Earnings Call: Q3 2018

Oct 31, 2018

Greetings, and welcome to the Clean Harbors, Inc. 3rd Quarter 2018 Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael McDonald, General Counsel for Clean Harbors Inc. Thank you, Mr. McDonald. You may begin. Thank you, Christine, and good morning, everyone. With me on today's call are Chairman, President and Chief Executive Officer, Alan S. McKim EVP and Chief Financial Officer, Mike Battles and SVP of Investor Relations, Jim Buckley. Slides for today's call are posted on our website, and we invite you to follow along. Matters we are discussing today that are not historical facts are considered forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Participants are cautioned not to place undue reliance on these statements, which reflect management's opinions only as of today, October 31, 2018. Information on potential factors and risks that could affect our actual results of operations is included in our SEC filings. The company undertakes no obligation to revise or publicly release the results of any revision to the statements made in today's call other than through filings made concerning this reporting period. In addition, today's discussion will include references to non GAAP measures. Clean Harbors believes that such information provides an additional measurement in consistent historical comparison of its performance. Reconciliations of non GAAP measures to the most directly comparable GAAP measures are available in today's news release on our website and in the appendix of today's presentation. And now I'd like to turn the call over to our CEO, Alan McKim. Alan? Thanks, Michael. Good morning, everyone. Thank you for joining us. Starting on Slide 3, we delivered another strong quarter that exceeded our guidance with both reporting segments contributing favorably to our performance. Adjusted EBITDA outpaced revenue growth, resulting in a 50 basis point margin improvement. Growth in Environmental Services was driven by Veolia, an improved mix of waste streams and increases in our industrial energy and field services businesses. Safety Kleen delivered its 9th consecutive quarter of revenue and EBITDA growth. Turning to Environmental Services on Slide 4, we generated 15% top line growth. Approximately 2 thirds of that revenue increase was Veolia. The remainder was driven by greater activity among a variety of businesses, pricing improvements, and a mix of higher value waste streams into our disposal network. Looking at this segment's profitability, adjusted EBITDA was up 18% with a 60 basis point margin improvement. And I should point out that we're still in the early days of improving Veolia's profitability. If we remove Veolia from the segment, our margins would have been approximately 20.1% or 180 basis point improvement from last year. Incineration utilization came in at 84% due to a heavy schedule of planned maintenance plus a few unplanned days at several locations. Fortunately, the combination of pricing initiatives and our success in capturing higher value waste streams yielded increased profitability in our incinerator network even with the 8 point drop in utilization. With the addition of our El Dorado incinerator, we're setting new records for drum volumes and we are drawing more waste streams from the ongoing expansion that we see in the chemical sector. Landfill tonnage was down 18% due to the timing of some projects, but our average price per ton was up significantly year over year due to a strong base business, which more than offset the lower tonnage. Landfill volumes remain ahead of 2017 year to date. We generated strong profitable growth within our network of TSDFs, our wastewater treatment plants, and our chemical recycling facilities. Moving to Slide 5, Safety Kleen grew revenues by 6%, primarily due to higher base oil and blended pricing, supported by growth in our core offerings at the branches, including direct lube sales. Potts washer revenues were flat despite a slightly lower number of actual services performed in the quarter, while waste oil collection volumes dropped more than 60,000,000 gallons, up from a year ago. The team had achieved this while maintaining a 0 pay average per gallon. Similar to the past several quarters, our re refineries ran well, again with production levels above a year ago. Safety Kleen's adjusted EBITDA increased 13% due to higher pricing, the team's ability to manage the spread and the closed loop offering. In terms of sales mix, direct lube sales accounted for 6% of Safety Kleen's total volume sold, similar to Q2 and up from 4% a year ago. Overall, blended product sales were lower than expected at 25% of our total volume. Our focus continues to be on profitable blended product sales, and we are focusing on margins versus volumes at this time, With the upcoming changes expected as a result of the IMO 2020 regulations, we will continue to look at every contract and every sale on a short term basis until we have better visibility on the impacts to our collection markets and the basin blended oil markets. Moving to our corporate update on Slide 6, our focus this year remains on growing the business profitably and improving our margins. We've been pleased with our performance year to date and want to carry that momentum through Q4 and into 2019. The price mix efforts in our incineration network was really what carried us through in Q3. This focus enabled us to overcome the higher number of down days in the quarter. And as we move into Q4, we expect to see our mix continue to improve, supported by new or expanded chemical waste streams, and that trend should continue in the years ahead given the availability of cheap natural gas here in the U. S. For the closed loop, we continue to target doubling the volume of direct lubricants sold from that of 2017. We remain confident about the compelling value proposition for our direct lubricant offering, and we continue to have steady success. We have now surpassed 25,000 unique direct customers as of September. We continue to see a considerable pipeline of medium and large direct lube opportunities, and our ramp up in the closed lube continues and interest remains high. The strategic realignment that we did of our sales and service organization within environmental services at the start of this year is really working well. We see it improving profitable growth for us this year and it should continue to enable us to achieve more cross selling and really better sharing of people and assets going forward. The Veolia integration continues and we're on plan with capturing a number of cost synergies. And in fact, we spent some capital during Q3 to eliminate some of their legacy legal leasing costs. Their operational footprint should afford us more opportunities for growth and drive more waste streams into our network, particularly in the Gulf and Midwest going forward. Turning to our capital allocation strategy on Slide 7. As Mike will touch on, we expect a good cash flow performance this year and we'll evaluate the best ways to deploy that capital. On the acquisition front, we're targeting companies that allow us to leverage our network and benefit from our investments in technology. Along those lines, we're intensifying our focus on mobility at Clean Harbors, and we'll be promoting a greater usage of handheld devices, applications and mobile platforms among our workforce. We're examining new and different ways to apply artificial intelligence and data analytics to streamline many of our internal functions and to improve on safety. In Q3, we purchased a small Massachusetts company, Syn Environmental, that will support both our environmental services and our waste oil collection business. Their location included a Part B oil terminal outside of Boston and a PCB storage facility located in New Hampshire. And while we look for attractive bolt on acquisitions like Cin, we're also seeking opportunities to divest some of our smaller non core assets or businesses. And in addition, we'll continue to execute on our stock buyback program. Let me close with our outlook. We entered the final quarter of 2018 with momentum, supported by array of favorable market trends and internal initiatives that should bode well for us in 2019 beyond. Strong growth in the U. S. Chemical and manufacturing industry should feed additional high value waste streams into our disposal network. We're seeing a growing pipeline of larger scale remediation and waste projects that can support our landfills going forward. Within Safety Kleen, we remain optimistic about our ability to continue to effectively manage the spread, while growing our core lines of business in our branches and advancing our direct lube oil sales model. Overall, we look forward to a strong conclusion to this year. So with that, let me turn it over to Mike Battles. Mike? Thank you, Alan, and good morning, everyone. Turning to Slide 9 in our income statement. We followed up a strong first half of the year with continued profitable growth in Q3. We increased revenue by more than $87,000,000 from the prior year. Veolia accounted for approximately half of that growth, with the remainder driven by organic contributions from both reporting segments. The decline in gross margin this quarter largely reflects the impact of Veolia as well as our high number of down days our incinerators that Alan referenced. We expect our plans to perform in Q4 and beyond, which should translate to gross margin improvement as we leverage those high fixed cost assets. As expected, SG and A expenses were up on an absolute dollar basis, reflecting increases in benefits and incentive compensation as well as the Veolia acquisition. As a percentage of revenue, however, SG and A expenses came down by 60 basis points in the quarter. That improvement was driven by higher revenue, improved leverage from our new regional structure and the integration of Veolia into our existing SG and A structure. For the full year 2018, we now anticipate that SG and A expenses as a percentage of revenue will be down from 2017. Depreciation and amortization was essentially flat as the addition of Veolia was offset by assets that were fully depreciated. D and A expense for the full year 2018 is expected to be $295,000,000 to $300,000,000 slightly below our previous range. Income from operations for the Q3 increased 38 percent to $65,700,000 reflecting higher revenue and operating margin. Better pricing and more high margin waste streams propelled a 15% increase in adjusted EBITDA. We also benefited from a favorable comp from last year because of the negative impact of the 3 hurricanes in that period. On the bottom line, GAAP EPS was $0.55 per diluted share, which was up more than 160% from a year ago. Adjusted EPS was $0.59 Turning to the balance sheet on Slide 10. Cash and short term marketable securities totaled $252,900,000 for the end at the end of the quarter. The increase in receivables in Q3 was a direct result of our higher revenue. DSO came in at 75 days, slightly higher than expected, primarily due to Veolia. Excluding Veolia, DSO would have been 72 days, exactly where we ended 2017. That said, we're not satisfied with DSO in the low 70s and are working hard to bring that number down in Q4. Before moving to our cash flows, I want to remind folks that we refinanced a quarter of our long term debt in July, shifting $400,000,000 of our senior unsecured notes to a $350,000,000 expansion of the variable rate Term Loan B facility and drawing $50,000,000 on our revolver. To offset the variable rate nature of our Term Loan B, we put an interest rate swap in place. These refinancing activities should more than save us should save us more than $2,000,000 in annual interest expense, push the tenor of that debt out by 4 years and afford us greater flexibility to reduce our debt. At the end of the third quarter, our net debt to EBITDA ratio was 2.9 times. At the end of September, 27% of our total debt portfolio remains at a variable rate, and our weighted average cost of debt as of September 30 was 4.7%. Turning to cash flow highlights on Slide 11. Cash from operations was $117,500,000 in Q3, up 12% from a year ago. CapEx, net of disposals, was $53,100,000 leading to adjusted free cash flow of $64,400,000 CapEx this quarter was up from a year ago, but is mainly due to the timing of some investments, including lease buyouts in Veolia. We expect CapEx to trend down in Q4 from Q3. For the full year, we continue to target CapEx, net of asset disposals of $170,000,000 to $190,000,000 which include those Veolia investments. During the quarter, we repurchased $7,100,000 of stock or approximately 104,000 shares. Year to date, we have bought back more than 635,000 shares at an average cost of $52.82 per share. As you can see on Slide 11, when we instituted our share repurchase program in 2014, we had approximately 61,000,000 shares outstanding. Today, we have reduced that by about 8% to 56,000,000 shares. Moving to guidance on Slide 12. Based on our 9 month results and current market conditions, we are raising the low end of our adjusted EBITDA guidance from $460,000,000 to $470,000,000 The new midpoint represents a 13% increase from 2017. For Q4, the midpoint of that range would translate to an adjusted EBITDA increase of about 9% versus the prior year. We are hopeful to conclude the year in the upper half of our guidance range, want to continue to provide numbers that we are confident we can consistently achieve. Here's how our current full year 2018 guidance translates from a segment perspective. In Environmental Services, we expect adjusted EBITDA to increase 13% or better in 2018. This growth will continue to be driven by pricing, higher value waste streams and margin enhancements in our disposal business. We now expect Veolia's U. S. Industrial business to be at the high end of our guidance we set in August of $10,000,000 to $13,000,000 in adjusted EBITDA this year. Safety Kleen remains on track to generate adjusted EBITDA growth of 13% to 14 percent due to effective management of the spread in our re refinery business, increased production volumes in our plants and steady contributions from the branch network that includes the closed loop. We expect the negative adjusted EBITDA in our corporate segment to increase at a rate approaching a mid teens level from 2017, primarily due to cost of acquisitions and higher incentive compensation and benefits, including 401. Based on cash flows during the 1st 9 months of the year and our current working capital assumptions, we've narrowed our 2,008 adjusted free cash flow guidance to a range of $140,000,000 to $160,000,000 with the midpoint of $150,000,000 unchanged. In summary, we hit our adjusted dividend targets for the 3rd straight quarter and expect year over year profitable growth and margin improvements in Q4. Consistency and predictability have been a critical focus for us, and they remain so as we head into our annual budgeting process. We will provide 2019 guidance ranges for adjusted EBITDA and adjusted free cash flow on our Q4 call in February. With that, Christine, please open up the call for questions. Thank you. We will now be conducting a question and answer session. Thank you. Our first question comes from the line of Hamzah Mazari with Macquarie. Please proceed with your This is actually Mario Cortellacci filling in for Hamzah. Regarding the implications of the IMO 2020 rule, could you maybe talk about the impact to your business and maybe any work you've done to see how it plays out for the future of the business? Yes, I'll start and Mike can chime in. So there's certainly opportunities that we're seeing on the industrial side for sure as there is more work going on in the refineries and many of our customers, we believe, will be doing a lot more tank cleaning and other preparation for that change. Obviously, the bigger implication is on the Safety Kleen side of our business, where there will be a significant shift to the lighter fuels upwards of 50,000,000,000 gallons or so to the lighter distillate fuels and elimination of the high sulfur materials. And so therefore, having a significant amount more of high sulfur oil in the market will, in our opinion at least, have an impact on that waste oil side of our business, which today some of our waste oil goes into that market and is actually used as a fuel on some of these ships. So we think that that market will be significantly changing. And then on the opposite side, obviously, because of the high demand, that 50,000,000,000 gallon plus demand on the fuel side, we believe that the fuel market will continue to increase in cost. And therefore, there is a correlation with base oil many respects. So we believe that that base oil will probably be shifting upwards as well. So lower value for the quality of the oil being collected off the streets should continue to be a benefit of our raw material costs and a higher value for our base oil, we believe would be the benefit on the other side of it. So those are the three things that we're keeping our eye on, but certainly don't have an exact understanding of where it's all going to shake out over the next year or 2. Got you. Thank you. And then just a quick follow-up. Could you give us a sense of pricing in your incinerator and landfill business and how that's trending on the hazardous waste side? Yes, sure. Mario, this is Mike. Certainly, both on the incinerators and on the landfills, pricing have been good so far. They're up probably better than what we had expected in our original model. That is really due to the team focusing on not just on price, but on better mix. And you see that in the operating margins here in Q3 and really for the whole year. Great. Thank you guys so much. Okay. Our next question comes from the line of Tyler Brown with Raymond James. Please proceed with your question. Hey, good morning guys. Good morning, Tyler. Hey, nice quarter. But hey, Alan, I want to come back to that on the incinerator side. Just can you give any more flavor of specifically what that average price per pound was up this quarter? I think you had talked about it last quarter. Yes, probably up about 11%, I think at this point, right, Jim? Year over year. Year over year up about 11%. And Tyler, by that step down from 92% to 84%, you would you that it's got to be higher than that percentage drop in order for us to have made more money in that business. And with the I think the most important thing too is that with the Eldo incinerator, which was really built to handle much more difficult streams, we're now as we started that plan up in the 1st 12, 16 months, we were bringing a lot of different volumes of waste as we're going through the start up of that plant. Now we've kind of got that plant lined out pretty well and we're starting to introduce some more difficult streams that that plant was originally designed for. And the timing was great because we've got a couple of customers that are coming online with those kind of streams. So it's worked out pretty well for us there. Okay, right. It kind of comes to my second question. Was maybe mix half of that increase? Is that a decent number, I guess? Yes. I think mix we can't underestimate the value of the mix. You're absolutely right. But I would tell you that there's been an initiative. We've been meeting with the team almost every other week to review pricing across the entire portfolio. And so that margin improvement initiative that we kicked off this year, we're now starting to bear fruit from that. And customers are realizing that over the last 3 or 4 years that with the economy the way it was, we weren't able as much to kind of command a higher price. And in fact, many cases gave out significant discounts, particularly with our oil and gas clients. So we've really been pushing that back again through those initiatives. Okay. So as we think about it though, the petrochem build out is starting to crescendo. You've got a bunch of plants coming online. They produce what I guess could be viewed as a higher value waste stream. But is there any reason to believe that we couldn't get this kind of maybe mid single digit core pricing plus a few points on the mix side for maybe the next couple of years? Or is that a little aggressive? It's purely would by hope, Mike. It would be a hope, but certainly we're cautious on that, right? Yes. I mean, Tyler, we've talked about having a lot of chemical investment in the chemical industry and the refining industry over the next 5 to 10 years. Who knows? But certainly, we've been able to grow low single digits, mid single digits. There's no reason to think we couldn't do it. It really depends on the market. Okay. And then real quick, Mike, what was your incentive comp expectation for this year? Is it over 100% of the normal accrual? Yes, it's right it's probably right around there. It's probably right at 100%. Okay. So when we think about SG and A dollars maybe off into next year, do you still think that do you think they'll be up with maybe 401 merit increases? It sounds like incentive comp won't be a positive variance necessarily, but do you still expect SG and A dollars to be up next year? Yes. So I think that incentive comp may be down a bit and offset by benefit increases. I don't think that those 2 may dent themselves. If I look at 2019, I think there's a netting of those 2, Tyler. Okay. All right. I appreciate it. Okay. Our next question comes from the line of Michael Hoffman with Stifel. Please proceed with your question. Thank you for taking the questions. Tax rate in 4Q, I get this is all over the map, but how do we think about what we should have as an effective tax rate? Yes. I think that it's going to be a little on the high side versus the high 20s that we've kind of said over the long term because I think there's going to be some losses in Western Canada that we can't take a benefit for, Michael, that's going to skew the rate a bit. Okay. And then how should we from a pure earnings per share standpoint, where should we start with an effective tax rate for 2019? We're hopeful that the plan has it so that we're going to start at least breaking even if not making money in 2019. I think our effective rate should be in the high 20s as you look at 2019. So 28%, 29%? Again. Okay. Yes. Okay. And then in the context of the full year guidance, if you take it at the midpoint, 480, you that has you dropping down to 111 for Q4. Help us with what the seasonal issues are in the waterfall of that $30,000,000 sequentially. And so everybody appreciates what's happening in the business that leads to that. Michael, can you repeat the question please, just real quickly? Yes. So in the if you hit the midpoint of your full year, you're at 480. Percent? Yes. That means 4th quarter is 111 percent? Yes. Which is down 30 Yes. So, Michael, that's very normal for this business. Yes. So Michael, that's very normal for this business. Q2 and Q3 are our best quarters. People do the turnarounds of our business is kind of of our customers happen in that time period. And so as such, our industrial business does really well. We do a lot of kind of hazardous waste pickup work is done in the fall. And this is our big September, October are our big months and April, May are our big months. And so really Q2 and Q3 are the big months. As you get to the end of the year, people the week of Thanksgiving, the week of Christmas, those are just slower naturally slower months for us, slower time periods for us, for our customers and for us. And so although that's down sequentially Q2 to Q3, that's actually pretty normal as has happened over the past few years. Okay. And that was part of it. This is a normal debt, the $30,000,000 You're not seeing anything? No. Michael, on the Safety Clean side, you have summer driving season, so you've got a lot more vehicle miles driven. So that everything kind of slows down. You get frozen ground starting in some areas. So construction slows. It's a natural seasonality. Got it. All right. Then if I think about the flow through of the pattern going into 2019, I mean, we're talking about probably a midpoint that's got a 5 handle on it, low $500,000,000 handle on it for 2019 is not an unreasonable place to start modeling. We have to go through our budget process, Michael, with regards in November and we got to go through it, review it with Alan and I and we have to get through the Board and that process happens naturally. It would shock me if that's the answer, but I don't want to make any commitments here. Okay. And then when do we start to see because your corporate overhead is going to be up, if you're saying mid teens 15%, that's greater than sales. So when do we get some operating leverage in the corporate overhead where it's not growing any faster than sales, maybe even slightly slower? Yes. I think that this is a catch up of incentive comp. I think that as you look at 2019, we're going to get some leverage in that part of the business, absolutely the case. All right. And then Alan, just to repeat, I think what you were saying, just to make sure I heard it correctly on IMO 2020. So in environmental services, in the industrial field services, you could have activity because of tank cleanups and incremental refining work. In Safety Kleen, in the KPP business, I get 2 plays. I get improvement on the front end of the used oil collection side because I'll have to pay less for it or even get to be able to charge more. And theoretically, that's permanent probably, but theoretically, there's at least a temporary lift in base oil prices because the incremental demand for middle distillates driving up back in gas oil pricing and that widens the spread and you're going to take a wait and see attitude on how that plays out before you put it into guidance? That's right. You got it. Okay. All right. Great. Thanks. Thank you. Our next question comes from the line of Noah Kaye with Oppenheimer. Please proceed with your question. Good morning. Thanks for taking the questions. If I could just briefly follow-up on Michael's question around kind of the seasonal cadence. I just want to make sure I'm thinking about this right. If I look at 3Q last year, if I remember correctly, you guys had about a $7,000,000 EBITDA hit from the hurricanes. So if you add that back, that's sort of a similar kind of $30,000,000 ish drop from 3Q to 4Q. So I just want to make sure I'm thinking about that right and that this is absolutely kind of consistent with how we would normally see the business trending. Is that correct? Absolutely, no. You got it right. Okay. Mike, I think you mentioned you're focused on DSOs and hoping to bring that down in 4Q. But even if you make some progress this year, it seems like working cap will be a drag. How should we think about that potentially kind of being neutral or even reversing in 'nineteen? Because it looks like it's going to be a free cash flow tailwind in 'nineteen. Am I thinking about that right? Yes. So the challenge you have with working capital is, as our competitors have suggested as well, people are holding back payments, and they really are. We need to do the same, and we have, and we'll continue to do so. I think as the business has grown, as we built out the closed loop, some of that has been a working capital headwind, whether that be in inventory, whether that be in AR. As the business grows, AR is growing. And that's I don't see any concerns there from a collection standpoint, but certainly AR has grown on an absolute dollar basis. As we go into 2019, again, we got to go through our budget process and understand kind of timing and kind of how the how our growth kind of flows through the P and L. But I'm hopeful that it's a modest headwind as we go into 'nineteen and that we can manage it better through kind of better processes. Alan Bates have talked about some investments we're making in technology. We're hopeful to kind of streamline some of that, some of the collection efforts that we have in our business to make it so less manual intensive and as such faster. That's very helpful. Turning to kind of some of the business factors here. You mentioned no emergency response in the quarter, which has been how it's mostly been, right, for the past couple of years. Seeing a lot of ink around PFAS liabilities mounting, it doesn't seem like there's for the makers of those products historically. We've been thinking about that as a potential opportunity for you. It seems like there's not a clear sort of regulatory framework yet. But are you guys starting to see some work related to that cleanup? Are you getting any indications of whether this can be a real opportunity and when that might start to convert into business for you? Yes. We've seen quite a bit on that and actually had a session on that a couple of weeks ago here with the management team to talk about strategizing on how to go after that market as it begins to, as you say, framework from a regulatory standpoint as well. So I absolutely think that that's a growing and could be a very large market for us. Okay. Just so I understand, are you getting any business from that now? Are you seeing any kind of quotation activity around that? Or is it still sort of future? I would say this year $25,000,000 $30,000,000 or so of revenue in that area right now and a lot of our units are booked out. So we're looking at investing some more capital to build more units to expand our service offering in that area. So yes. Okay, great. And maybe if I could sneak one more in. We've had a lot of discussion from industrials and even some of the solid waste folks this quarter about some of the How is that impacting your business? And How is that impacting your business? And do you think you could see maybe another lift next year as some of that capacity constraint starts to ease? I don't know if it's really directly impacting us per se with the constraints on the crude side. We are doing quite a bit of work in the Permian. We've been expanding some of our footprint in that market. It hasn't really directly impacted us. And so I don't think at this point it's something that's going to like open up the floodgates at least for us next year when the pipelines are completed. I do want to just get back to the issue of ER. Although the last few hurricanes that we've had, although been quite devastating, both in the southeast and down in the Gulf and Florida, we have been doing quite a bit of response work in the Gulf recently to help with getting the infrastructure back up. But as you know, many of the events that we've typically had were much more focused on those areas where there's such a large oil infrastructure. And so in the case of last 2, it's simply been where they landed. It didn't create the kind of opportunity that we typically see. But we continue to invest in our ER response capability, continue to sign up customers with standby service agreements, and we expect that to continue to be an important part of our business moving forward. Okay. Thank you so much, Alan. Appreciate the color. Okay. Our next question comes from the line of William Griffin with UBS. Please proceed with your question. Hi, good morning guys. So, first question is just given where oil is trending, industrial economy doing well, how are you guys thinking about margin expansion potential in the current environment? And is it possible for Clean Harbors to get back to, call it, the prior peaks? And then with waste oil cost at 0 this quarter, is moving to pay for oil potential headwind to margin expansion? Thanks. Hey, Will, this is Mike. I'll start now and feel free to chime in. So we've said many times, William, that our goal is to get 50 to 100 basis points of margin expansion each year, and that could be done through price, mix, cost controls, efficiencies, technology, what have you, that's been our mantra and our goal as we expand. So I think that there is certainly opportunity to kind of get back to kind of the high margins that we enjoyed 4, 5 years ago. On the PFO, there's 0 pricing we have today for our used motor oil. That's all predicated on the market. It's hard for me to predict that right now. As we look at Q4, we're not anticipating it going up or down in our current guidance, but obviously, oil prices will have a say in that. Yes. Will, it's important to understand that's a spread business. So if we're moving up to it, I wouldn't think of it as a headwind because it usually will be going because we're getting something on the back end. That's right. Good point. Got you. Okay. And then next question is just are you guys looking at any other potential large M and A like the Veolia acquisition either to further build out the closed loop or other strategic fits within the ES business? We continue to look opportunities kind of small and large in that area, and we always seem to have a good steady flow of opportunities coming through the door and people that we're working with. So nothing eminent at this point, but continue to certainly have discussions with folks and we continue to be interested. One of the real benefits of our company is we've got one platform, one system to run the entire company on. And as we look at opportunities to acquire companies, we find oftentimes they have many disparate systems and somewhat inefficient. And so when we're talking to some of these key strategic targets that we have, we're really looking for companies where we can really bring in some of the benefits of our technology and get the synergies quickly. Our next question comes from the line of Dave Manthey with Baird. Please proceed with your question. Hey, good morning, everyone. Hey, Dave. First off, on the Eldorado capacity, how much of that today is filled with high value waste streams versus I know when you started it up, you were just taking anything. So are you halfway through that transition, more than that? And then as you think about taking on those higher value waste streams, I would assume there's a glide path that will help improve margins next year as well. But any color you can give us in terms of the capacity that you filled and what you have left to go there? No, I think that's a never ending process really for us, not only in Eldo, but really with all of our plants. And it's always sort of maximizing the profitability, maximizing your mix, making sure that all of your feed systems in each of your plants are being utilized. So I think Dave, you're right that probably Eldo is behind in regard to that process simply because of the newness of that brand new plant, but maybe we're at 50%, getting it right, so to speak, or getting the right mix and blend. But I would just say that in the future that's just always an ongoing effort that we have in running basically what it is a chemical plant And that's part of our success, I think, we've seen over the last number of years on our incineration business. Okay. So what you're saying, Alan, is that you're also capturing higher value waste streams outside of Aldo in your other incinerators as well right now? Absolutely. Absolutely. All right. And then as it relates to the utilization of the incinerators and the high level of shutdowns you had in the Q3, because of those shutdowns planned and unplanned, is there anything we should read into the Q4 in terms of will we have more days of operation than normal in the Q4? Yes, we should. Absolutely. And it was just a way that some of our these were planned outages and we pushed 1 from Q2 to Q3 and a couple of extra days on a couple of our planned turnaround. So nothing outside of the ordinary, but they all kind of fell together in the Q3. So we do have quite a bit of waste to burn and a steady volume of waste being collected certainly. So we're going to be in pretty good shape here in the Q4. Good to hear. Thank you. Yes. Our next question comes from the line of Sean Hannan with Needham and Company. Please proceed with your question. Yes. Good morning, folks. Can you hear me? Okay. So wanted to see just generally high level, if you folks can talk maybe a little bit more about how you feel about the pace of volume and the mix in that legacy tech services business in terms of and a little bit more color on the accelerators there. Alan and Mike, you hit on the chemical industry a little bit earlier. We've also been encouraged by that and thank you. But can you give us maybe a summary picture here across the disposable areas for where we are today, which can see volume as well as mix improvements as we are looking forward? Thanks. Yes. Well, I guess what I would say is that we still see a lot of investment being made in the chemical area, and some of those plants may just require our industrial services folks to provide maintenance and turnaround services for them and they're not going to be heavy waste generators. But on the other hand, we've got some chemical plants coming online that are really generating some healthy waste streams that they're going to be relying on a partner like us to kind of tie in directly with them and help them with those streams, Sean. So it's I guess what I'd say is that it's evolving over the next year or 2 because those investments that have been made and now under construction and now those plants are coming online, those are going to continue to provide us opportunities we believe and we think we'll continue to win our fair share of them. I just think overall as we look at the amount of waste being generated across the network, not just these large chemical waste streams, but across the network, our drum volumes continue to be at record levels. We're excited about that. We're happy that customers are choosing us to be their supplier, and we think that will continue. And we're certainly working hard to get more trucks and more drivers to provide that increased demand for our services. Okay. All right. That's helpful. Maybe if I can follow-up on the landfill decline, was that Sawyer or elsewhere? I was surprised by the size of the decline given the levels it had already been at. And as we consider the more current state dynamics in terms of shale activity or other, just want to understand that piece a little bit better. And then I have a last question here. Yes. So certainly, our volumes are down a bit overall. For the full year though, Sean, they're up. At the end of the day, it is a lumpy business. We talked about that. I'm not going to speak any one landfill versus another. But we are the good message on there is that prices are up. The amount of revenue that we're generating out of the landfills is up quarter over quarter and we're pleased about it. It really is though, it's hard to when you talk about landfill volumes, waste volumes, it really is a mix issue and it really is based on the level of projects and it's off a bit, but I'm not overly concerned. Yes, I think with 11 landfills, each has always a different story in each quarter about opportunities and base business and so forth. And timing of projects, all kinds of interesting things. Yes. But I think the big piece of the pipeline that we're seeing, Sean, is good, and it's just the timing. And as Mike it's a lumpy business. Okay, fair enough. And then last question here, conceptual one for you. So you folks have about a $5,000,000,000 enterprise value signed by the market today. And when you step back and consider the replacement value of the disposal assets alone and particularly a lot of that incineration, permitting, etcetera, What kind of number you think would be in a broad sense on that replacement as I try to consider a sanity check against the valuation that the market's given you today? Well, I think obviously there is the capital side of it, but I think most important is the irreplaceable value of the permits that we have. We've really worked hard to maintain the compliance and the regulatory compliance of these facilities. And these are irreplaceable in my opinion. To get a new incinerator, I think would be such a monumental task and the fact that we've been able to not only maintain the existing network we have, but expand some of those existing facilities and maybe with the potential to continue to expand them. I think bodes so well for the reputation we have with our communities, the leadership team we have in running these plants. I think that I don't know how you put a dollar amount to that. Okay, fair. Understood. All right. Thanks for taking the questions, folks. Okay, Sean. Our next question comes from the line of Tyler Brown with Raymond James. Please proceed with your question. Hey, guys. I just have a quick follow-up, if that's okay. Okay. Hey, Mike, I want to come back to IMO real quick. So I'm optimistic, you're optimistic, we're all optimistic. But in reality, the outlook is pretty hazy. So Mike, I want to understand how you're going to think about SK whenever you go into the budgeting process. I mean, are you going to kind of look and take the current spread forward? Or are you going to try to impact or try to incorporate some of the impacts the spread could feel from either that waste oil pricing or maybe even VGO pricing? Yes. The good thing, Tyler, is that I don't have to do that today, and I have until February to figure that out. It's going to be hard because the problem I feel is that when it comes to like input costs and collection costs, it's going to be hard to put a number on what the impact is. Say one of our competitors decides to go out of business or do something else, we make it a little more on the charge for oil, but we won't know it because if we lost a customer in a certain geography, lost a competitor in a certain geography. So it's going to be very difficult, to be honest with you. I think we ultimately are going to push the team to put something on our internal budget so we can hold ourselves accountable to a number to make sure that we're focused and driving to an internal number. How we do that externally is going to be tricky. And I don't have a great answer for you today. Okay. Okay. That's helpful. And then maybe my last one, Alan, do you think that 20,000,000 gallons of direct sales could be possible in 2019? And if so, do you think you really need to anchor a couple of these really big accounts? And maybe what's been the hindrance on securing maybe a couple of those? Yes, we have a 12,000,000 gallon goal this year. We're not going to achieve that goal. So that's certainly going to make it more difficult to get to that 20,000,000 gallon target next year. I would say that the team has done a really good job of touching a lot more clients. So as I mentioned in my script there, there's 25,000 customers now that are buying our products. But getting some of the larger national customers, We have a lot in our pipeline. We've got a lot of interest in that. To be honest with you, we have opportunities to continue to grow our blended volume next year, which should deal with the shortfall that we might have on the $20,000,000 direct. So we certainly have other interest, particularly from our distributors in growing the volume of business through our distributor network to offset that. So I hope next year we could say that we are moving more away from base oil and more to blended. I think the blended direct is where it's going to tail behind a little bit next year still. Okay. I appreciate the commentary. Thank you. Yes. Okay. Our next question comes from the line of Scott Levine with Bloomberg. Please proceed with your question. Hey, guys. Good morning. Good morning. Hi, Scott. Yes, just on the capital allocation maybe. A couple of years ago, you guys were pretty active there on the acquisition side, even last year Veolia, etcetera. I haven't seen as much activity in the last few quarters and a little bit more on the buyback. But maybe if you could assess your appetite on acquisitions and maybe a little bit more specifics with regard to where your interest may be in the marketplace right now? Sure, Scott. I'll stop. And Alan, feel free to chime in. So we bought Veolia this year. So that was we bought that it feels like a long time ago, I get it. But we bought it in February. So we are still that was a major acquisition for us, and we've worked our way through. Look, our goal, as Alan has said and I've said many times, is that we try to find assets that we get a good value that feed our network, whether that be in the re refining space, whether that be in the incineration landfills, assets that give us the permits and the footprint that we need to kind of grow our core business. And so nothing changes in that area going forward. As Alan said earlier, we see a steady flow of M and A targets. And so we see many, and we pass on many. We don't get credit for that, but we pass on tons of potential opportunities. So we want to make sure that we're getting a good value for our shareholders. And I would just chime in that valuations have been very rich. And one of the things that we like to be optimistic and we like to obviously pay a fair price and kind of have a good deal that's going to be good in the long term. And so valuations, I think, have been very high with some of the transactions that we've seen out there, and so that's held us back a little bit too, Scott. Got it. Great. Thank you. We have reached the end of the question and answer session. I would now like to turn the floor back over to management for closing comments. Well, thank you all for joining us this morning. We look we're participating in some upcoming events. The Stifel event will be coming up. We'll be presenting at the Baird Industrial Conference next week out in Chicago. So look forward to seeing some of you at these and some of our other events. Thanks very much. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.