Heritage-Crystal Clean Inc (HCCI) 2018 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Heritage-Crystal Clean, Inc. 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, planned, 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 the call. Please refer to our SEC filings, including our annual report on Form 10-K as well as our earnings release posted on our website for a more detailed description of the risk factors that may affect our results. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website.

Also please note that certain financial measures we may use on this call, such as earnings before interest, tax, depreciation, amortization or EBITDA and adjusted EBITDA are not GAAP measures. Please see our website for reconciliations of these non-GAAP financial measures. For more information about our company, please visit our website, 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.

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 key areas of the business.

I would first like to discuss the results in our Environmental Services segment. From a revenue standpoint, I'm excited about the fact that we delivered strong double-digit growth in this segment for the second straight quarter. This performance is a direct result of 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 businesses in this segment experienced growth on a year-over-year basis.

Our revenue growth in 2018 has been aided by the 5 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 in 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 3 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 have negatively impacted our operating margin on a percentage basis. For example, we experienced an increase of approximately 28% in the cost per unit of the mineral spirits used in our parts cleaning service during the third quarter compared to the third quarter of last year. From a transportation perspective, we experienced an increase of approximately 8% in the fuel surcharges we received from our transportation vendors during the third quarter compared to the third quarter of 2017. These escalating costs have in part prevented us from getting our operating margins back to the same level we achieved during 2017 on a percentage basis. Despite the decrease from 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 for bunker and related fuels, which are used to set pricing in the RFO market, have continued to increase the price we need to pay to 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 per 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 were 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 rig refinery, we are proud to report that we produced double-digit operating margins 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. Our 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 scheduled an extended shutdown during the fourth quarter to conduct both routine maintenance and to complete several capital projects at the re-refinery. We were able to accomplish all of the maintenance and capital project activities we had 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 in excess of our nameplate base oil capacity and producing very high quality product. We believe the effects of the work performed during our shutdown at the beginning of the fourth quarter will put us in a position to more consistently operate the refinery at higher rates into the future.

Mark will now walk us through our third quarter financial results in detail.

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 services 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 in others. In the parts cleaning business, we experienced price and mix gains, which were partially offset by a slight decline in volume but resulted in overall solid growth for the business.

In our containerized waste business, we experienced strong volume growth while price and service mix increased slightly. The vacuum services business had favorable increases in our price and service mix but saw 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 gallons 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 a 7.1 percentage point improvement 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 the balance sheet highlights. Cash on hand at the end of the quarter stood at $46.3 million compared to $33.5 million 1 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 million a year ago. During the third quarter, we generated $10.2 million in cash flow from operations, representing an increase of 147% compared to the third quarter of 2017. We intend to use our excess 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 with that, I will turn the call over to our operator to take your questions.

(Operator Instructions) And our first question will come from David Manthey with Baird.

Yes, 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?

Yes. 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.

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 there's always the holidays, where they fall and how that impacts the sales line. But any additional thoughts or color as we look at cost and D&A and so forth in the fourth quarter this year?

I think it's going to progress on a 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 we'll have an extra week in it, not this year or 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. Just an extra...

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

Yes, 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, in our case, positively impact the price of bunker fuel. It will lower the value of it on the street. As we know, the marine fuel market is a large market, I mean, 4 million barrels a day to support the global market. We're optimistic that obviously the price for used motor oil in the street is going to change at 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 cost and our feedstock prices. So no real strategic shift, but just optimistic, at the back half of the year, we may benefit with better used motor oil conditions.

Yes, okay. And then just one follow-up...

David, one other thing is it's going to certainly impact the price of lube oil as the price of these lighter distillates goes up because of the demand for the lighter distillates. So we certainly think base oil price is going to have to move because the virgin producers are going to pay more for feedstock.

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 6 oil index and how much of it is just spot?

Well, 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.

Most of it is tied to WTI.

And most of it is 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 spot each time you go collect it, there's a strong correlation because that's what the rest of our competitors pretty much are pegging it to.

Then our third party, David, is certainly tied to the No. 6 high sulfur fuel oil. So that will certainly be an impact. And we've had internal discussions that there's going to be a separation between high sulfur fuel oil No. 6 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 towards the high sulfur fuel oil index.

And our next question will come from the line of Sean Hannan with Needham & Company.

Just want to see if I could understand some of your viewpoints at this point, thinking about the pricing that we're observing on the output side for the re-refined oil. Clearly, there's some thoughts there, given that you're at least initially sensing you might have a bit of a break-even quarter mainly tied to the production impacts and that maintenance work that's performed -- yes, can you hear me?

Sean, yes, the breakeven -- can you hear me? Yes, the breakeven is going to be more driven by the expense side of the turnaround activity. I mean, '18, they shut down, we spent quite a bit of money. Obviously, we lost significant production as well. But the big driver is going to be on the cost side because of the maintenance activities.

Yes, so we were -- right, so we're going have some costs within the business. We're going to have some lost revenues, right, because we're coming offline for a little bit. So I guess, ultimately, I'm trying to get a sense of how do you feel about 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 Brent 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've got a lot of variables to think about pricing here, want to get your perspective, rounding out the year at this point.

Yes, good, Sean. Yes, we were fresh off of a conference, a lube oil conference. And certainly, there's a lot of base oil out there. Pricing is driven more off of feedstock cost. So in our view on the balance of the year, which obviously we only 1 quarter left, is more flat base oil -- more flat pricing for our end products looking into Q4. Beyond that, I think we begin to get above 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. The near term, flat netbacks for us is what we're predicting for Q4.

Okay. And actually, to follow up on that comment, Brian, so we've seen at times in the past, particularly as we get to -- when we think about the sulfur consideration coming out of IMO 2020 and we think about the value of VGO, which should improve, in theory, we should be able to see the Group II lube oil pricing increase as a derivative of that, right? It's kind of last step before we hydrotreat. So the concept is there. But we've seen not long ago, some breaks where that concept didn't work and didn't prove true. It was short term but want to see if we can get your perspective on what may occur, what may be supportive, where we do get that dynamic playing through of VGO improving and base lube oil improving kind of a sustainable fashion once this all plays out on kind of a multiyear basis. Do you have any perspective around that? That would be really helpful.

My perspective is no different than yours. We've already seen a few of the virgin producers raise base oil pricing. Even though we're in a fairly loose supply market because of the higher cost of feedstock, so we're certainly in the camp that you're in. What's driven the weakness overall in base oil, at least recently, is the fact that we had a great production year with most of the virgin producers not having any major maintenance and turnaround.

And no hurricane.

Yes, 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've had a great opportunity for the plants to run well. There's a lot of base oil out there. But we're still in the camp that base oil is going to go up next year because of higher feedstock cost, including VGO.

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 that there is. But is there anything that could be a positive impact as a consequence of IMO 2020? I don't think that there's really necessary anything there. But if there is, any insight you could provide, that would be great.

Yes, I don't see any real impact other than on the cost side, I mean, obviously low sulfur distillates, including diesel prices, will go up. And that's just something we're going to have to manage. I don't see any other negative effect from it or positive effect from it. It's just going to be a cost item that we're going to have to manage. Diesel prices will go up next year.

I mean, I would take, maybe it's ultra-optimistic view, but there is potential. I mean, 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 accounts than the collection side of used oil, that gives us that many more ears to speak to and try and help with their needs on the other things that we do, so...

Yes, absolutely.

Indirectly, I think it even is good for that segment.

With the weak Brent fuel market, it certainly enhances the value of this re-refinery.

And our next question will come from the line of Ryan Merkel with William Blair.

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

I can go over, whatchamacallit, Ryan, on kind of a business-by-business standpoint. For parts cleaning, 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 over 18%. So most of that was volume. But we still got again a couple percent of price. And then roughly about the same in our vac. We didn't really see any price in our antifreeze business, it was all volume. And we're integrating, which for us within the antifreeze business is sizable, it's not that big for a segment-wide, but a fairly sizable acquisition. And one of the first things we do is try and focus on the customer and then the people. And getting pricing and whatnot 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 the more important from a margin standpoint, as you look at 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. But the great thing is we're going to get scale. We'll never have as poor a scale, I guess I would say, as we do now or as we did in Q3 in businesses like antifreeze as we continue to grow it. So we should see us ramp up the profitability curve there. But there wasn't really any price in that business. And we are coming into -- as you know, Ryan, you've covered us long enough. Q4 is kind of the time where we do our price increase across the board. And we implemented, it was so much staggered, but for the most part, already began to implement our price increase a month or 2 earlier than normal, mainly due to the inflationary pressures we have seen already that Brian spoke to a little bit. Other than our antifreeze, which was maybe a 1.5 months later than the rest of the businesses in ES, we're already implementing that. So hopefully, we normally expect in Q1 to kind of have a full-on or be hitting the ground running. We might hopefully get a little tailwind at the end of Q4 from it because we did it a little earlier than normal.

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

And Ryan, we are seeing a little bit of a stabilization on the inflationary effects. It was certainly worse in Q2 and Q3 and we were beginning to see that stabilize. Obviously, we meet with our vendors quite often. And we're not feeling as much pressure as 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 reaccelerate our organic growth next year and get ourselves into a position to be able do that. With opening up additional branches and adding new resources, that's certainly something we're going to do again hard in 2019.

Yes. Before I ask about the margins in the ES segment, I was a little surprised to hear Mark say that parts cleaning business was actually all price. So on a volume basis, it didn't grow. What -- so what's the issue there?

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

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

Yes. I mean, like as you've read or heard in our prepared remarks, I mean, we're guiding flat now. But we certainly expect to begin to see improvement in 2019. We've got the -- we'll begin to see the effect of this price increase in Q1, 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 on 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. We think that's important in the absence of meaningful acquisitions. Yes, we talk about tuck-ins, but we've got a lot of money on the balance sheet and it's the best use of our resources at this point. We're confident. We have a proven track record. We've done it before and we'll do it again. And we have plans to get that branch count up over 100 over the next few years. And we're going to march toward that goal.

Our next question will come from the line of Brian Butler with Stifel.

First, on the Oil Business, if I heard you correctly, the pay for oil was up sequentially $0.07 or $0.08, but netback was flat. So pricing on base oil was kind of similar to that, $0.07, $0.08? Is that the right way, I'm thinking about that correctly?

No, the netback did -- was not flat. That was our -- our netback was flat, the spread wasn't flat.

Yes, the base oil selling price was flat.

Yes, so we had a...

Quarter-over-quarter.

Spread deterioration of the $0.07.

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

We're running right now on third-party supply less than 20%, but that's down significantly from 1.5 year ago. Very much value our third-party suppliers, but as you've heard on our conference calls, route 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 that each one of our trucks are supplying. The feed -- the wet feed this year, our feed is a little bit drier than normal, is going to finish the year at roughly 68 million gallons. And of that, 80% of it is coming in internally.

We've had a little less than 17 million in the quarter.

17 million with an annual being around 68 million? 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 100 basis points?

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

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's normal to get it over the course of the years. But occasionally, you'll get guys who most of the time unknowingly will give you a PGB load. It doesn't -- it hasn't really caused us any operating problems, just inconvenient in that we had to recognize some accruals for some of that in Q3 results.

Yes, no issues at the plant in terms of our tank capacity. We caught it before it got to the plant. But still, as Mark said, it cost us money.

Okay. And then when you think about the investments on the -- you've made in the fourth quarter with the scheduled shutdown, how should we think about margins in the current price environment looking into '19? I mean, is double-digit margins for a full year truly achievable? Or is that still an optimistic kind of look at what the Oil Business can generate?

Absent any mechanical issues, I'll be pretty disappointed if we can't get to consistent double-digit performance. You've heard that from us on every call. That's our goal. We've done it 2 quarters in a row. We would have done it in Q4. We did the maintenance base oil. It's a little bit soft today. It was the right time for us to do the capital project. It was planned all year, took 18 days. It is what it is. It was the right move for us as 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 ratable operation. And that was our ultimate goal. And we think the construction project and the turnaround were successful.

Okay. And then on the Environmental Services piece, when you think about growth going into '19 with somewhat less additions from new locations, 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 the investments that were made last year and this year that you're still on the double digits?

Yes, we're putting together our plan now. And we're guiding more to high single-digit performance next year.

And that's on a pure organic-type basis. And we'll probably find acquisitions. You can't say for sure. We're always looking, so...

We're in the project field services business. We could see a bump or 2 there. But overall, guiding to a high single-digit number.

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

No, 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-20s. 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 will be parts cleaning. That's always going to be there. And then in addition to the parts cleaning spend, which has usually been in that $5 million-ish range with maintenance repair, capitalizable repairs and whatnot, the other big thing has been the re-refinery. We just have one more compliance project in our mind to do. We've talked about it with some of you, finishing that Florida project up. And that will probably 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 15-ish, 13-ish-type range.

(Operator Instructions) And our next question will come from Kevin Steinke with Barrington Research.

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?

That's a great question, Kevin. We definitely are doing that for the exact reason that you pointed out. So we might normally go out -- I mean, you've covered us long enough in that 5% to 7% range, give or take, between 1 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 with is going to be around that 10% mark. It varies a little bit based on the line of business, but...

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 the -- in terms of wages and labor costs, given the tight labor market?

Tight labor market is more about us -- it is more expensive in general, but to me -- or to us it's more about getting people. We have a number of openings that it's more or less affecting revenue, to be honest. And that obviously has a trickle-down effect in our route service business. We can't quite get the leverage. If you're really hooked unsurprisingly, and this is part of the reflect of not having as many as adds in personnel, as Brian alluded to, this year versus last year. But compared to Q3 last year, labor cost actually came down as a percentage of revenue. So labor, it's still a challenge for us. I don't want 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.

Okay, fair enough. Now that you've done this extended shutdown at the re-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?

Yes, Kevin, we're not going to change our nameplate on the refinery. We guided at the beginning of the year to 47 million gallons of production. We're going to see how it runs with the changes. I mean, we're fresh off the construction project. But all signs point to the answer being yes. The plant is performing extremely well right now, very happy with product quality and it's the best we've seen since we've been in operation of the plant. So thrilled with the outcome so far. But we'll know more as we get into Q1 and get some run time under our belt.

Okay, makes sense. Circling back on Environmental Services, disposal costs had been an issue for you the last couple 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 are we kind of past that disposal cost issue now?

Well, 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 had a day or 2 for Hurricane Florence and whatnot. But other than that, things are great there. I think overall, there's still a big challenge for disposing and just cost in general because we're seeing the same inflationary pressure there that we're seeing in some of the more commodity-type costs. So part of the story as far as our results, too, where we had this large field services jobs that is -- when we have these extra-large, I'll call them, projects, which are not all that normal for us, you're obviously usually going to be willing to do that business with a slightly lower margin. So then that is just some of the noise around why disposal was higher for us not just in Q3 relative to revenue but in Q2. So there's a couple different factors there. But there is an inflationary component still with disposal that put a lid on margins. But that one project is over. I don't know if I stated that. So on whatever part of headwind that was, that won't be there in Q4.

And as we commented earlier, we are seeing some stabilization from our vendors. I mean, energy costs have been relatively flat. I mean, they're up 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 labor. I mean, it's a tough labor market. And Mark mentioned the vacancy, it's part of the reason why we had to slow down some of our organic growth just to try to fill the positions that we have currently in our existing branches. That's a better opportunity for us to see quicker growth.

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

Yes, we continue to have a pretty robust pipeline. They are smaller in nature, tuck-in varieties. As you well know, the M&A market is a very difficult market today. And we want 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 pipelines. So it's always pretty robust. We've got a good feeder network of people. When you have 90 locations, they identify opportunities. We've got a dedicated resources out there meeting with those potential targets. And it continues to generate nice opportunities.

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, and you may now disconnect. Everybody, have a wonderful day.