto -- President & CEO
So, Kevin, obviously we made the changes in Q4 and we proved out the run rate in the middle two quarters. So we're comfortable as we move into 2020 changing the nameplate.
Kevin Steinke -- Barrington Research -- Analyst
Okay, great. That's all I had. Thanks for taking my questions.
Brian Recatto -- President & CEO
Thank you.
Operator
[Operator Closing Remarks]
Duration: 39 minutes
Call participants:
Brian Recatto -- President & CEO
Mark DeVita -- Chief Financial Officer
Michael Edward Hoffman -- Stifel, Nicolaus & Company, Incorporated, Research Division -- Analyst
Gerry Sweeney -- Roth Capital -- Analyst
Quinn Fredrickson -- Baird -- Analyst
Kevin Steinke -- Barrington Research -- Analyst
