Heritage-Crystal Clean, Inc
Q3 2018 Earnings Call Transcript

Published: 18 Oct 2018

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Heritage-Crystal Clean, Incorporated Third Quarter 2018 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] Some of the comments we will make today are forward-looking. Generally the words aim, anticipate, believe, could, estimate, expect, intend, may, plan, project, should, will be, will continue, will likely result, would and similar expressions identify forward-looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward-looking statements. These risks and uncertainties include a variety of factors, some of which are beyond our control. These forward-looking statements speak as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. Please refer to our SEC filings, including our annual report on Form 10-K as well as our earnings release posted on our website for a more detailed description of the risk factors that may affect our results. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website. Also, please note that the certain financial measures we may use on this call, such as earnings before interest, taxes, depreciation, amortization, or EBITDA, and adjusted EBITDA are non-GAAP measures. Please see our website for reconciliations of these non-GAAP financial measures. For more information about our company, please visit our website at www.crystal-clean.com. With us today from the company are the President and Chief Executive Officer, Mr. Brian Recatto; and the Chief Financial Officer, Mr. Mark DeVita. At this time, I would like to turn the call over to Brian Recatto. Please go ahead, sir.

[Brian Recatto:]

Thank you and welcome to everyone joining us this morning. Last night, we reported our third quarter 2018 results. We recorded diluted earnings per share during the quarter of $0.27 compared to diluted earnings per share of $0.20 in the third quarter of 2017, an increase of 35%. Our revenues for the third quarter increased 19.6% compared to the third quarter of 2017 to $99.7 million, driven by 28.6% growth in our Oil Business segment and 15% growth in our Environmental Services segment. Mark will provide more financial details in a moment but I would like to cover other areas of our business. I would first like to discuss the results in our Environmental Services segment. From a revenue standpoint, I'm excited by the fact that we delivered strong double-digit growth in this segment for the second straight quarter. This performance is a direct result on the approach used by our sales and service team to discover the true needs of our customers and then work to meet those requirements. All of our lines of business in this segment experienced growth on a year-over-year basis. Our revenue growth in 2018 has been aided by the five new branches we added during 2017, as well as the sales and service resources, such as branch sales managers, antifreeze sales and service reps, vacuum sales and service reps, ESP specialists and field services reps we added throughout 2017. The cost incurred during 2018 associated with the new branches and resources added during 2017 was approximately 9.8 million, from which we generated approximately $11.8 million revenue. Although we have continued to identify opportunities to add new resources during 2018. We have not been as aggressive in doing so compared to 2017. Through the first three quarters of 2018, we incurred approximately $1.1 million in operating cost, while generating approximately $0.7 million in revenue for the resources added during this year. Our Environmental Services operating margin in the third quarter of 2018 was 25.7%, down from 27.2% in the same quarter a year ago. We continue to face strong inflationary headwinds which negatively impacted our operating margin on a percentage basis. For example, we experience an increase of approximately 28% and the cost per unit of the metal spirits using our parts cleaning service, during the third quarter compared to the third quarter last year. From a transportation perspective, we experience an increase of approximately 8% in the fuel surcharges we receive from our transportation vendors during the third quarter compared to the third quarter of 2017. These escalating cost have in part prevented us from getting our operating margin back in the same level we achieved during 2017 on a percentage basis. Despite a decrease in the prior year, we increased our profit before corporate SG&A by $1.3 million or 8.7% from prior year and we are working hard to show additional improvement during the fourth quarter. Moving on to our Oil Business, in the third quarter of fiscal 2018, Oil Business revenues were up $8.1 million or 28.6% compared to the third quarter of fiscal 2017. The increase in revenue was driven by improved conditions in the base oil market, in part due to rising crude oil prices as well as strong sales volume. Our base oil netback increased by $0.32 per gallon during the third quarter compared to last year but was flat compared to the second quarter. As has been the case for over a year, higher crude oil prices and higher prices from barker and related fuels which are used to set pricing in the RFO market have continue to increase the price we need to pay the generators to collect their used oil. During the third quarter, the price we pay to generators increased by approximately $0.07 per gallon and the price we paid for feedstock from third parties increased $0.08 per gallon compared to the second quarter of 2018. While managing our Street price has been challenging, we're able to partially offset the negative impact of higher Street pricing by increasing our oil collection route efficiency on a year-over-year basis for the second quarter in a row. During the third quarter, we increased our route efficiency by 9.5% compared to the third quarter of 2017. For the first time since we've been operating our re-refinery, we're proud to report that we produced double digit operating margin in back to back quarters in our Oil Business segment. This result was made possible in part due to very strong production at our re-refinery. The re-refinery operated 103.6% of nameplate production capacity during the third quarter. The strong production rate was due to the fact that we did not take our planned extended shutdown until early in the fourth quarter. As we discussed during our second quarter earnings call, we schedule an extended shutdown during the fourth quarter to conduct both routine maintenance and to complete several capital projects at the re-refinery. We're able to accomplish all the maintenance and capital project activities we have planned to complete during this shutdown which lasted approximately 18 days. Unfortunately, the impact of this extended shutdown will mean lower production and higher maintenance expense during the fourth quarter. We expect this will result in our fourth quarter operating margin being near breakeven for the Oil Business segment. The good news is the re-refinery is running an excess of our nameplate base oil capacity and producing very high quality product. We believe the effects of the work performed during our shutdown get in the fourth quarter will put us in a position to have more consistently operate the refinery at higher rates into the future. Mark will now walk us through our third quarter financial results in detail.

[Mark DeVita:]

Thanks Brian. I'll begin with the Environmental Services segment. In the third quarter of fiscal 2018, Environmental Services revenues increased by approximately $8.3 million or 15% from $55 million in the third quarter of fiscal 2017 to $63.3 million in the third quarter of fiscal 2018. We generated higher revenue in all our product and service lines with the strongest growth in our field services, antifreeze and containerized waste businesses. The revenue growth was a result of positive impacts from price and service mix in some of our businesses and volume increases and others. In the parts cleaning business, we experienced price and mix gains, which were partially offset by slight decline in volume but resulted in overall solid growth to the business. In our containerized waste business, we experienced strong volume growth, where our price and service mix increased slightly. The vacuum services business had favorable increases in our price and service mix with solid declines in overall volume. The increase in antifreeze business revenue was due to volume gains driven primarily by the antifreeze acquisition we made in the middle of the second quarter this year. Revenue from this acquisition was approximately $1.3 million during the third quarter. Our strong growth in our field services business was aided by the conclusion of a large project we discussed during our second quarter earnings call. This project contributed $2 million in revenue during the third quarter. Same branch revenues grew approximately 12.8% on a year-over-year basis during the third quarter. If you exclude the previously mentioned field services project, our same branch sales growth was 9.2%. Profit before corporate SG&A expense in the Environmental Services segment was $16.2 million, representing a 1.5 percentage point decline in our third quarter operating margin compared to the year ago quarter. However, profit dollars before corporate SG&A expense increased $1.3 million over the same period. On a percentage basis, our third quarter operating margin was 10 basis points better than the second quarter as we continue to battle inflationary pressure in various aspects of our business. In our Oil Business segment, the increase in revenue was due to stronger base oil pricing and higher volumes of base oil gallon sold as a result of strong base oil production at our re-refinery during the third quarter of 2018. During the third quarter of 2018, we produced 11.2 million gallons of base oil compared to 9.5 million gallons during the third quarter of 2017. During the third quarter of 2018, we sold approximately 10.5 million gallons of base oil compared to 8.9 million gallons during the third quarter of 2017. Profit before corporate SG&A expense in the Oil Business segment increased 3 million in the third quarter from 1.4 million in the third quarter of 2017 to 4.4 million or 12% of revenue in the third quarter of 2018. This represents the 7.1 percentage point improvements in operating margin on a year-over-year basis. Our overall corporate SG&A expense as a percentage of revenue was 11.4% compared to 14.2% from the year ago quarter, mainly driven by higher revenue and lower severance, partially offset by increased share based compensation expense. The company's effective income tax rate for the third quarter of 2018 was 26.2% compared to 35.2% in the year ago quarter. The rate difference is principally attributable to the decrease in federal corporate income tax rate. Third quarter EBITDA was 12.7 million compared to 11.8 million in the year ago quarter. The increase in EBITDA was primarily due to our revenue growth, partially offset by higher underlying operating costs. Third quarter 2018 adjusted EBITDA was 13.9 million compared to 10.6 million in 2017. Turning now to balance sheet highlights, cash on hand at the end of the quarter stood at 46.3 million compared to 33.5 million one year ago and 41.8 million at the end of the second quarter of 2018. Total debt was steady at 29 million compared to 28.7 a year ago. During the third quarter, we generated 10.2 million in cash flow from operations, representing an increase of 147% compared to third quarter of 2017. We intend to use our access cash balance to execute our growth strategy, seeking additional acquisition opportunities, as well as to opportunistically pursue capital projects, to help drive revenue growth and improve operational efficiency. In summary, we had a solid third quarter, achieving strong revenue growth, while improving margin dollars in both of our segments. We continue to be excited about the opportunities ahead of us and we are focused on carrying this momentum into the fourth quarter. And what that I will turn the call over to our operator to take your questions.

[Operator:]

Thank you, sir. [Operator Instructions] And our first question will come from David Manthey with Baird, your line is now open.

[David Manthey:]

Thank you. Good morning, everyone.

[Brian Recatto:]

Good morning, Dave.

[David Manthey:]

Yeah, first off, on the fourth quarter shutdown, so we should assume that plant utilization goes to the high 80s or low 90s or something depending on pricing of base oil, how should we think about the utilization in the fourth quarter?

[Brian Recatto:]

Yeah, how about I give you the actual production estimates for the quarter. We're expecting to be in the 13.25 million range for the quarter versus last year David, we were in the 14.3 million range for the quarter, so that's the impact year-over-year.

[David Manthey:]

All right, got it. And as we enter the fourth quarter, Mark, do you have any comments on how we approach modeling for this extra week in the fourth quarter? I know, you know there's always the holidays where they fall and how that impacts the sales line, but any additional thoughts or colors we look at costs and D&A and so forth in the fourth quarter this year?

[Mark DeVita:]

I think it's going to progress on pro rata basis the same as any of our other Q4s. Remember, I just want to make sure we're on the same page. 2020 with our current fiscal calendar is one will have an extra week in it, not this year or our next. But I would expect on a pro rata basis for those metrics to be similar to what we've experienced in the last quarter.

[David Manthey:]

All right, got it. Okay. And then finally, if Brian maybe you could talk about how you view the potential impact of IMO 2020 in the business and I'm wondering if it's early and I know there is lot of question marks out here, but are you making any strategic moves today that you normally wouldn't have an anticipation or you taking a wait and see approach, how are you viewing IMO 2020 and the impact on the business?

[Brian Recatto:]

Yeah, David, it's too early to take any strategic moves. Obviously we're optimistic on the impact of IMO 2020 based on the fact that we think it's going to negatively impact or on our case positively impact the price of Barker fuel at a lower the value of it on the Street. As we know, the Marine fuel markets are large market having 4 million barrels a day to support the global market. We're optimistic that obviously the price for used motor on the streets because it change the back half of 2019 in our favor. So pretty excited about it and we're going to continue to push our internal collections in our direct generator business, so we can continue to improve our collection costs and our feedstock prices. So no real strategic shift which is optimistic the back half of the year, we will benefit with better used motor oil conditions.

[David Manthey:]

Yeah, okay. And then just one...

[Mark DeVita:]

David, you know one other thing is that because it certainly impact the price of oil is the price of these lighter desolate it's goes up because of the demand for the lighter desolate, so we certainly think base oil prices going to happen because of margin producers are going to pay more for feedstock.

[David Manthey:]

Right, okay, that's a good point. Then the final question is you mentioned earlier about the indexes that are impacting the used motor oil market, approximately how much of the used motor oil that you collect and/or source is based on some kind of the six oil index and how much of it is just spot?

[Brian Recatto:]

Well, you know we have some customers that are directly impacted or directly tied to it through our corporate accounts. Our corporate account volume has been growing. I mean it's not half of it but it's a pretty big share.

[Mark DeVita:]

Most of that is tied to WTI.

[Brian Recatto:]

And most it's tied to WTI. But to be honest with you, any just street or spot business which is obviously more than half of what we do that indirectly really David is tied to it. So even though there's not a set contract with the index price on it, it's you know a spot each time you go collect it. There's a strong correlation because that's what the rest of our competitors pretty much are taking into.

[Mark DeVita:]

And our third party Dave is certainly tied to the number six also for fuel oil, so that that will certainly be an impact. You know we've had internal discussions that there's going to be a separation between for fuel number six and WTI. So we're going to - we've got to look strongly at separating ourselves from that WTI index because of what we expect is going to happen in the back half of '19 and go more toward the high sulfur fuel index.

[David Manthey:]

That makes a lot of sense. Okay, thank you very much.

[Mark DeVita:]

Thank you.

[Operator:]

Thank you. And our next question will come from line of Sean Hannan with Needham & Company. Your line is now open.

[Sean Hannan:]

Yes, thanks, good morning. Thanks for taking the question here. Nice work on the quarter here. Just want to see if I could understand some of your view points at this point thinking about the pricing that we're observing on the output side for the re-refine oil. Clearly, there is some thoughts there given that you are at least initially sensing you might a bit of a break even quarter mainly tied to the production impacts and mainly perform.

[Mark DeVita:]

Yeah, the breakeven - can you hear me. Yeah, the breakeven is going to be more driven by the expense of the turnaround activity. The 18 day shutdown, we spent quite a bit of money. Obviously we lost significant production as well but big drivers going to be on the cost side because of the maintenance activities.

[Sean Hannan:]

Yeah, so we were right, so we're going to have some costs within the business, we're going to have some lost revenues right, because we're coming off line for a little bit. So I guess ultimately I am trying to get a sense of how you feel that pricing as we're going into this back quarter here and we've had some good momentum, you've already commented on this in terms of looking at commodity oil whether bridge or WTI, perhaps that should provide a little bit of sustainability and support around pricing as we enter into '19. So I guess at a high level, we have a lot of variables think about pricing here, I want to get your perspectives running out the year at this point?

[Brian Recatto:]

Yeah, good time, you know we're fresh off of it you know oil and certainly there's a lot of base oil out there. You know pricing is driven more off of feedstock cost. So our view on the balance of the year which obviously will have one quarter left is more flat based on, more flat pricing for our end products looking into Q4. Beyond that I think we began to get a bump because of what's going to happen with IMO 2020 because of feedstock cost we certainly think the price of base oil is going to have to go up, because they're going to pay more for it. But near term, you know flat net backs for us as well we're predicting for Q4.

[Sean Hannan:]

Okay. And actually follow-up on that comment Brian, so we've seen at times in the past particularly as we get to - because when we think about the sulfur consideration coming out IMO 2020, and we think about the value our VGO which should improve. In theory, we should be able to see you know the group to loop oil pricing increase as derivative of that, right, it's kind of last step before we hide a treat. So the concept is there, but we've seen not long ago some brakes where that concept didn't work and did improve true. I was short term, but want to see if we can get your perspective on you know what maybe occur, what may be supportive where we do get that dynamic playing through, VGO improving and base loop oil improving kind of a sustainable fashion once it's all plays out on kind of a multi-year based. Do you have any perspective around that that would be really helpful?

[Brian Recatto:]

You know my perspectives is not different than the others. We've already seen a fuel the virgin producers raise base oil pricing, even though we're in a fairly loose supply market because of a higher cost of feedstock. So we're certainly in the camp that year end, what's driven the weakness overall and base oil at least recently is the fact that we had a great production year where most of the virgin producers not having any major maintenance and turnaround. Yeah, we broke the 2000 record in terms of the amount of oil produced in the first half of this year. So it's just - we had a great opportunity for the plants to run well, there's a lot of base oil out there but we're still - and the camp that base oil is going to going up next year because of higher feedstock cost including VGO.

[Sean Hannan:]

Okay, that's helpful. Last thing just to squeeze in here if I could. Is there anything within Environmental Services side, I don't think there is, but is there anything that could be a positive impact as a consequence of IMO 2020, I don't think if there's really necessarily anything there but if there is any insight you could provide that would be great? Thanks so much for addressing all the questions here.

[Brian Recatto:]

Yeah, I don't see any real impact other than on the cost side. I mean obviously most low sulfur distiller it's including diesel prices will go up and that itself that we're going to have to manage. I don't see any other negative effect from and no positive effect from and it's just going to be the cost side and there we're going to have to manage, diesel prices will go up next year.

[Mark DeVita:]

I mean I would take, maybe it's all trapped unless the view but there is potential and you know really one of the main reasons we even got into this business is to help leverage our full menu and to the extent that we're able to get in and stay into more cost in the collection side of used oil that gives us that many more years to speak to and try and help with their needs and you know there is other thing that we do. So, indirectly I think it even is good for that segment.

[Brian Recatto:]

You know where lead for the fuel market, it certainly and have the value of [indiscernible].

[Sean Hannan:]

That's great point, that's very helpful. Okay, thanks again folks.

[Brian Recatto:]

Thank you.

[Operator:]

Thank you. And our next question will come from line of Ryan Merkel with William Blair. Your line is now open.

[Ryan Merkel:]

Hey, good morning, everyone.

[Brian Recatto:]

Good morning.

[Ryan Merkel:]

A couple of questions on ES segment for me. I guess first of all how much of the fifteen 15% revenue growth was price and how much was volume if you have that roughly?

[Mark DeVita:]

I can go over and let in the call Brain and kind of a business by business standpoint, on for parts cleaning you know almost all of that was - almost all of the parts cleaning was price and it was really only about 2.5% growth. In that business, we had around the same percentage of price in the containerized waste business and that growth was the over 18% percent so multiple volume, but we still got again one of couple percent of price and then roughly about the same in our back. We did really see enterprise in our antifreeze business, it was volume. And you know we're integrating which for us within the antifreeze business it's sizable, it's not that big for a segment wide, but a fairly sizable acquisition. And you know one of the first things we do is try and focus on the customer and then the people and getting pricing and what not is a tertiary type focus. So that's expected for us. We think there is pricing power the bigger we get there and I think more important from a margin standpoint. As you look at it you know inflation was probably the main thing but we have had headwinds as we grow some of these early stage businesses where we don't really have scale yet. That the great thing is we're going to get scale, we'll never have a horrid scale I guess I would say, as we do now or as we did in Q3 and businesses like antifreeze as we continue to grow it. So we should see us ramp up the probability curve there, but there wasn't really any price in that business. And we are coming into as you know Ryan, you covered it, Q4 is kind of the time when we do our price increases across the board and we implemented with somewhat staggered for the most part already began to implement our price increase a month or two earlier than normal, mainly due to the inflationary pressures. We have seen already the branch up to a lot of it. Other than our antifreeze which was maybe a month and a half later than the rest of the businesses, we're already implementing that. So hopefully we normally expecting Q1 that kind of have full on or it would hitting the ground, we might hope to get a little tailwind at the end of Q4 from it because we did it a little earlier than normal.

[Ryan Merkel:]

Got it, that's helpful. And a follow-up...

[Brian Recatto:]

Yes, Ryan, we are seeing a little bit of a stabilization on the inflationary, it was totally worse at Q2 at 30 and we began to that stabilize. We obviously we made with our vendors quite often and we're not feeling as much pressure we were before. But as Mark said, it was important for us to get the price increase out early because of that pressure. And we want to re-accelerate our organic growth next year and get ourselves in a position to be able to do that. We was opening up additional branches in that and that's certainly do again hardly 2019.

[Ryan Merkel:]

And before I ask about the margins in the ES segment, I was a little surprised to hear Mark say parts cleaning business was actually all price, so on a volume basis, it didn't grow, what - so is it - what the issue there?

[Mark DeVita:]

Ryan, that's been - it's a dichotomy, really our parts cleaning business has double digit growth, the solvent has been kind of 1% to 2% negative grower and it's been that way by the last couple of years. So well I think in Q2, we actually did had a flat results in volume on the parts cleaning side if I'm getting the number right. We have seen a slight deterioration. And if there is some cannibalism in that the double digit increase growth, but you know we're not targeting that, we're intending our guidance to go after new business when they're in this more higher growth focus of it, but part of it is just the - you know it's more of a cash cow business for us right now.

[Ryan Merkel:]

Okay. Got it. All right. And then you know, Brian in the press release you said the ES you know profit margins and profit growth could have been better in not for the inflationary pressure. So it sounds like you're doing the price increase a little bit early to help solve that, you probably going to hit these are comparison here soon. I am sure you are working at productivity. Those all the things you are working on I guess do you think, when do you think we might start seeing you know margins rise year-over-year in that business?

[Brian Recatto:]

Yeah, as you have read, heard in our prepared remarks, I think we are guiding flat now but we certainly expect to begin to see improvement in 2019. We've got the - we will begin to see the effect of this price increase and Tier 1 as Mark talked about. And certainly some of our optimization activities will continue to impact our profitability. So we're going to get back to the 27% number that we've talked about of previous calls. That's our internal goal. With the addition of the organic growth that we've talked about, we don't want to slow that down, we want to work hard to achieve the efficiencies to maintain that margin while we roll out new locations, because we think that's important and the absence of meaningful acquisitions, yes we talk about tuck-ins, but we've got a lot of mopping up balance sheet, is the best use of our resources at this point. We're confident, we are improving track record, we done it before and we will do it again. And we have plans to get that branch going on up over 100 over the next few years and we're going to march toward that goal.

[Ryan Merkel:]

Okay, very helpful. Thank you.

[Operator:]

Thank you. And our next question will come from the line of Brian Butler with Stifel. Your line is now open.

[Brian Butler:]

Good morning. Thanks for taking my questions. Can you guys hear me?

[Brian Recatto:]

Yeah, we can hear you well. How are you, Brain?

[Brian Butler:]

Great, doing well. First on the oil business, if I heard you correctly pay for oil was up sequentially $0.07 or $0.08 but the net back was flat, so pricing on base oil was kind of similar to that $0.07 to $0.08, is that the right way I'm thinking about that correctly?

[Mark DeVita:]

No, no, the net back was not flat. Our net back was flat, the spread wasn't flat.

[Brian Recatto:]

Yeah, the selling price was flat.

[Mark DeVita:]

Yeah, so we had a spread duration of the $0.07.

[Brian Butler:]

Okay, so the spread compressed by $0.07. And how much UMO did you guys process and what percent was from third party?

[Brian Recatto:]

We're on it right now the third quarter supply you know less than 20% but that's down significantly from a year and a half ago. You know very much value are third party suppliers, but as you've heard on our conference calls, well density is very important to us from a cost management standpoint, so we've reduced that number from the high 20s to below 20% of our feedstock and that's because we've increased the route density and the oil each one of our trucks is supplying. You know the feed, the wet feed this year, our feed is a little bit drier than normal, it's going to finish the year roughly 68 million gallons and out that 80% of it is coming in internal.

[Mark DeVita:]

We tried a little less than 17 in the quarter.

[Brian Butler:]

17 with an annual being around 68, okay. And then so margins came in about 100 basis points in the oil business sequentially from second quarter, third quarter, was that from the spread compression or was there some additional breakdown of that that 100 basis points?

[Brian Recatto:]

A little bit of spread and we also had a few minor issues of the flat which cost us a little bit of production. We had our hydrogen supplier that went down for a couple of days which cost us 300,000 gallons of production. So some minor production issues a little bit of spread.

[Mark DeVita:]

And we did have a few one-offs too which I think is again it shouldn't reoccur with related to getting contaminated oil. It is normal to get it over the course of the years, but occasionally you will get guys how most of the time are normally will give you a B2B lower, it doesn't, it hasn't caused us any operating problems. Just in convenientness, you know we had to recognize some approvals for some of that in Q3 results.

[Brian Recatto:]

Another issues of the plant though in terms of our tank capacity, we call it before we got to the plant, but it's still as Mark said cost us money.

[Brian Butler:]

Okay. And then when you think about the investments you've made in the fourth quarter with the schedule shutdown. How should we think about margins in the current price environment looking into '19 I mean it's double digit margins for a full year truly achievable or is that still an optimistic kind of look at what your oil business can generate.

[Brian Recatto:]

As any mechanical issues, I will be pretty disappointed if we could get a consistent double digit performance. You've heard that from us on every call that's our goal. We've done it two quarters in a row. We would have done it in Q4, we did the main, it's a little bit softer, it was a right time for us to do capital project, it was planned all here. Took 18 days, it is what it is, it was a right move for us, we look out into 2019 because of what we think is going to happen. Significant upgrades at the plant which should give us a more readable operation and that was our overall goal and we think the construction project in the current rate is successful.

[Brian Butler:]

Okay, and then on the environmental services piece, when you think about growth going into '19 with somewhat less additions from new locations, you know this kind of mid-teen growth that we saw in the third quarter and likely for the full year, does that come back down to single digit or again is that something that can be maintained based on investments that were made last year and this year that, you're still in the double-digits?

[Brian Recatto:]

Yeah, we'll put into together our plan now getting more to high single-digit performance next year.

[Brian Butler:]

Then that's not a pure organic that basis in. What will probably find acquisitions you can't say for sure?

[Brian Recatto:]

Yeah looking so, we're in the project field services business where we could see of opportunities there, but overall guiding to the high single-digit number.

[Brian Butler:]

Okay. And then last one just on capital spending thoughts looks like you're on phase to do about 20 million, 21 million in capital spending for '18, has a this most recent shutdown and investment on the upgrade is that - is that still a good number to be thinking about for '18 and how does that go into '19?

[Brian Recatto:]

No, I think you're going to want to bump that number up we look to not just what we've already done but we have some other capital projects, so I would suspect that that would get into the mid 20's. And really when you look going forward, it really depends on good ROI projects, if we can find them we're going to do them, but on a kind of the anchors of our capital budget through most of our history we'll be parts cleaning that's how it's going to be there and then in addition to the parts cleaning spend which is usually been in that 5 million range, maintenance repairs, capitalize over repairs and whatnot. The other big thing is going to refinery we just have one more compliance project in our mind to do, we've talked about with some you on finishing that flair project up and then a part of that would be done maybe third quarter next year or something like that. But other than that we should see CapEx come down, it depends on some of those other projects, but if we don't have a lot of great opportunities to get great returns on capital then you're going to be back down in that 15ish, 13ish type range.

[Brian Butler:]

Okay, great. Thank you very much.

[Operator:]

Thank you. [Operator Instructions] And our next question will come from line of Kevin Steinke of Barrington Research. Your line is now open.

[Brian Recatto:]

Hi, Kevin.

[Kevin Steinke:]

Hello. Just you had discussed in the environmental services segment accelerating the fourth quarter price increases a little bit. But what about the magnitude relative to history given the inflationary pressures you're seeing, I mean are you kind of ramping up the magnitude as well?

[Brian Recatto:]

It's a great question Kevin, we definitely are doing that exactly as you pointed out. So we might normally go out I mean you've covered us long enough from that. 5% to 7% range give or take between one year or the next, we're ramping that up to near double-digit is our plan, so we always realize something less than that as you know, but what we're going out like that is going to be around that 10% market it varies a little bit based on the line of business.

[Kevin Steinke:]

Okay. That's helpful. And the cost pressures you talked about I think were mostly you mentioned commodity related and transportation. Are you seeing anything on in terms of wages and labor costs given the tight labor market? A - Mark DeVita Part labor market is more about us and it is more expensive in general, but to me it - to us it's more about getting people. We have a number of openings that - it's more or less affecting our revenue to be honest and that obviously has a trickled down in fact in our service business. We can't quite get the leverage. If you're really looked unsurprising and this is part of the fact of not having as many ads and personnel as Brian alluded to this year versus last year, but compared to Q3 last year labor costs actually came down as a percentage of revenue. So it's - labor is still a challenge for us, I don't have to tell a different story because that wouldn't be true, it just didn't manifest itself the way you might think in the financial results.

[Kevin Steinke:]

Okay. Fair enough. Now that you've done this extended shutdown at the refinery, I mean it sounds like you think that's going to - is that going to increase production capacity going forward in any meaningful way or are you just going to try and run it now and see kind of where the capacity is before kind of declaring that you can actually now run it at a higher production capacity I guess?

[Brian Recatto:]

Yeah Kevin we're not going to change our name plate on the refinery, we guided at the beginning of the year to 47 million gallons of production. We're going to see how [indiscernible] what the changes of a more fresh - fresh off the construction project, but all signs point to the answer being yes, the plan is performing extremely well right now, very happy with product quality and it's best we've seen since we've been in operation of the plant, so thrilled with the outcome so far, but well we'll know more as we get into Q1 and to get some runtime under our belt.

[Kevin Steinke:]

Okay, makes sense. The circling back on environmental services, the disposal costs had been an issue for you the last couple of quarters at least the first half of '18, I mean are we past that in terms of I think you had an issue with a third party provider and we kind of passed that disposal cost issue now?

[Brian Recatto:]

But I think we're past the third party issue, that partner has been up and running and things are running well between us and them, they hadn't dared to for Hurricane or and say whatnot but other than that things are great there. I think overall, there is still a big challenge for disposal and just cost in general because we're seeing the same inflationary pressure there that were seen in some of the more commodity type cost. So part of this story as far as our result to it we have a large field services job that is - we have these extra-large common projects which are not all that normal for us, you're obviously used to going to be willing to do that because there's a slightly lower margin so then - that is some of the noise around why disposal was higher for it's not just in Q3 relative to revenue but in Q2, so there is a couple of different factors there, but there is an inflationary component there with disposal that put all that on margin, but that one product is over. I don't know if I stated that so and whatever part I had one that was that will be there in Q4. And as we commented earlier we are seeing some stabilization from our vendors from an energy cost have been relatively flat and then there are significantly year-over-year but relatively flat over the last couple of quarters. So the bulk of the inflationary pressure we think we've seen we'll probably see a little more and you're absolutely right to talk about ways that it's tough labor market and Mark mentioned [indiscernible] for the reason why we had a slowdown some organic growth as charts show the positions that we have currently in our existing branches that's a better opportunity for us to see quicker growth.

[Kevin Steinke:]

Okay, makes sense. I guess lastly, just acquisition pipeline as you - you look forward into 2019, the number, are you still evaluating a number of opportunities or maybe the areas that you'd like to continue to expand into?

[Brian Recatto:]

Yeah, we continue a pretty robust pipeline, they are smaller and major tuck- in varieties if you well know the M&A markets with very difficult market today and we want more value for our money, so we're really focusing on the smaller tuck-ins, we're certainly looking for larger opportunities you see our balance sheet we have the capability to lever up and do a larger deal. It just has to be the right deal, but we've got 10 active discussions in our pipeline, so it's always pretty robust. We've got a good fleet of network of people, when you have 90 locations laid down for opportunities, we've got a dedicated resources out there meeting with those potential targets and it continues and generally nice opportunities.

[Kevin Steinke:]

Okay, great. Thanks for taking all the questions.

[Brian Recatto:]

Thank you.

[Mark DeVita:]

Thank you. Welcome.

[Operator:]

Thank you. Ladies and gentlemen, this concludes our question-and-answer session for today. We'd like to thank you for your participation on today's conference. You may now disconnect. Everybody, have a wonderful day