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Clean Harbors Inc  (NYSE:CLH)
Q3 2018 Earnings Conference Call
Oct. 31, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Clean Harbors, Inc. Third 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. (Operator Instructions) 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.

Michael R. McDonald -- General Counsel

Thank you, Christina 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 31st, 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 and 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?

Alan S. McKim -- Chairman, President & Chief Executive Officer

Thanks, Michael. Good morning, everyone and 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 and 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 two-thirds of that revenue increase was Veolia. The remainder was driven by greater activity among a variety of businesses, pricing improvements and the 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 are still in the early days of improving Veolia's profitability. If you 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 driving 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. Parts washer revenues were flat despite a slightly lower number of actual services performed in the quarter, while waste oil collection volumes top more than 60 million gallons up from a year ago. The team achieved this while maintaining a zero pay average per gallon.

Similar to the past several quarters, our rerefineries 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, excuse me.

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 base and 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 US.

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 loop 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 then we're on plan with capturing the number of cost synergies and in fact we spend some capital during Q3 to eliminate some of their legacy legal -- leasing cost. 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 are intensifying our focus on -- mobility at Clean Harbors and we will be promoting a greater usage of handheld devices, applications and mobile platforms among our workforce. We are 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, CEN 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 Part PCB storage facility located in New Hampshire. And while we look for attractive -- Bolton acquisitions like CEN, we are 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 enter 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 and beyond. Strong growth in the US chemical and manufacturing industry should feed additional high value waste streams into our disposal network. We're seeing a growing pipeline of largest 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 and 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?

Michael L. Battles -- Executive Vice President & Chief Financial Officer

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 million 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 in 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&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&A expenses came down by 50 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&A structure. For the full year 2018, we now anticipate that SG&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&A expense for the full year 2018 is expected to be $295 million to $300 million, slightly below our previous range. Income from operations for the third quarter increased 38% to $65.7 million, reflecting higher revenue in operating margin. Better pricing and more high margin waste streams propelled the 15% increase in adjusted EBITDA. We also benefited from a favorable comp from last year because of the negative impact of the three 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 $252.9 million for the end -- at the end of the quarter. The increased 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've refinanced a quarter of our long-term debt in July, shifting $400 million of our senior unsecured notes to a $350 million expansion of the variable rate term loan B facility and drawing $50 million on our revolver. To offset the variable 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 million in annual interest expense for the tenure 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 30th was 4.7%.

Turning to cash flow highlights on slide 11, cash from operations was $117.5 million in Q3, up 12% from a year ago. CapEx, net of disposals was $53.1 million, leading to adjusted free cash flow of $64.4 million. CapEx this quarter was up from a year ago, but it's mainly due in 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 million to $190 million, which include those Veolia investments.

During the quarter, we repurchased 7.1 million of stock or approximately 104,000 shares. Year-to-date, we have bought back more than 630 -- 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 million shares outstanding. Today, we have reduced that by about 8% to 56 million 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 million to $470 million. 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, but 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 of Veolia's US industrial business to be at the high end of our guidance we set in August of $10 million to $13 million in adjusted EBITDA this year.

Safety-Kleen remains on track to generate adjusted EBITDA growth of 13% to 14% due to effective management of the spread in our rerefinery business, increased production volumes at 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 401k. Based on cash flows through the first 9 months of the year and our current working capital assumptions, we've narrowed our 2008 adjusted free cash flow guidance to a range of $140 million to $160 million with the midpoint of $150 million unchanged.

In summary, we hit our adjusted EBITDA targets for the third 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 headed to 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.

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) One moment, please while we poll for questions. Thank you. Our first question comes from the line of Hamzah Mazari with Macquarie. Please proceed with your question.

Mario Cortellacci -- Macquarie -- Analyst

Hi guys. 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?

Alan S. McKim -- Chairman, President & Chief Executive Officer

Yeah, I'll start and Mike can chime in. So there certainly opportunities that we're seeing on the industrial side for sure, whereas there is more work going on in the refineries and many of our customers, we believe will be doing a lot more of tank cleaning and another 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 billion gallons or so to the lighter distillate fuels and the 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's 50 billion 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 in many respects, so we believe that that base oil probably be shifting upwards as well. So lower value for the quality of the oil being collected out 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 two years.

Mario Cortellacci -- Macquarie -- Analyst

Got you, thank you. And then just a quick follow-up. Could you give us a sense of pricing in your incinerator in landfill business and how that's trending on the hazardous waste side?

Michael L. Battles -- Executive Vice President & Chief Financial Officer

Yes sure. Mario this is Mike. Certainly on the -- both on the incinerators and on the landfills, pricing have been -- had been good -- have been good so for (Technical Difficulty) 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.

Mario Cortellacci -- Macquarie -- Analyst

Great. Thank you guys so much.

Alan S. McKim -- Chairman, President & Chief Executive Officer

Okay.

Operator

Our next question comes from the line of Tyler Brown with Raymond James. Please proceed with your question.

Tyler Brown -- Raymond James -- Analyst

Hey, good morning guys.

Alan S. McKim -- Chairman, President & Chief Executive Officer

Good morning.

Michael L. Battles -- Executive Vice President & Chief Financial Officer

Hey, Tyler.

Tyler Brown -- Raymond James -- Analyst

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.

Alan S. McKim -- Chairman, President & Chief Executive Officer

Yeah, probably up about a 11% I think at this point, right, Jim? About year-over-year up about a 11%.

Michael L. Battles -- Executive Vice President & Chief Financial Officer

And Tyler, while that stepped down from 92% to 84% it would tell you that it's got to be higher than that percentage dropped in order for us to have made more money in that business.

Alan S. McKim -- Chairman, President & Chief Executive Officer

I think the most important thing to us that with the El Do incinerator, which was really built to handle much more difficult streams. We're now -- as we started that plant up in the first 12 months, 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 stream. So it's worked out pretty well for us there.

Tyler Brown -- Raymond James -- Analyst

Okay, right. That kind of comes to my second question, was maybe mix half of that increase, is that a decent number I guess?

Alan S. McKim -- Chairman, President & Chief Executive Officer

I think mix, we can't underestimate the value of the mix. You're absolutely right. Yeah. But I would tell you that there has 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 initiatives that we've kicked off this year, we're now starting to bear fruit from that and customers are realizing that over the last three years or four years that with the economy the way it was, we weren't able as much to kind of command the higher price 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.

Tyler Brown -- Raymond James -- Analyst

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?

Alan S. McKim -- Chairman, President & Chief Executive Officer

Clearly would but I hope, Mike and -- we hope but certainly we are cautious on that.

Michael L. Battles -- Executive Vice President & Chief Financial Officer

Yeah. 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 years to 10 years. Who knows, but certainly and we've been able to grow in the low single-digits, mid single-digits, there is no reason to think we couldn't do it, it really depends on the market.

Tyler Brown -- Raymond James -- Analyst

Okay. And then real quick, Mike. What was your incentive comp expectation for this year. Is it over a 100% of the normal accrual?

Michael L. Battles -- Executive Vice President & Chief Financial Officer

Yeah, it's right. It's probably right around there. It's probably right at 100%.

Tyler Brown -- Raymond James -- Analyst

Okay. So when we think about SG&A dollars maybe off into next year, do you still think that -- do you think they'll be up with maybe 401k merit increases sounds like incentive comp won't be a positive variance necessarily, but do you still expect SG&A dollars to be up next year?

Michael L. Battles -- Executive Vice President & Chief Financial Officer

Yeah. So I think that incentive comp might be down a bit and offset by benefit increases. I don't think that those two maintain themselves, if I look at 2019, I think there is a netting of those two, Tyler.

Tyler Brown -- Raymond James -- Analyst

Okay. All right. I appreciate it.

Operator

Our next question comes from the line of Michael Hoffman with Stifel. Please proceed with your question.

Michael Hoffman -- Stifel -- Analyst

Thank you for taking the questions. Tax rate in 4Q, I get this is all over the map and how do we think about what we should have is an effective tax rate?

Michael L. Battles -- Executive Vice President & Chief Financial Officer

Yeah 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 really some losses incurred in Western Canada that was -- that we can't take the benefit for it, Michael, that's going to skew the rate a bit.

Michael Hoffman -- Stifel -- Analyst

Okay. And then how should we -- from a pure earnings per share standpoint, where should we start with an effective tax rate for 2019?

Michael L. Battles -- Executive Vice President & Chief Financial Officer

We are hopeful that the plan has it, so that we are going to start at least breakeven if not making money in 2019. I think our effective rate should be in the high 20s as you look at 2019.

Michael Hoffman -- Stifel -- Analyst

To 28%, 29%?

Michael L. Battles -- Executive Vice President & Chief Financial Officer

It will probably (ph).

Michael Hoffman -- Stifel -- Analyst

Okay. And then in the context of a full year guidance, if you take it at the midpoint, $480 million that has been dropping down to 111 for the fourth quarter. Would you help us with the -- what the seasonal issues are in the waterfall of that $30 million sequentially. And so we -- everybody appreciates what's happening in the business that leads to that?

Michael L. Battles -- Executive Vice President & Chief Financial Officer

Michael, can you repeat the question, please just real quickly.

Michael Hoffman -- Stifel -- Analyst

So if you hit the midpoint of your full year, you're at $480 million?

Michael L. Battles -- Executive Vice President & Chief Financial Officer

Yes.

Michael Hoffman -- Stifel -- Analyst

That means fourth quarter is $111 million?

Michael L. Battles -- Executive Vice President & Chief Financial Officer

Yes.

Michael R. McDonald -- General Counsel

Which is down $30 million sequentially, can you waterfall that why that happens so everybody appreciates the strength of the business despite the sequential dip?

Michael L. Battles -- Executive Vice President & Chief Financial Officer

Yeah. So, Michael, that -- that's very normal with this business, Q2 and Q3 are our best quarters. People do know the turnarounds of our business is going to -- of our customers happen in that time period so as such our Industrial business does very well. We do a lot of high -- you know kind of hazardous waste pickup, work is done in the fall I mean, 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 you know in 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 is actually pretty normal as has happened over the past few years.

Michael Hoffman -- Stifel -- Analyst

Okay. So -- and that was part of it, is this is a normal dip, the $30 million that's not -- you're not seeing anything?

Michael L. Battles -- Executive Vice President & Chief Financial Officer

No.

Alan S. McKim -- Chairman, President & Chief Executive Officer

Michael, on the Safety-Kleen 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.

Michael Hoffman -- Stifel -- Analyst

Right. All right. And then if I think about the flow through of the pattern going into 2019. I mean, we're talking about a -- probably a midpoint that's got a 5 handle on it. Low $500 million handle on it for 2019 is not an unreasonable place to start modeling.

Michael L. Battles -- Executive Vice President & Chief Financial Officer

We have to go through our budget process, Michael which starts in November and we got -- we got to go through a review with Alan and I and we have to get through the Board and that process happens naturally. It wouldn't shock me if that's the answer, but I don't want to make any commitments here.

Michael Hoffman -- Stifel -- Analyst

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?

Michael L. Battles -- Executive Vice President & Chief Financial Officer

Yeah, I think that this is a catch-up of incentive comp, I think as you look at 2019 we're going to get the leverage in that part of the business. Absolutely the case.

Michael Hoffman -- Stifel -- Analyst

Right. And then, Alan just to repeat I think what you were saying just to make sure I heard it correctly, an IMO 2020. So in Environmental Services and Industrial Field Services, you could have activity because the tank cleanups and incremental refining work and Safety-Kleen in the KPP business I get to plays, I get improvement on the front end of the used oil collection site because have to pay less for it or even get you to really charge more. And theoretically that's permanent probably but theoretically there is at least a temporary lift in base oil prices because the incremental demand for middle of them just let's driving up backing gas oil pricing and that widens the spreads and you're going to take a wait and see attitude on how that plays out before you put it into guidance?

Alan S. McKim -- Chairman, President & Chief Executive Officer

That's right. You got it.

Michael Hoffman -- Stifel -- Analyst

Okay. All right, great. Thanks.

Alan S. McKim -- Chairman, President & Chief Executive Officer

Okay, thank you.

Operator

Our next question comes from the line of Noah Kaye with Oppenheimer. Please proceed with your question.

Noah Kaye -- Oppenheimer -- Analyst

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 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 million EBITDA hit from the hurricanes. So if you add that back, you know, that's sort of a similar kind of $30 million-ish drop from 3Q to 4Q. So I just want make sure I'm thinking about that right and that is absolutely kind of consistent with how we would normally see the business trending, is that correct?

Michael L. Battles -- Executive Vice President & Chief Financial Officer

Absolutely you know, you got it right.

Noah Kaye -- Oppenheimer -- Analyst

Okay. Mike, I think you mentioned your focus on DSOs and hoping to bring that down in 4Q, but even if you make some progress this year it seems like working capital will be a drag. How should we think about that potentially kind of be neutral or even reversing in 2019 because it looks like it's going to be a free cash flow tailwind in 2019. Am I thinking about that right?

Michael L. Battles -- Executive Vice President & Chief Financial Officer

Yeah. So you know the challenge you have with working capital is, as our competitors have suggested as well, people are holding back payments and they really are -- where we need to do the same and we have and will continue to do so. I think as the business that's grown as we built out the closed loop, some of that has been a working capital headwind, whether that be an inventory, whether that be an 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 an absolute dollar basis.

As we go into 2019, again we got to go through our budget process and understand kind of the timing and kind of how the -- how our growth kind of flows through the P&L, but I'm hopeful that it's a modest headwind as we go into 2019 and that we can manage it better through kind of better process. Alan maintenance -- talked about some investors who are making the technology. We're hopeful that kind of streamline some of that from the collection efforts that we have in our business to make it. So less manual intensive and as such faster.

Noah Kaye -- Oppenheimer -- Analyst

That's very helpful. You know 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 Inc around the 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 clean up, are you getting any indications of whether this can be a real opportunity and when that might start to convert into business for you?

Alan S. McKim -- Chairman, President & Chief Executive Officer

Yeah. We -- we've seen quite a bit in that and actually had a session on that a couple of weeks ago here with the management team that talk about strategizing and how to go after that market as it begins to, as you say, framework that from a regulatory standpoint as well. So I absolutely think that that's a growing and could be a very large market for us.

Noah Kaye -- Oppenheimer -- Analyst

Okay. Just so I understand, are you getting any business from that now. Are you seeing any kind of quotation activity around that --

Alan S. McKim -- Chairman, President & Chief Executive Officer

Yeah I would say, this year you know $25 million to $30 million 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.

Noah Kaye -- Oppenheimer -- Analyst

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 constraints in the Permian around takeaway capacity. How is that impacting your business and do you think you could see maybe another lift next year as some of that capacity constraints start to ease?

Alan S. McKim -- Chairman, President & Chief Executive Officer

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 and 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 -- 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, would get an infrastructure backup.

But as you know many of the events that we've typically had were much more focused on those areas where there is such a large oil infrastructure and so in the case of last two has simply been where they landed that didn't create a 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.

Noah Kaye -- Oppenheimer -- Analyst

Okay. Thank you so much, Alan. Appreciate that color.

Alan S. McKim -- Chairman, President & Chief Executive Officer

Yeah. Okay.

Operator

Our next question comes from the line of William Grippin with UBS. Please proceed with your question.

William Grippin -- UBS -- Analyst

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 zero this quarter is moving to pay for oil potential headwind to margin expansion? Thanks.

Michael L. Battles -- Executive Vice President & Chief Financial Officer

William this is Mike. I'll start now and Alan feel free to chime in. You know so we've said many times, William that our goal is to get 50 basis points to 100 basis points of margin expansion each year, and that can be done through price, mix, cost controls, efficiencies, technology what have you and that's been our mantra and our goal as we expand.

So you know, I think that there is certainly opportunity kind of get back to kind of the high margins that we enjoyed four years, five years ago. On the PFOs zero 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 you look at Q4, we are not anticipating it going up or down in our current guidance, but obviously oil prices will have a say in that.

Alan S. McKim -- Chairman, President & Chief Executive Officer

Yeah, Will, it's important to understand that's a spread business. So if we're moving up to -- I wouldn't think of it as a headwind, because it usually will be going because we're getting something on the back end.

Michael L. Battles -- Executive Vice President & Chief Financial Officer

That's right. Good point.

William Grippin -- UBS -- Analyst

Okay. And the next question is just, are you guys looking at any other potential large M&A like the Veolia acquisition either to further build out the closed loop or other strategic fits within the US business?

Alan S. McKim -- Chairman, President & Chief Executive Officer

Yeah, we continue to look at opportunities kind of small and large in that area and we always seem to have a good steady flow of opportunities that are 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 as you know, 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 you know, 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.

William Grippin -- UBS -- Analyst

Got it, thank you.

Operator

(Operator Instructions) Our next question comes from the line of Dave Manthey with Baird. Please proceed with your question.

David Manthey -- Robert W. Baird -- Analyst

Hi, good morning, everyone.

Michael L. Battles -- Executive Vice President & Chief Financial Officer

Hey, Dave.

David Manthey -- Robert W. Baird -- Analyst

First off, on the El Dorado capacity. How much of that today is filled with high value waste streams versus, I know when you started it up you are 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?

Alan S. McKim -- Chairman, President & Chief Executive Officer

No, I think that's a never ending process really for us, not only in El Do but, really with all of our plants and it's always sort of a 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 EL Do 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 been running and basically what is a chemical plant you know and that's part of our success I think we've seen over the last number of years on our incineration business.

David Manthey -- Robert W. Baird -- Analyst

Okay. So, what you're seeing, Alan is that you are also capturing higher value waste streams outside of El Do in your other incinerators as well right now?

Alan S. McKim -- Chairman, President & Chief Executive Officer

Absolutely, absolutely.

David Manthey -- Robert W. Baird -- Analyst

All right. And then as it relates to the utilization of the incinerators and the high level of shutdowns you had in the third quarter. Because of those shutdowns planned and unplanned, is there anything we should read into the fourth quarter in terms of what we have more days of operation than normal in the fourth quarter?

Alan S. McKim -- Chairman, President & Chief Executive Officer

Yeah, we should, absolutely and it was just a way that some of our -- these were planned outages and we pushed one from Q2 to Q3 and a couple extra days on a couple of our planned turnaround. So nothing outside of the ordinary but they all kind of fell together in the third quarter. So we do have quite a bit of waste to burn and you know steady, you know volume of waste being collected certainly. So we're going to be in pretty good shape here in the fourth quarter.

David Manthey -- Robert W. Baird -- Analyst

Good to hear, thank you.

Alan S. McKim -- Chairman, President & Chief Executive Officer

Yeah.

Operator

Our next question comes from the line of Sean Hannan with Needham & Company. Please proceed with your question.

Sean Hannan -- Needham & Company -- Analyst

Yeah. Good morning folks. Can you hear me?

Michael Hoffman -- Stifel -- Analyst

Yes. Good morning, Sean.

Michael L. Battles -- Executive Vice President & Chief Financial Officer

Hi, Sean

Sean Hannan -- Needham & Company -- Analyst

Okay, good morning. 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 in 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 cross the disposable oil areas for where we are today which can see volume as well as mix improvements as we are looking forward? Thanks.

Alan S. McKim -- Chairman, President & Chief Executive Officer

Yeah, it's -- well, I guess what I would say is, 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 you know, year or two years 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.

Sean Hannan -- Needham & Company -- Analyst

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 that they had already been at and as we consider the more current state dynamics in terms of the shale activity or other. Just want to understand that piece so that better and then I have a last question here.

Michael L. Battles -- Executive Vice President & Chief Financial Officer

So certainly our volumes are down a bit, overall for the full year that was, Sean they're up at the end of the day it is a lumpy business we've talked about that and I'm not going to speak anyone landfill versus another. But we are, you know, the good message on there is that, prices are up, the amount of revenue that we're generating out of landfills is up year -- quarter-over-quarter. And we're pleased about it. It really is, though it's hard to -- we talk about landfill volumes, waste volumes, it really is a mix issue and it really based on the level of projects and and it's off a bit, but and not overly concerned.

Alan S. McKim -- Chairman, President & Chief Executive Officer

Yeah, I think with the 11 landfills, each has always a different story in each quarter.

Michael L. Battles -- Executive Vice President & Chief Financial Officer

That's right. That's right.

About opportunities and base business and so forth so.

And timing of project is (Multiple Speakers)

Alan S. McKim -- Chairman, President & Chief Executive Officer

But, I think (Technical Difficulty) this is the pipeline that we're seeing, Sean is good and it's just the timing and as Mike sense it, it's a lumpy business.

Sean Hannan -- Needham & Company -- Analyst

Okay. Fair enough. And then last question here conceptual one for you. So you folks at about a $5 billion enterprise value assigned by the market today and when you step back and consider replacement value of the disposal assets alone and particularly a lot of that incineration, permitting, et cetera. 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 markets given you today?

Alan S. McKim -- Chairman, President & Chief Executive Officer

Well, I think obviously this 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 you know, 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 expand them, I think bodes so well for the reputation we have with our communities, the leadership team we have been running these plants. I think that I don't know how you put a dollar amount to that.

Sean Hannan -- Needham & Company -- Analyst

Okay. Fair -- understood. All right, thanks for taking the questions folks.

Alan S. McKim -- Chairman, President & Chief Executive Officer

Okay, Sean.

Operator

Our next question comes from the line of Tyler Brown with Raymond James. Please proceed with your question.

Tyler Brown -- Raymond James -- Analyst

Hey, guys. I just have a quick follow-up, if that's OK.

Alan S. McKim -- Chairman, President & Chief Executive Officer

Okay.

Tyler Brown -- Raymond James -- Analyst

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 outlooks 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?

Michael L. Battles -- Executive Vice President & Chief Financial Officer

Yeah. The good thing, Tyler is that don't have to do that today. And I have until February to figure that out. It will be hard, because, the problem I feel is that, when it comes to like input costs and collection costs, it is going to be hard to put a number on what the impact is, say one of our competitor has decided to go out of business or do something else, we may get a little more on the charge of oil, but we won't know it, because that we lost a customer in a certain geography, lost competitiveness in 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 drive into an internal number, how we do that externally is going to be tricky, and I don't have a great answer for you today.

Tyler Brown -- Raymond James -- Analyst

Okay, OK. That's helpful. And then maybe my last one, Alan do you think the 20 million 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 then the hindrance on securing maybe a couple of those?

Alan S. McKim -- Chairman, President & Chief Executive Officer

Yeah, we had a 12 million 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 million 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, this 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 million direct. So we certainly have other interest, particularly from our distributors and growing the volume of business through our distributor network to offset that. So I hope next year we could say that you know 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 so.

Tyler Brown -- Raymond James -- Analyst

Okay. Appreciate the commentary, thank you.

Alan S. McKim -- Chairman, President & Chief Executive Officer

Yeah. Okay.

Operator

Our next question comes from the line of Scott Levine with Bloomberg. Please proceed with your question.

Scott Levine -- Bloomberg -- Analyst

Hey guys, good morning.

Alan S. McKim -- Chairman, President & Chief Executive Officer

Good Morning.

Michael L. Battles -- Executive Vice President & Chief Financial Officer

Hi, Scott.

Scott Levine -- Bloomberg -- Analyst

Hey, just -- you know, just on the capital allocation maybe. A couple of years ago you guys were pretty active there on the acquisition side, even last year at Veolia, et cetera haven't seen as much activity in the last few quarters and a little bit more on the buyback, but maybe if you could access to your appetite on acquisitions and maybe a little bit more specifics with regard to where your interests maybe in the marketplace right now?

Michael L. Battles -- Executive Vice President & Chief Financial Officer

Sure, Scott, I'll start 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, you know, our goal, as Alan have said and I've said many times is that, we tried to find assets that we get a good value that feed our network whether that would be in the rerefining 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&A targets and so we see many, and we pass on many, we don't get credit for that, we pass on tons of potential opportunities and we want to make sure that we're getting a good value for our shareholders.

Alan S. McKim -- Chairman, President & Chief Executive Officer

And I would just chime in that, valuations have been very rich and one of the things we'd like to be opportunistic and we'd like to obviously pay a fair price and kind of have a good deal that's going to be good in the long-term. So valuations I think have been very high with some of the transactions that we've seen out there and so that's held the spec a little bit too, Scott.

Scott Levine -- Bloomberg -- Analyst

Got it. Great, thank you.

Operator

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.

Alan S. McKim -- Chairman, President & Chief Executive Officer

Well, thank you all for joining us this morning. We look -- we -- 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.

Operator

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.

Duration: 52 minutes

Call participants:

Michael R. McDonald -- General Counsel

Alan S. McKim -- Chairman, President & Chief Executive Officer

Michael L. Battles -- Executive Vice President & Chief Financial Officer

Mario Cortellacci -- Macquarie -- Analyst

Tyler Brown -- Raymond James -- Analyst

Michael Hoffman -- Stifel -- Analyst

Noah Kaye -- Oppenheimer -- Analyst

William Grippin -- UBS -- Analyst

David Manthey -- Robert W. Baird -- Analyst

Sean Hannan -- Needham & Company -- Analyst

Scott Levine -- Bloomberg -- Analyst

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