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Heritage-Crystal Clean Inc (NASDAQ:HCCI)
Q3 2020 Earnings Call
Oct 15, 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 Third 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 reconciliations of these non-GAAP financial measures to GAAP. For more information about our Company, please visit our website at www.crystal-clean.com. With us today from the Company are the President and Chief Executive Officer, Mr. Brian Recatto; and the Chief Financial Officer, Mr. Mark DeVita.

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

Brian Recatto -- President and Chief Executive Officer

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 continue 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 among our employees.

During the third quarter, total lost time from employees off the job due to COVID-19-related health issues was approximately 3,700 hours Companywide. 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, 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 oversupply in market continues to put pressure on the selling price for our base oil. While pricing is strict when 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 put 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 made [Phonetic] with 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 rerefining 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 [Phonetic] 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 rerefinery 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 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 U.S. has spiked over 50,000 new cases several times over the past week or two. Increased COVID-19 infection results could -- 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, 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 in a safer manner as possible. I'm also pleased that we're able to maintain a strong balance sheet to what we believed was a low point of the pandemic-induced downturn and are [Phonetic] in a good position to take advantage of the current market conditions.

With that, Mark will take us through our third quarter financial results.

Mark DeVita -- Chief Financial Officer

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 was $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 from both of our segments, resulting in an increase of revenue of $7.6 million or 9.6% from the second quarter of 2020.

Moving on 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 the quarter, as the cost control initiatives Brian mentioned helped us minimize the negative impact of the pandemic-induced economic conditions.

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 at the rerefinery operated at a 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 was mainly driven by lower compensation costs due to wage reductions, partially offset by higher severance expense.

SG&A expense as the percentage of revenue was 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 figure for the second quarter of 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 improvement over the second quarter.

Company's effective tax rate for the third quarter of fiscal 2020 was 22.7% compared to 27.1% in the third quarter of fiscal 2019. The rate decrease is principally attributable to the opposing effect on the tax rate from the changes in the year-to-date earnings. For the quarter, we generated $5 million in operating cash flow and $1.6 million in free cash flow, ending 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're 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. 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 I hope everyone stays 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.

Questions and Answers:

Operator

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

David Manthey -- Baird -- Analyst

Thank you. Good morning, guys.

Brian Recatto -- President and Chief Executive Officer

Hi, David. How are you?

David Manthey -- Baird -- Analyst

I'm great. Thank you very much. So first off, thinking back to last quarter, you were expecting ES segment profit to be up 200 basis points to 300 basis points. Can you outline the sources of outperformance that you realized to get to the [Indecipherable]? Just what were the biggest areas of outperformance relative to your expectations 90 days ago?

Brian Recatto -- President and Chief Executive Officer

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

Mark DeVita -- Chief Financial Officer

Waste internalization helped a little bit.

Brian Recatto -- President and Chief Executive Officer

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.

David Manthey -- Baird -- Analyst

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

Mark DeVita -- Chief Financial Officer

Yeah. David, I think we guided -- our hope was that we would get to breakeven for the quarter, if I remember our comment 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 also 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 those are 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 where we had an outstanding cost control at the plant for the quarter and they did a hell of a job. That's the primary reasons.

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 -- we kind of changed philosophically. We've like 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. 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.

David Manthey -- Baird -- Analyst

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.

Mark DeVita -- Chief Financial Officer

Yeah. I would -- you hit on the key one, a lot of the themes 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 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 run against you or anyone else's buy side and 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 is literally 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.

David Manthey -- Baird -- Analyst

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

Mark DeVita -- Chief Financial Officer

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

Brian Recatto -- President and Chief Executive Officer

For modeling purposes at the plant level, we're forecasting production 14.5 million gallons to 15 million gallons for the quarter. Last year, I think we're in the low-15s, 15.3 million gallons if I remember.

Mark DeVita -- Chief Financial Officer

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

Brian Recatto -- President and Chief Executive Officer

In addition to our...

David Manthey -- Baird -- Analyst

Okay. Thank you very much.

Brian Recatto -- President and Chief Executive Officer

Yeah. David, it's just not our normal cleaning, we're going to be doing some tuck [Phonetic] inspections, which impacted the plan a little bit.

David Manthey -- Baird -- Analyst

Okay. All right. Yeah. Thanks again.

Brian Recatto -- President and Chief Executive Officer

Thank you.

Mark DeVita -- Chief Financial Officer

Thank you.

Operator

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

Jim Ricchiuti -- Needham & Company -- Analyst

Hi. Good morning.

Brian Recatto -- President and Chief Executive Officer

Morning. How are you?

Mark DeVita -- Chief Financial Officer

Hey, Jim.

Jim Ricchiuti -- Needham & Company -- Analyst

Well, thank you. Hope you guys [Technical Issues]. 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?

Mark DeVita -- Chief Financial Officer

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 this time last quarter that we had experienced about 5,000 hours. We're down to 3,700 hours. So Q2 from an internal standpoint was definitely better from a pandemic impact. I will tell you early Q4 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 a microcosm population that they -- maybe we will get last, we certainly hope not. But there could be -- we could start to get closer back to what Q2 was than Q3, but the time will tell. That's why it's 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.

Brian Recatto -- President and Chief Executive Officer

Yeah. I mean, obviously, we're in contact with our branches on pretty routine basis. You read the economic indicators like we do. Manufacturing is down 7% compared to pre-pandemic level, so that's certainly rolling through our branches. Customers are cautious. I mean they are certainly worried about potential -- further slowdown because of the increased COVID cases as we enter the fall season. But overall, the mood at the branch level and 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. I mean we'd love to start next year with the renewed activity, but overall, very positive. Our workforce is positive. As we put in our prepared remarks, 3,700 hours of COVID case hour losses. But our employees are, as we said in our remarks, I mean very gritty. They worked extremely hard. They battled through this. I think we've been able to capture some market share from our customers because we had to furlough as many people early. We've not had any service failures.

So, overall very pleased with where we are and began to see some optimism from our customer base. Unemployment is higher though. You saw the numbers this morning. The numbers came in higher than we expected. We've got 13 million people unemployed. Let's hope that Congress gets up and pass and get the money flowing in the fall. PPP held for sure. So, we're a bit worried about that.

Mark DeVita -- Chief Financial Officer

Yeah. I think some people have also mentioned Jim that [Indecipherable] look at vehicles miles driven. We also look at that. I only have 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 I think it was about 11% year-over-year, only down. That is a little bit more, but it is not too off of -- too far off of what our ES 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 through to 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 0.75%. So, it's I think going into this fall cycle, times are good, but there is still the specter of the pandemic.

Brian Recatto -- President and Chief Executive Officer

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

Jim Ricchiuti -- Needham & Company -- Analyst

Got it. And follow-up question is just 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 is any additional color you could provide on how we think about that. Thank you.

Mark DeVita -- Chief Financial Officer

Yeah. As we've dug into it more, when we're preparing not just for our forecast for the rest of the year, our budget was not -- I'm pretty optimistic. We've done intentionally while we've had at furloughs both in the support roles, corporate, back-office stuff and in our field personnel, we've done some things that try and keep people not literally home, but protect their income. We have a lot of people in the field that are commission based. And a lot of that commission obviously is tied to revenue. So when that's down, there is a domino effect there.

And when you really look at the actual dollars that we've saved at least at the field level have -- we haven't had giant savings. In other words, they're not embedded in Q3 as it sounds fantasy land type results, that's ultra-low cost. So, we're pretty optimistic the longer we looked at it that, those types of things are going to be a bigger headwind to say, even though we are maybe bringing that 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 is 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 antifreeze 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.

Jim Ricchiuti -- Needham & Company -- Analyst

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

Brian Recatto -- President and Chief Executive Officer

Thank you.

Operator

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

Brian Recatto -- President and Chief Executive Officer

Hi, Kevin.

Mark DeVita -- Chief Financial Officer

Hi, Kevin.

Kevin Steinke -- Barrington Research -- Analyst

Hi. Good morning.

Brian Recatto -- President and Chief Executive Officer

Good morning.

Kevin Steinke -- Barrington Research -- Analyst

I'm just wondering how you're thinking about price increases in the Environmental Services business as you 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?

Brian Recatto -- President and Chief Executive Officer

Yeah. I'll talk from a macro standpoint then Mark maybe get into more specifics. We actually had a meeting to discuss pricing yesterday. Certainly with inflation, we're seeing it with our insurance cost, healthcare 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 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 the smaller manufacturing level, especially given that we call on. So, we're going to be -- we will be muted, but we're going to get out of price increase. It's certainly going to cover the inflationary pressures that we're going to feel moving into 2021. So, it will be a net positive to our performance.

Mark DeVita -- Chief Financial Officer

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 maybe we more aggressively priced in the past to try and target, maybe weighted a little more toward 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, we've talked about it. But we tried to actually do it two [Phonetic] price increases. You've covered us long enough to know we have the normal cadence of around in the early November time frame 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 what Brian's comment really are informed by what's happened before, what we have tried and what have worked. So we're pretty comfortable with the strategy we have for this year.

Kevin Steinke -- Barrington Research -- Analyst

Okay, that's helpful color. I wanted to talk too about the acquisition pipeline you mentioned. You continue to pursue acquisitions. And yes, in this environment, 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 or they slowed or just maybe any characterization of the overall pipeline?

Brian Recatto -- President and Chief Executive Officer

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're 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. That's tough for us to make money without it.

Kevin Steinke -- Barrington Research -- Analyst

Okay. Yeah, no, that's great. That's all I had for now. Thanks for taking the questions.

Brian Recatto -- President and Chief Executive Officer

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

Mark DeVita -- Chief Financial Officer

Thanks, Kevin.

Operator

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

Michael Hoffman -- Stifel -- Analyst

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

Brian Recatto -- President and Chief Executive Officer

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

Michael Hoffman -- Stifel -- Analyst

No, we were there. Your operator gave me hard time. So everybody has been trying to work their way around how to model this at this point. And when we grossly oversimplify, 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. So is that what we're hearing revenue wise? And then the question is...

Brian Recatto -- President and Chief Executive Officer

Yeah. I think that's good.

Mark DeVita -- Chief Financial Officer

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

Michael Hoffman -- Stifel -- Analyst

No, no. But it's so -- we're simple people as sell-side guys, right.

Brian Recatto -- President and Chief Executive Officer

I think you heard in our macro comments that we think we will see some slight incremental revenue growth. I mean 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 is going to go in the fall. Overall, the mood is positive. We're seeing improvement every period. So I think you good to model the way you're modeling it.

Michael Hoffman -- Stifel -- Analyst

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 I 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.

Brian Recatto -- President and Chief Executive Officer

Yeah. Let me give you my perspective. It will be from a macro standpoint and Mark can chime in. I'm certainly thinking flat when I look quarter to quarter. Obviously, we're going to see some increased 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 the 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 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 to 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 -- scheduled uptime and unscheduled downtime at the rerefinery, which improves our CPG. If you look at the structural changes in oil, we've seen the CPG improvement in three years that's meaningful, which allows us to make money in a shitty spread market that we're experiencing right now, which is -- can tell you how proud we are that we were able to be gross margin positive at the rerefinery 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.

Mark DeVita -- Chief Financial Officer

I mean from an ES standpoint, I really think the ability to get to around the same margin is there. I mentioned that for all the initiatives we've done, part of the or 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 when revenue goes down, you're going to lose every dollar of that.

So the fact that we [Indecipherable], 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 that Brian mentioned that as they continue to bear fruit, some antifreeze operations, internalizing ways. Those are the incremental ones are our truck costs. Those are all contributors, and those are ones that can continue to contribute.

Michael Hoffman -- Stifel -- Analyst

Okay. So -- go ahead.

Brian Recatto -- President and Chief Executive Officer

Mike, I'll talk about oil. In terms of third-party supply, I think we collect 75% plus of our own internal supply of the plant. We're seeing some improvement in third-party gallons. RFO demand is down a bit. And I think from a macro standpoint, 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. 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 locations.

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 market place and we continue to see stable spread conditions. At some point, base oil is going to move in a better direction it has to.

Mark DeVita -- Chief Financial Officer

Yeah. I mean it's the minor piece that Brian mentioned on our call. 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 with what we told in Q2 is like 2.3 million gallons, so...

Michael Hoffman -- Stifel -- Analyst

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 that's where we're driving, 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 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 fully 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?

Brian Recatto -- President and Chief Executive Officer

Yeah. I mean, being the optimist, I'd like to think that we can get there. I mean, 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 to double-digit growth in quarters. I'd like to think we 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 organic and will lay in the inorganic, the acquisitions, which we've been successful with and I think we'll continue to have success with. So I'm pretty bullish on next year, provided we don't see the pandemic eat back up and we had more recessionary conditions.

Mark DeVita -- Chief Financial Officer

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

Brian Recatto -- President and Chief Executive Officer

Correct.

Mark DeVita -- Chief Financial Officer

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, whatever the threshold is. That's the bigger risk is does somebody shutdown your customer.

Brian Recatto -- President and Chief Executive Officer

Yeah. I agree.

Mark DeVita -- Chief Financial Officer

It seems like the severity of illness or the way we were able to treat it is getting better. And as long as that doesn't take a step back because people are more comfortable, no one wants to get it, but you get a sense that people aren't fearful depending on if they have pre-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.

Brian Recatto -- President and Chief Executive Officer

And Michael, I don't think people are going to -- and I made this comment earlier. I don't know if you heard it, but I don't think people are going to jump right back in the mass transit. I know I haven't. And I think you'll see -- you've seen the 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 of optimism there that the number of cars will increase because families are going to have to buy and own. And I'm thinking about it.

Michael Hoffman -- Stifel -- Analyst

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

Brian Recatto -- President and Chief Executive Officer

Yeah.

Michael Hoffman -- Stifel -- Analyst

Up from $14 million [Indecipherable] 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 manufacturing industrial service?

Mark DeVita -- Chief Financial Officer

It's about 50-50.

Brian Recatto -- President and Chief Executive Officer

Yeah.

Michael Hoffman -- Stifel -- Analyst

Okay. Thank you very much for taking the time.

Brian Recatto -- President and Chief Executive Officer

Thank you, Michael. Take care.

Operator

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

Brian Recatto -- President and Chief Executive Officer

Hi, Gerry. How are you?

Mark DeVita -- Chief Financial Officer

Hi, Gerry.

Gerry Sweeney -- Roth Capital -- Analyst

Hi, good morning. I'm doing well. How are you guys doing?

Brian Recatto -- President and Chief Executive Officer

Good.

Gerry Sweeney -- Roth Capital -- Analyst

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, less jet fuel, the whole as you said market is maybe in turmoil or disarray, but you also mentioned taking market share, etc. 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 at the market. Air travel could be down for an extended period of time, etc. And then, you also have this IMO 2020, I dare to ask how that actually even fits into the equation anymore?

Brian Recatto -- President and Chief Executive Officer

Yeah, I think structurally, we may have even mentioned it on the Q2 call. We have seen some smaller collectors, parked trucks that go out of business. I can't tell you that they're not going to restart, if market conditions, the RFO market improves. But we have seen some improvement as I said in the third-party supply with 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 in 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 rerefiners. 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 is no shipping traffic out there. There is no demand for distillate, so a lot is going to happen over the next six months.

I think probably premature for me to answer that, but I do think the third parties are going to be hard that are not tied in the rerefiners because the RFO market is 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 the used motor oil competing with us. I don't know if I answered this question.

Gerry Sweeney -- Roth Capital -- Analyst

Got it. 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 are any markets doing considerably better than others? And part of the reason I ask is almost a benchmark for going into the winter maybe tracking how some of those COVID infections rise in fall. Just curious if some areas are doing better than others in terms of...

Brian Recatto -- President and Chief Executive Officer

It's funny. We talked about that, as we prepared our price increase thinking and working on budget. 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.

The early part of the pandemic, we were struggling in the Northeast. Obviously, they did a great job of locking down. That improved conditions in Northeast picked up. We started to seeing hotspots in the south. We started struggling in the 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.

Gerry Sweeney -- Roth Capital -- Analyst

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 in Florida, California [Indecipherable]. It's helpful to understand that perspective. So I appreciate it. That's it from my end.

Brian Recatto -- President and Chief Executive Officer

Okay, good. Thank you very much.

Operator

That was our last question. [Operator Closing Remarks]

Duration: 49 minutes

Call participants:

Brian Recatto -- President and Chief Executive Officer

Mark DeVita -- Chief Financial Officer

David Manthey -- Baird -- Analyst

Jim Ricchiuti -- Needham & Company -- Analyst

Kevin Steinke -- Barrington Research -- Analyst

Michael Hoffman -- Stifel -- Analyst

Gerry Sweeney -- Roth Capital -- Analyst

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