Clean Harbors Inc (CLH) 2011 Q4 法說會逐字稿

Greetings, and welcome to the Clean Harbors Incorporated fourth quarter 2011 conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Please limit yourself to one or two questions.

(Operator Instructions)

As reminder, this conference is being recorded.

It is now my pleasure to introduce your host, David Musselman, General Counsel for Clean Harbors Incorporated. Thank you, Mr. Musselman, you may begin.

Thank you, Jesse, and good morning, everyone. Thank you for joining us today. On the call with me are Chairman and Chief Executive Officer, Alan S. McKim; and Vice Chairman and Chief Financial Officer, Jim Rutledge. Matters we are discussing today that are not historical facts are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Participants are cautioned not to place undue reliance on these statements, which reflect management's opinions only as of this date, February 22, 2012. Information on the potential factors and risks that could affect the Company's actual results of operations is included in our filings with the SEC.

The Company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's press release or this morning's call other than through SEC filings that will be made concerning g the reporting period.

In addition, I would like to remind you that 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. A reconciliation of the non-GAAP measures to the most directly comparable GAAP measures is available in today's press release, which can be found at our website, www.CleanHarbors.com.

And now I'd like to turn over the call to our Chairman and CEO, Alan McKim. Alan?

Thanks, David, and good morning, everyone.

We delivered another strong quarterly performance, concluding what was an outstanding 2011 overall for the Company. On the strengths of the acquisitions we completed during the year, combined with a steady organic growth across our segments, we grew Q4 revenues 31%, and for the year nearly reached $2 billion in revenues. Our profitability was higher in Q4, as we achieved in EBITDA margin of 17.8%, and our net income was up 64%. This was partly related to a tax benefit that Jim will detail in his remarks.

For the year, our consistent efforts to lower our cost structure and drive margin improvements while growing revenue, was reflected in our annual EBITDA margin of 17.6%, and we are confident there are significant opportunities to capture additional leverage going forward. As we saw throughout 2011, our growth in Q4 was driven by broad-based contributions across our business lines. Geographically, Western Canada was particularly busy this quarter, but we also experienced healthy levels of seasonal activity throughout much of the US. The levels of investment by many of our customers in our key verticals, particularly on the Energy and Industrial sides of our Business, continue to climb in Q4.

Turning to our performance by segments, our Technical Services segment had a notably strong Q4 in what can seasonably be one of the weaker quarters. Incineration utilization for the quarter was 91%, which is above the 89% we recorded in Q3. Since I mentioned it on our last call, I should point out that we did carry through with our plan to temporarily idle our Mercier, Quebec, incinerator, which we mothballed at the start of December. Similar to what we saw in Q3, our Landfill Business had a great quarter. Volumes were up slightly from Q3 and marked our highest levels of 2011. Our Sawyer facility in North Dakota continues to benefit from the concentration of activities in the Bakken oil-field. The remainder of our Landfill saw nice volumes from a mix of large-scaled projects and remediation work.

As it has for the past several quarters, our Field Services segment turned in another consistent performance in Q4. Our growth strategy of geographic expansion, expanding our service offerings, and capitalizing on cross-selling opportunities proving to be effective. In Q4, when you exclude the emergency response work, Field Services recorded 17% organic growth. We continued to see a nice mix of base business and projects throughout the quarter. Emergency response revenue in the quarter was limited, with about $4.1 million in residual work, primarily related to the Yellowstone River clean-up efforts.

Our Industrial Service segment grew more than 50% from Q4 a year ago, based on our recent acquisitions, increased oil sands activity, and a high volume of turnaround work at our refinery customers. Several of our specialty industrial services also were in high demand during the quarter. Within our lodging business, we experienced another solid quarter of high margin business. And with the addition of Peak, the acquisition of BCT Structures, and the internal investments we have made, lodging now represents more than $200 million of annual revenues for us. Equally as important, it serves as a differentiator for us in managing our own internal accommodation needs, and enables us to attract and retain talent in a highly competitive field for skilled labor.

Our top performer in Q4 was clearly our oil and gas Field Services segment, which exceeded our expectations with year-over-year growth of greater than 140%. While the addition of Peak and smaller acquisitions played a larger role in the year -- excuse me, in the year-over-year growth of the segment, our core oil and gas Field Services Business had an outstanding quarter.

We increased the activity in Western Canada in Q4, from substantial levels of investments by major energy companies contributed to our performance. We also benefited from shale play-related work throughout the US and Canada, and captured numerous cross-selling opportunities, particularly as a result of the addition of Peak. Peak services, which are primarily concentrated around the drill rig itself, were in high demand in Q4, and a complement to our existing offerings. We couldn't be happier with how Peak has performed since the acquisition. They have been a great addition to our Energy and Industrial Business.

To give you some more perspective on Q4 results, here's how our key vertical markets performed -- as expected, oil and gas production was our largest vertical this quarter, rising to 20% of revenue. This was driven by the seasonal activity in our legacy transport, down hole, and exploration services, combined with the addition of all the Peak assets. Refineries and upgraders were our second largest vertical at 12%, as we performed several large projects in the quarter. This business has come on strong for us throughout 2011. During the full year, we provided our services to 147 of the 159 refineries operating in North America, and we have increased our market share.

Turning back to the quarter, oil and gas exploration increased sharply to 11% of revenues, reflecting the addition of Destiny, along with solid growth in our directional drilling and legacy exploration Businesses. The chemicals vertical, at 11% of revenue, was a little light, as we saw a few projects pushed out and some lower production at certain clients in the quarter. Other significant contributors in Q4 included our general manufacturing at 7%, our broker Business at 6%, utilities at 4%, and our environmental engineering consulting at 4%. With the exception of our chemicals Business that we saw a little bit lower slightly year-over-year, virtually every single one of our verticals grew by significant percentages from Q4 a year ago. Some, like our construction vertical, more than doubled in the past 12 months.

I want to take a moment to touch on pricing, which I know many of you are interested in. Pricing gains still tend to be market and business line-specific; but overall, the pricing environment was good for us in Q4. Within our Energy and Industrial segments, our services are for the most part in high demand, and much of our specialized equipment is solidly booked going forward. In many cases this offers us some near-term pricing leverage. We are also looking at ways to bring some of the pricing at our recent acquisitions more in line with Clean Harbors' traditional levels. Within our environmental Business, we continue to generate high levels of utilization and steady volumes. And it is at those times that we are able to best manage our mix, maximize our margins through some incremental price gains. For 2012, the guidance Jim is going to provide later on the call assumes a price increase of roughly 3%; but again, that is not implemented across the board -- it is more of an average.

Overall, 2011 was another year of significant achievement for Clean Harbors. We set new records across all of our key financial metrics. We generated organic growth across all four of our segments. We successfully acquired and integrated several valuable acquisitions, including Peak. We advanced our organizational structure and internal systems to prepare the Company for its next stage of growth. We entered 2011 with approximately 6,800 employees; and even though we ended the year with a headcount of roughly 8,300, we still have several hundred open full-time positions where we continue to look to fill.

As we highlighted in this morning's release, our commitment to excellence and safety in service remains a key element to our success. We exceeded our key safety metrics for 2011, besting the good scores we received in 2010. This is accrediting the entire organization, and I'd like to publicly thank all our Clean Harbors employees listening today. The company-wide Safety First program we implemented has been a great success due to your efforts, and we recognize its importance as do our customers.

Looking ahead, we are excited about Clean Harbors prospects as we enter 2012. Obviously, the energy sector is an area that is showing great promise. Levels of activity remain very high in both the US and Canada. Rig counts are continuing to climb on both sides of the border and investments are showing no signs of slowing down. Some investors have asked us about how the sharp drop in natural gas prices is affecting our business, and are we losing projects as a result? What we are particularly seeing is just a shift in our project flow from dry gas installations to more liquid-rich plays. We are not seeing the pool of investments shrinking, just redirecting. In fact, a recent study issued by oil field market research firm, Spears & Associates, on the US energy space showed $145 billion was spent drilling and completing US wells in 2011. This is nearly double the $73 billion spent in 2009, and is more than 10 times the $13 billion spent in all of the US in 2000. The Bakken oil field, the Marcellus Shale formation, and a number of energy-rich areas of Texas continue to offer us a broad variety of opportunities.

The story is similar north of the border, where massive oil sands projects, numerous long-term investments throughout western Canada are continuing unabated. While the Keystone pipeline project has been temporarily delayed, there is no doubting the rush to bring more energy-rich products out of Canada into the US. And all of this activity is supported by an environment that continues to drive oil prices above $100 a barrel and shows no signs of weakness.

In conclusion, we are continuing to see evidence to support that the general economic recovery has taken hold in North America, and as a result we intend to continue to aggressively execute our two-pronged strategy of internal investments and select acquisitions. Even with the acquisitions we completed in 2011, and the level of capital we are investing internally, we concluded the year with more than $260 million in cash, which we plan to put to work. We'll remain active and selective on the acquisition front in 2012, and we have a variety of attractive candidates, both large and small, in our pipeline. We are currently evaluating potential acquisitions within all four of our operating segments. We also will continue to make internal investments, with a target of $175 million to $180 million in capital expenditures for 2012.

With that, I'll turn it over to Jim for the financial review and 2012 guidance. Jim?

Thank you, Alan, and good morning, everyone.

Clean Harbors delivered another great quarter, achieving Q4 revenue of $545.9 million, and reflecting a strong performance across the board. As Alan outlined, our 31% growth was driven in large part by our recent acquisitions; however, if you back out revenue related to 2011 acquisitions and emergency response events from both periods, our year-over-year organic growth was again strong at approximately 14%. I should note that for the acquisitions we made in 2011, such as Peak and Destiny, we don't intend to break that revenue out going forward, as they are fully integrated with our core Business. Also, our cross-selling activities also make it more difficult to designate what's organic and what's pure acquisition-related.

Gross profit for the quarter was $172.7 million, or a gross margin of 31.6%, which is up 130 basis points from 30.3% in the same period last year. This improvement is due to the higher revenue, as well as our cost control programs and margin improvement initiatives. Turning to expenses, our SG&A in Q4 was $75.4 million, or 13.8% of revenue, compared with 13.4% a year ago. Our SG&A percentage this quarter was above our target range of 13% to 13.5%, due primarily to about $3 million in acquisition-related expenses, severance costs, and the implementation of some key enhancements to our centralized information systems. Looking ahead to 2012, we believe we will gain more economies of scale from our recent acquisitions and our ongoing cost reduction efforts; therefore, we are targeting our normalized SG&A range of 12.5% to 13% of revenues going forward.

At the outset of 2011, we set a goal of eliminating $20 million in company-wide expenses as a way of offsetting higher labor and commodity costs. I'm pleased to announce that we've reached that goal for the year. We also captured the synergies we expected from the acquisitions we've made. We exceeded the $5 million in synergies we expected from Eveready, and we are on track to hit the $10 million target we have set for Peak. Looking at 2012 as a whole, including the remaining Peak synergies, we are targeting about $30 million in overall cost reductions in areas such as internalizing vehicle and equipment maintenance costs, turnover reduction, lower recruitment costs, and transportation. We believe these will offset expected increases in labor, commodity, and healthcare costs.

In order to hit that $30 million figure, we have a number of comprehensive programs under way and we've made some key hires to support these efforts. We are excited to have recently brought on board Tom Seeger, as our EVP of Asset Management. Tom is a results-driven veteran executive who brings substantial experience at a variety of growth companies. One area in which we see him having a significant effect is our growing transportation fleet. Tom spent more than a decade working at both Hertz and Budget, overseeing supply chain activity, asset management, and vehicle utilization. We believe he is a great fit for Clean Harbors as we continue on our growth trajectory.

Turning back to the numbers, depreciation and amortization increased 43.8% year-over-year to $35.7 million, which primarily reflects our acquisitions, particularly the 4,000 pieces of equipment we added from Peak. Full-year D&A of $122.7 million was in line with our expectation of $120 million to $125 million. We expect our D&A in 2012 to be in the $140 million to $145 million range, which excludes any additional acquisitions we may make.

Income from operations was $59.2 million, or 11% of revenues; compared with $43 million, or 10% of revenues in Q4 2010. We generated EBITDA growth of 38%, as we nearly hit the $100 million mark for the second consecutive quarter, coming in at $97.4 million; compared with $70.3 million in Q4 of last year. This amounts to a Q4 EBITDA margin of 17.8%. This reflects the success of our pricing initiatives, productivity gains within our asset base, economies of scale from our acquisitions, and ongoing cost control initiatives. Our full-year 2011 EBITDA margin of 17.6% was well above our initial goal of 17% for the full year.

Our effective tax rate for the quarter was 21%, compared with 37% in Q4 of last year. Our provision for income taxes in Q4 included a $6.5 million benefit, or approximately $0.12 per diluted share, related to the favorable release of unrecognized tax benefits that are related to an earlier acquisition. Looking ahead to 2012, we currently expect our effective tax rate to be in the range of 37% to 37.5%.

Q4 net income was $38.2 million, or $0.72 per diluted share; compared with $23.3 million, or $0.44 per diluted share last year; the increase reflecting our profitable growth and the favorable tax benefit. As a reminder, the Company completed a 2-for-1 stock split in July, and the per share amounts I just mentioned for last year's Q4 have been adjusted retroactively to reflect the split.

Our balance sheet remains healthy, with cash and marketable securities of $260.8 million as of December 31, compared with $305.4 million at year end 2010, and $257.3 million at the end of Q3 2011. The decrease from the end of 2010 is directly related to our acquisition activity, which totaled a use of cash of nearly $340 million during the year, partly funded by the $250 million in secured senior notes that we issued back in March.

The sequential increase of $3 million in cash during the quarter was less than we expected, as our Days Sales Outstanding grew with the integration of the acquisitions. We are ascribing this to two primary factors -- a number of customer arrangements in the acquired businesses have longer payment terms than we typically allow for. And secondly, many of these new customers are on a month-end billing cycle. Total Accounts Receivable was $478.9 million at quarter end, and our DSO for Q4 rose to 82 days, compared with 74 days in Q3. Our target DSO remains at 70 days or less, but it will likely take us several quarters to work our way to that level, due to the acquisitions and the time it will take to work through the existing contract cycles.

CapEx for Q4 was approximately $35 million, and for the full year, it was approximately $149 million. We continue to have a broad pipeline of attractive high-return opportunities available to us. As Alan mentioned, we are targeting CapEx for 2012 in the $175 million to $180 million range. A majority of this CapEx is related to growth capital, and within our full year number is approximately $70 million of maintenance CapEx.

Moving now to our guidance -- based on our 2011 performance and current market conditions, we are raising our 2012 annual revenue and EBITDA guidance. We are currently targeting 2012 revenues in the range of $2.2 billion to $2.25 billion, up from our previous guidance of $2.15 billion to $2.2 billion. We expect EBITDA in the range of $400 million to $410 million, up from our previous guidance of $390 million to $400 million. This guidance implies an EBITDA margin of greater than 18% for the full year, and I should note that this is also exclusive of any potential future acquisitions.

And with that, Jesse, could you please open up the call for questions?

Sure. Thank you. (Operator Instructions) One moment please while we poll for questions. Thank you. Our first question comes from the line of Hamzah Mazari from Credit Suisse. Please proceed with your question.

Good morning. Thank you. Just a question on pricing. You spoke of 3% price this year, if you could give us maybe a sense of where you are in terms of pricing your portfolio? Are you in early innings of this? What percent of your contracts are inflation indexed versus discretionary pricing? And how does -- how do you feel about pricing power across your various verticals? Just a little more color as to how investors should think about price in your business.

Sure, Ham, so this is Jim, I'll start it and if Alan wants to add anything. But we did, as Alan mentioned, achieve 3% pricing this year; and this year, in 2011, it was targeted toward high utilization areas. For example, in our incineration, our western Canada business where previously there had been discounts and now with the increased utilization in both those areas, we have made some nice gains. But with that at the same time, we have been putting in place through our VPs of commercial operations, initiatives to improve their toolbox in approaching the markets whether they be volume related or time and materials based type services or even spread businesses. For example in our recycling businesses, and in 2012, the way we are approaching those areas is with very tailored program to approach pricing there with higher utilization being the main thing. If it is a high utilization area where we think that pricing is deserved and where there are cost increases that make pricing deserved, we are hitting it. Again, we are looking at 3%. Maybe we can do little bit better than that in 2012, maybe it is 3% to 3.5%, but that's kind of what we have built into the guidance of about 3%.

Okay, and just a follow-up question on the acquisition pipeline. You spoke of that pipeline being pretty robust, maybe if you could give us a sense of how valuations are trending relative to a couple of months ago and any vertical you are particularly interested in or are you looking at all of them right here?

I think all of them, Hamzah, we certainly have been spending a lot of time on strategy in growing the business through acquisitions and looking for partners out there that culturally fit well with us. And we've had some ongoing discussions with a number of firms both in the US and Canada and really across the various segments of our business. I would think that last year we completed about six acquisitions, which was pretty aggressive particularly in the second and third quarter. And I think we've got a great team here able to not only perform these -- put together these deals, but also integrate them timely and to bring them together with the Company here. So we are excited about the potential going forward.

Great. Thank you very much.

Thank you. Our next question comes from the line of Rodney Clayton of JPMorgan Chase & Co. Please proceed with your question.

Hi. Good morning, gentlemen.

Good morning, Rodney.

So first of all, on the guidance it looks like you are guiding to something around just a touch above 18% EBITDA margin. Given the fact that you exited the year at about 17.8%, is that just a dose of conservatism or are there any potential headwinds that you are being cautious about?

Rodney, I think you are right. We are being conservative. As you know when we said our guidance, we like to express it in terms of what we see a clear path to executing on our plan. So, but it is a bit conservative considering our pricing and our cost reductions and our plans going forward, so we might be able to top that a little bit.

Okay, very good. Secondly, you mentioned some project delays in your chemicals vertical, can you just talk to maybe what some of the reasons that your customers gave to you for those delays and is this an ongoing concern for you or do you think it is more of a one-off event in the quarter?

I would say more of a one-off. Sometimes the project side of our business tends to be a little lumpy and can be pushed due to funding or regulatory change. So, I wouldn't read anything more than that. The chemical vertical for us had a wonderful year. We exceeded over $40 million of cross-selling revenues from our chemical customers. So, I think overall, very, very pleased with what we are doing with the chemical vertical.

Okay and then just finally to go back to the previous question. You asked about valuations on the acquisition front, obviously, we saw Flint Energy in the ERS deal yesterday, and we got a data point there in terms of valuation, but just what are you seeing on valuations? Have they move materially and given how you categorize the pipeline as being robust, I'm assuming you like what you see there?

Yes, I think there are some deals out there that from a value standpoint work for us. We tend not to be at that high multiple that we saw as you mentioned recently. That would probably be significantly beyond what our typical acquisition target would be. On an evaluation, we certainly want to look at synergies and other -- both on the cost side and revenue side, so we'll work together with the Company on valuations if there is some significant areas there, but overall, I don't see we've seen anything material different in the last couple of years on valuations at this point.

All right. Thanks. Nice quarter.

Our next question comes from the line of Matt Duncan from Stephens Inc. Please proceed with your question.

Good morning, guys, congratulations on a great quarter.

Thank you.

The first question I have is the housekeeping stuff, Jim, can you run down the revenues in EBITDA by segment for us and also if you could break out what organic growth was and then total acquisitions?

Sure. The revenues in Q4, technical services was $219.5 million, field services was $69.1 million, industrial services was $122 million, and the oil and gas field services was $135 million. Those were the revenue figures. On the EBITDA side, technical services was $57.3 million, field services was $11 million, industrial services $23.7 million, and the oil and gas field services was $33.8 million; and corporate, which obviously is a decrease on EBITDA is $28.4 million. As far as the acquisitions, I mean, clearly, we had the businesses starting in June which was the Peak acquisition, which was mid-June and then the rest of the acquisitions were in Q3. So we haven't seen a full year of that, but the acquisitions in Q4 roughly totaled about $90 million in revenues. So, hopefully that helps with your modeling.

Sure. And then remind us, Jim, which segments those would be found in? So maybe if you could just give us organic growth rates for the segment that they would be in, I'm assuming it's probably industrial and oil gas field mostly?

Yes, I would say about 60% of the $90 million is in the oil and gas segment. And about 30% -- a little bit more than 30% is in the industrial services side and then the balance is the smaller acquisition that we had in technical services, which was like $8 million or $9 million.

And then last thing here and I'll hop back in queue, if you could just give us some insights into what you're seeing so far in the first quarter specifically on the refinery turnaround side. We've heard a lot of indications that the turnaround season has started off strong, started off early and maybe how is that impacting your business so for this quarter?

Yes, I would say that the weather certainly in Canada has been much warmer than expected, and that will have some slowdown in some of our oil-field service work; but on the other hand, we see a very strong shutdown season ahead of us and looking at staffing and moving forward with a number of large turnaround projects. So, our first quarter is very strong and we expect that to continue right into the second quarter because of shutdown work.

Thanks, Alan.

Thank you. Our next question comes from the line of Al Kaschalk from Wedbush Securities. Please proceed with your question.

Good morning.

Good morning, Al.

Excellent 2011.

Thank you.

Just to follow-up on -- I'll touch around some of the edges on some of these questions. In terms of mix and utilization of assets, are you seeing any changes from the competitive environment that would -- while your utilization rates remain high, you may need to shift or boost some investments to keep share or to gain share? And if so where would they -- where are you seeing those pressure points?

I think if you look at the vehicles and equipment and the large fleet of assets that we now have, which is about 26,000 pieces, when we look across roughly 130 or so categories of assets within that 26,000, we're looking at utilization, we're driving improvements. There still is a lot of opportunity particularly with some of the acquired businesses we have with improving our overall utilization. In some of the businesses, we have acquired like Peak, we have expanded our capital expenditures with them because they see real growth opportunities, particularly in the US. And so, we are I think a great partner for them as they look at growing in the US with the oil and gas field service side of the business, and so we are deploying more capital there. But I don't think anything significant more than that, Al, I just think that we have a continuing opportunity to improve overall utilization. I think Tom Seeger, as Jim mentioned, is a great add for us and he is going to help certainly drive that initiative for us.

Is there -- well, it's probably too early with Tom's -- with Tom coming on board, is there an average or utilization rate that you are targeting?

I think we've historically communicated utilization of our incineration facilities because it is so well-defined, and I think as you look at all these varying assets that the Company has, we haven't really broken them down, there would be so much detail behind that. But I think overall, when we look at a lot of our rental assets and a lot of our oil-field services related assets, both Eveready, Peak, and some of the other acquired companies that we recently have made, have under utilized assets that we are in the midst of refurbishing, redeploying, improving on utilization, and that really goes across all of our operations here. So I think it's hard for us to kind of give you a sort of a broad number whether it be 50% or 60% or something like that, I think that would be too general. But we are and have always measured utilization at the detailed asset level, but I think what we're going to see is really an improvement in cross border utilization of assets as we try to take out the seasonality of the business.

Very good. And then just finally on the pricing front, if we could look at it on the flipside, where are you still seeing challenges on pricing either functional industry or business segment? Where are your most -- your higher challenges there where you're going to have to work a little bit harder at?

We have got full time people dedicated to driving pricing improvements. Some are targeting contracts that may have been unimpacted by an '10 or and '11 price increase that will be coming up and available to change in 2012. Others are focused on the fuel surcharge; and as you know, that is a very important part of our pricing initiative here is to make sure that we have the flexibility to deal with the rising fuel costs. In the case of Peak, they still had a significant discount to book in some parts of their business so really trying to eliminate as best we can those discounts and really look at book rates and put in some more formalized pricing strategies for their business. But I think whenever you are doing an acquisition as we have had, there's ways of putting better systems in place and better controls in place for pricing. And so we are really in the early stages particularly to do with the acquisitions we have made there.

Very good. Thanks.

Thanks, Al.

Our next question comes from the line of Larry Solow of CJS Securities. Please proceed with your question.

Good morning. In terms of your CapEx outlook, clearly your sort of a high-class problem is spending a lot of -- making a lot of good investments. Could you maybe outline just a couple of the -- sort of the key investments over the next couple years and maybe update us a little bit on the potential additional kiln in El Dorado?

Absolutely, I'll talk a little bit about that, Larry, and then if Alan wants to join into that. We are continuing our expansion of the fleet. So tractor-trailers, containers, rolloffs, and intermodal, we're continuing to invest in. Some of the opportunities in the lodging side of the business to be able to invest in not only western Canada, but we're looking at North Dakota as well for what is going on in the US. Also in our landfills, were doing some expansion, some cell expansions with our increased volumes that we have coming through the system. And then also in our systems, we talked a little bit about what we are doing in the vehicle and maintenance side. So we are improving some of the systems there to be able to internalize a lot of the maintenance cost and to be -- as far as how we acquire parts and so forth, so those are the big items. I don't know Alan, if you wanted to add anything?

On the permanent, we certainly hope that we are continuing in the permanent process to expand our incineration capabilities.

Oh, right.

There are waste streams today that we as an industry have limitations on the volume and quantity that we can handle a lot of the ozone-depleting kind of chemicals for example and some of the more difficult hazardous streams. So we're looking to expand our facility to put another kiln in to be able to have more capabilities to handle more difficult type streams as we've talked about in the past. So that project is going forward. We actually had our board at one of our incineration facilities last quarter, and we're pretty excited about the opportunity there.

Okay, and just a related question. Can you just remind me on the Quebec facility, the incinerator you closed, the capacity there? And I believe that was sort of a stream that was not very profitable, is that right?

Yes, it was less than probably $200 a ton where today our average price is much higher than $600; and so it was about 60,000 tons, but a very low margin operation for us.

Okay and just a clarification question. On the weather in Canada, if you get sort of an earlier thaw, it would just sort of be a timing issue, I imagine it would just sort of push the I guess the slowdown unless I guess it is wet for a long time, but it would sort of just, once you thaw and you melt down, then the roads I imagine should in theory be clear. Is that --?

Yes. Well, I think the wood to drill program could end early this year as a result of that the weather has been very warm, and we are sort of looking at that week by week. On the other hand, it has been very dry. We haven't seen anywhere near the kind of rain or snow as we did last year. So the flooding that we saw, that really prevented us from doing a lot of work particularly like in the Estevan area, we don't see that this year so I think overall it will be neutral for us.

Okay, great. Thanks a lot. Congratulations.

Thank you, Larry.

Thank you. Our next question comes from the line of David Manthey of Robert W. Baird & Company, Inc. Please proceed with your question.

Thank you. Good morning.

Good morning, Dave.

First off, on the refineries, I think you mentioned that you're doing something for nearly every refinery in North America; and I'm just wondering based on the current set of capabilities you have right now, how deeply penetrated do you think you are of that total opportunity? And then as you look at the refining space overall, I guess upgraders and so forth, are there ancillary services that you think you can either provide via greenfield applications or acquisition that will be able to expand that total available market as well?

Well, I think expanding through cross-selling is certainly the first thing that we are focused on because we have a lot of capabilities across our catalyst business, our decoking business, a lot of our specialty services. And so when we talk about the work that we are currently doing for our refineries, we certainly don't have the share that we want to get to. There is a significant opportunity to take our existing service offerings and expand that even more across refineries and upgraders. So, we're really in the early stages there.

Okay, so you have significantly less than say 50% or 30% of the share that you could have with your current capabilities through cross-selling?

Yes, I would say so at this point for sure. And that is with the existing services that we offer, not expanding any particular new services that we are not offering today.

Got it, okay. And then the second question, is there anything on frac water treatment, any changes in regulations or technology? I think last quarter you said it is not a big contributor but you're trying to figure it out, and I think people view that as having fairly high optionality. Is there anything you have to report there?

Nothing new at this point. Certainly, no new regulatory federal regulations, yet, although there is a lot of activity in that area and a lot of proposed regulations, but nothing yet that we can kind of sink our teeth in and put our mobile treatment technology in place for yet.

So you are still serving that market by taking frac water off-site and treating it?

Predominately and it is not a big part of our business still, particularly in Pennsylvania and so forth. So we are still doing it but it's -- I think there's a lot of uncertainty still on what is the ultimate regulations going to be there.

All right. Thank you.

All right. Thanks, Dave.

Our next question comes from the line of Rich Wesolowski of Sidoti & Company. Please proceed with your question.

Thanks. Good morning.

Good morning, Rich.

How do I get a picture of how your thermal desorption operation has improved and mixed in your incinerators? Would you have any idea as to how many tons of waste is diverted from Deer Park or any other incineration plant to your thermal fleet and what that was a year ago?

We are probably looking at 20,000 to 25,000 tons as a rough guess there, Rich, it is not a huge number.

Okay. A landfill competitor recently cited price increases of 4% to 7% for their base business as distinct from the event project business, which is always very competitive. What has changed during the past year to allow any pricing at all in the landfill sectors? That's been an area that is separate from your incineration as far as your bargaining leverage?

Our landfill business for the most part is pretty local, so each market has somewhat of a story so it's kind of hard to give you a generality. I think you are right in regard to the larger projects that become more of a logistics and large event projects. Those tend to be much more competitive. But I think in each of our landfills from a local market standpoint, there is a story behind each one, and in some cases we've had some nice opportunities to improve our pricing. In other cases they may be more competitive. So, I think for example in western Canada and in the Bakken, we've got a lot of volumes. We have a lot of waste coming at it, so that we have a little bit more opportunity there as an example.

And then lastly, regarding acquisitions, does the broadened service line offered by the Company today versus five, seven years ago naturally lead to fewer deals for fixer upper targets or assets that you can buy at cents on the dollar and more targets that are chosen more for the service line and how that fits into your portfolio?

Well, I certainly think there is still opportunities for us to buy organizations that may have a need for information systems like we have where we could really layer in our technology and help a business become much more efficient and more cost-effective. There are what I would call a lot of smaller acquisitions, singles and doubles that we could do and there is certainly some home runs that we see out there also. But for the most part, I would say that it really hasn't changed that much. It -- and we are certainly interested in paying a fair multiple but not a high multiple, and we have seen some transactions at a much higher multiple than we are willing to pay.

Right, sorry one more, you mentioned you have a few hundred open positions you are looking to fill. Is there any geographic concentration of where those are?

It's clearly in the field. A lot of the western US and western Canada area continues to be a big area of need for us. We do have a seasonal workforce and we are trying to convert more of them to full-time employees as well. But I think when we look at adding more equipment and more resources and try to improve on overall utilization, we have equipment sitting today due to the lack of availability of labor so it a big area of focus for us.

Best of luck in 2012. Thanks.

Thank you.

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

Yes. Good morning and congratulations.

Thanks, Sean.

So you've touched on the fab -- I'm sorry, the lodging offerings a few points this morning. Can you give us an update on the progress of the fabrication efforts to expand those offerings. I know that you are looking at Bakken as well as western Canada, just looking to see if we can get a little bit more detail as we think about those geographicals, the degree perhaps they may be morphing one versus the other as you get further into the effort. Thoughts around production goals and perhaps how you might think about capacity utilization in that business today and exiting the year?

So, our lodging is made up of three different components. We have our permanent camps, we have over 60 drill sites, and we have over 400 well site units. And as we look at utilization of those assets, we see opportunities for growth, and the BCT acquisition was made as a way of number one, having a facility to refurbish assets as they come into the end of their lifecycle. We can bring those assets in and refurbish. Number two, be able to control the quality of the manufacturing and also be able to create assets that we can move into the US that will meet US codes like in the Bakken. But also to really manage the cost side of the lodging side of the business. We can do it much more efficiently if we manage and built these facilities ourselves.

And so, we've got a great team there. We've hired a new manager for our manufacturing facility. We are -- I wouldn't say we are booked out, but we are very busy, very strong volumes there. And we also have a number of projects of our own that are on the drawing board for both western Canada and the US; and throughout this year, part of our capital expenditure that Jim talked about will include investments in all three of those segments of our lodging business. And as I mentioned, it is about a $200 million or so business for us today. That is probably going to continue to grow maybe 5% or so per year as we add more camps and add more of those facilities. And we see this as a very nice business but also helps us keep our people.

Okay, and so just to briefly follow-up on that last comment. If I think about 5% growth on that business, is that really a matter of expansion on what it is you are able to offer as actual sites given the assumption of near full capacity for many of them, and just kind of keeping up with that or are there any pricing schemes that can be worked in there that could perhaps add to that growth? How to think about that?

Yes, the level of the utilization is very good right now and there is a significant demand for additional housing and we expect to continue to grow. We've kind of felt like if we can keep this side of our business at roughly 10% or so of our revenues, it is probably a good amount of exposure that we want to have in this side of our business. But for right now, we not only are pretty high level utilization, but we see some opportunities for pricing, and we are still outsourcing needs of our own with subcontracting. So there is a fair amount of opportunity there.

Okay, that's helpful. Then jumping to another side of your business. I think you had mentioned last quarter you already had 10 turnarounds booked for 2012 -- I'm sorry for 2012, you've talked about turnarounds looking strong already on the call. Has that number changed, and can you share with us your expectations for turnaround this year and the degree your business could see perhaps something higher as we move forward?

I think, I might have made mention that at the time at least when we were talking that we were booking turnarounds right up through September of '12 and which was unusual for us to be out that far with guaranteed contracts and commitments, and so I think that is just reflective of the fact that there is a lot of opportunity there. There are a lot of needs and I would say that it hasn't changed other than there continues to be strong for us and the outlook looks strong for us.

That's very helpful, thanks.

Thanks, Sean.

Our next question comes from Jamie Sullivan of RBC Capital Markets. Please proceed with your question.

Hi. Good morning.

Good morning, Jamie.

Question, you talked about some of the shift in projects you are seeing from the gas side to oil and liquid, just wondering, my understanding was that your gas exposure was relatively small, maybe 1% of the overall business or maybe even less; is that a -- is that the right characterization?

I would not say it was that low, but clearly in Canada, there had been a trend away from gas going back to when the prices were first coming down years ago and that was when like for example with the Peak Services business, they bought a lot of their growth into the US. I would say, probably we are talking -- as far as Peak's business in the US is probably somewhere around -- I would say around $100 million. I don't have a precise figure, but clearly the minority of that is gas, but maybe a little bit more than 1%, maybe a couple more percent than that.

And we are shifting the assets that we have to -- from the gas plays to the oil plays and moving with our existing customers and certainly that is what they are doing. They are looking at crude at $100+and natural gas at $240 or $250 and so they're shifting as well.

Right, okay.

And we are shifting with them.

Okay, and then I think Destiny had won, I think it was a $50 million contract in the Marcellus prior to the acquisition, just wondering what the status of that is. Is that already contributing to their business?

That contract is ongoing and that work will be kicking in here. We've had a very mild winter and so that activity actually should be accelerating because of that, here in the US.

Okay, that is helpful. And then, Alan, maybe just from a big picture perspective, you talked about some of the energy investments in 2011, do you have any sense for your customer budgets and plans for investment, how much they are expecting to be up in 2012 versus 2011?

I think everything that we have seen and from our marketing people everything that we have heard, investments will continue to exceed 2011 investments both in the oil sands, we've got a lot of projects that were impacted by the great recession that now got back on the drawing board again and capital is being invested in them. Even in some of the gas plays in BC, those continue even today, very strong. So not all gas has certainly been impacted. And so I would say that the general theme is a larger investment in capital in western Canada and the US in the areas that we are particularly focused on and I think that is the best way to characterize it, Jim?

Yes, that is about right. Yes.

All right. Thanks very much.

Thanks, Jamie.

Our final question comes from Michael Hoffman of Wunderlich Securities. Please proceed with your question.

Thank you. Good morning, Alan and Jim.

Good morning.

On the subject of free cash flow, can you help us with what you finished the year fiscal '11 in free cash? And then can you talk about sort of long-term capital allocation strategy, and seeing the need and the value in investing growth, but how does dividends and buybacks factor in over time?

Sure, Michael, our cash flow from operations just maybe to start there was about $180 million for the full year 2011. And the expectation was for that to be higher, and I think I talked a little bit in my remarks upfront about our Days Sales Outstanding going up in the quarter six, seven, eight days. So clearly, cash flow from operations, we would have expected $30 million or $40 million higher, I would say. So free cash flow, it will probably be, we're finishing up the numbers, free cash flow for 2011 will probably be in the $40 million to $50 million range whereas we are thinking more in the terms of $70 million to $80 million. But again, we are deeper into some verticals where there are some arrangements that the acquired businesses had with customers to have extended terms and we will be working on that and clearly the outlook looking ahead for free cash flow, I think, will top $100 million or be in that ballpark.

I do believe that cash flow from operations will probably be up in the $270 million range cash flow from operations there. So, I think it is a really good outlook there. As far as capital allocation, I think that we believe that the best use of our capital for our shareholders is to continue with our acquisitions. We are not considering at this point any dividends or share buyback programs. We think that we can really leverage with some nice accretive acquisitions some nice shareholder value for our investors. So, does that answer what you're after there, Michael?

It does. So tying that then, I think you're coming up to an opportunity to refinance that high-yield debt; and in the context of that, sort of what is the timing? And two, what do you think of as your buying power or worded maybe differently, what target leverage would you be willing to move to as acquisitions really kind of get robust this year?

Good question, Michael. I think looking at our existing debt does become callable in August at a 1038 price, and clearly that would fit into any of our acquisition plans on how we do that and how we position that. So clearly, that is part of our strategy there going forward.

Okay. And then do you have a target leverage that you would operate the business?

Yes, what we look at there, again, having a strong balance sheet as we've talked before is very important to our customers along with just being prudent and being able to take advantage of any downturns or whatever. So we would not want to exceed like three times EBITDA in terms of our leverage. We look at our debt to total cap of that 35% to 40% as being a place where we think is fine to be. We might go north of that if we see a good opportunity and see our way clear with an acquired business to bring it down, but generally we like to run a nice prudent balance sheet and be able to do it. But clearly our leverage is low right now, clearly, with $520 million of debt and having cash of $260 million on hand, our net debt is less than one time EBITDA right now so there is a lot of debt capacity and a lot of room for us to continue to do as we have been doing to expand the business.

And might I ask just one more question?

Sure.

Sure.

There's been a lot of talk on this call about pricing, and my memory has always been about your business model that pricing is more opportunistic than a strategy and that mix tends to shift as the business fundamentals improve of your customer and that helps to drive average selling price. And then as you've talked about asset utilization tends to allow you to price opportunistically; but as a strategy, the real driver is to drive more volume through the business model? Am I wrong about that or is that --?

Well I think on the waste disposal business, there are different levers there than maybe on the energy side or the industrial side, and I think -- so I think pricing is today a little different than that. And I think if we take a step back and say, we did a full blown pricing study across our entire business, we instituted six new vice president level positions within the Company whose sole responsibility is to drive margin improvement and pricing improvements across their respective segments of the business. And the Company today has 35 different lines of business, so our service offerings that it has and there are pricing strategies across each one of them that we are focused on. And certainly, when we talk about incineration, that is a lot different than looking at large event business for landfills.

So we have to kind of -- in the context of pricing when we talk to the folks like you, we have to really explain through it a little bit in more broader detail that there is a lot of levers, and we are really focusing on all of them and looking at it on an ongoing basis to try to improve overall the profitability of our business. We have also gone to our customers and share with them the information about the capital expenditures, their compliance requirements and what have you, particularly running these fixed-based facilities and getting them to buy into the fact that they want us to be a strong Company. We need to be a profitable Company today to replace an incinerator. The current pricing environment does not provide an adequate return on investment, and so we are communicating that and we are trying to drive improvements across incineration business particularly very strong.

Thanks. That is what I was looking for.

Okay.

Thank you. We do have a follow-up question from the line of Sean Hannan. Please proceed with your question.

Yes. Thank you. Actually I didn't realize I was going to get one in. So, I just wanted to go back to the M&A topic quickly. I know that there has been a lot of time you have spent around this today, Alan, and Jim. When you look at the four business areas, can you perhaps give us a little bit of your perspective. How do you characterize what maybe more important for you in some of -- in those four segments -- reporting segments. When you look at perhaps relationships, capabilities, growth prospects, margins, what might be of more relative importance in each one of those? If you could help to differentiate, that would be helpful.

I think our environmental business, which is about $1.1 billion this year is an area where we continue to see opportunities to expand. The permits are very difficult to get. You cannot -- so acquiring firms that have those permits, those unique permits are important for us, and we have systems that we have built out as I mentioned in the past. We put $100 million into our homegrown information management systems that we can deploy and leverage across acquired companies, and particularly in the environmental space where we've got 25 years of process management, process improvement across our -- using our systems. That would be certainly the best for us right now. If that is what you're asking?

That type of logic is helpful. Yes. Is there a way to still walk for -- all four segments, could you perhaps give us a little bit more detail on what might stick out in some of the others?

Well, I think asset management is something that we are excellent that. I think that when we look at managing utilization tracking, assets tracking, billability of all of our people and equipment, material supplies, all of those things we can bring to a Company some I think some significant tools. And in many cases those tools don't exist today in their respective businesses. We've seen recently a lot of companies out there trying to put ERP systems in, whether it is SAP or others, and they are very complicated systems and oftentimes really don't support the kind of business that we are all in. And so we've built some super systems, some great technologies that we can leverage and if there is one thing that we want to do is continue to drive our overall SG&A less than 10% of revenue, and we can do that by acquiring firms, leveraging our systems, managing them more efficiently, and still provide that kind of service quality that those customers are looking for.

Okay, thank you so much for the follow-up.

Okay. Great, Sean, thank you.

And thanks, everybody, we appreciate you joining us on the call today. We look forward to updating you again.