Clean Harbors Inc (CLH) 2013 Q2 法說會逐字稿

Greetings, and welcome to the Clean Harbors second-quarter 2013 conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Mr. Michael McDonald, Assistant General Counsel for Clean Harbors. Thank you, Mr. McDonald. You may begin.

Thank you, Manny, and good morning, everyone. Thank you for joining us today. On the call with me are Chairman and Chief Executive Officer, Alan S. McKim; Vice Chairman, President, and Chief Financial Officer, Jim Rutledge; and our SVP of Investor Relations and Corporate Communications, Jim Buckley.

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, August 7, 2013. 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 statement made in today's press release or this morning's call, other than through SEC filings that can be made concerning this reporting period.

In addition, I'd 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 news release, which can be found on our website, cleanharbors.com. Now, I'd like to turn the call over to our CEO, Alan McKim. Alan?

Thanks, Michael. Good morning, everyone. Let me start my remarks this morning by making three points. First, we are obviously disappointed with the Q2 results. Even though we achieved record results in both revenues and EBITDA, we encountered a variety of headwinds this quarter which I'll discuss shortly. Second, all of the challenges we faced were either temporary, such as the historic flooding in Western Canada, or we can readily address, such as the selling of more blended products from our re-refineries. Third, none of the industry dynamics or the underlying fundamentals have changed in a meaningful way, nor has our long-term outlook for the combination of Clean Harbors and Safety-Kleen. While the re-refinery business has been negatively impacted by pricing and mix, we remain confident that the acquisition of Safety-Kleen will prove to be a winner for our shareholders. With that said, let me discuss our Q2 results and how each of our segments performed.

Overall, we had a multitude of negative factors influencing the quarter with the unprecedented flooding in Western Canada being one of the largest. Following the typical spring break up in Alberta, heavy rainfall triggered catastrophic flooding throughout that region. We were directly affected as our High River and Calgary offices were both without power for well over a week. An employee who was off duty was one of the fatalities related to these horrible floods. This flooding was essentially that region's Hurricane Katrina-type event. Business activity plummeted in Alberta over a multi-week period, and many of our customer sites ranging from drill rigs to oil sand mines to industrial plants were directly affected. While we ultimately picked up some clean-up work due to the flooding, we estimate that the net EBITDA impact to us in the quarter was a loss of several millions of dollars.

Turning to the segments, let me start with technical services which continues to benefit from the acquisition of Safety-Kleen. Utilization at our incinerators was 92.3% in Q2, which is particularly impressive considering that Deer Park had a three-week unplanned shutdown in June. This shutdown reduced our EBITDA in the quarter by approximately $3 million. By region, our Canadian operations essentially ran at maximum utilization in Q2 while our U.S. locations came in just shy of 90%. Our landfills business rebounded from a slow Q1 with a 50% sequential increase in volumes, which was also 17% higher than Q2 of 2012. Bolstered by Safety-Kleen, overall disposal volumes remained high across our network during the quarter, and we enter Q3 with momentum in the segment.

Revenue in our Safety-Kleen Environmental Service segment grew sequentially in the second quarter with strong margin improvements as the segment began to realize some initial synergies from the transaction. Our waste oil volumes were up in the quarter, increasing more than 10% from Q1 levels. To effectively leverage our waste treatment and disposal network, we also focused on expanding the segment's share of work in small quantity generator and parts washers business. Cross-selling opportunities in this area abound, particularly as we introduce these product offerings to our legacy customers in Canada.

Turning to Oil Re-refining and Recycling. While the base oil pricing environment remained stable in Q2, this price is substantially lower than a year ago. We have not seen a major improvement in pricing in this line of business since our acquisition late December. In Q2, we saw lower-than-expected volumes of blended products which also reduce the segment's revenues and EBITDA contribution. There were two primary factors behind the lower blended volumes. First, a drop-off in volumes from the US government, a key buyer of our products. Second, we chose not to renew the contract of a larger customer who is unwilling to meet our new posted pricing.

Since one of our team's main objectives is to sell more blended products, particularly our EcoPower motor oil, the drop-off in volume is disappointing. But, the Safety-Kleen team has been working diligently to develop a strong pipeline of prospective customers and expects volumes to rebound. In fact, EcoPower was recently selected by Nestle USA as the motor oil for its entire fleet of tractor-trailers. We are in discussions with a number of other well-known brands that are pursuing sustainability initiatives and want to reduce their carbon footprint. At the midpoint of the year, our blended volumes are only at 38% of our total lubricants. As a result, it will likely not be until next year when we reach our goal of achieving a 50-50 split between base oil sales and blended oil sales.

Another ongoing and important effort within the re-refining operation is to lower our input costs by reducing the prices we pay for waste oil. As a reminder, Safety-Kleen uses no virgin crude. We are gathering waste oil from thousands of accounts. In the second quarter, we continued to make incremental progress on lowering our pay-for-oil costs, but the process of re-indexing some accounts to base oil pricing and going beyond simple price relief is going to take several more quarters. In the interim, we continue to look for less expensive sources of waste oil in new geographic areas and among the Clean Harbors legacy customer base. We are confident that over the next several quarters, we can continue to enhance the margin in this segment even without any improvement in the currently depressed price of Group 2 base oils.

Industrial and Field Services segment performed well in the quarter, especially in light of the flooding and turnaround delays. Segment revenue increased year over year by 22% while EBITDA grew 34%. This demonstrates that we captured some high-margin business while efficiently leveraging our assets. Lodging again contributed strongly, particularly as flooding in the region drove demand for remote accommodations.

Overall, we were pleased with the performance of our turnaround services. Results could have been better, however, had some refineries elected to delay shutdowns because they were running so efficiently. Fortunately for our business, these plants can delay maintenance turnarounds for only so long before the risk of a major upset. So, garnering additional business in the segment is more about timing than anything else. In addition to refineries, Industrial and Field Services saw a reasonably strong level of activity within the Oil Sands market. Our Field Services group also contributed nicely in the quarter generating a solid mix of projects and maintenance work. Although for the second consecutive quarter, we did not participate in any major emergency response events.

Severe flooding in Western Canada significantly affected our Oil and Gas Field Services segment, which performed poorly in Q2, exacerbating the segment's seasonally weakest quarter. Wet conditions delayed project kickoffs throughout much of the quarter. Rig counts in Alberta, which number in the 500 to 600 range during the winter drilling season, lagged last year's Q2 levels, and we were actually below 100 for much of the quarter even into early June. One consequence of this severe slowdown in Canada is that it masks some of the success we are having expanding our presence in the U.S. service rental markets. We have established a growing reputation in the Bakken, the Utica, and the Marcellus shales and recently began work on some rigs in Wyoming and Colorado, and our teams are also targeting moving into additional plays in Texas and Oklahoma.

Before moving on to our outlook, let me briefly discuss the progress we have made on the integration of Safety-Kleen. Since our call in early May, we have made tremendous progress in combining our two organizations as well as beginning to realize the synergies and cross-selling opportunities available to us. As I have outlined on previous calls, hundreds of integration initiatives are underway, including conversion of their systems to our proprietary WIN platform. We believe moving to WIN not only generates considerable savings but will enable us to gain efficiencies, increase asset utilization, really enhance our internalization initiative. We remain confident that we can still achieve our synergy guidance. More importantly, we remain fully on track to realize the $100 million of annualized cost synergies in 2014. With that, let me turn to our outlook.

Based on our performance through the first six months of 2013 and the second quarter in particular, we've concluded that we needed to revise our guidance and reset the bar for this year. It's important to point out that we expect the second half of 2013 to be much stronger than the first, but the backlog of activity that was delayed because of the flooding in Western Canada, our lowered percentage of blended product sales, and other factors made achieving our current guidance unattainable. Only now, for example, are dry conditions leading to a pickup in drilling activity. A similar story exists for our Industrial business in Western Canada where the flooding and extraordinary rainfall delayed some of our customers' plans and projects. The weather even affected us directly there as our plans to open our new 600-person, Ruth Lake Lodge in July was pushed back into this month. We will be opening the first wave of rooms later on this month, and as we move through September, we expect to approach being fully booked there. For Safety-Kleen, we are working to revive our growth and blended volumes at our re-refineries in the next few quarters.

As I mentioned earlier, we believe that the industry and market fundamentals across our business remain strong. The management team here is taking action, and we are focused on more effectively leveraging the Clean Harbors/Safety-Kleen combination as we move through the remainder of 2013. We expect to finish the year on a strong note with record results and are poised for success entering 2014. With that, let me turn it over to Jim for the financial review. Jim?

Thank you, Alan, and good morning, everyone. The revenue in the second quarter of 2013 was $860.5 million, up 64% from the $523.1 million we reported in Q2 a year ago. As Alan mentioned, our revenue performance fell well short of our expectation based on a confluence of factors, including the flooding in Western Canada, the Deer Park shut down, delayed refinery turnarounds, lower-than-expected volumes of blended lubricants, and lackluster results in oil and gas. To provide some additional perspective on Q2, here's a snapshot of how our key verticals performed. This is the first quarter in which the percentage of revenue by vertical includes Safety-Kleen.

General manufacturing was our largest vertical in the quarter accounting for 18% of total revenue. We saw a nice contribution from high-tech customers, and our overall manufacturing customers base remains stable. For comparison, before the Safety-Kleen acquisition, general manufacturing hovered around 8% of revenue. Looking ahead, given the availability of inexpensive domestic natural gas, manufacturing customers are cautiously optimistic about their prospects. Refineries and Oil Sands customers accounted for 16% of revenue in Q2 and generated double-digit growth over the same quarter last year. Even if you exclude the businesses we acquired in the past year, organic growth in this vertical was 8%, and it could have been even stronger had some refineries not delayed their turnarounds.

The automotive vertical, historically not a meaningful contributor for Clean Harbors, now accounts for 11% of revenue. Given Safety-Kleen's expensive waste collection -- I'm sorry -- waste oil collection business and the many services performed for customers such as auto shops, the prominence of this vertical in Q2 was expected and complements our diverse customer mix. The chemical vertical represented 10% of revenues in Q2, essentially flat with the same period a year ago, as we experienced solid base business and incineration volumes but a lower level of remedial and industrial projects in the quarter. At 8% of revenue, oil and gas production was up slightly from the same period in 2012 as we saw some growth in our US service rentals business. Other notable contributors in Q2 included utilities, brokers, and government, each at about 3% of total revenues along with a number of smaller verticals, including the pharmaceutical and biotech vertical which accounted for 2% of revenue. Within that vertical, we are seeing demand for more sustainable solutions which aligns well with our new assets such as the Safety-Kleen recycling centers. Our team has closed several new pieces of business in this vertical, further diversifying our Bio Pharma customer base.

Returning to the income statement, gross profit for the quarter was $246.2 million, or a gross margin of 28.6%, compared with a gross profit of $155.5 million, or a gross margin of 29.7% in the same period last year. We anticipated a lower gross margin this quarter due to the addition of Safety-Kleen, which carries a lower margin presently. In addition, many of the assets within our Oil and Gas Field Services segment, particularly on the Canadian side, were severely underutilized this quarter. We see a backlog of potential activity in oil and gas which should help to accelerate utilization of the Company moves through the second half of 2013 and beyond.

Turning to expenses. SG&A was $122.6 million, or 14.2% of revenues, compared with $66.8 million, or 12.8% of revenue in Q2 of 2012. And, 14.9% in the first quarter of this year. While we had expected an even greater sequential reduction in SG&A percentage, we also had anticipated higher revenue in Q2. The modest decline from Q1 to Q2 is just the initial effect of cost synergies, a large portion of which fall in the area of corporate costs. Excluding integration and severance costs of about $5.5 million that were recorded in SG&A in Q2, our SG&A percentage would have been 13.6%.

We are still north of our original target SG&A range of 12.5% to 13% of revenues, however, as those synergies continue to take hold, we fully expect our SG&A percentage to decline in the quarters ahead. In Q2, depreciation and amortization increased 75% year over year to $67.5 million. Clearly, the addition of Safety-Kleen and several smaller acquisitions in the past year are playing a major role in this increase. At the midpoint of the year, we are currently at $127.5 million, so we remain on target for our full-year expectation of D&A in the range of $255 million to $265 million.

Income from operations for Q2 was $53.2 million, or 6.2% of revenues, compared with $47.5 million, or 9.1% of revenues in Q2 2012. This decrease reflects the higher depreciation as well as near-term expenses. Integration-related expenses, including severance costs, totaled $6.8 million in Q2. Our Q2 adjusted EBITDA was $123.6 million, or a margin of 14.4%. This is a 39% increase from the $88.7 million we reported in Q2 a year ago which had a margin of 17%. I should point out that our adjusted EBITDA includes the $6.8 million of integration and severance costs as well, so our EBITDA margin without these costs would have been 15.2%.

Turning to our taxes. Our effective tax rate for the quarter was 35.1% compared with 35.8% in Q2 of last year. The decrease in the effective tax rate was primarily attributed to lower accrued interest costs related to unrecognized tax benefits in 2013 as compared to the same period in 2012. We have reduced the forecast of our expected effective tax rate for 2013 by 100 basis points to be in the range of 35.5% to 36%.

Second-quarter net income was $22.9 million, or $0.38 per diluted share compared with $23.4 million, or $0.44 per diluted share that we reported in the same period a year ago. Our Q2 2013 net income was certainly affected by the lower than anticipated revenue in the quarter and the large increase in depreciation. It also included the pretax $6.8 million in integration and severance costs I previously mentioned. We continue to maintain a healthy balance sheet and are well capitalized. Cash and marketable securities as of June 30 were $273.8 million, up substantially from $233 million at the end of Q1 as we had excellent cash flow and cash collections this quarter. Total accounts receivable were $584.2 million at quarter-end, down slightly from the $595.9 million we reported at the end of Q1.

In Q2, our days sales outstanding were 62 days compared with the 63 days we reported in Q1. This improvement reflects our ongoing focus on collections and continually improving our billing processes. We continue to target achieving a DSO level below 60 days. Environmental liabilities at the end of Q2 were $218.3 million, down from $219.9 million at the end of Q1. CapEx for Q2 was $69.2 million, which is similar to the $72.2 million we spent in Q1. For 2013, we are targeting CapEx in the range of $280 million, which includes maintenance CapEx of approximately $130 million and about $150 million of high-return internal investment such as our Ruth Lake Lodge. Our cash flow from operations in the quarter was strong at $98 million compared with $39.6 million in Q1.

Moving on to guidance, we are lowering our 2013 revenue and EBITDA guidance based on Q2 performance and our outlook for the second half of the year. We now expect 2013 revenues in the range of $3.5 billion to $3.55 billion. For adjusted EBITDA, we now expect 2013 to be in the range of $535 million to $545 million. It should be noted that this range of adjusted EBITDA includes the effect of integration and severance costs for the full year of approximately $15 million, $12.5 million of which we already recognized in the first half of this year. With that, Manny, could you please open up the call for questions?

(Operator Instructions)

Our first question is from Al Kaschalk of Wedbush Securities. Please go ahead.

Good morning.

Good morning, Al.

I'd like to start on the positive side on technical services. The volumes looked pretty good in terms of the business. Could you chat a little bit about price, and in particular, the outlook for the next couple of quarters?

Absolutely, Al. Pricing -- I think earlier in the year I was thinking that pricing overall for the Company would be in that 1% to 2% range, probably closer to 2%. But now, we are thinking, just looking across some of the price competition that we are seeing, certain parts of our business, for example, in oil and gas and some projects that we were bidding on that the increase probably will be in the 1% to 1.5% range. Clearly, some parts of our business that have high utilization, for example, parts of our technical services business, pricing is going well and is higher than that, of course. But, what I was responding it is the overall Company there.

Are you seeing it more geographically mixed in terms of pricing strength? In other words, Canada is better, or less? How should we think about where your pressure points are?

Absolutely. I would say probably right now the most price competition that we are seeing is more in Canada, but I will say that in the oil and gas US business, although we are clearly expanding, there is good price competition there that we are up against.

Let me transition to Oil and Gas Field Services. Alan, it sounded as if this was a timing issue, but is it also a function of utilization in terms of the equipment? Can you talk about maybe your degree of confidence on Q3 and Q4?

I think as we looked at the challenges we had last year in the US, I think the team really did a great job this year of diversifying its customer base, and we are ahead of budget with our service rental business in the US. Our utilization is ahead of where we had expected. We expect to continue to grow. I think Laura and the team have done a really good job of growing the business here in the States. In Canada, certainly, it was weather impacted. Although we are now starting to see a good pickup in utilization of a lot of our rental assets, we still have a long way to go to get our utilization up there back on track. Again, I think overall I would say for the second half of the year, we feel pretty good about the momentum we have in that business now.

Okay. And then, I am sure you will get a few more questions, and I will hop back in the queue here. But hopefully, you can address maybe on the re-refining side. I know you talked about lowering cost and the blended issue mix is going to take some time. But, in terms of correcting that business, for lack of a better word, is that a function of getting it to the right size such as firing certain customers because they are not up to the pricing gait that you are trying to establish? Could you talk about maybe a little bit of how that business gets corrected in your mind?

Yes. We really -- I think in the environmental business, the Company really has taken a leadership role on pricing and really trying to go to our customers and deal with getting a fair margin for the business that we do. I think in the area of the oil business, particularly, we are doing the same thing. That has certainly impacted our short-term volume on the blended side, as we mentioned. But, I think when you look at what happened with crude oil in the second quarter going from low $90s to now $105, $108, that certainly was a headwind for us on our efforts to go back and re-price our oil collection customers, especially our national account customers, who had typically been indexed off of -- or closely aligned with crude. So, that didn't help us at all, but you are absolutely right.

We have walked away from some volume. We have pushed really hard on pricing. There has been a significant disconnect between June of last year and June of this year in how base lube oil has correlated to crude. It has been a significant issue for us, and the team has really worked extremely hard to lower its cost structure to deal with that margin squeeze that we've been dealing with. By now, we would have hoped that we would have seen some improvements, and we have just recently, even this morning, seen a little bit of price talk, but we've got a long way to go. So, we've got to address our cost structure, and we have gone back to our customers and talking to them specifically about this very issue.

Thank you.

Thank you.

Thank you. The next question comes from Rich Wesolowski of Sidoti. Please go ahead.

Thank you. Good morning.

Good morning.

It seems from your release that the activity in Western Canada is back up and running. I'm wondering if the flooding is affecting your back half estimates? Either for the field oil and gas or the industrial services?

I think to some degree the flooding and all that wet weather caused a slow start in Western Canada in general. I do though also want to point out that the rig counts in Western Canada are not as robust as they were last year, so that is also a factor. So, we are being conservative with the outlook for the rest of this year. Clearly, better than Q2 -- Q3 and Q4 will certainly have improvement there in Western Canada, but it's not going to be as robust as last year. I do think that on the US side, it's a more positive story because on the leadership of our President in business there, we are expanding into various shale plays that Alan talked about before, and we are diversifying further so we expect to see some strength there.

Okay. Speaking of the second half outlook, again, you have -- I understand the second quarter you had the incinerator shut down, you had the integration costs, the floods, et cetera, but there's a wide gap left for the second half. I'm wondering if you'd flush out even qualitatively where the surprise came from? Because we are speaking about the re-refining in the field oil and gas, but those are divisions that were kind of known to be weak as we headed into the year.

Maybe to just walk through segments might be a little helpful. I will just give some qualitative kind of points. In tech services, clearly, we have done well. Safety-Kleen has certainly helped the volumes coming into our plants, but I will say that given -- if you look at industrial production, or GDP, or the chemical industry indices in manufacturing in more recent months -- in the last quarter or so, they are down from the beginning of the year. I think overall that has affected our legacy volumes. Not to make them down, but they are not as robust as where we thought they would be in the beginning of the year. In other words, rather than talking about mid- to upper-single digits kind of growth, I am more below middle single-digits on waste volumes there. So, that's one of the big things there.

And then, also, and I think it's somewhat related is that the projects, the waste projects which also affects the industrial side, we have seen delays out there. Some weather-related, but they are delays, nonetheless. We are being conservative about what we are projecting out for the second half of the year as far as catching up on that.

Talking a little bit about -- I think we talked about facilities. Alan mentioned the reduced blended lube percentage that we are at right now. We are also forecasting some lower RFO sales because we are being conservative on waste oil collections as we identify those partners that we are going to be working with going forward. So, there is some conservativism there. In industrial and field services, Alan talked about the turnarounds being pushed off because the refineries and upgraders are at record -- at not all-time highs but at least highs in the last 7 to 10 years of efficiency. So, we're seeing some delays in maintenance turnarounds due to that. So, that clearly -- while not a surprise, we've been through that cycle before. It's reason for us to be cautious about how much will come into this year.

And then, also, we are not within that segment forecasting any events. We have, as Alan pointed out, we haven't seen any significant events come through this year, so we are not forecasting any for the rest of the year and that would be upside if we were to participate in any.

In oil and gas, I think we talked about the weather issues, the sluggish rig activity in Western Canada, although partly offset by stronger activity in the US. Hopefully, that gives you a little -- at least a qualitative analysis of why, even though we see a stronger second half, it's not as strong as we originally thought it would be back in the earlier part of the year due to the reasons I just mentioned.

A very helpful rundown. Thanks. Lastly, and more briefly, it seems Ohio and maybe Colorado are the only areas where the US rig count is growing. I'm wondering if you drill a little deeper into how you position your rental fleet, and how that's working out? Thanks.

Certainly, we have positioned our assets in those areas, and we are gaining share. We know that there is a growth going on in those markets, so we absolutely are participating in that and expect to continue to grow in those regions.

Thanks again. I appreciate it. Best of luck with the rest of the year.

Thank you.

Thank you. The next question is from Michael Hoffman of Wunderlich Securities. Please go ahead.

Hi. Good morning. Thank you for taking my questions. If we could start with oil and gas. If I recall, you had about 80 out of 150 packages were deployed previously. 50 in the US and 30 in Canada. How did you finish the second quarter? And, what are your thoughts about that sort of positioning of the 150 into the second half?

Michael, we are looking at how we define packages and trying to correlate that with rig counts to give a better measure of how we're proceeding and that would be helpful to the analyst community. For example, you can have a rig and a package deployed, but the number of directions that a particular well is drilling -- number of feet drilled could be more important a measure for us in terms of disposal. All that being said, I think the way to answer your question at best would be to say that in the US, I would say we are probably in the 80% -- 70% to 80% utilization level of the packages and the types of centrifuges that we employ in the US. In Canada, I would say -- Alan, would you say maybe in the 50% area?

Or less.

Or less.

Okay. And, that 70%, 80% is up sequentially because you weren't at that pace given you are just focused really in the Utica, Marcellus, and the Bakken up really until -- (multiple speakers).

That's right. Last year, it was more like the way Canada is right now. We were down into pretty low utilization levels, and now we have gotten that up.

Okay. And then, is there a certain amount of pressure on the margin in that business? Is it because equipment titles, you've got all the personal costs. There's a lot of fixed cost that you carried without any offsetting revenues. Therefore, there is this sort of upswing of activity coming in the second --?

We certainly try to share resources across the business whether it's turnaround work or other work in the Western Canada market, but you are absolutely right. You typically incur a lot more maintenance in the second quarter because of the breakup anyway. That even exacerbated itself even more this year because those maintained items that were ready to go are kind of sitting there. In Saskatchewan particularly, we've had a lot of business there put aside, and it's there for us, we just need to have a little break in the weather to put it to work.

Okay. Switching gears to cash from ops. Last year, you did $146, this year you are doing $98 million. You did have a big swing between net income and D&A year-over-year, but there is still about a $50 million -- call it working capital gain that was in last year that is not in this year. Can you -- can we talk about the cash conversion of the business model? You are kind of running in that low 20% of EBITDA getting converted into free cash. What is a reasonable objective? And, how fast can you get to that objective as far as the cash conversion of the model? To that point, isn't capital spending -- shouldn't it be coming down going into '14?

Absolutely, absolutely. All of the above, Michael. Just to hit some of the major points. First off, these cost synergies that we are working on are improving our margins. Clearly, that is going to have a direct impact on our cash flow from operations. What you have seen so far in Q1, particularly Q1 and Q2 with where we were at before you really see the full impact of synergies, that had an impact on the cash flow from operations. Also, we had those $12 million or so in integration and severance costs that we are spending, so there's an amount of spending that has gone on as we are investing in this new business and integrating it.

I think also from the standpoint of CapEx, with the teams -- our four teams here are working very diligently on ROIC and looking at our capital programs. We are expecting in 2014 to be at a lower level. Now, there might be some timing with the new incinerator that we are putting in that will come live the end of 2015. There might be some incremental investment there, probably later in the year in 2014. But overall, we are looking at a drop that without that incinerator that could be as low as $200 million. We are kind of going through that now. We're just trying to play favoritism with the projects with the higher ROIC, and that have good sustainability and are more resilient. I don't know, Alan?

I just think that we are all aware that we need to get our ROIC to double-digit levels. Whether it's 10.5%, 11%, that really has to be our short-term target here. Our management team met over the last month here and really talked specifically about free cash flow, ROIC, CapEx, and really focusing on what we need to do in 2014. We feel very good about how we position ourselves now to kind of achieve those kind of goals.

Okay. So, if I can push on that a little bit. The maintenance capital in '13 looks like it's about $130 million. I've heard you talk in other forums about maintenance being sort of $120 million. Is it $120 million, $130 million as maintenance, and then, there is growth. Ex-El Dorado, what's really in front of you growth-wise in '14?

Well, we see some nice growth investments. As I said, we are kind of going through that process right now. But, the reason why we are putting it at $130 million at maintenance, and we are being a little may be conservative there -- but it's after a lot of scrutiny of each of our investments that we are making to say, okay, is this really growth? Is this going to have sustainable growth in the future? Or, are we just replacing current revenues, replacing equipment, and all of that? So, we are taking a harder stance here. $130 million might be a little higher, a little conservative, but nonetheless, that's the approach we want to take. We really want to make sure that our growth projects are pushing a good ROIC. So, by difference there, I'm saying $70 million is what we are looking at right now -- growth projects, other than the incinerator for next year.

And, the incinerator is sort of $60 million to $80 million in total, split between '14 and '15, right?

Exactly. So, in other words, it would be in total about $70 million to $75 million that would be split between those two years.

Okay. And then, can you help us a little bit with the revised guidance? If you thought about a waterfall across your business units, and then there is a couple parts to this. One, the EBITDA is down proportionally a lot more than the sales. If I looked at the sales numbers and then the difference in EBITDA, you are suggesting that 60% margin EBITDA off the $120 million sales reduction. Where do I put or take out of buckets that $120 million on the sales side? Between technical, used oil, Safety-Kleen environmental, industrial, and oil and gas? How do you think about that?

Yes, it's hard to quantify that in detail there, but I would say that probably the effect on revenues of the blended and the lower blended percentage and also what we are forecasting for reduced RFO. That could be probably about 1/3 of the total in revenues. Not as much as an EBITDA impact -- not a substantial EBITDA impact there -- but that's what that would be.

And then, if you look at the other businesses being that the effects that I talked about before about pricing, about some of our growth rates in line with industrial production and chemical and manufacturing indices, I think that you'd see revenue kind of across the board. In oil and gas, that was brought down substantially, maybe 15% or so. That had a high impact on EBITDA due to the lower utilization. It's the pricing just across what I talked about before, maybe not having such an aggressive total price increase for this year and also oil and gas, the utilization. Those are the things that may be proportionate share of the EBITDA to revenues to be a little higher. Hopefully, that adds a little color for you.

It does. And then, on the used oil business, we are hearing that there is this oversupply in the fuel market, the RFO market. If that is the case, why isn't the collection price starting to come down? Because there's less -- 70% of used oil goes into a fuel market, not into refining. Why aren't we just seeing more pressure despite the fact that the crude prices higher?

We are -- well, that's certainly the headwind there, but we are seeing lower prices, and we've been tracking that every month. Our pricing is coming down and will continue to come down this year.

Okay. All right. Thank you very much.

Thank you, Mike.

Thank you.

(Operator Instructions)

The next question comes from Jamie Sullivan of RBC Capital. Please go ahead.

Hi, good morning.

Good morning, Jamie.

Maybe if we could go right at re-refining and oil and gas for the year. Can you maybe just help us on sort of revenue ranges and EBITDA ranges as we think about the sensitivity? It's obviously a difficult business to forecast, but sort of what is baked into the guidance at this point for those two?

Well, clearly, the oil and gas is down from last year. We expect that to be down for the year. In EBITDA, that could be between $10 million and $15 million down from the previous year of what we were talking about there. On the re-refining, being that we are not reporting 2012, and we acquired it only since the very beginning of the year, that is a tough question to answer. I think -- I don't know that I can give a comparison right here off the top of my head here.

But, it is significantly below our expectations from the time that we acquired Safety-Kleen or signed our agreement in early November to where we are.

Absolutely.

We have been dealing with the cost structure and the business to basically address the margin squeeze that we just talked about. But, I think a substantial amount of our margin miss this year is in that space.

Yes.

We are seeing great volume coming from the Safety-Kleen customers. Our internalization is working. The tech services business is strong. We've got a lot of volume. We've got a lot of inventory. We are going to have a very strong second half of the year, so our tech service business is really benefiting.

The total project management business that came along with Safety-Kleen also is a nice business for us that we have moved into the Clean Harbors field services and tech service business. That business is also doing extremely well, but let's face it, we have had a real difficult time. That's really where the big margin squeeze has been for us from an EBITDA standpoint, Jamie.

Right. I understand that. I'm just trying to figure out, is it -- should we think about it more as sort of 2Q run rate for the re-refining business as what that range is the range for the whole Company is contemplating? Or, just trying to get a little help on the modeling side of what's baked into the numbers so we know what -- how to benchmark that against expectations going forward?

Yes, I don't know. I would say that the expectation is that we will do a little better than Q2 as we go into Q3 and Q4 in the re-refining business, so I think that that run rate is kind of low in Q2. But, it would be hard to say at this point of giving specific guidance down to that level, Jamie, right now.

I understand. That's helpful. Maybe just on the cost synergy side, what did you get in the quarter? It sounds like you had maybe $6 million in severance integration costs in the quarter as well. Can you just update us on the synergy side and the trajectory there?

Absolutely. And, this is clearly the key thing that helps, to Alan's point, of the cost reduction we are doing to offset some of the unfavorable things that we were exposed to in the re-refining market. We estimated it was about $17 million that we saved -- in cost synergies that we had in Q2.

And then, I guess it ramps up to the $75 million run rate -- or $75 million for the year. Exactly. Thanks very much. Appreciate it.

Thanks, Jamie.

Thank you. The next question is from David Manthey of Robert W. Baird. Please go ahead.

Thank you. Good morning. Along the same lines here of the seasonality and how things play out from the second quarter going forward, I guess if I am piecing this together and we've got Deer Park cost you, say, $3 million in EBITDA. Weather was several million. You are going to pick up Ruth Lake, which should be $2 million. You get additional Safety-Kleen synergies. I'm coming up with something in the $10 million-plus range of incremental EBITDA run rate as you go from second quarter to third quarter. Given the guidance you've given, it looks like it's maybe $20 million into the back half. So, maybe 50% of that can be explained by some of these items which only leaves about $10 million for the normal seasonality, the Canadian oil and gas uptick. Some of these projects and turnarounds in the core business. Just seems a little light to me. I'm trying to justify this. Is there something else that I'm missing between the second quarter and what you expect to be your second half run rate of EBITDA that I didn't describe there that we haven't talked about yet this morning?

No, I think that you are kind of right in what you are saying, and I did try to point out in my earlier comments that in certain areas we were being conservative. That it doesn't -- we are basing our guidance based upon what we are seeing out there. We are not looking for any events to help us. We are not looking for any price increases in refined lubricants to help us. We are being conservative in what our outlook is. As you can tell by the numbers, if you take the last half of -- given our first-half results, it means that the EBITDA would be -- would average over $150 million for each of the third and fourth quarters. So, it is a nice increase over the first half of the year, but it does have an element of conservativism in it.

Right, it would just seem that just the uptick in oil and Gas Field Services alone the last couple of years would make up that or more, so it just seemed a little light to me. That being said, just looking at the severance piece that went from $5.7 million to $6.8 million, I thought it was expected to decline in the second quarter. Maybe I had that wrong. Could you talk about how that's going to roll off here through the third quarter and fourth quarter? I know you said $15 million for the full year. Related to that, can you talk about the run rate of corporate items as we enter 2014? That number, specifically, I know it spiked up after Safety-Kleen. Where should that number be as you enter 2014?

What we would like to do is to get that corporate number to be around $200 million or less on a run rate in 2014. As you know, we are over that run rate right now. Regarding the synergies, the rest of the year, I think -- I'm sorry, the integration and severance costs. We do expect that to be $3 million for the rest of the year to bring us to the $15 million that I mentioned in my comments. That was pretty much it.

It was a $3 million termination fee in that integration cost that we had in the second, which was basically getting out of a contract that allowed us to get a significant savings going into next year. So, that was part of that. It wasn't all severance, to your question.

Jim, in terms of when you are talking $200 million, if I'm looking at the right line here, was that $50.8 million in the current quarter? That doesn't seem like much of a decline between here and 2014. Is it significantly less than $200 million you are targeting?

Yes, we're looking in the $180 million. I don't have all the details in front of me right now, Dave, but it is down in that $180 million range.

Okay, all right. Thank you very much.

Thank you, Dave.

Thank you. The next question is from Larry Solow of CJS.

Hi, good morning. Most of my questions have been answered. A couple of follow-ups. On the technical services, I know you mentioned Deer Park and the shutdown impacted EBITDA by about $3 million. If we add that back, year-over-year margin was still down on an EBITDA basis almost 200 bips. Is there anything else in there that's sort of impacting the quarter? I realize pricing may be not be quite as good as you thought, but that doesn't seem to be from that segment. If you can just give a little more color on that, that would be great.

Just some of the margins with the addition of the Safety-Kleen business. Some of the margins are lower, and that's where you would see it on some of the disposal that we are taking in. Clearly, that's an area of focus. So, that's one of it.

And then, on the positive side, industrial still with some of the impacts perhaps late in the quarter in Western Canada. Maybe going forward a little bit with some delayed projects. But, still pretty good growth there. 22%. I don't know if you have the organic number. Just give us a little more color on that?

Organic, you just mean excluding acquisitions?

Correct.

I would say mid-single digits in there if you exclude the acquisitions, and that includes Safety-Kleen. We are doing some industrial work since we have added industrial services work since the Safety-Kleen acquisition, excluding that as well, and any of the other acquisitions we did. It's about mid-single digits there.

Okay. And, in oil and gas, I know we started the year -- we thought maybe it could be close to breakeven on a revenue basis, slightly down. Clearly, it got a little worse in Q1. Q2, maybe the outlook is a little bit worse because of the Canadian side. Do you expect growth in the back half of the year on an absolute year-over-year basis in the oil and gas services?

Yes, we do expect that. We will still be down for the full year, but as you know, Q1 and Q2 were down severely. But, with the getting out of the wet season in Western Canada, that will add volume of services as well as the US is picking up well, so we do expect first half -- or second half to be better than the first half there.

Okay. And, year-over-year, you expect growth, too, though?

Yes.

Thanks so much.

On that last point, Larry, on the year-over-year, I think it's more flattish on revenue and down. I think I said that earlier that we would be down in the $10 million to $12 million range when you do it year-over-year --.

On EBITDA.

On EBITDA. Yes. $10 million to $15 million down.

And, that corporate run rate would probably be in the $180 million to $185 million based on the December run rate. That corporate number right about that $180 million, $185 million.

Thank you.

Thank you. The next question is from Hamzah Mazari of Credit Suisse. Please go ahead.

This is Flavio. I'm standing in for Hamzah today. My first question was how much do you think that from the EBITDA guidance is from items that you are considered to be one-time and out of your control and just behind you already? And, how much of it is just the slowdown that you've been talking about?

I would say the majority of it is due to when you consider weather factors, the fact that we had an unplanned several week shut down at our largest incinerator. I think things like that as well as some of the push-out of projects related to weather. I would say that probably the majority is what I would say really are out of our control. Certainly, in the re-refining business, as you know, price -- price is out of our control there, although that didn't affect the second quarter. But, certainly it has affected the overall business since the beginning of the year, and that's out of our control as well. To some degree. The margin is not out of our control, and that's what we are working on. That's what we are working very diligently on within that business.

That makes sense. And, on that line, how successful have you been with that initiative of trying to change the pricing for the used motor oil that you buy from being tied to crude to be more tied to the base oil prices?

I would say we're in the early innings on that. The crude price has certainly had an impact to our ability to move faster in that area.

Perfect, perfect. Just a final, really quick. On the synergy side, which are the more lower hanging fruit on the synergy side that you already have seen, and that you are realizing in the S-K environmental services, as you mentioned. And, can you give us some color on which items that you talked about before are already materializing?

Certainly, the internalization of disposal is going nicely. We are seeing that today in our plans and in the backlog and in the deferred revenue. We are down -- overall staffing is down about 600 people, and that is across both organizations. A combination of 130 or so direct, non-billable people and another 260 or so -- SG&A, indirect kind of folks. That includes contractors and temporary. We are hovering right around 13,000 in our workforce, which is down quite a bit from the acquisition date. So, I would say those are a couple areas that are behind us now.

That sounds great. Great color. Thank you so much.

Okay.

Thank you. The next question is from Sean Hannan of Needham & Company. Please go ahead.

Yes, thanks. Good morning. First for Jim. Just want to see if I could verify -- if we were to pull out the integration severance costs, I think we are looking at about a $0.45 number. If we could kind of check that as we go through the Q&A.

That's right, Sean.

Okay, great. And then, in terms of Evergreen Oil, wanted to see if we can get some color in terms of what's next? Or, what is the next decision with the corporates, where we stand with that? And then, also, if you can elaborate from your perspective the benefits of bringing on some of those assets?

Sure. Sean, I guess at this point we are in a process. As you know, Evergreen was a -- for those on the call who might not know that it is a re-refinery out in California that had been put into bankruptcy early part of the year. We participated in that process. That was a targeted acquisition that Safety-Kleen had for the last couple of years, so very familiar with the assets. We've been participating in that auction process. That process may end this month. We are really not sure totally on the timing, so it would probably be premature for us to talk too much about what, if anything, it's going to bring to the table here.

I would like to just say though that one of the lowest-price oil markets is California, and Safety-Kleen exited that market because waste oil is a hazardous waste in California. Safety-Kleen exited that market back in 2005. Clean Harbors has a number of facilities today in California, over 1,000 employees there. We are very familiar with the operations of that market and manage a lot of hazardous waste. We want to tap into that market and be able to handle that lower-priced oil to provide a better feedstock, if you would, at a lower cost to our re-refineries. This is one way for us to enter that market. It's not the only way, certainly, but that has really been our focus is getting into the California market, which is exclusively what Evergreen focuses on today. Hopefully, that gives you enough color for now.

That's helpful, Alan. And then, my next question, just in terms of the synergies we've talked about with Safety-Kleen, these are really the explicit costs and redundancies that come out. We haven't been talking too, too much in terms of financial model benefits from really other ways to think about synergies. What's basically optimize in the combined operations then? Wanted to see, is there a way to talk a little bit either qualitatively or quantitatively about the benefits you could see as we kind of go into 2014 about the optimized operations and the timing of how some of that could actually materialize. Thanks.

That's a great question. We've been doing literally branch-by-branch reviews with every single area manager, general manager of Safety-Kleen, their counterparts at the legacy Clean Harbors Company, as well as a number of other parts of the organization. Particularly focused on transportation, logistics, and efficiencies there. I would tell you that in participating in a lot of those discussions, it's just an enormous amount of opportunity there that is not baked into our synergy number. They are in the early stages of looking at optimization of the networks and dealing with the redundancies and the growth. I think we certainly see a tremendous opportunity to grow the Safety-Kleen business and to take advantage of that infrastructure that they have. So, I would say that we are just beginning that piece. Most of what we have been focused on is just combining the two businesses together more from a corporate standpoint in systems and processes there, but now we are getting into that detailed level, Sean.

That's very helpful. Thank you, Alan.

Okay.

Thank you. The next question is from Adam Thalhimer from BB&T Capital Markets. Please go ahead.

Hi, good morning.

Good morning.

Alan, what are your thoughts about the refinery end market in general? The crack spreads have come down a lot over the past couple of months. Is that a good thing for you? With the crack spreads being low? Or, do the refineries now get back to maintenance that has been deferred?

Yes, it's a good question. Sometimes -- we get that question quite a bit when the spreads are down. Do they want to spend any money? When the spreads are good, they don't want to spend any money because they want to keep running really strong, right. (laughter) I don't necessarily look at it either way. These planned outage have to get done -- These outages have to get done. These turnarounds have to get done. There may be some timing and pushing that goes on within their decision-making from a capital or maintenance spend, but they have to get done.

Do you have any sense from those customers -- what their appetite is for CapEx? Are they concerned about the crack spreads, or no?

I guess I personally don't have any color to share with you, myself. Maybe our head refinery guy would have better color on that. Overall, our refinery business this year I think has grown close to $450 million, which is getting close to their $500 million target here for us. We are doing very well with the refinery business. I just can't give you any color on that particularly.

Okay. Lastly, I just wanted to ask about the technical services margins. They came up 4%. That they were down a little bit year-over-year. What would be your expectation for the back half?

I would think with Q3 being the strongest quarter, I think it does come up a little bit in Q4, probably be similar to what we saw this Q2. Clearly, we are looking to, as with all of the margin enhancements that we are doing through synergies and so forth, we hope to be able to improve that -- continue to improve that margin into next year.

Okay. Thanks.

Thank you.

Thank you. The next question is from Jeff Osborne of Stifel. Please go ahead.

Good morning. I was wondering if you could give us a sense of what the utilization rate was in the re-refinery? Or, what volumes were, and what the internal collections were versus buying from third parties?

We were running -- with the blended percentage coming down, we offset that clearly with running more base volume. So, we have been running at full capacity. Our RFO sales of excess that we've collected beyond our capacity has come down a little bit, and we are projecting that to remain down for the rest of the year. That might be a little conservative, but with all that we are doing on the front end with waste oil, we are just being conservative with volumes there.

Got you. Jim, with the 38% blended, was that for 2Q? Or, a mix between 1Q and 2Q?

It was Q2, and for the full year, it actually is expected to be at that level.

Q1 was a similar number then?

Q1 was higher. Q1 was a little higher than that.

Last question is, can you give a sense of what lodging revenue was for the quarter, and what your expectations for the year is given Ruth Lake is opening?

We expect lodging to go up. I don't have a precise figure on that, but that's at a run rate of about $220 million in that range for lodging. We expect Ruth Lake to add to that. Next year, we will be north of that $220 million. Clearly, because we will have a full year. Probably in the $230 million-plus range.

Got you. Thank you very much.

Thank you.

Thank you. The next question is from Barbara Noverini of Morningstar. Please go ahead.

Hi. Good morning, everyone.

Good morning.

When you think about your expansion towards the other shale plays -- Wyoming, Texas, Oklahoma, Colorado -- what would you say is the main factor that gives you a foothold in these new markets for you? Is it your ability to provide disposal management? Or, is demand greater for some of your other ancillary well site support services?

Clearly, we are focused on the disposal management. That's where we think we can bring our assets into provide solids control and processing waste on-site. The logistics side -- tying it into our disposal network, our rail capabilities, our transportation network is what we think we can differentiate.

Okay. Thanks very much.

Thank you, Barbara.

Thank you. The next question is from Jack Atkins of Stephens. Please go ahead.

Good morning. Thanks for taking my questions. I will keep this brief. Just a quick question here on your potential role and involvement in the cleanup activities in QuC)bec after the Lac-Magentic crude-by-rail explosion earlier in July. Are you all planning to play a role in that cleanup? And, if so, could you maybe help us bracket what you expect the total cleanup costs to be there?

We have been playing a role there. We've been handling some material. It has not been significant. There are some contracts and RFPs out right now on some of the remediation disposal. I don't have a number necessarily, but I don't believe it is significant. It's certainly a catastrophic event, but from the kind of work that probably involves our capabilities, it's not as big.

Okay. Thank you for the color.

Thank you, Jack.

Thank you. We have no further questions in queue at this time. I would like to turn the floor back over to management for closing remarks.

Okay. Thanks again to everyone for joining us today. We look forward to updating you on our progress in the second half of the year. We are planning on hosting and webcasting an investor day in September which will include presentations from our extended management team. We will be issuing a news release with more details as the event gets closer. So, with that, have a great day. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.