Clean Harbors Inc (CLH) 2014 Q1 法說會逐字稿

Greetings and welcome to the Clean Harbors, Inc. first-quarter 2014 earnings conference call.

(Operator Instructions)

I would now like to turn the conference over to our host, Michael McDonald, General Counsel. Please go ahead, sir.

Thank you, Shay, and good morning, everyone.

Thank you for joining us today. On the call with me, our Chairman and Chief Executive Officer, Alan S. McKim; Vice President, Chairman and Chief Financial Officer, Jim Rutledge; and our SVP of Investor Relations and Corporate Communications, Jim Buckley. We have posted some slides to the Investor Relations section of Clean Harbors' website that we will be reviewing during today's call. We invite you to take a moment to open the file and follow the presentation along with us.

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, May 7, 2014. 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 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., as well as in the appendix of today's presentation.

And now, I would like to turn the call over to our CEO, Alan McKim. Alan?

Good. Thanks, Michael, and good morning, everyone.

Starting here on Slide 3 with a summary of our Q1 results. Our revenue in the quarter was slightly above the guidance range we provided on our Q4 call. Adjusted EBITDA was in line with our guidance, but when you add back the $4.7 million in integration and severance costs in the quarter, we actually exceeded that range as well. The effects of foreign currency translation and weather negatively affected many of our businesses on a year-over-year basis. On a relative basis, however, most of our businesses performed on plan in the quarter.

Tech Services delivered another solid performance as it continued to benefit from the Safety-Kleen volumes. Industrial is down slightly as increases in several of our Industrial lines was offset by the currency translation. Safety-Kleen was hit hard by the unfavorable weather this quarter with branch closures and transportation bottlenecks, particularly in Chicago, on the re-refining side. Both came back strong in March.

Oil and Gas was down as expected from the currency translation effects and lower near-term exploration spending which impacted our seismic business. Looking at segments in more detail, beginning with slide 4, revenue from Tech Services was up due to remediation and additional volumes particularly in our landfills. Margins were slightly lower, but that was due to a weather-related cost and the mix of waste streams we saw in the quarter.

Incineration utilization was a healthy 91%, compared to 89% in Q1 of 2013. Incineration volumes increased considerably as the quarter progressed. In fact, Deer Park, our largest incineration facility, achieved an all-time record for volume in a single month in March. So kudos to the whole team in Deer Park who continue to do a fantastic job. On the landfill side, volumes were up 25% from Q1 2013 as we benefited from some project work late in the quarter. Overall this segment performed well and we exited with good sales momentum.

Turning to slide five, results in the Oil Re-Refining and Recycling were mixed. Revenues were down year-over-year and sequentially as volumes of base/blended products were off despite the addition of incremental volumes from Evergreen. The quarter began with the oil majors dropping their base oil prices by $0.25 in mid-January. As the quarter progressed and activity increased, eventually pricing in late March recovered by about $0.08 a gallon. Although segment margins were up from Q4, weather-related rail disruptions resulted in lower sales volume and higher transportation costs as we were forced to truck more products in the quarter than normal.

In terms of our mix, blended products accounted for 33% of volumes in Q1 which was flat with Q4. And I should point out that Evergreen ramped up in the quarter, adding to our base totals. In fact, Evergreen had its best production month ever in the history of that plant in March. Our blended mix is another area that we're focused on addressing. And one positive note is that we have seen a pickup in that mix already in April and we would expect that to continue to climb over the course of this year.

On slide 6, Safety-Kleen Environmental Services was down 7% year-over-year. This was directly attributable to the weather, in particular the related office closures. With ice storms in areas such as Atlanta, Dallas, Houston, early in the quarter, we saw major disruptions in our branch business with office shutdowns. One day 26 of our 154 branches were closed at the same time. The harsh weather conditions also drove heating, maintenance, transportation costs; really did weigh heavily on our margin performance.

Overall, however, we saw some promising trends in the business. The number of parts washers serviced was up slightly from Q4. We continue our efforts to gain market share. We collected about 47 million gallons of waste oil in the quarter, less than the average collection which partly reflects our efforts to walk away from higher PFO accounts. One of the highlights of Q1 was our pay-for-oil program, as we have successfully lowered our average PFO cost by $0.03 from Q4. And lastly during the first quarter we opened three new branches in Canada.

Turning to Industrial and Field Services on slide 7, revenue was down slightly as we generated some nice growth in several core Industrial businesses which was offset by the effect of the lower Canadian dollar. For the fifth consecutive quarter, we had no major emergency response events. We responded to several smaller ER events in the Midwest and in the Gulf, but nothing rose to a multi-million dollar level inside the quarter. Overall, our utilization for all our billable personnel in this segment was 80%, which is consistent with prior quarters. In particular, our turnaround group has done an excellent job. Considering that there was one-third fewer scheduled US refinery turnarounds in Q1 than the same period a year ago, our performance in the US was very good.

Turning to slide 8 in Oil and Gas Field Services. Before going into details in our quarterly performance, I did want to mention that we had a change in leadership in this segment. Laura Schwinn who led this business for the past year has left the Company to pursue other opportunities. We wish Laura the best in her future endeavors and want to publicly thank her for her contributions this past year. Marv Lefebvre is now heading up the Oil and Gas segment. Marv came to Clean Harbors through Eveready acquisition in 2009 and over the past five years Marv has been a key executive at Clean Harbors and has over 30 years experience in the oil and gas area.

As expected, segment revenue was down due to the currency translation effect and slowdown in expiration. Our production services group was up from a year ago, but not enough to offset the other shortfalls. Profitability and margin were down quite a bit from a year ago but were consistent with Q4 2013. Given the winter drilling season in Western Canada, our average number of rig serviced in Q1 was at 203, up from 195 in Q4. We also continue to focus on growing our presence in the US shale plays; the Bakken, Rockies in Texas, particularly the Eagle Ford, remains areas of focus for us. And as I mentioned last call, our objective is to not only increase the number of rigs we're at, but increase our service intensity at each location. In terms of key equipment utilization, which is the primary -- which is predominantly our centrifuges, we increased from 46% in Q4 to 54% in Q1.

Turning to slide 9. I'd like to update you on some of the operational -- excuse me -- on some the corporate initiatives I outlined on our Q4 call. To start, we initiated two major operational changes that we believe will drive organic growth, cross selling and business development. First we created a new North American Sales and Operational organization consisting of three parts: a central team responsible for several of our key vertical sales; a senior leadership team with responsibility for each of our five geographic regions; and a sales operations team overseeing our Companywide budgeting and incentive tracking.

This team will be led by Dave Parry, who's been President of our Industrial and Field Services segment. Many of you know Dave from having met him at various investor events. Dave is a 25-year veteran of Clean Harbors, ideally suited to lead this newly formed sales and operations group. We will be transitioning Dave's leadership duties on the Industrial side in the near-term.

Complementing the new sales organization, we have formed a Central Logistics and Supply Chain group to manage our strategic sourcing, transportation, distribution, inventory management, and logistics. This team will be led by Dave Eckelbarger, who has been named Executive Vice President of Supply Chain and will be joining my executive staff. Dave is an 11-year Safety-Kleen veteran, an excellent choice to oversee the genesis and advancement of this new group which we expect to be a driving force in increasing our efficiencies and improving our margins in the coming years. We also have engaged an outside consulting firm to work with us to accelerate the many opportunities we see both in sourcing and transportation efficiencies.

We have initiated a cost-reduction program aimed at taking $75 million in additional costs out of the business. We also launched a series of margin improvement initiatives, such as the PFO program I discussed earlier. Headcount reduction will account for approximately one-third of that $75 million, and the vast majority of that is now behind us as we have eliminated over 300 employees through April. The remaining two-thirds of cost reductions will be a mix of other items. Since the Safety-Kleen acquisition in late 2012, our headcount has been reduced by over 800 employees, including a 14% reduction in nonbillable staff.

Regarding the strategic review of our operations, we have engaged a firm to accelerate our work on the business review. We have a strong platform to build from. We are looking at our underperforming areas and non-core assets as we seek to improve our return on invested capital. I would expect this year to generate some cash from asset sales. In the first quarter we generated $15 million in cash as a result of monetizing some marketable securities. Our long-term goal remains to leverage our business model to achieve 20% EBITDA margins and double-digit return on invested capital.

Before going to the outlook for our segments, I wanted take a moment to talk about our capital allocation strategy. This is an important topic among investors, several of whom have shared their perspectives. Presented on slide 10 is our current philosophy on capital allocation. It has three key elements: organic growth, accretive acquisitions, and stock buybacks. The precise combination of those three components at any given time will be determined by an assortment of factors and we are firmly committed to efficiently deploying our capital in a manner that generates sustained long-term value for our shareholders. As part of that commitment, we're laser focused on improving returns, particularly ROIC. And as explained in our recent filing of our proxy, ROIC has been added as a key metric to our incentive-based plans.

Now let me turn to our outlook on slide 11. As I mentioned last quarter, we have a range of initiatives underway aimed at revitalizing our revenue growth. These growth initiatives will only be further supported by our new sales organization. We continue to move ahead with the El Dorado incinerator expansion. We have the permit in hand and we're now going through final engineering and lining up construction vendors.

For Safety-Kleen, we are really encouraged about the re-refining business. We recently had an internal oil summit with many leaders in the Company in attendance. The key takeaways were that based on the business now being on our WIN platform, this business now has more analytic capabilities than it ever had to improve its efficiencies and better manage its inventories. We see tremendous opportunity to revive our spread in that business, even without any improvements in base oil pricing. The team is generally excited and optimistic about our long-term prospects in that business. On the branch side, we are pleased to have opened the three new branches in Canada and we will continue with similar expansion efforts in new markets. Our number one priority for Safety-Kleen branches is continue to lower our PFO costs.

Within Industrial and Field, our primary emphasis in the near term will be maximizing our resources during the upcoming turnaround season. And, lastly, key to our near-term success in Oil and Gas we are carefully managing our redeployment of assets to the US and improving our asset utilization. The steps we are taking to reduce cost, increase revenue, and drive returns put Clean Harbors in an upward trajectory. We're encouraged by our trends that we're seeing across our businesses and with many of our key verticals. We are confident that the combination of our cost reduction programs, our margin enhancement activity, and our organic growth initiatives will deliver increased value to our shareholders.

So with that, let me turn it over to Jim for the financial review. Jim?

Thank you, Alan, and good morning, everyone. As I do every quarter, let me start with some brief perspectives on how our market verticals performed. Looking at slide 13, General Manufacturing remained our largest vertical in the quarter, accounting for 18% of total revenue. This vertical grew 9% year-over-year. In legacy Clean Harbors, we saw stable core business growth offsetting a pullback in high-tech manufacturing. On the Safety-Kleen side, this vertical performed well, particularly with base oils. Automotive was our second largest vertical accounting for 11% of Q1 revenue. It would've been even higher had the base and blended lubricant sales been stronger in the quarter.

Safety-Kleen's core lines of business, including parts washers, containerized waste, and vacuum services drove this vertical in the quarter. Refineries and Oil Sands customers accounted for 10% of Q1 revenue. This vertical was down more than 10% from a year ago due to lower activity in the Oil Sands region and the fewer turnarounds in Q1 this year. The Chemical vertical also represented 10% of Q1 revenue. Solid base business continued, supported by low-cost natural gas, particularly in petrochemicals as North American producers are exporting more. Volumes and project flow were hindered by winter weather early in the quarter.

Oil and Gas Production accounted for 10% of revenue, with growth in our surface rentals, industrial and fixed lodges helping to offset some slowdowns in drill camps and seismic work. Beyond those large verticals, we continue to have a highly diversified mix of industries we serve. The growth in many of them was hindered this quarter by the weather and the effects of currency translation. One smaller vertical I would like to call out is Terminals and Pipelines, which grew over 40% from Q1 a year ago through significant expansion in the Canadian marketplace. Congratulations to that team on a job well done growing that vertical.

On slide 14 here is a quick snapshot of our Q1 direct revenue from our five segments, ranging from Oil Re-Refining and Recycling at 10% of total revenue for the quarter to Technical Services at 32%. This revenue split is along the lines of what we anticipated for the quarter, although on a normalized basis we would expect Oil and Gas Field Services to account for a larger portion in Q1 as it is historically that segment's seasonally strongest quarter.

Turning to the income statement on slide 15, gross profit for the first quarter was $220.9 million, or a gross margin of 26.1%, flat with a year ago. On a sequential basis, our gross margin percentage declined 500 basis points from the fourth quarter. This margin performance was relatively in line with our expectations considering the seasonality of our environmental businesses and given the headwinds we faced in Q1, particularly on the cost side with the weather. I should note that within our cost of revenues was $1.2 million of severance and integration costs.

Turning to selling, general and administrative expenses. They totaled $119 million this quarter or 14.1% of revenues. This compares with $128.5 million in Q1 a year ago. This reduction of nearly $10 million in SG&A is primarily due to the effect of cost synergies with Safety-Kleen in the past year. Excluding severance costs of about $3.5 million recorded in SG&A in Q1, our SG&A percentage was closer to 13.6%. For the full year we are still projecting our SG&A percentage to be in the mid-12% range.

In Q1, depreciation and amortization increased 16% to $69.4 million. Part of that increase is related to the addition of Evergreen in September last year. Looking ahead to the remainder of 2014, we continue to project full-year D&A to be in the range of $275 million to $280 million. Income from operations for Q1 was $29.9 million, or 3.5% of revenues, compared with 4% of revenues in Q1 a year ago. Our operating margin declined slightly due to the lower revenue and as higher depreciation offset the gains we made in SG&A. Our Q1 Adjusted EBITDA was $102 million, or a margin of 12%. As Alan noted, this was within our guidance range. However, when you add back the integration and severance costs, we would've exceeded our guidance and our margin would have been 12.6%.

Turning to our taxes. Our effective tax rate for Q1 came in at 38.3%, compared with 32.2% in Q1 a year ago when we benefited from a reversal of a FIN 48 tax accrual. This tax rate was higher than anticipated, given the lower income in Canada subject to lower tax rates compared to the US. Given our current outlook in Canada, we now expect our effective tax rate for the full year to be in the 37.5% to 38% range, above our previous guidance of 36.5%.

Turning to the balance sheet on slide 16, we continue to maintain a healthy balance sheet profile. Cash and marketable securities as of March 31 totaled $249.2 million, compared with $322.5 million at year-end. Q1 is historically a cash-intensive period due to capital purchases, the timing of interest payments, the seasonality of our business, and the payment of incentive compensation and commissions during the quarter. Total accounts receivable was up slightly from year-end. However DSO improved by two days from Q4.

We continue to focus on collections and improving our billing processes to reduce DSO. However, one change I would like to note, on the past several calls I've been saying that our DSO target going forward is 60 days or less. However, we are making a number of enhancements to the Safety-Kleen billing process that will add a few days to our invoices. These changes will help to ensure that we are more fully capturing revenue opportunities related to off-spec charges, fuel surcharges, rental fees and the like. Therefore DSO will likely remain above the 60-day level for the foreseeable future.

Environmental liabilities at quarter end was $217.2 million, down slightly from year-end. CapEx for Q1 was $75 million, slightly above the $72.2 million we spent in Q1 of last year. We expect to bring that number down considerably in the upcoming quarters. For 2014 we expect CapEx spending of approximately $240 million, consisting of maintenance CapEx of approximately $140 million and growth CapEx of approximately $100 million including our incineration project in El Dorado. We are presently evaluating some opportunities to buy out equipment that are on short-term rentals which may add $10 million to $15 million to our CapEx this year.

Cash flow from operations was only $4.6 million in the quarter, compared with $39.6 million last year. The primary factors behind that delta was a year-over-year increase in DSO and a reduction in accounts payable. For the full year 2014, we expect our cash flow from operations to exceed $400 million. As we announced on our Q4 call, our Board has authorized a share repurchase program totaling $150 million and we intend to fully complete that program in a reasonable time frame. We implemented the program late in the quarter and purchased $1.2 million worth of shares.

Moving to guidance on slide 17. As we did in Q1, we are providing guidance for the second quarter to help investors more fully understand the impact of seasonality on our revenue and profitability in 2014. For the second quarter we are expecting revenue in the range of $860 million to $880 million, with corresponding Adjusted EBITDA in the range of $130 million to $135 million, In addition, based on our first-quarter financial performance and current market conditions, we continue to expect 2014 revenues in the range of $3.5 billion to $3.6 billion and Adjusted EBITDA in the range of $525 million to $555 million.

With that, Shay, could we please open up the call for questions?

(Operator Instructions).

Hamzah Mazari, Credit Suisse.

Just a question on capital allocation.

As you look at potential assets that maybe don't fit in the portfolio, and as you look at your current leverage on the balance sheet, should we be thinking about buybacks being larger than $150 million and maybe being a part of the normal capital allocation strategy if you do not find a deal?

When we look at the marketplace, we just saw two large environmental deals that just took place. There's maybe one or two other large assets; but if you don't find a deal, shouldn't you be buying back more stock? Especially if you're selling assets and the balance sheet is healthy? How should we think about that?

Sure, Hamzah. This is Jim. I'll start and if Alan wants to add anything.

But the way we're looking at it, clearly we're looking at our total capital allocation; and clearly organic growth acquisitions and share repurchases are all part of it. And as you just described in your question, it is something that is fluid in that there are some great potential acquisitions out there.

But it's all about timing; it's all about getting the right price; and therefore availability might not be immediately when we want it to be.

And what we're looking at is clearly we look at Clean Harbors as an excellent investment. And certainly during those times when we have the liquidity and we have enough cash, certainly investing in Clean Harbors is a good investment.

But we will look at that on a continuous basis, based upon what we know is going on in the marketplace in terms of acquisitions; what we do see as opportunities for growth, organic growth, capital investments within our own Company; as well as that investment in Clean Harbors. So it is balanced.

In the first quarter, we were low. We started first late in the quarter. And also, we all know that Q1 we tend to have a liquidity drain; so liquidity is part of it too. So looking forward, we expect to pick up on that.

And I will just add on the acquisitions that you mentioned, Hamzah, I think we, as a Company, are focused on integrating the businesses we have; the acquisitions we've made; and really driving the performance and return on capital. And the improvement on our earnings is really, in the near term, our key focus here.

And although there are many acquisitions that come through, we're really focused on making the business as profitable and as performing according to what we think the expectations are out in the market.

Got it. That's helpful.

And some of the corporate initiatives you laid out look pretty good on the sales and supply chain, as well as the $75 million cost takeout. Could you give us a sense of when you expect organic revenue growth contribution from some of these initiatives in terms of timing? Is that more of a 2015, 2016 event?

And is the $75 million a net number, or how much of that did you see in Q1? Is that a net number or a gross number, the $75 million? Thank you.

Jim, you want to answer on that?

On the cost?

Yes, on the $75 million, that is the annualized amount for the year; and that is not net of costs that we will have. Like, for example, the $4.7 million, I think, was the total in Q1. It's not net of that -- the costs that we'll have in severance.

But I don't think that the cost outlays are going to be that large going forward, as we're beyond a lot of the personnel reduction part of that plan; and severance tends to be a higher cost.

So we expect that we'll get a fair portion of the $75 million in this year. I think historically we've gotten anywhere from one-half to three-quarters -- two-thirds on average, into the year.

So it is an annualized amount. We'll be at that run rate at the end of the year. And I don't know if you wanted to add to that.

Just on the revenue growth. I continue to believe that you're going to see near-term opportunities for organic revenue growth. And as we layer in the new team that we put in and we changed the incentive programs, particularly focused on cross-selling, that will just accelerate next year.

We did have headwinds this year, at least as it relates to currency. We've lost about $100 million of revenue just from the translation effect.

So we are growing and we will continue to grow. The Company has historically grown north of 5% organically for the last 15, 20 years.

We also have grown through acquisition. And I think what you're going to see this year is really clear, pure organic growth. And into next year, I think that will accelerate even more.

We have seen great work between Safety-Kleen and the legacy Clean Harbors Field Services organization, as well as the Transportation and Disposal Tech Services side of our business.

And so I think we're in the early stages of seeing some wonderful opportunities coming across from the customer base of Safety-Kleen; and, quite frankly, vice versa. The customer base of Clean Harbors is now being cross sold with a lot of opportunities of selling additional services.

I think on the organic revenue side, I think we're on the right path, Hamzah.

Very good. Thank you.

Yes.

Michael Hoffman, Wunderlich Securities.

Alan, can you help us with, how much business does the Oil and Gas segment, the manner in which you report it, contribute to Technical Services?

And I'm thinking back to a comment you made on the fourth quarter call that you think of Clean Harbors as being in an asset-intensive, volume-driven business model; and that's why you're in lots of other segments, to drive that volume.

So what does that volume look like in revenues?

I would tell you that I don't have the dollar amount here. But I would say, Michael, that there isn't a single landfill that we own -- we own nine landfills -- that hasn't enjoyed tremendous increase in volumes as a result of our presence and our focus in the Oil and Gas area.

And whether it's in Alberta or it's in California or its in Texas or in North Dakota, our landfills and the work that we're doing in the Oil and Gas area are driving volumes, container rental, transportation and disposal.

And so there's a huge investment going on in that space. And we believe the amount of waste will only continue to increase, and we want to be part of that.

And so what I would like to try to get at is you're clearly not where you want to be. How much does that number or that scope have to change to say that the challenges that a commodity business, like surface rentals, poses you -- at least the perception that it poses you -- are worth it?

Go ahead, Jim.

I would point out, the rationale for getting into it, I think it's not just the volumes of today. But it's an industry that we believe will be in need of environmental solutions. And being the leading environmental solutions provider, we think that there will be opportunities in the future.

As you know, frac water is something that the states are doing studies around. And Federal Government is getting into some regulations that might facilitate a path forward on how to deal with that. And kind of being there enables us to be part of that solution.

And I would also point out that the rental services that you talk about, which you asked about, which is the solids control on the rigs, is a lot of maintenance and cleaning work that we typically do -- and disposal, obviously -- that we typically do at plant sites. So in that industry, that is the locale of where we do our work.

So it's a tough decision looking at it, weighing that commodity focus and being in an industry where we know we can be a solution provider. And it's something that we continue to look at in our strategic planning.

Okay.

And I guess that would be the next piece of that. I'm not sure there's a right or a wrong or whether you have to be in solids control to capture volumes to be in the energy waste disposal market? You've chosen to be in it, but part of the strategic review is you may choose not to be and approach this a different way. That's what I'm hearing.

And I think, for the purpose of customers, competition, employees, I don't think it's appropriate for us to get on a call and talk about all the details of each of every one of our lines of business.

Fair enough.

I hope you appreciate us trying to be responsive and transparent, but also recognizing those factors here, Michael.

Fair enough.

Jim, on the capital spending, the maintenance number has gone up about $10 million since the fourth quarter report. Is that now a permanent change, or is that -- what's -- you were at $130 million in February and now you're at $140 million.

Yes. Thank you for that question, Michael.

It's between $130 million and $140 million going forward. Just looking at some of the things that we're doing in the compliance area and safety and so forth has boosted up our maintenance spending this year. We typically classify safety and compliance in that area.

We're upgrading some parts of that, so it's a little more costly. I think we will be in that $130 million to $140 million at our present level of business going forward there.

Okay. And then in the fourth quarter you were very specific -- $400 million was the cash flow from operations. And this quarter, you said greater than $400 million, which is good. So that suggests there's some incremental improvements you're seeing.

Well, if you look at last year, we were -- I believe it was between $415 million to $420 million of cash flow from operations. And certainly we expect stronger EBITDA this year than last year. So I feel pretty confident that we can exceed that.

Okay.

And then within the context of the Canadian sale, the headwind on the $100 million, if you did a like currency, what did you think about the quality of the growth on a like-to-like currency related to your Canadian businesses?

I would say considering the contract that we lost in the middle of last year that we've talked about probably enough, outside of that and some of the slowdown that we saw -- or not slowdown. We didn't see the typical events, although we are now on a significant event today. But we didn't see any major events. And I think everybody would agree that it was just a bitter cold winter for the team up there, minus 40-degree weather that the industry was operating in up there. And so the level of activities probably wasn't as strong as a year ago.

But you've seen it improve as you exited the quarter? Exit the spring breakup issues?

Absolutely. We did see it get better there toward the end of the quarter.

It might be helpful if I tell you, if you look at the Industrial and Field Services -- just to give you a feel for the size in revenues of the foreign exchange impact -- it was over $11 million that Industrial and Field Services was impacted by foreign exchange.

And if you look at our Oil and Gas Field Services business, it was about $7 million, over $7 million, that was affected by foreign currency. So that kind of gives you an idea of what that impact is at the revenue level.

Okay.

And lastly, Alan, can you talk us through what it means to add return on invested capital to your incentive comp? What the metrics are or what group is influenced by that?

Is that the C suite? Is it senior management level? Below it? Can you share some of that?

I think both the senior executive and then really through the senior leadership team, this is a change in their compensation programs. And we're even looking at do we even take a harder look at moving more towards an EBITDA or from an EBITDA to an EBIT basis to try to prove on return on invested capital.

And so there are some ongoing discussions about how we transition the leadership team from some of the typical incentive programs we've had in the past, which were much more driven towards EBITDA and EBITDA margin percent revenue growth to add in that component of really improving the return on the capital that they have.

I hope that kind of gives you a little color on that.

And a proportion of the total comp now will be based on that? The incentive comp?

Yes.

And I would also say that we realize that we're making some bets on certain investments -- like we did with the Ruth Lake, like we're doing with the new incinerator. And so we've got to look at these projects and realize what are we really trying to accomplish as a Company, both short-term but also long-term investments that we're trying to make.

That's a good point because that could take two to three years -- like, for example, the incineration expansion -- to get there.

But to the question that you asked about what proportion, one-half of our typical annual incentive plan, which used to be all EBITDA, now one-half of it is ROIC-based. And our long-term incentive plan, it used to be that it was not in that plan either; and now it is one-quarter of it, in addition to revenue, EBITDA margin and safety incident rates.

So it's like we have those four criteria in our long-term plan.

Great. Thank you very much for taking my questions.

Thank you, Michael.

Al Kaschalk, Wedbush Securities.

Good morning.

Good morning, Al.

Alan, you had commented about asset sales. And while I don't expect you to maybe specifically talk about it -- it would be nice -- but can you talk about a timeframe maybe which you have set out to go through the strategic review?

And is it the balance of this year before we're likely to see something?

Yes. I think first and foremost, Al, our focus is improving the financial performance of this business; and we are intensely focused on that.

And I think we've laid out a number of initiatives the Company is doing, including taking out cost out of the business; dealing with growing the top line; growing revenues; we are lowering our capital spending. And all in all, I think we are improving on a lot of things here, as you know.

We also need to look at those assets that we have that are non-performing, that are not contributing to the improvement that we're expecting and need to generate. And we're in the early stages of that.

But we don't want to get to a point where we're so distracted that we are going to miss delivering on the financial results that we've committed to, to our Board and our shareholders for this year and next year.

The point is that, I guess, as part of this review, it is to focus on driving improved margin and growth.

Of course.

And what may fall out of this is a couple of business units or asset sales. But you're not setting yourself up to go through a process where you're selling a segment necessarily.

That's right.

And I would say that we brought in a firm to help accelerate this and to give us a little bit more hands and legs on the ground to help us to accelerate it. But, yes, you're right.

Excellent.

My follow-up question. In terms of the Industrial and Field Services, if you could maybe give us an update, one, on the turnaround season and what that looks like for the second quarter. I know it was a little bit weaker in Q1, or is it pushed out a little bit to Q3?

And second, where you stand on Ruth Lake?

Yes, Ruth Lake is full today. We are very pleased with the progress the team has made.

And I just want to comment -- I guess it's appropriate to comment on our Industrial and our business in Western Canada. Clearly, we went into Western Canada, it was first and predominantly focused on the environmental opportunities that we saw.

Some of the most significant environmental remediation exists in Western Canada, particularly. And as we have expanded into Western Canada, after being there since 2002, with Eveready, we divested some assets early on. We recognize that there are some businesses that may look unfamiliar to driving waste into the landfills or incinerators we have, like Lodging. But Lodging is a strategic asset for us.

It allows our 700 employees to operate within a very remote area, where there are hundreds of billions of dollars of investment going on -- huge environmental needs that these customers of ours have.

And we continue to look at that industrial investment that we've made in Western Canada as a long-term strategy of ours and certainly in the keeping of what our business is all about, which is environmental services.

I would say that we are very pleased with the performance of our Lodging business, and we expect that to continue to do very well for us.

And the turnaround season?

I don't know.

Jim, do you have anything to add?

You asked like Q2 and Q3. And what we've seen are some push outs, some going into Q3. So I think that will be the stronger of the two quarters.

That being said, in Q2 we are seeing some pickup toward the latter part from some of the scheduling.

Thanks.

Thank you.

(Operator Instructions)

Jamie Sullivan, RBC Capital Markets

Good morning.

Good morning, Jamie.

Just to clarify on some of the guidance and the savings, are you including the cost savings program in the guidance for the year?

As we go out each quarter, as we forecast that, we are incorporating the savings. But the full-year, we are not fully incorporating that.

And our position on that is our savings program is how we are responding to the headwinds that we've seen. And we consider it early in the year to try to factor that into our guidance for the last half, knowing that there could be more headwinds in our business.

Not that we know of anything specifically, but I think we have seen enough headwinds that we're looking more at this savings program of how do we respond to those things to make sure that we're meeting what we're sharing with the investment community about what we believe our earnings will be and to exceed that.

So that's kind of where we are with how we are incorporating that.

Okay.

It sounds like with the severance costs and the timing, there's really no savings in the first half -- so essentially no net benefit for the year right now in the numbers.

Well, there are some savings that hit the second quarter; net of costs. I don't have an exact number. It's not very big, because we're in the throes of doing a lot of that right now.

Although the headcount we've done through April, as Alan pointed out, is clearly affecting some of the second quarter and certainly the rest of the year.

Okay, that's helpful. And then you mentioned about one-third of it is headcount. Can you touch on the other two-thirds?

What kind of visibility do you have on those costs, and what areas they're coming in?

There are about 60 different key initiatives led by executives in the business and working across functional teams. So I think we've got great visibility.

We're tracking that, and we're reporting that on a biweekly basis to the executive staff. So I feel very good about that.

Great. Thanks very much.

Thank you, Jamie.

Thank you. Our next question comes from Charles Redding, from BB&T Capital Markets.

If I could just circle back on Alberta.

Q2 rig counts are up materially, obviously, albeit in the spring breakup. Can you kind of tell us what you're seeing specifically in Alberta? And how relevant are the rigs as a proxy of the business right now?

You know, even through breakup, our business has been very good. A lot of our equipment stayed on and continued and will continue through the quarter.

So particularly in the solids control side of our business, we didn't see that typical slowdown, which is great. And in Northern B.C. particularly, where there's huge investment going on, particularly to do with the drilling and activities to go after the LNG export in Kitimat, we see some great opportunities there.

So we're extremely busy in that Horn River in Northern B.C. area.

That's helpful.

On the Technical Services side, the increase in landfill volume is certainly a positive. Can you tell us what the primary driver of the increased project work was?

I would say it's a lot of oil and gas residuals that we're getting from a lot of the activities throughout the US and Canada.

Okay.

And then really quickly on Safety-Kleen environmental, have there been any major changes in raw materials pricing for the parts washer business? And how aggressive do you look to stay on pricing there relative to your primary competitor?

We've been successful in increasing pricing on our parts washer business as a result of the fact that, yes, our solvent costs have increased and transportation costs have increased.

And, again, I think by having better now visibility on the profitability and looking at all-in costs, I think we have begun the process of improving pricing in the overall Safety-Kleen business. And I think that's going to continue.

I'm extremely excited about the branch network that we have, the team we have in place, the leadership team.

After now a year owning the business and getting them on our platform, I've got nothing but high expectations about our ability now to get back on track to growing, gaining market share, improving pricing in that business and profitability. And I think you're going to see it.

Great. Thank you.

Thank you, Charles.

Sean Hannan, Needham & Company

Can you hear me?

Yes, Sean. Good morning.

Good morning.

Just a quick sanity check. In terms of your strategic review of various pieces of your businesses, it seems like there has been some expectation that's been set that there could be a larger segment sale. You're clear, I think today, that that's not the approach; instead it's trimming other smaller, non-core pieces of your business.

Now, when I consider that you wouldn't sell a larger segment, if I interpret your comments correctly today, it sounds like not only are you still very optimistic about what your opportunities are within, say, oil and gas or within re-refined oil, et cetera. But also that from today's point in time, the markets, as well as some of your cost efforts, are both gaining traction and improving.

Is that fair?

To your point, it's premature to talk about what if. We mentioned it in our fourth-quarter call that we were going to take a real hard look at our operations.

And as you can imagine, Sean, after the Company has grown from $200 million to almost $3.5 billion here, as we have grown organically and through acquisitions and got from those acquisitions some businesses that, maybe in the long-term, aren't businesses that we need to be or should be in or should divest, it's appropriate. And that's what we said in the fourth quarter.

It's appropriate for us to be looking at ourselves and looking at our business and looking at -- How do we get to $5 billion? How do we get to 20% EBITDA margins? How to we continue to grow our environmental business, drive volumes into our fixed-base facilities?

And then what about some of these other businesses? How do they fit? Are they the businesses we want to be in?

And I think that is something that Clean Harbors has always done. And we realize that since taking on Safety-Kleen particularly, and subsequently with some of the difficulties we've had in the oil and gas area, for example, that it's appropriate for us to be looking at that at both the Board level and at the leadership level.

And as we've said, we brought in a firm to help us; and they've begun, and they're working with us. And that process will probably continue throughout the year.

And the results of that, we will share as we develop those. But I think it's just premature to talk about big, small, little, none.

But I can tell you one thing. We going to continue to drive the financial performance of this business and get this business back on track to the kind of growth and profitability that we were doing before the last 18 months.

Sure. Fully understood.

But just from a performance of those segments today, is there a way -- if you could just address that piece of it, Alan? Because it sounds like it's not as dire or problematic as it was not too long ago. At least from an outlook perspective.

I guess I don't think anything was ever dire for us. I think that we --

Fair.

-- recognize that from a margin and earnings per share and what have you, we've spent well over $1 billion for Safety-Kleen. And our expectation was about $100 million more in EBITDA than we ended up with. And so we've been working really hard to dig ourselves out of a hole as a result of market conditions and other things that impacted our business last year.

So I think taking out 800 people; taking out a ton of costs; consolidating -- all the things that we've been doing. People have been working extremely hard to counter the headwinds that we've been sharing with all of you.

And so we feel very confident that we can right size the business, fix the business. And if some of those assets that we have should not be part of our long-term strategy, we'll address those.

Great. Thanks.

Okay.

Barbara Noverini, Morningstar.

Good morning, everybody.

You had mentioned 100% utilization for your Canadian incinerator. Was that largely due to one-off projects in the quarter? Or might you need to think about adding some additional capacity in that area in the future?

I'll just start.

We operate our incinerators through a whole network that spans North America. And the particular incinerator that had very high utilization is a liquids plant, and the mix that we had in there took it actually to its full capacity.

And by the way, when we talk about capacity, we talk about practical capacity. So it includes the effect of down days and turnaround days. So we had less turnaround days at that particular site.

But to the point that Alan made earlier, our volumes were good in the quarter. We had some good oil and gas residuals going to our landfills, and our incinerators did well too.

Got it. Thanks a lot.

Thank you, Barbara.

Yilma Abebe, JPMorgan

This is Andrew West on for Yilma.

Can you remind us about your financial policy as it relates to leverage and how it fits with these capital allocation plans?

Absolutely.

I know this goes without saying, but we do run our balance sheet prudently to be able to be sure that we're not overleveraged, not only from the standpoint of being prudent but also it's very important to our customers.

We're cross-selling a lot of businesses into our customers, and we want to be able to have our customers know that we're going to be around forever. So they look at our balance sheets when we engage them on large multimillion dollar contracts. So it's important that we keep a nice balance sheet there.

I think that if you think in terms of our leverage ratio, I think if we started to exceed 3 times -- and right now, net of cash, we're probably about 2 times EBITDA -- I think if we started to exceed 3, we would start getting a little nervous. We'd want to bring that down.

That's kind of where we are on that metric. And if you look at debt to total cap, I would say probably in that 35%, 40% range we consider a comfortable range.

That being said, for the right opportunity or for an investment that we are making that would take us a little bit above those ratios, as long as we had a very clear view that we could bring it back to those levels, we would go little bit higher.

But we do run it prudently. That's basically the way we do it that.

I would add to that too, Jim, your point about customers.

Most of our major customers do financial reviews on the annual basis of ours. They send their compliance people to inspect our facilities. They've sent third-party companies to evaluate our financials and give approval to continue to use our facilities. And we're talking about the largest customers that we have, as you said.

And so we enjoy significant market share and trust with major corporations throughout North America because of our financial wherewithal, our financial assurance that we have in place to deal with all the regulatory compliance requirements for our permanent facilities. And we need to have a strong balance sheet.

Great. Thank you so much. That's all I had.

Thank you, Andrew.

Thank you. At this time we have no further questions.

I will turn the call back over to Alan McKim for closing comments.

Thanks again, everyone, for joining us today. We appreciate your questions and your feedback.

We look forward to seeing many of you at the upcoming conferences, both next week as well as later in May. So have a wonderful day. Thank you.

Thank you. This does conclude today's teleconference.

You may disconnect your lines at this time. Thank you for your participation.