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Heritage-Crystal Clean Inc (NASDAQ:HCCI)
Q2 2020 Earnings Call
Jul 23, 2020, 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 Second Quarter 2020 Earnings Conference Call. [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 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 Recatto -- President & Chief Executive Officer

Thank you, Shannon. Good morning, everyone, and thank you for joining us today. This morning we will begin with an update on the impact of the pandemic, discuss our second quarter results and share our third quarter outlook. Like most companies since the end of March, we have faced many challenges as a result of the global COVID-19 pandemic. Since our company and many of our customers have been deemed essential businesses, we have worked hard to adapt to the challenging operating environment the pandemic has created.

To safeguard the well-being of our employees and decrease the spread of the COVID-19 virus, we implemented the following steps during the second quarter. Provided additional personal protective equipment and sanitizers; utilized the staggered work schedule to increase social distancing; allowed high-risk or other impacted individuals to work from home when possible; thoroughly cleaned and disinfected some of our facilities; temporarily closed less than 10 of our facilities, none of which were closed for more than three to four business days at a time. These steps, along with the cooperation of our employees, have allowed us to limit the number of confirmed or suspected cases of COVID-19 among our employees. During the second quarter, total lost time from employees off the job due to COVID-19-related health issues was approximately 5,000 hours companywide.

From a customer standpoint, during the second quarter, we experienced situations where some of our customers temporarily closed their businesses, while others remained open, but limited our access to their facilities, which curbed our ability to fully service those customers. Other active customers have had a decreased need for our products and services due to the economic downturn. We continue to encounter these same conditions in the early part of the third quarter.

In addition to taking steps to ensure the safety of our employees, during the second quarter, we also executed several actions to ensure the health of our business. Some of these actions included, but are not limited to the following. Implementation of salary reductions for all levels of management; implementation of furlough and a reduction in force programs; implementation of reductions of cash compensation for members of our board of directors; elimination of 401(k) plan company match; reduction of capital expenditures; suspension of mergers and acquisitions activity; elimination of non-essential travel, implementation of a hiring freeze; thorough assessment of vendors to ensure continuity of critical supplies and materials; and lastly, the tightening of customer credit controls.

Although we have restarted our mergers and acquisitions activities, many of the other initiatives I just mentioned are still in effect today. During the second quarter we also launched the COVID-19 decontamination service to help our customers implement their return to work strategies. We will continue to offer this service if we see a need for it in the marketplace.

I would now like to spend a little time talking about our oil business. During the second quarter, there was significant drop in demand for crude oil and oil refined products due to the COVID-19 pandemic. This deflated demand scenario came on the heels of a battle for market share between two of the world's largest oil producing countries, Saudi Arabia and Russia.

This market share battle led to a historic oversupply of crude oil and the supply/demand dynamics pushed the price of crude oil and finished products to all-time lows during the quarter. While crude pricing has rebounded from historic lows, lower demand as a result of the economic slowdown has resulted in ample supplies of crude oil in the market today.

The shelter in place orders, which were widespread during the second quarter led to a drastic decrease in driving and lower levels of manufacturing activity. This in turn has led to a decreased need to replace finished lubricants, such as engine or hydraulic oil, less oil changes mean less used oil to be collected and less demand for finished lubricants. As most of you know, base oil is the main ingredient in finished lubricant. As demand for finished lubricant plummeted, this led to a decreased demand for our base oil as well as downward pressure on the price for our product.

Early in the third quarter, we have seen an easing of the shelter in place orders in many parts of the country, which increased the demand for finished lubricants and base oil. This allowed base oil producers, including Heritage-Crystal Clean, to gradually increase prices during the early part of the third quarter. However, the recent resurgence in COVID-19 cases in areas which were the earliest to resend shelter to place orders has the potential to limit the level of improvement we will see in base oil demand and pricing.

The steep decline in the price of crude oil during the second quarter, which I mentioned earlier, led to a decline in value across the oil commodity complex. This provided us an opportunity to move from a slight pay-for-oil position during the first quarter to a significant charge-for-oil position during the second quarter. On a net basis, from the first quarter to the second quarter of fiscal 2020, we saw net improvement of $0.48 per gallon in our charge-for-oil program.

As the price of crude oil has come off historic lows, we have seen increased pricing pressure related to used oil collection charges in the early part of the third quarter. Due to lower demand for our base oil as well as a soft pricing environment, we decided to move up a scheduled extended turnaround from the beginning of the fourth quarter of fiscal 2020 into the second quarter. We also executed the turnaround at a more deliberate pace to limit overtime and other labor costs, which would normally be incurred during the turnaround. As a result of the extended turnaround, the rerefinery was down for approximately three weeks, which led to base oil production of 6.5 million gallons or 57.2% of base oil capacity during the second quarter compared to 11.8 million gallons in the year earlier quarter.

During the early portion of the third quarter, rerefinery is performing well as we increased production to meet growing base oil demand. We're also experiencing increasing availability of feedstock, which will improve our planned operating performance and utilization. We are projecting base oil production to be in excess of 11 million gallons for the third quarter, provided we're not faced with additional shelter in place orders because of accelerating COVID-19 virus cases.

As we move forward, we estimate in the third quarter the Environmental Services segment, we'll see year-over-year revenue performance slightly better than what we saw for the second quarter. In addition, we estimate the Environmental Services segment operating margin percentage will be two percentage points to three percentage points better than our second quarter operating margin percentage.

From an Oil Business segment perspective, we estimate third quarter revenue will be down 25% to 35% from the prior year quarter, and we estimate our operating margin will improve sequentially quarter-over-quarter. We believe we have seen the worst of the impact of the COVID-19 pandemic on our financial results. However, recent surges in COVID-19 infections in certain parts of the country could bring new or additional shelter in place orders, which could directly or indirectly negatively impact the demand for our services, the health of our workforce and our future financial results.

While our results for the remainder of 2020 and into 2021 are hard to predict, one thing I am 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 in as safe a manner as possible. I'm also pleased that we have maintained our strong balance sheet and are in a good position to take advantage of improving market conditions. However, at this point, we are unable to predict the ultimate impact the COVID-19 pandemic will have on our business, results of operations, financial condition and cash flows.

With that, Mark will now walk us through our second quarter financial results.

Mark DeVita -- Chief Financial Officer

Thank you, Brian. Good morning, everyone. Revenue for the second quarter of 2020 was $79.5 million compared to $105 million for the same quarter of 2019, a decrease of 24.3%. Net loss attributable to common shareholders for the second quarter was $2.7 million compared to net income of $7.1 million in the year earlier quarter. Basic loss per share was $0.11 compared to basic earnings per share of $0.30 in the year ago quarter.

Earnings in the current quarter were favorably impacted by $0.20 per share as a result of an adjustment to an accrual established during the fourth quarter of 2019 related to a settled class action lawsuit. Excluding this accrual adjustment, net loss attributable to common shareholders would have been $7.3 million or $0.31 per share.

Moving on to Environmental Services, we recorded segment revenues of $59.8 million compared to $70.2 million in the second quarter of 2019. The 14.8% decrease in revenue was mainly 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, containerized waste, and antifreeze lines of business. Environmental Services profit before corporate SG&A expense was $8.3 million compared to $19 million in the year ago quarter. Operating margin declined to 14% from 27% in the second quarter of 2019. But we were pleased with our overall operating performance in this segment, given the very challenging economic conditions.

Oil Business segment revenues decreased 43.3% to $19.7 million compared to $34.8 million in the second quarter of fiscal 2019 as the COVID-19 pandemic and related shelter in place orders led to a significant decrease in the demand for finished lubricants, which directly impacted demand for our base oil products. Pandemic impacts also led to a significant decline in the generation of used oil, which negatively impacted used oil collection and feedstock volumes used in our rerefinery. As Brian mentioned earlier, these headwinds led us to move up the timing of an extended turnaround at our rerefinery into the second quarter. These unfavorable conditions resulted in our Oil Business generating negative operating margin of 28.2% for the second quarter.

During the second quarter, the weighted average increase in our net charge to customers to collect their used oil was $0.48 per gallon compared to the first quarter of 2020. From a base oil standpoint, we sold 7.1 million gallons during the second quarter and our netback declined $0.65 per gallon compared to the first quarter of 2020 and $0.61 per gallon compared to the second quarter of 2019. Our overall corporate SG&A expense increased slightly by $0.4 million compared to the second quarter of 2019.

SG&A expense as a percentage of revenue was 15.3% compared to 11.2% from the year ago quarter. This percentage basis increase was mainly driven by lower revenues and higher severance and bad debt expense, partially offset by lower travel expenses, share-based compensation and legal fees. EBITDA for the second quarter was $2.9 million compared to $13.6 million in the year ago quarter. The company's effective income tax rate for the second quarter of fiscal 2020 was 8.7% compared to 23.1% in the second quarter of fiscal 2019. The rate decrease is principally attributable to the opposing effect on the tax rate from changes in year-to-date earnings in an income quarter as compared to a loss quarter.

At the beginning of the second quarter, we closed on an acquisition of an Environmental Services business focused on field services and wastewater treatment for $10.1 million. This acquisition provides us our first wastewater treatment operation in the Midwestern U.S. as well as the ability to use internal labor to perform various field services projects, albeit in a limited geography.

We ended the quarter with $50.8 million of cash on hand. This balance represents a decline of $9.9 million from the end of the first quarter. In addition to the cash outlay for the acquisition I just mentioned, we also paid out approximately $4.5 million during the quarter -- second quarter, excuse me, related to the legal settlement I previously mentioned. The payments made during the second quarter represent all material amounts owed by the company related to the settlement.

For the quarter, we were able to generate $7.6 million in operating cash flow, and we were also able to generate free cash flow of $4.3 million during the second quarter. Despite the many challenges presented by the COVID-19 outbreak, we maintained a strong balance sheet and net cash position as of the end of the second quarter. We do not expect the impact of the pandemic to force us to exercise any portion of our still unused revolving loan in the coming quarters. As we move forward, we've restarted our acquisition-related activities during the third quarter as we look to leverage our strong balance sheet to execute on opportunities, which we believe can create value for our shareholders.

In conclusion, given the challenges presented by the COVID-19 pandemic, we are pleased with the execution of our team during the second quarter, and we believe we are well positioned for the challenges we may encounter during the third quarter and remainder of the year. We hope everyone stays safe and healthy. And as always, we appreciate your continued interest in our company.

Thank you for joining us today. I will now turn the call back to Shannon 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 E. Hoffman -- Stifel -- Analyst

Thank you very much for taking questions, and glad to hear that your employees are safe and all-in-all OK.

Brian Recatto -- President & Chief Executive Officer

Thank you, Michael. How are you? How are things on your end?

Michael E. Hoffman -- Stifel -- Analyst

We can't complain. I mean, what's the point anyway, right?

Mark DeVita -- Chief Financial Officer

We're here to listen.

Michael E. Hoffman -- Stifel -- Analyst

Thanks. I just want to tease out a little bit of your outlook for 3Q to try and understand the pieces. When we think about what was the rate of change of down in say, Environmental Services, parts cleaning is down almost 16%, vacuum's down a little over 20%, but field services is up, antifreeze is down mid-20%s. How do I think about those pieces in 3Q, given the rolling reopening of economies and where your branches are located?

Brian Recatto -- President & Chief Executive Officer

Let me talk to what we're currently seeing and maybe Mark could review some additional Q2 history. But we are beginning to see gradually increasing revenue performance from most of our branches. Obviously, Michael, the oilfield is impacted -- oilfield branches, we have 14 that are impacted more severely than the rest of our network. So their current run rate, we're seeing those branches in down 18% to 20% year-over-year.

The rest of our network, running in the 10% clip down year-over-year and we're pretty happy with that. Obviously, we're seeing hotspots of COVID-19 around the country and that may impact some branches going forward more than others. Right now, Florida is pretty hot. Texas, we're seeing a little bit of a slowing in some of those branches only because of COVID-19. But overall, that will give you some color on what we're seeing currently.

Mark DeVita -- Chief Financial Officer

And, Michael, if you look at from a -- Brian talked to the geographic impacts. If you look to the overall line of business impacts, you called out the three most important ones. If you look at parts cleaning compared to vacuum and our containerized waste businesses, as you just outlined, those businesses, the latter two, were impacted from a negative standpoint about -- had about twice the decrease on a year-over-year basis than our parts cleaning business did. And that really makes sense. I think if you think about it logically, the parts cleaning business is a scheduled routine business. And you would expect that compared to businesses where the waste pretty much is connected to production or activity more directly anyway, that you'd see a quicker more drastic downturn.

So I think on the way back up, when you think Brian mentioned, getting some -- a couple of percentage points increase from the last quarter's performance in the ES segment overall, I'd probably say maybe two-thirds of that from the vacuum and containerized waste business combined and a third of that from parts cleaning, because parts cleaning has that much less further to come back from as opposed to those two other businesses.

Brian Recatto -- President & Chief Executive Officer

And we don't expect to see any quarter-over-quarter improvement in field services. Lot of the projects that we performed in Q2 are already teed up, Michael, that's why we didn't see any erosion in revenue in field services. We'll begin to see some of that filter through the income statement in Q2.

Mark DeVita -- Chief Financial Officer

In field services, there's a little more than $1 million. So if you look at on a quarter basis, you obviously look through our Q you got that breakdown. It's close to -- not quite, but close to 25% of the revenue is kind of COVID-related.

Michael E. Hoffman -- Stifel -- Analyst

That's the decontamination work?

Brian Recatto -- President & Chief Executive Officer

Yeah. Yeah, we're obviously doing it for our manufacturing client base, smaller client base. So it's not to the level of some of the other industrial service contractors, but fits what we do really well, because we're supporting our customers and helping them get back open.

Michael E. Hoffman -- Stifel -- Analyst

Okay. And then, if I switch gears to oil, you shared that you thought you'd be at 11 million gallons of production. That's a very high capacity utilization. I mean, that puts you at -- approaching a 100% utilization.

Brian Recatto -- President & Chief Executive Officer

Yeah, that's provided, Michael, the feedstock continues to be available like it is today. I think I mentioned that in my prepared remarks.

Michael E. Hoffman -- Stifel -- Analyst

Yeah. Yeah, you did. And I wanted to sort of tie that in, which is -- so vehicle miles traveled based on gasoline supplies seem to be back up about 70% from the bottom. So why...

Brian Recatto -- President & Chief Executive Officer

See, I'd say a little higher than that based on what I'm reading, but yeah, definitely way up from where it was.

Michael E. Hoffman -- Stifel -- Analyst

And therefore, oil is back in supply. The other part of that question, has the oversupply of base oil been corrected, so we've rebalanced the market relative to the current level of driving?

Brian Recatto -- President & Chief Executive Officer

Yeah, I'm not going to go as far as saying we've rebalanced base oil. I think, as you know, a lot of refineries have reduced production, including us and some of the other rerefiners, which obviously took some base oil out of the marketplace, way less fuel and distillate demand, which I think will keep the refineries at lower capacity utilization. So for now, we feel pretty good about supply/demand on base oil.

And I'm projecting at least as we put our numbers together for our Board over the last couple of days, we're projecting relatively flat base oil pricing near-term, expecting it to be balanced. And obviously, we'll hit the fourth quarter which is a slower base oil period and we'll see where it goes from there, but near-term we're projecting flat base oil pricing. And pretty good demand. We haven't had any trouble moving the base oil that we've been producing.

We feel pretty good about the 11 million gallons. And if you look at our past performance last year, I think we were at 11.7 million gallons for the plant. So getting back close to a 100% capacity. Not all the way there, but close.

Yeah, and pretty good demand from our third party suppliers, so I know everybody is seeing increased used motor oil activity based on what I'm hearing from the third parties, including us, our route density on our trucks has picked up quite a bit since the worst part of the COVID pandemic, which was April, first part of May.

Michael E. Hoffman -- Stifel -- Analyst

Okay. And just so I'm clear, when you say at flat base oil price, that's flat sequentially or flat year-over-year? It's got to be down year-over-year, isn't it?

Brian Recatto -- President & Chief Executive Officer

Yeah, no, sequentially, I'm talking just run rates.

Michael E. Hoffman -- Stifel -- Analyst

Okay.

Brian Recatto -- President & Chief Executive Officer

Yeah, sequentially. And they're way down year-over-year as you know.

Michael E. Hoffman -- Stifel -- Analyst

Yeah. Yeah. And just so we're -- on how -- what the relative spread sequentially has been materially enhanced by the charge for oil in -- within your collection business. Is that correct?

Brian Recatto -- President & Chief Executive Officer

Yeah, we're happy -- I mean we're happier with where our spread is today, not where I want to be, but we've made a lot of progress with our charge for used motor oil, significant progress. We obviously got a -- you saw Motiva's price increase, so we got a price increase on base oil, which helped our spread.

So between the two, we're pleased. I mean, I don't know if it gets us all the way where we need to be. But I'm much happier than I was in Q2, which is why we're producing base oil.

Michael E. Hoffman -- Stifel -- Analyst

Okay. And then, Mark, the capital spending reduction, what are we -- what should we be modeling for capital spending as we sort of work through your cash flow statement?

Mark DeVita -- Chief Financial Officer

Yeah, we weren't as successful as we wanted to be. We spent roughly, from a cash basis, $1.5 million more than what we had forecasted and I had talked to the market on. And I'd rather just conservatively, especially since our cash position, we were able to, from an operating basis, produce a better result than we thought.

We're probably going to put out and forecast another $3.5 million for Q3 and Q4. And Q4, I know it's an outside calendar quarter, but say, try and shoot for another $7 million total in the second half of the year. And hopefully, we can beat that. I really hope so. It's a matter of when Brian and I get people coming to us about, they need this or they need that, trying to make sure we do the right thing.

Brian Recatto -- President & Chief Executive Officer

Looking at lot of it, Michael, is rolling stock. I mean, you've heard us on calls before, we're buying a lot of our power these days, especially on our specialty drugs, because we last longer, it reduces our maintenance cost. We like having the asset, we can repurpose the ancillary equipment that's associated with it. So it makes sense for us.

We push a lot of it off. But at some point, we know this market is going to recover. Our balance sheet is strong. We want to get ourselves into a position to have these plants optimized and have our rolling stock in good shape, so we can hit the ground running in 2021.

Michael E. Hoffman -- Stifel -- Analyst

Okay. And then the last couple around that cash subject. So, clearly cash collections were good. Bad debt provisions seemed like they were not bad on a percent of total revenues. How do we think about where that trend -- all that overall trend is?

Mark DeVita -- Chief Financial Officer

Yeah. I think we take an extra special care on bad debt, especially with the new accounting rules. I think that the CECL standard is what the accountants call it. But to -- not just do our normal looking at specific accounts, which we do have some things we'd reserve for, but ramp up that bad debt.

So I really think outside of some specific account, big account reserves, which are always hard to predict, we're probably seeing the worst of it or hopefully book the worst of it into our allowance right now.

But things could change, if shelter in place orders hit extra hard again, then maybe we'll have a different outlook. But right now, I feel pretty comfortable that we're not going to have any additional big shocks that we're going to have to absorb into P&L and that our allowance is in good shape.

Brian Recatto -- President & Chief Executive Officer

You always worry, Michael, as you move from a slight pay for used motor oil to a charge and that's a lot of smaller customers, never easy to collect money from those guys.

Michael E. Hoffman -- Stifel -- Analyst

Right. Right. Okay, fair enough. Thank you for taking the questions. Appreciate it.

Brian Recatto -- President & Chief Executive Officer

Thank you. Appreciate it. Take care.

Mark DeVita -- Chief Financial Officer

Yeah, you too.

Operator

Our next question comes from Jim Ricchiuti with Needham & Company. Your line is open.

Brian Recatto -- President & Chief Executive Officer

Hi, Jim.

James Ricchiuti -- Needham & Company -- Analyst

Hi, thank you. Hello, good morning. Yeah, if I look at...

Mark DeVita -- Chief Financial Officer

Good morning, Jim.

James Ricchiuti -- Needham & Company -- Analyst

Good morning. Mark, the cost reductions that we saw in Q2. How much of that is -- would you characterize as temporary in nature? I don't know if you could size that? Because I guess what I'm also trying to get to is, how should we think about that expense being layered back in as you do start to see the business improve?

Mark DeVita -- Chief Financial Officer

I think a vast majority of it is temporary. The layering in, you're not going to probably like my answer, because we don't have a ton of clarity there. Certainly, at the beginning part of the third quarter, you're seeing those same savings in place. And I would say that for -- since we're almost halfway done, most of the third quarter, they're probably going to be in place in that -- into the fourth quarter is when you'll see some of those costs come back into frame.

I can't tell you how much, how quick. That's about as granular as I can get. But we're already basically halfway through and we're holding the line. And we've taken advantage, we haven't done any large reduction in force, but we've selectively pruned the tree. There has been some permanency in some of the cost reductions. But most of it we hope we'll bring back but we're dependent on activity increasing. Brian, do you have anything to add?

Brian Recatto -- President & Chief Executive Officer

No, I'd just second that. I mean, obviously, we hope that we could bring these furloughed employees back sooner rather than later. But right now, we're not seeing the revenue increase to justify bringing them back. We feel like we're staffed fairly well.

In some markets, we may need to bring people back, because as the restrictions have eased, like in the Midwest and the Northeast, we're seeing more rapidly recovering revenue. Those were the hardest hit areas early on, because of the lockdown. We're seeing improving conditions there. So we may selectively, again to bring people back geographically, where we're seeing increased revenue.

James Ricchiuti -- Needham & Company -- Analyst

Got it. And then, guys, again, with respect to some of the areas where we've seen the flare-ups in recent weeks, within the ES business, are you seeing some noticeable impact or is it just a case of, the opening of these states has outweighed what we're seeing?

Brian Recatto -- President & Chief Executive Officer

Yeah, I think, I mentioned this, Michael asked a similar question. Initially, we saw a greater impact in the Midwest and Northeast, because it shut down sooner. Obviously, the -- a lot of the southern states continued to operate, although not at a 100%, but certainly at a greater percentage than Midwest and Northeast.

We're kind of seeing the reverse today. A lot of the southern states have had the flare-ups. And we're seeing a little more caution out in the field from our customers where they're pushing back on not wanting us to have access to their plants and people.

So I would say, if you look at what's happened the last few weeks, probably a little more of a lesser activity in the southern states, better in the Midwest and Northeast. But overall, our branches in general are running at about a 90% clip compared to 2019, with a heavier impact down South and less up Midwest, Northeast, because of increased activity as a result of them going back to work.

James Ricchiuti -- Needham & Company -- Analyst

Brian, maybe even in these areas that are most affected that some of these southern states. And again, I'm just trying to get a sense, it's not anything close to what we saw, it sounds like earlier when we were seeing in the Northeast and some of the other states are really shutdown.

Brian Recatto -- President & Chief Executive Officer

No, you're absolutely right, less of a percentage, certainly. We're still getting the work done. It's just harder.

Mark DeVita -- Chief Financial Officer

Yeah. I think it's just a reflection of -- I think the general economy, Jim, is getting a little bit more used to navigating with this, it might not be that much better, the situation medically. But I think we're a little more prepared -- incrementally more prepared as an economy.

James Ricchiuti -- Needham & Company -- Analyst

Okay. And -- thanks. And just on the M&A side, the idea that you're restarting some of the activities there. What's driving that? Are you seeing some potentially more attractive valuations out there or are you just saying, hey, this is time we should be doing it. We've got the balance sheet. Let's start refocusing on that.

Brian Recatto -- President & Chief Executive Officer

Yeah. I think it's certainly a combination of the two.

James Ricchiuti -- Needham & Company -- Analyst

Agreed.

Brian Recatto -- President & Chief Executive Officer

I don't think people are going to put their companies into play near-term. It doesn't make a lot of sense when your EBITDA run rates are as low as they are today based on historical performance. But it takes time to gen-up [Phonetic] these opportunities, and we think starting now, we'll get us in a position to close some strategic deals in 2021.

A very important component of our overall business strategy, as we've talked about on many calls, we've done quite a few tuck-ins in three years. We still think that strategy works for us. Yes, we'd like to do bigger deals that may or may not develop because of struggling balance sheets and 2021 coming out of this pandemic.

So we're going to focus on the tuck-ins first, and then look for these big strategic opportunities, certainly with a focus on ES -- continued focus on ES, continued focus on wastewater treatment, because it fits our vacuum truck business well. It's a type of industrial customer that we like to call on. So really nothing has changed. We just think the opportunities will begin to develop in 2021 and we need to get after it now.

James Ricchiuti -- Needham & Company -- Analyst

Got it. And last question for me. I know it's a fairly small acquisition, but I'm just curious on that COVID-19 service revenue stream. Is that showing signs of contributing in any -- somewhat meaningful fashion in the current quarter or how should we think about that?

Mark DeVita -- Chief Financial Officer

I don't have quarter-to-date information right at my fingertips, Jim. But I would think you can basically look forward and whatever your forecast is for the return to work approach would be the way I would try and forecast what this business would do.

Personally, I think as there's more education around the virus, how long it lives on certain services, we're not planning on this growing much more than kind of around where it's at.

And if it does, if its way bigger, then fantastic, it's a way to help keep our people engaged, and obviously, offset the headwinds from the other lines of business.

Brian Recatto -- President & Chief Executive Officer

A lot of people in the business, Jim. I mean, our focus was to protect our client base. I think, we want to make sure our customers are taken care of and can get back to work and we want to be the ones that help them.

James Ricchiuti -- Needham & Company -- Analyst

I'm sure that it makes sense. Okay, thank you.

Brian Recatto -- President & Chief Executive Officer

Thank you.

Operator

Our next question comes from Kevin Steinke with Barrington Research. Your line is open.

Brian Recatto -- President & Chief Executive Officer

Hi, Kevin.

Mark DeVita -- Chief Financial Officer

Good morning, Kevin.

Kevin Steinke -- Barrington Research -- Analyst

Hey, good morning. Hey, so I wanted to ask -- start off by asking about your expectations for the Environmental Services' operating margin in the third quarter. You said, I believe, 2 percentage points to 3 percentage points better than the second quarter.

What -- how should we think about that improvement occurring? Is it because you said, maybe revenue decline will be slightly less or taking up more cost? What's kind of driving that expected improvement in the ES margin?

Brian Recatto -- President & Chief Executive Officer

I'll offer a little commentary and let Mark give more detail, if necessary. But, yeah, it's driven by both a slight uptick in revenue which we talked about, and the full effect of the cost reductions. Obviously, the pandemic happened and started really in earnest in March, April. And we worked on our cost reduction plan. The cost weren't pulled out of the system until mid-second quarter. So it will be the full effect of the cost reduction. So, a little bit of both.

Mark DeVita -- Chief Financial Officer

Yeah, I can't -- I'm not going to add. That's Perfect.

Kevin Steinke -- Barrington Research -- Analyst

Okay, good. And then, you called out severance and bad debt impacting the corporate SG&A expense. Is there any way you could quantify that impact so we can kind of get an idea of what it was in the quarter and what we might expect for the next couple of quarters, if those items will be impacting going forward as well?

Brian Recatto -- President & Chief Executive Officer

Yeah, we're not...

Mark DeVita -- Chief Financial Officer

Well -- go ahead.

Brian Recatto -- President & Chief Executive Officer

You know, just from a color standpoint, we're not expecting any additional severance or meaningful bad debt changes for Q3. Even absent a failure of a customer, we're not forecasting that.

Mark DeVita -- Chief Financial Officer

Yeah, the severance. It's kind of buried at the back of our press release. It was a little over $300,000 in the quarter, specifically.

Kevin Steinke -- Barrington Research -- Analyst

Got it.

Mark DeVita -- Chief Financial Officer

And then, that bad debt I can follow up with you on that detail, Kevin.

Kevin Steinke -- Barrington Research -- Analyst

Okay. Thanks. And then, you mentioned you started to see some pressure on used oil collection charges, given commodity prices rebounding. What's the state of the competition there in terms of used oil collectors? Is that -- you would think they're under pretty significant pressure, given the current environment and also, IMO 2020, are you seeing any competitive failures there or any less competitive pressure over time? I mean, what's the outlook there in terms of the competitive pressures on collection charges?

Brian Recatto -- President & Chief Executive Officer

Yeah, I think our comment on pricing, I mean, obviously, we have corporate accounts and that's indexed to the commodity itself. So that's going to drive some of the price change for used motor oil. We're certainly seeing a lot of the smaller third party used motor oil collectors under pressure.

There's not a robust RFO market at least this time of the year. Certainly in the winter, there's more opportunity to move RFO, which is why our phone is ringing. And then, our supply has increased quite a bit from the worst timeframe in the pandemic. So we feel pretty good about supply.

And yes, I think the Street is fairly stable. As of right now, absent any meaningful commodity price change, I don't expect to see much deterioration in our charge for oil over the next couple of periods. I can't -- as you know, oil is so volatile, I'm not going to go beyond that. But certainly near term, we feel pretty good about competitive pressures and pricing being relatively stable over the near term with charge for oil.

Mark DeVita -- Chief Financial Officer

And just to be clear, we have seen some deterioration from our weighted average for the quarter. So the trend was once downward on charges.

Brian Recatto -- President & Chief Executive Officer

And as price of crude goes up, I mean, obviously, that's going to impact our corporate pricing structures.

Kevin Steinke -- Barrington Research -- Analyst

Okay, got it. Just following up on your M&A activity, what's -- kind of what's most attractive to you in this environment in terms of the environmental -- building out the environmental services footprint, if you are able to provide any color on that at all?

Brian Recatto -- President & Chief Executive Officer

Yeah, I think I could talk to it generically. I don't really want to spell out what we're looking. There is a lot of competition for acquisitions already. But as you know, we really want to focus on the environmental side of our business, drum collections, drum waste management, wastewater treatment, light field-service type companies that don't -- and are not asset heavy that fit with our small to mid-size industrial customer base, anything -- vac truck companies that service those types of customers. So we're really focusing on the customer and then looking for acquisitions that fit in terms of what they do historically.

Mark DeVita -- Chief Financial Officer

It's something we've always done, Kevin. We try and leverage that customer base that we already have. That's one of the key pillars, if we're doing just general screens or high-level screens of opportunity, so that hasn't changed.

Brian Recatto -- President & Chief Executive Officer

And then we need density out west as we talked about on a few of our phone calls, trying to build up our branch network and capabilities in the western half of the U.S.

Kevin Steinke -- Barrington Research -- Analyst

Right. Okay, got it. That's helpful. Thanks for taking the questions.

Brian Recatto -- President & Chief Executive Officer

Thank you.

Mark DeVita -- Chief Financial Officer

Thanks, Kevin. [Operator Closing Remarks]

Duration: 43 minutes

Call participants:

Brian Recatto -- President & Chief Executive Officer

Mark DeVita -- Chief Financial Officer

Michael E. Hoffman -- Stifel -- Analyst

James Ricchiuti -- Needham & Company -- Analyst

Kevin Steinke -- Barrington Research -- Analyst

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