Clean Harbors Inc (CLH) 2018 Q4 法說會逐字稿

Greetings. Welcome to Clean Harbors' Fourth Quarter of 2018 Conference Call. (Operator Instructions) Please note this conference is being recorded. I'd now like to turn the conference over to Michael McDonald, General Counsel for Clean Harbors. Thank you, Mr. McDonald, you may now begin.

Thank you, Rob, 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're 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, February 27, 2019. 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?

Thanks, Michael. Good morning, everyone. Thank you for joining us. Starting on Slide 3. We concluded 2018 with a strong performance that enabled us to exceed our guidance. Both our segments delivered profitable growth in the quarter. Environmental Services achieved better-than-expected results from a combination of higher-margin waste streams, pricing gains and a solid contribution from Industrial Services, which includes the Veolia acquisition.

As was the case throughout 2018, adjusted EBITDA outpaced revenue growth in Q4, resulting in a 60 basis point margin improvement. Our full year results were also strong. Credit for that goes to our entire team, which consistently drove profitable growth and did so safely all year. I'm extremely proud to report that 2018 was the best safety year in Clean Harbors' history with our TRIR and other key metrics at record lows. Nothing is more important to our leadership team than ensuring that each employee goes home uninjured every day.

Financially, our revenues grew 12% and adjusted EBITDA increased 15%, while our adjusted free cash flow for the year was a record $195.3 million. Turning to Environmental Services on Slide 4. Our top line grew nearly $100 million in the quarter, with Veolia accounting for about $45 million of that amount. The remainder was driven by organic growth. Adjusted EBITDA in the segment was up 35%, with a 210 basis point margin improvement. Incinerator utilization came in at 86% in Q4. Our average price per pound grew by 17% year-over-year as we continue to focus on gathering more high-value waste streams and optimizing our mix.

With the addition of our El Dorado incinerator, we're drawing more waste streams from the ongoing expansion in the chemical sector and regularly setting new records for drum volumes coming from both Safety-Kleen and our legacy Clean Harbors business. For the full year, our El Dorado location ran at 95% utilization, up from 85% a year ago, demonstrating how well the new plant is running in year 2 of its operation.

Landfill tonnage in the quarter was down 6% from a year ago as a result of the timing of some projects. However, our average price per ton was up 18% due to our focus on bringing in more high-value waste streams and greater base work. For the full year, landfill volumes were up slightly from 2017. We also generated profitable growth in Q4 within our TSDF network, our wastewater treatment plants and our other recycling centers.

Moving to Slide 5. Safety-Kleen grew revenue 6% in Q4 due to our higher production volumes, our closed loop initiative and pricing and growth within the branch network's core lines of business. Parts washer revenues were up slightly in the quarter due to pricing, while waste oil collection volumes were 56 million gallons, giving us a record of 234 million gallons collected in 2018.

Similar to the past several quarters, our re-refineries ran well, with production levels above a year ago. Safety-Kleen's adjusted EBITDA increased 1% due to pricing in its core branch offerings, which offset the short-term spread compression we experienced when base oil prices declined during the quarter. The Safety-Kleen team did a great job throughout 2018, capitalizing on positive pricing trends as well as managing the spread between our used motor oil and base oil.

In terms of the sales mix, direct lube sales accounted for 6% of Safety-Kleen's total volume sold, similar to the past 2 quarters and up from 4% a year ago. Total blended product sales were 22% compared to 23% a year ago, and as we move into 2019, our focus is on increasing blended sales through not only our direct sales -- lube sales, but growing volumes with our key distributors. After selling less than 40 million gallons of total blended products in 2018, we aim to expand that to 50 million gallons in 2019, with about half of the increase coming from our closed loop and the remainder from distributors.

I want to take a moment to highlight the increasingly complementary relationship between our Safety-Kleen and our Environmental Service segment. Since acquiring Safety-Kleen, we've grown adjusted EBITDA in that business by $112 million or 66%. More importantly, adjusted EBITDA margins has increased 900 basis points from 15.3% in 2013 to 24.3% in 2018. During the same period, we've also made considerable progress integrating Safety-Kleen with our legacy business. Last year, Safety-Kleen gathered a record level of drums for our disposal network. Our Environmental Service, on the other hand, generated $100 million of revenue from Safety-Kleen's customers within its Total Project Management business. And we've also now located 35 legacy Clean Harbors locations within the existing Safety-Kleen branch network. The alignment between our segments continues to strengthen, and our results underscore the financial benefits that we can achieve together.

Here on Slide 6, we wanted to share with you a quick snapshot of the top 10 verticals that we serve. And as you can see from the chart, manufacturing and chemical are our largest verticals, and those who -- 2 industries accounted for nearly 1/3 of our revenues last year. After that, we are well diversified across a variety of markets that we serve. I should point out that upstream oil and gas has become a considerably smaller part of our revenue base in recent years, and today, only represents about 4% of our total sales.

Moving to our corporate update on Slide 7. A high-quality workforce is integral to our strategy to ensure we're operating efficiently as possible, while servicing our customers' needs. In 2018, we invested an additional $30 million into our people in the form of higher average wages, greater incentive compensation, the reinstatement of our 401(k) match program and other expanded benefits. Our investments in our people will continue to increase in 2019 as we more than double our 401(k) contribution and absorb all healthcare cost increases. And we're also pursuing a broad array of cost savings initiatives again this year that we believe will offset these workforce investments.

Profitable growth remains the focus for us in 2019. We took a significant step forward in 2018 but there's more we can do to extend our momentum and improve our margins. We saw early success from the strategic realignment of our sales and service organization within our Environmental Services segment at the beginning of 2018. This structure should generate growth for us again this year, expanding cross-selling opportunities and enabling more efficient sharing of people and assets going forward. With the impending changes expected from IMO 2020 regulations, we continue to review every contract and sale on a short-term basis, really to look for opportunities to capitalize on market conditions.

Turning to our capital allocation strategy on Slide 8. In 2018, we executed on all 4 elements of our capital allocation strategy. We invested nearly $180 million in net CapEx in the business. We acquired Veolia's industrial business and Cyn Environmental for approximately $150 million in total. We bought -- brought back more than 400 -- excuse me, more than $45 million worth of our shares, and we also reduced our debt obligation by more than $55 million. Based on the timing and market conditions, we plan to be opportunistic across all 4 categories again in 2019.

So in summary, the underlying dynamics of our business are real positive, and we anticipate a strong 2019. So with that, let me turn it over to Mike Battles. Mike?

Thank you, Alan, and good morning, everyone. Turning to Slide 10 and our income statement. We closed out a strong 2018 with excellent profitable growth in Q4. We increased revenue by more than $110 million from the prior year. For the year, we grew more than $355 million or 12%, with the majority coming from organic growth. The 120 basis point improvement in gross margin in Q4 reflect the mix of business in the quarter, the impact of our pricing initiatives and our favorable comp with a year ago when some of our customers and locations were still being affected by the remnants of the hurricane season.

On a full year basis, we saw a slight increase in gross margin. That number would have been much higher, except for the addition of Veolia, which generates gross margins lower than our company average. Q4 SG&A expenses were up on both an absolute-dollar basis and on a percentage basis, primarily reflecting the increase in -- of incentive compensation given the outstanding results that the team delivered. On a full year basis, SG&A expenses, as a percentage of revenue, improved by 20 basis points. This result was driven by higher revenue, improved leverage from our new regional structure and the ongoing integration of Veolia into our existing SG&A structure.

For 2019, using the midpoint of our guidance range, we would expect our SG&A to be slightly down in absolute dollars. Depreciation and amortization for the full year was up a little over $10 million due to the addition of the Veolia assets. For 2019, we expect depreciation and amortization to decrease to a range of $285 million to $295 million as some existing assets become fully depreciated.

Income from operations for the quarter increased 49% to $41.5 million, reflecting higher revenue and operating margin. For the full year, that increase was 43% to $182.6 million. Higher-margin waste streams, pricing improvements in multiple businesses and a solid contribution from Veolia drove a 20% increase in adjusted EBITDA for the quarter. Looking at the full year, our adjusted EBITDA grew 15%. On a GAAP basis, EPS was $0.29 per diluted share versus $1.48 a year ago, when we had a large benefit through the changes in corporate tax law. On an adjusted basis, our EPS was $0.24 compared with the loss of $0.06 a year ago. For the full year, our adjusted EPS was $1.26 compared with $0.20 for 2017.

Our full year tax rate in 2018 was 30.5%. Looking at 2019, we would anticipate that our effective tax rate on an adjusted basis to be in the 28% to 31% range.

Turning to the balance sheet on Slide 11. Cash and short-term marketable securities totaled $279.4 million at year-end, up more than $26 million from Q3. Our DSO calculation came in at 76 days, 4 days higher than a year ago, but that is directly related to the addition of Veolia. The team actually did a nice job on collections down the stretch, and in combination with our working capital management, we were able to generate strong free cash flows.

Our long-term debt balance declined to $1.57 billion as we elected to repay the $50 million that we had drawn on our revolver when we refinanced our 2020 senior notes back in June. Given our cash on hand and the current loan environment, we thought it was prudent to delever a bit at this time. Ultimately, we can redraw on that revolver at a later date if needed. Overall, we believe our balance sheet is very strong. Our weighted-average cost of debt is about 4.7%. We ended 2018 with a net debt-to-EBITDA ratio of 2.6x. And if we use the midpoint of our 2019 guidance with today's net debt balance, it would take us below 2.5x.

Turning to our cash flows on Slide 12. Cash from operations was $126 million in Q4, nearly double a year ago. CapEx net of disposals was $33.3 million. Included in that number were net proceeds of $7.4 million related to the sale of assets associated with our lodging manufacturing operation in Western Canada. This divestiture is consistent with our strategy of exiting noncore businesses and selling off noncore assets. The combination of our strong cash from operations and lower net CapEx spend led to an impressive $92.7 million of adjusted free cash flow for the quarter.

For the full year, we delivered a higher-than-expected $195.3 million. As Alan mentioned, that's a record for the company and is reflective of our ability to deliver strong cash conversion as we continue to profitably grow the business and control capital spending.

For the full year, our net CapEx came in at $177.9 million, which was right in line with our CapEx guidance. For 2019, we currently expect net CapEx in the $190 million to $210 million range. The midpoint of that range is up about 12% from 2018 as a result of growth in our business, the timing of landfill cell construction and some incremental capital investments to enhance our re-refinery capacity.

During the quarter, we repurchased $11.5 million of stock. For the full year, we bought back approximately 814,000 shares at an average cost of just over $55 per share. We have bought back close to 5.6 million shares at an average price of just under $53 since the program began a few years ago. We remain committed to returning capital to our shareholders through our repurchase program.

Moving to guidance on Slide 13. Based on our 2018 results and current market conditions, we expect 2019 adjusted EBITDA in the range of $500 million to $540 million. The midpoint of that range represents a 6% increase from 2018, and the top end of the range equates to 10% growth.

Looking at our guidance from a quarterly perspective. We expect normal seasonality during 2019, with the back half of the year being slightly higher than the first half and Q1 remaining our weakest quarter. That said, we expect Q1 adjusted EBITDA this year to be up about 10% year-over-year due to growth in the business, continued better pricing and a favorable comp with the prior year.

Here's how our current, full year 2019 guidance translates from a segment perspective. In Environmental Services, we expect adjusted EBITDA to increase in the mid- to high single-digit range in 2019. This growth will again be driven by pricing, higher-value waste streams and margin improvement in this segment. For Safety-Kleen, we anticipate adjusted EBITDA growth in the low single-digit range due to the continued effective spread management, increased production volumes in our plants and growth in key lines of business in our branch network, including direct lube sales.

In our corporate segment, negative adjusted EBITDA should be flat to slightly higher in 2018 as increases in areas like healthcare and benefits, including 401(k), are mostly offset by cost-saving initiatives. Based on our current guidance and working capital assumptions, we expect a 2019 adjusted free cash flow in the range of $190 million to $220 million as incremental EBITDA is partially offset by a higher CapEx.

In summary, 2018 was an outstanding year as we met or exceeded our guidance in all 4 quarters. Our goal is to consistently deliver on our promises. Overall, we expect another year of profitable growth in 2019. With that, Rob, please open up the call for questions.

(Operator Instructions) The first question today comes from the line of Luke Junk with Baird.

First question I had, just in terms of the first quarter EBITDA of 10%, just wondering if there's any seasonal impacts we should be aware of in the quarter? Obviously I know it's your lowest quarter seasonally, but anything we should be aware of in terms of shutdowns or similar?

So we did struggle a bit in January in our re-refinery in Chicago. That was shut down for a bit because of the polar vortex that kind of affected that part of the country, but outside of that, Luke, there's not a lot. That's not a big number per se.

Okay, that's helpful. And then in terms of Safety-Kleen, Mike, you'd recently made some references to your spread management system at Safety-Kleen specifically, how much they have improved there over the last few years. Can you speak to some of those changes more specifically? And maybe give us some updated guard rails as well in that area?

Yes, sure. So the system that we're talking about was put in place a year or 2 ago, and I think it continues to do very well. And you kind of saw it in the results here in Q4. I mean, although oil prices kind of collapsed in November and December that -- the SK team continued to drive, kind of, profitable growth and still for the 10th consecutive quarter, had a year-over-year growth in their EBITDA. So I'm really pleased with that the team and how they did down the stretch of managing their input costs as well as managing the output costs. And so that system continues to do well, and I'm hopeful that regardless of what -- how oil prices go in 2019, we'll be able to manage our -- manage that spend and drive profitable growth.

Great. And then, I guess, sneak one more in. Alan, just the outlook for incinerator pricing in 2019, obviously, a steady economic backdrop, good utilization, high barriers of entry in that business, of course. Seems like a good backdrop to take price?

We had a number of pricing initiatives across the business last year, and we would expect the benefit of those increases to flow-through here in 2019. So you will see an improvement in pricing on incineration this year for that reason for sure. I think, more importantly will be the mix -- the team really has been able to line out that new plant, and we've been able to really increase our feed rates and the type of waste, the high-value feeds into the plant, and that's really come online at a really opportune time for us because we've got a number of key customers that have been expanding and generating those kind of high difficult -- high-cost difficult streams to treat. So the team's really done a nice job getting that plant up online.

The next question is from the line of Hamzah Mazari with Macquarie.

My question is on pricing as well. How much of the pricing ramp, Alan, is just sort of a catch-up? Because you sort of didn't price earlier. I'm just thinking about long-term pricing in your business. Is the pricing ramp in '19 much higher, and then we go to sort of a CPI-based pricing? Just any thoughts on, sort of, pricing? I know you've been strategic around that, and I know we've had capacity ramp and you had to fill volume. Any thoughts on pricing longer term?

Well, we have -- we certainly have been doing a little bit of catch-up as you know because there were a reluctancy on us raising pricing as we were bringing on new capacity, but at the same time, more waste is entering the market. We're seeing more captives looking to outsource more material direct to our facilities. And with some of the consolidation that took place within the chemical industry, there are a number of facilities right now that are beginning to outsource waste that otherwise may have internalized those materials. So all in all, I think we're pleased with our utilization rates. We have been doing a little catch-up as you mentioned. We have increased pricing, and quite frankly, as we've approached a lot of our large key customers, I think many of them appreciate the fact that we've made a substantial investment into these plants to increase more capacity and also, to meet the new regulation. So all in all, I think the pricing are justified and being received pretty well.

That's great. And I know you touched on the synergies between Safety-Kleen and Environmental, and obviously, it's been a number of years since we did that deal, but any thoughts as you look at M&A longer term? I know we got involved in energy after the BP oil spill and, sort of, you're in these sort of 2 segments, but there's a number of different verticals in those 2 segments. As we think about M&A longer term as leverage comes off, is the portfolio going to remain sort of similar? Or are you looking at other avenues that sort of you're not in right now? Just sort of thoughts on longer-term M&A.

I think there are a lot of opportunities in the 2 segments that we're in today. We see a lot of deal flow through our M&A group here. And we continue to look at opportunities, but we're trying to be opportunistic as well. We're somewhat competing with a number of PE Firms out there that in some cases pay a much higher multiple than they're willing to pay. So we only did a couple of deals last year. I think they worked out extremely well for us. We continue to see opportunities to grow, just in the 2 segments, quite frankly, Hamzah, that we're in right now.

Got it. Last question, I'll turn it over. Just the IMO 2020, could you remind us, is that all hype or do you think that, that really generates EBITDA in your business?

Certainly, we're watching that very closely, and we think there are going to be some impacts on both outlets for oils that are being collected today that is not being re-refined, so we think there could be impacts to the outlets for them. We also think there's going to be changes to the pricing on marine diesel oil and fuel oil and subsequently, potential positive implications on base oil pricing. So we think on both the collection side as well as on the sales side, IMO 2020 could have an impact on us, but I think only time will tell to kind of see just how it all shakes out, Hamzah.

The next question is coming from the line of Michael Hoffman with Stifel.

I'm Mike, Jim. Close the loop on IMO 2020, it's not in your guidance, that's the more important point?

That's true, Michael.

Yes.

Okay. so it's all upsided whatever happens, whether it has a benefit or not, and you don't have to spend any capital to benefit from it? It's -- you're -- you basically are in the right place at the right time?

Yes, as I mentioned in my prepared remarks, we are going to spend a couple of million bucks of probably incremental capital in our re-refineries to run them a little more efficiently, but other than that, nothing to your point.

Yes, but you don't have to spend money for IMO 2020, that's just a business position about...

Fair enough, fair enough.

Right, okay. In 2018, you enjoyed a recovery in refining turnarounds your -- on a -- as a service provider. And at the time, we chatted about it having been a prolonged lengthening of the cycle that it looked like we were back to some normal level of maintenance cycling again. How do you frame 2019 in the context of you had a good '18 in refining? Is '19 setting up to be yes, looks like we're doing maintenance again?

I think Western Canada had a really good year on turnaround, both our -- in the specialty side as well as our base industrial cleaning business. So they will have a much slower year this year because of the schedule. The U.S. should be stronger this year. Although, I think probably not significantly more than what we saw last year. So I think on a net basis, we're probably flat, Michael, for right now.

But would you say that we're back into a cycle again, where it look like it -- you couldn't predict it for the prior 5 years?

Yes, I definitely think it's much more of a cycle, and we're looking at the book out there of the turnarounds and the schedules. And we're hiring, we're ramping up, obviously, staffing to deal with the demand that we have. So I would say, yes, it's probably more consistent. And I think the pricing of oil being in this high 50 range certainly helps that. We're not seeing a lot of customers all of a sudden shut off maintenance or CapEx like they would do in the past years.

Yes. I would say, Michael, that cycle -- to your point, yes. I think that we are, but I don't think this is a big catch-up per se. I think we're just back on a normal cycle and I think 2019 -- as Alan said, 2018 in Western Canada was awesome. And I don't think that repeats itself, but I think the U.S. grows a bit. And I think net-net, we're probably flat.

Yes, and that's what I was trying to get to is we've now found a pattern again, whether we didn't seem to have a pattern for a while as they changed the cycle times.

That's fair.

Yes, okay. And then you used to talk about, in the incineration world, of $0.50 a pound, the sort of your middle of the road pricing. And then you add it to El Dorado and it clearly would dampen it as you loaded it and then it's -- and then walked the ASP up. How would you frame where you are in the aggregate to that $0.50 a pound?

Yes, it's a good question. I guess, Jim, you have a comment?

Yes. Michael, we're back to where we were because throwing the 70,000 tons of capacity and then having to fill that up we, obviously, diluted the price and with the large increase we're reporting in the past several quarters, we put the average price back up. I'm not sure that $0.50 a pound unless you're excluding our Canadian incinerator, which is liquids only. That dilutes that price, but in the U.S. network, that's approximately where we are.

All right. And so to the point of pricing, anything from here now is more likely real price as opposed to ASP in mix because you now get to benefit from better volumes.

Right. And to Hamzah's point about asking about year-over-year, yes, we had a bit of a favorable comp last year, obviously, with running so much low-price material through. So if you say we're back to kind of level-set here with 70,000 more tons, then everything from here forward is moving up the scale.

Incremental, yes.

Right, which is the point I was trying to make. And then lastly, we can, as a market observer, see posted oil -- base oil prices, and so we understand what's happening on that end of your spread, and we have no idea what's happening on the front end, but I have to believe you didn't say idly when oil was coming down. So could you share at least what you did in the fourth quarter on an incremental basis for charge for oil? So the market understands how quickly you were able to respond.

Yes. So, Michael, this is Mike. So yes it was about 0, about flat, maybe down -- rounded down to $0.01, but as we looked here into 2019, it's been up a bit here in January. So yes, we did drop -- we did raise our pricing down. It pushed out the price, but when the price went down on December 1, but at the end of the day, we've kind of recovered that.

So probably going to charge for oil, we're going to charge for oil now.

We are definitely charging for oil, yes, right now. Absolutely.

So 2019 is a charge -- and can you share any assumption about -- oh, no. I guess, really what you're saying is you're going to manage the spread regardless and therefore, that's why we can look at a 1% to 2% EBITDA growth despite base oil down?

That's right.

Yes.

That's exactly right, but we have that -- please go ahead.

Sorry. Last tie-in just to close loop on it. I'm assuming you'd haven't built seasonality, you've taken the base oil where it is at the moment and that's what life is, manage the spread. And if we get a normal seasonal, slight demand push then that's upside as well?

Yes, sir.

The next question is coming from the line of Jeff Silber with BMO Capital Markets.

In your commentary around Safety-Kleen, you talked about your goals to increasing the blending products component in 2019. Can we get a little bit more color on how you're going to get there? And what you think the impact might be on segment margins?

Sure. We established about 15 bulk distribution facilities within our existing network. And we have been, in our supply chain organization, been expanding the quantities and the types of products really across the network, not only in those bulk facilities, but through our distributors as well as our package materials across our distribution centers. So as 2018 continued to roll out and we ran our sales initiatives, we realized that there was a lot more opportunity for us to continue to grow that. We've kind of, I would say, made a case that customers really are willing to buy our oil. They liked the product we have. They liked it -- the delivery method to -- that we're making here to pick up their waste and deliver oil at the same time. So I think we're just going to continue now to execute on that plan. Would've liked it going on faster than the way we ended up for the year. We're a little bit short from where our internal targets were, but all in all, I think we grew at about 60%, 70%. So that was good news for us.

And I'm sorry, the potential impact on margins, if you get there?

Well, I think when -- just at a very high level, we've always thought this probably $1 a gallon kind of margin uplift as we sell more blended oil than if we are in the kind of commodity base oil business. So that's always been sort of our thinking at a very high level.

Okay, that's fair. And, Mike, forgive me, in your comments, did you say that you sold the Lodging business in Canada? Are you completely out of that business now?

No, Jeff, we sold the lodging manufacturing operation. We had a small manufacturing operation south of Edmonton, and we sold that building and the land to a third-party for about USD 7.5 million.

The next question comes from the line of Noah Kaye with Oppenheimer.

Yes, so again, to come back to price. I mean, pretty notable mix improvement, obviously, and -- yes, in 2018. So looks like there's a little over $20 million of EBITDA growth at kind of the midpoint of your guidance for '19. And really, how much of that is price? I mean, is this basically all price driven? Can you talk about your assumptions for price versus volume?

So Noah, I'll take it. And so when you think about the growth in 2018, certainly prices, as Alan and others have said, was a good driver of that. I would say, the predominancy of the growth and revenue was mix, as Alan tried to say. We're kind of higher-margin waste streams, higher chlorinated waste streams that are difficult to dispose of, really, kind of, came into the network, and that's due to their -- our growth in the chemical and the manufacturing space. And so that really drove the incremental revenue and the incremental margin improvement. As you look to 2019, I think that, that just keeps going. I think that some of the contracts we have kind of continue, and these types of waste streams continue into 2019. So when I think of kind of the midpoint that we ended at $491 million and the midpoint of our guidance is $520 million, I think that a lot of that is really a -- is a mix issue as much a price issue. Price is up, no doubt about it, catching up from 2017. And really our costs are going up, and we've been able to constructively -- have constructive conversations with our customers about increasing price, but if you look at the overall growth, it really is a mix story and that continues in 2019, which I think is actually a much -- a more positive story, frankly. I think that really talks about kind of what's happening in the United States from a chemical renaissance, which we've talked about quite a bit, whether our current customers are doing more or new customers are coming online, it's really been a -- it really was a great finish to a great year and I -- but I think the story is a mix story as much as a price story.

That's very helpful, Mike. Kind of switching gears, how should we think about working capital impacts for the free cash flow guide for '19? It looks like you got a nice benefit to 4Q around the payable side. You've talked about maybe still an opportunity to decrease DSOs? What should we expect for working capital impact?

Yes, I'd say working capital is neutral, maybe it grows a bit as the business grows, but we're not anticipating us -- in my guidance, I'm not anticipating DSO dropping dramatically. We'll continue to work it. We have plans to do that, but I don't think that it's going to be a -- I really don't think it's going to be a -- we're not planning on a big DSO decrease.

Yes. I mean, I would just point out that from our perspective, on kind of underlying free cash flow growth in the guide, it is higher. You did a really nice job, to your credit from 4Q on the working capital side. Let me just ask one slightly different question to finish off here. I think we've seen data from EPA that something like 1.3% of all public water systems have detections of PFAS that are at or above the nation's health advisory level, and recently, we've seen EPA saying they're going to propose a regulatory determination by the end of 2019. Alan, I think last quarter, you estimated $25 million to $30 million revenue in 2018 from the PFAS cleanup, so really kind of a 3-part question: Where did you end up in 2018 revenues? What have you projected for 2019? And how large do you think the TAM becomes if the EPA ultimately sets a rigorous drinking water contamination standard?

Yes, we -- it probably came in closer to $15-plus million last year, but we've certainly been paying attention to that regulatory change that's going to be coming about, and we see a real opportunity to be honest with you. We've invested capital and part of our increase in capital spending is to build more on-site treatment units to support our customers' demand in that area. We've been pretty much maxed out with the facilities that we have today. So that's going to be a real positive, I think, for us.

Noah, can I add one more point to Alan's comments. So I think if you look at 2019 guidance, we haven't assumed a lot of incremental from that number. And to -- so you and I are on the same page, and The Street's on the same page, if PFAS becomes a thing here in '19, there's probably upside to the model.

The next question comes from the line of Larry Solow with CJS Securities.

It's Pete Lucas for Larry. I apologize if I missed it in a prior question. Just on direct lube, you've done a nice job there in expanding it to over 25,000 customers. Do you see the continued growth as a slow grind or more of a hockey-stick growth that will need a couple of national accounts to get it going?

Yes, Pete, this is Mike, I'll take it and, Alan, feel free to jump in. I'd say that 2018 on the direct lube didn't hit our own internal guidance, but still a great growth for the -- 70% growth year-over-year on our direct lube business, and it continues to grow in 2019. The point we wanted to mention in the comments was, it's more of a blended lube story. And so we're trying to grow both our distributor business and our direct lube business, going from kind of $39 million, $40 million in 2018 to $50 million in 2019. So whether we get it through the direct lube channels that we've talked about previously or through our distributing -- our distributor network, and we want to grow that blended lube. That's where the margins are, that's where the stickiness is, that's where we really want to, kind of, drive this business going forward.

Yes, and it just reduces the volatility and the exposure on the...

On base lube.

On base lube.

Yes.

Perfect. And you guys did a real nice job covering it and talking about the EBITDA guidance going forward there. So a lot of positive commentary for '19. And it sounds like mix is kind of the main driver between the high-end and low end of guidance. Is that the right way to think about it? Or is there any other key driving factors that we should think about there?

Yes, I'd say mix is a big part of it. I think that one would be it depends on the mix and the projects that we have. We have a -- the pipeline of projects looks very strong. One of our guys said that -- one of the strongest he's seen in a long time. And so we're hopeful that comes through. If that comes through, we're going to be in the high-end. If those get delayed for reasons beyond our control, well, we'll be in the low end.

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

Just quickly, sorry if I missed it, but could you just detail the Veolia contribution in 4Q for both revenue and EBITDA? And then, it sounds like you're making some good progress ramping that business, improving margins. Just kind of size up for us maybe what you're expecting for 2019 for that acquisition?

Yes. So, William, I'll have to -- if you give me 30 seconds, I'll pull the Q4 revenue. The EBITDA was about $4 million, $4.5 million in Q4. And for -- and so for the year that turns out to be about $14 million, $14.5 million of overall EBITDA for Veolia. We think that goes up into that -- into the high-teens, into $20 million in 2019 as that business continues to do well for us, but I don't have the revenue numbers at my fingertips.

(Operator Instructions) Thank you. At this time, I will turn the floor back to Mr. McKim for closing remarks.

Okay. Thanks, Rob. Thanks for joining us today, everybody, and we're going to be presenting at next week's Raymond James conference, so we look forward to seeing some of you there as well as other investor events. So we appreciate you joining our call today and have a great day.

This will conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.