Clean Harbors Inc (CLH) 2014 Q2 法說會逐字稿

Greetings. Welcome to the Clean Harbors Incorporated second-quarter 2014 conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

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

Thank you, Rob. 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.

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 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, August 6, 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.

Now, I'd like to turn the call over to our CEO, Alan McKim. Alan?

Thanks, Michael. Good morning, everyone. Thank you for joining us this morning.

Starting here on slide 3 with a summary of our Q2 results: Revenue was unchanged from the prior year's second quarter, and slightly below the guidance range we provided on our Q1 call, primarily as a result of some project delays and reduced activity in the oil sands region, as well as in oil and gas field services. It is worth noting that adjusted EBITDA exceeded our guidance, even though we incurred $4 million in integration and severance costs in the quarter.

Tech services delivered a strong quarter, reflecting our focus on enhancing profitability and improving margins across the Organization. Oil re-refining and recycling also contributed nicely this quarter, and demonstrating profitable growth driven by improved pricing and margin enhancements.

Safety-Kleen environmental services performed on plan. Tech services continues to benefit from the incremental waste volumes from this business. In fact, our drum volumes have consistently hit all-time highs in the past several quarters, reflecting the influence of additional Safety-Kleen waste. Both our industrial, field service, and oil and gas businesses, continue to be affected by the effects of currency translation, as well as softness in some of their markets.

Lodging, as noted in this morning's press release, is now being broken out as a stand-alone segment. The complete segment breakdown is shown here on slide 4. This morning, we filed a Form 8-K with revised historical, quarterly segment information that is consistent with how we are presenting the six segments today.

Lodging was previously reported under the industrial and field services when it was managed as part of industrial services. We are reporting it separately now, consistent with the organizational changes within our internal reporting structure. The business will continue to report to Dave Parry, who formerly ran industrial and field services, and is now heading up our new North American regional sales and operations group.

Looking at our segments in more detail, beginning with slide 5, tech service revenue improved 5% in Q2, primarily due to the performance of our incineration business. Incineration hit 95% utilization in the quarter, and, as most of you know, very high utilization drives improved margins, and our margins this quarter reflect that leverage.

Adjusted EBITDA increased 21% from a year ago when our incineration utilization was at 91%. That equates to nearly a 400-basis-point improvement year over year. We benefited from greater drum volumes and the performance of our Canadian facility, which operated above name-plate capacity for the second straight quarter.

Landfill volumes were off 6% from Q2 in 2013, but the primary reason behind that was timing. Three large projects scheduled to get underway in June were pushed off until late summer or early fall. Overall, tech service performed well, and we head into the second half of the year with good sales momentum.

As you look at the industrial and field services results on slide 6, keep in mind that these numbers exclude lodging from both periods. Reduced activity in the oil sands, compounded by the effect of the lower Canadian dollar, decreased revenue 7%. Q2 was the sixth consecutive quarter without a major emergency response event, although we responded to several smaller events both in the Midwest and Texas.

Utilization for our billable personnel was 87%. This was up 7 percentage points from Q1, unchanged from Q2 last year.

Overall, our performance in the US market was good, while western Canada was down from a year ago due to currency and fewer projects. Within the oil sands, pipeline and rail congestion is creating bottlenecks that make it difficult for energy producers to move product. One quick example: Recently a job involving several hydrovacs was cancelled because the customer literally could not move any more crude through the pipeline it was using.

While delays like this have hampered project work, base business remains good. We're confident that the region will figure out ways to navigate these temporary roadblocks through additional pipelines, rail facilities and alternative routes. Clean Harbors will be there to benefit. We remain well positioned for growth, as we are the top provider for many industrial services in that area.

Turning to slide 7, oil re-refining and recycling generated a 19% increase in both revenue and adjusted EBITDA. Strong volume, stable pricing and incremental volumes from Evergreen drove our performance. We experienced a healthy supply/demand balance throughout the quarter, based on the summer driving season; segment profitability rose sharply year over year and sequentially, with higher revenues and greater efficiencies fueling continued gains. Margins were flat year over year due to the addition of Evergreen and its associated cost.

Blended products accounted for 37% of volumes, compared with 33% in Q1. Increasing our blended mix remains a top priority. We have made progress this quarter with several customer wins. Our EcoPower program is in its early innings, and customers are looking for an eco-friendly product in services.

Turning to Safety-Kleen environmental services on slide 8: On a third-party-revenue basis, this segment was up $5 million from a year ago. On a direct-revenue basis, as you see here in the slide, it was down slightly year over year. The reason for that is the business mix in the segment, as we drove even more containerized waste into our network during the quarter, which benefited tech services.

The number of parts washer services was up slightly from Q1, but we'd like to see that number even higher. The gallons of waste oil collected climbed to 55 million from 47 million in Q1. While seasonality explains much of the increase, the growth also reflects our success in sourcing new waste oil from existing customers, and the expansion into new regions such as western Canada. We achieved this increase even while reducing many high-PFO customers, which we can no longer service profitably based on historical pricing contracts.

We lowered our average PFO cost by $0.05 in the first half of 2014. Our pricing discipline, and new incentive plans that went into effect January 1, are proving effective. I also want to point out that recycled oil sales, or our RFO, is down approximately $5 million in the quarter as we continue to internalize more oil for re-refining. This reduction reduces both outside and direct sales for the Safety-Kleen environmental segment.

Systems enhancements continue to be made to the Safety-Kleen branch business. The new tools we've developed are empowering employees in our waste business to make smarter economic decisions. These systems will continue to be developed and used to run our Safety-Kleen branch business more profitably. This bodes well for the future of the Safety-Kleen business.

Turning to slide 9 and lodging services, Q2 revenues were down from a year ago, as currency translation and some weakness in our drill camp business offset the addition of Ruth Lake. Overall, our fixed lodges performed on plan, particularly compared to how some of our competitors faired. Lower adjusted EBITDA reflected a combination of factors, including some higher maintenance costs.

We took advantage of lower short-term occupancy at several locations to make some repairs and enhancements. Outside room utilization at our fixed lodges, including Ruth Lake, was 72%. That's consistent with the two prior quarters. Just as with our industrial group, we believe that the lodging business is well positioned to capitalize on the rebound in oil sands activities.

Turning to slide 10, oil and gas field services underperformed in what is its seasonally weakest quarter due to the breakup in western Canada. Revenue declined due to the continued slowdown in exploration, and that was compounded by the currency translation effect.

With spring breakup occurring early in the quarter, our average number of rigs serviced during the quarter was 124, down from 203 in Q1. Average utilization of key equipment, primarily our centrifuges for processing waste, was 40% in Q2. Recently, we've seen some promising activity in our solids control business, which won a bid to service 10 rigs with full waste processing equipment packages. That work is scheduled to start in Q3.

We are also committed to strengthening our presence in the US domestic shale plays. Toward that end, we recently enhanced our sales personnel in certain US regions. We're really optimistic that these moves will accelerate our progress in the areas like the Rockies and Texas/Oklahoma region, particularly the Eagle Ford shale.

Let's move to slide 11 for an update on recent corporate initiatives. First, we are making excellent progress within our North American sales and operations organization. We have filled key positions with internal candidates, complemented by outside hires, to bring valuable industry experience.

Led by Clean Harbors' veteran, Dave Parry, the team is tasked with organic growth through cross-selling initiatives. With over 200,000 active customers, we believe this organic growth will drive the highest margins and return on invested capital.

The next initiative is our $75-million cost reduction program, which proceeded on schedule in Q2. We have identified numerous opportunities to achieve that savings goal, and I will go into those in more detail in a moment.

Third is our strategic business review. The review is proceeding as expected, and the gathering of data nearly completed. Senior management working with our Board will then evaluate the information and make some important decisions regarding underperforming areas, non-core assets, and how best to significantly improve the return on invested capital of the Business. Quite simply, the focus is on enhancing returns. We have created a strong platform to build from, and our intention remains to leverage that foundation to achieve our long-term goal of generating 20% EBITDA margins and double-digit return on invested capital.

As part of this review, it is more clear to us that the Safety-Kleen investment will be a transformative acquisition for Clean Harbors. The opportunity to collect and dispose of more waste from over 200,000 customers into our 100-plus disposal and recycling centers, and to provide our customers with a closed-loop recycling option for many of their hazardous waste materials, is what both our customers and the government is looking for. Like the Safety-Kleen chemical services division acquisition that we made in 2002, we believe this acquisition will be equally as successful.

Slide 12 provides you with a bit more detail on our cost savings program and the major buckets that comprise the more than 40 projects underway. The chart also shows $35 million to $45 million of cost savings we expect to recognize in 2014; and obviously, we would see the full benefit in 2015.

Early in Q2, we completed our planned headcount reductions. We have reduced our general workforce, since the Safety-Kleen and Eveready acquisition, by over 1,000 employees, as well as many other contractors and subcontractors. We are now moving forward with a broad range of initiatives, ranging from internalizing maintenance and transportation, decreasing third-party rentals to procurement. We are confident that we will exit 2014 at the $75-million run rate, and possibly higher.

Before turning to the outlook for our segments, I wanted to briefly touch on our capital allocation strategy, as I did on our Q1 call. This remains an important focus for us. Internally, our team is looking very closely at delivering the right mix among the three components you see here on slide 13: organic growth, acquisitions and share buybacks. What the balance is between those three elements will be determined by a number of factors, including valuation, risk and opportunity.

As anyone who has spoken to us in recent months knows, we are firmly committed to improving our ROIC and overall returns. Our incentive compensation depends on us doing that, so we are closely aligned with shareholder interest. In order to improve our returns, we know we need to invest our capital efficiently, whether that be to buy back stock, build an incinerator, or acquire another environmental service company.

Moving to our outlook on slides 14 and 15: Within tech services, we expect to continue to capitalize on the positive trends in the sector, such as manufacturing and chemicals. As our utilization climbs, we'll look to optimize mix to maximize profitability.

We are moving forward with the El Dorado incinerator project. We have completed the detailed design, and have now completed our construction, material and supply agreements, and project management teams are in place. We are breaking ground this quarter. The recent direction of the market, the steady and increasing waste volumes pulled through Safety-Kleen, and recent regulatory rulings have further strengthened our decision to invest in the incinerator.

Because a new incinerator must meet the new MACT 2 standards, the estimated cost of the project has increased from what was our original $80-million estimate to more than $100 million, predominantly due to the back-end air pollution control systems, again, needed for MACT 2. Startup is now expected to be in late 2016. Given the positive market trends, we're confident that the facility will deliver a very good return, and be a valuable asset for decades to come, even with this higher capital cost.

Within industrial and fields, we will look to cross-sell our services to the Safety-Kleen expansive customer base, continue to grow in the oil sands, and capitalize on some emerging opportunities in the Gulf region. For Safety-Kleen, we are excited about both the segments of that business.

In our oil re-refining, we believe the systems and the new tools I mentioned will have a considerable impact on margins in that business. We continue to see tremendous opportunity to drive our profitability in that business, even without improvements in base oil pricing. We also see substantial opportunities to sell more blended products, particularly EcoPower.

Turning to slide 15: On the Safety-Kleen branch side, five new locations are tentatively scheduled for the second half of this year. Our priority here is to continue to lower our PFO costs. We believe the programs we are rolling out will drive that success.

For lodging, it will come down to maximizing occupancy at our fixed locations, and deploying as many mobile camps as possible. Ruth Lake was full for May and June, and our client base was extremely pleased with these new facilities. Our employees who reside at this lodge know it to be real first-class. We believe the future is really bright for our lodging business.

For oil and gas, we are confident in the future market opportunities, and external trends are favorable as we move into the latter half of year. In particular, US expansion initiatives will continue, so will preparations for the winter drilling season in Canada, which will include pursuing some emerging opportunities, particularly in gas drilling in northern Alberta and northeast BC.

The trends in many of our businesses and key verticals are encouraging. Our business model is built around driving waste streams into our disposal network, so it is exciting to see our utilization in our incineration business continue to climb. Our focus on the bottom line is proving to be effective. The guidance that Jim will discuss in a moment demonstrates how, even with the challenges in certain markets, we are successfully growing EBITDA margin of our Company, as we ultimately build towards our 20% goal in the years ahead.

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

Thank you, Alan. Good morning, everyone. As I do every quarter, let me start with some brief perspective on how our verticals performed.

Looking at slide 17: General manufacturing remained our largest vertical in the quarter, accounting for 20% of total revenue. This vertical grew at a strong 12% year over year. That increase was primarily on the Safety-Kleen side, as revenue from base oil sales and containerized waste rose more than 20%.

Automotive was our second largest vertical, accounting for 13% of Q2 revenue. While flat year over year, one area of strength in automotive was again containerized waste, which grew 15%. We continue to drive more and more volumes into our disposal network.

Refineries and oil sands customers accounted for 12% of revenue. Fewer scheduled refinery turnarounds and lower oil sands activity resulted in a 5% revenue decrease from Q2 2013.

Chemical represented 10% of Q2 revenue, and was essentially flat with a year ago. While we haven't seen a large surge in new plants, our base business remains solid, supported by the low cost of natural gas. A number of projects, particularly in the area of remediation, were pushed out to the second half of the year.

Oil and gas production accounted for 7% of revenue, and was off slightly from a year ago, as declines in our drill camps, drill support and downhole services more than offset some gains in our bulk waste business in this vertical.

We service an attractive and highly diversified mix of industries. Among the smaller verticals, one of our top performers was our utilities vertical, where we generated double-digit sales growth on the strength of project wins in both the US and Canada. Congratulations to that team on generating excellent organic growth in the quarter.

Turning to slide 18 and the income statement, we reported Q2 revenue of $858.5 million, which was essentially flat compared to last year. I should point out, however, that the foreign currency translation impact related to the weaker Canadian currency this quarter compared to last year reduced our revenues by approximately 1.8% this quarter.

Gross profit for the second quarter was $251.5 million, or a gross margin of 29.3%, which represents a 70-basis-point improvement over the 28.6% we reported a year ago. The margin improvement reflects our success in reducing our cost structure. I should note that our gross profit was reduced by $800,000 of severance and integration costs this quarter.

SG&A totaled $115.7 million this quarter, or 13.5% of revenues. This compares with $122.6 million or 14.2% of revenue in Q2 a year ago. This favorable $6.9-million reduction, or 70-basis-point improvement in SG&A, is due to a combination of the effect of last year's Safety-Kleen cost synergies and our 2014 expense reduction programs.

Excluding severance and integration costs of about $3.2 million recorded in SG&A in Q2, our SG&A percentage was closer to 3.1%. For the full year, we are projecting our SG&A percentage to be approximately 13%.

Depreciation and amortization declined slightly from a year ago to $66.1 million. The reduction is primarily related to decreased landfill amortization. For 2014, we continue to project full-year depreciation and amortization to be in the range of $275 million to $280 million.

Income from operations was $67.1 million or 7.8% of revenues, compared with 6.2% of revenues in Q2 a year ago. Our operating margin increased significantly from a year ago due to the reductions we have made, both in cost of revenues and in SG&A.

Our adjusted EBITDA was $135.8 million, or a margin of 15.8%. As Alan noted, this was just above our guidance range. When you add back the $4 million of integration and severance costs, we would have further exceeded our Q2 guidance, and our margin would have been 16.3%.

The effective tax rate for Q2 was 39.1% compared with 35.1% in Q2 a year ago. As in Q1 of this year, our tax rate remains higher than our historical levels due to our lower income in Canada, which is subject to lower tax rates than the US. In addition, our tax expense increased by $1.2 million this quarter due to the resolution of a Canadian tax audit relating to previously acquired businesses. We expect our effective tax rate for the full year to be in the 38.5% to 39% range, which represents a 1% increase from our earlier expectation due to the factors I just described.

Turning to the balance sheet on slide 19: We continue to maintain a healthy financial profile. Cash and marketable securities as of June 30 totaled $278.6 million, up from $249.2 million at the end of Q1, as we generated strong cash flow in the quarter. Total accounts receivable were up slightly since the end of Q1. DSO increased by 1 day during Q2 to 68 days.

The enhancements that we have made to the Safety-Kleen billing process this year have added a few days to the issuance of our SK invoices. Therefore, we expect DSO will remain in the mid- to high-60-day range for the near term. However, we continue to be focused on improving our collections to ultimately reduce our long-term DSO.

Environmental liabilities at quarter end were $217.7 million, flat with the end of Q1. CapEx was $63.2 million, compared with the $69.2 million we spent in Q2 of last year and down from the $75 million we spent in Q1 of this year.

For 2014, we are now targeting CapEx spending of approximately $250 million. This is $10 million above our previous estimate, as we decided to move ahead with about $10 million of equipment we bought out, which were on short-term rentals. The $250 million consists of maintenance CapEx of approximately $140 million and growth CapEx of approximately $110 million, including work related to the El Dorado incinerator project.

We were pleased with our cash flow from operations this quarter, which came in at $110.3 million compared with $98 million a year ago, and well ahead of Q1. Our cash flow performance is even more impressive when you consider that our accounts payable balance declined by $22 million from Q1 due to the timing of payments scheduled before quarter end. For the full-year 2014, we expect our cash flow from operations to be in the $400-million range.

As we announced earlier in the year, our Board authorized the first share repurchase program in our history, with an allotment of $150 million. During Q2 we purchased approximately 250,000 shares at a total cost of $15 million.

Moving to guidance on slide 20: For the third quarter, we are expecting revenue in the range of $890 million to $910 million, with corresponding adjusted EBITDA in the range of $155 million to $160 million. In addition, we are updating our full-year 2014 guidance. As result of our Q2 performance and the current market outlook, we now expect to be at the low end of our revenue guidance range of $3.5 billion to $3.6 billion. At the same time, we are still increasing the low end of our full-year adjusted EBITDA guidance, which is now $535 million to $555 million. The change reflects our cost savings and margin improvement initiatives that Alan outlined in his remarks.

With that, Rob, could you please open the call up for questions?

(Operator Instructions)

Joe Box, KeyBanc Capital Markets.

Morning, gentlemen. The question for you on the rationale for breaking out Lodging. Should we be thinking about this as maybe the first step to strategic alternatives for this asset or is this more just a function of the valuation in this business has been different from the Industrial Services component and maybe by breaking out it is easier to do the sum of the parts here?

Hi, Joe, this is Jim. I can start it and if Alan wants to add anything. The reason for breaking out Lodging is because we are managing it now separate from the Industrial business, which is under Eric Gerstenberg. So Dave Parry continues to manage the Lodging side. It is also grown to a size that we think it deserves separate attention, when we talk about it with an analyst and so forth, the Lodging business. That being said, we are watching what is going on with the spin-out of Lodging business from Oil States. I think that you are aware of that. We don't have any strategic plans at this point, but clearly, we are watching what's going on with that particular transaction.

Understood. Thanks. Just switching gears to the cost side. Alan, I think you said your planned headcount reduction is complete. Can you maybe just give us an update on some of the other projects, like the branch consolidation and the transportation expense? Just curious on the progress on that front? Not sure if you just quantified what the savings was in the quarter? Sorry, if I missed that.

I don't think I quantified the savings.

No, we did not.

I think in regard to your first part of your question, we are re-looking at our entire network, again, as part of our, now, combination of the two companies and now having everybody up on one system. Everything from routing to logistics, all of our rail and waste movements. There's a number of key projects and probably about four major initiatives that I'm part of steering committee on that's driving improvements. We're really trying to accelerate some of those efficiencies that we know are out there. There are many, many opportunities here. We have the scale now that we have. We're pretty excited about the list of them and the fact that we still continue to see real good opportunities to improve on margins.

I would say probably my number one priority for the Company and what I'm driving is really revenue, organic growth and cross-selling. So part of Dave Parry's role now, as one of my direct reports -- and again, one of the reasons why Lodging is here, is that we really believe there's tremendous opportunity to begin getting the Company growing again. We -- this particular past year, have really reduced a lot of customers that were just not profitable business. It's showing up as lower revenue for us, but it is the right thing for us to do because we really inherited quite a bit of customers that really were just not profitable. We still have some more work to do in that area. That's a little bit of a headwind on the revenue growth, but it continues to be my number one project that we're driving.

I appreciate it. Thank you, both.

Thanks, Joe.

Larry Solow, CJS Securities.

Good morning, Alan and Jim. To follow up on the line of question, on the cost reduction, you had $35 million to $40 million realized in 2014. Is that, now, all incorporated into your revised guidance or can you help us parcel out what is in guidance currently?

Yes. That is incorporated in the guidance and that is why we took the lower end and raised the lower end of our EBITDA guidance to account for some of that. Also, the fact that we saw the revenues at the lower end, clearly that's not having any impact. In fact, it is helping EBITDA in the cost-saving side.

The prior guidance did not incorporate any of this, is that correct? It actually did incorporate a little bit that you achieved in the first half, isn't that right?

It did of what we had in the first half, so what we've introduced now is what is in the second half.

So it is probably like, a plus or minus, $25 million benefit on the cost side or give or take?

It could be in that range. I don't have the exact precise figures. There are over 40 projects involved in this, but it is probably almost to that range.

There is some offset to that. We're hoping to pay incentive compensation this year. We didn't pay last year at all, so the team is working extremely hard and there is some offset, Larry, to the savings we have.

Great. Excellent. Technical Services, particularly incinerators, had an outstanding performance with the 95% utilization. It sounds like you're getting a lot of nice benefit from the containerized waste. Is this number, seems like, is this a sustainable type number? As you get the El Dorado plant, that should obviously help that in the long run. Is pricing, because of this high utilization, benefiting from that?

Yes, it absolutely is. We are extremely strong in volumes. Our deferred revenue, actually, went up $5 million to $30 million on the Tech Service side, and our deferred revenue overall is about $60 million right now. We have a lot of volume. We have a lot of material to move and a lot of projects coming in the door. We are excited to move forward with the new incinerator, and we are also looking at our product mix and trying to move some of the low profit materials out of our network and into third-party disposal if need be.

Okay. Just last question, you cited some additional weakness or increase weakness in the oil sands. Sounds like it is a lot of the pipeline log jams. Is there any visibility on timeline on when that might improve? Is that also causing the weakness in the oil and gas services in Canada or the additional weakness there?

You knew that we lost a pretty significant contract at this time year ago, so I think moving forward into third quarter, you won't see the big variances as much as you have in this quarter. There is a lot of contract work that we are bidding, new business, particularly in British Colombia. There's a lot of activity going on with moving more products to the West Coast, so we are optimistic about not only the oil sands but some of that Northeast BC area. We are bidding a lot of work up there. Our hope is that we will continue to not only maintain a good book of business that we have, but we will see some nice new projects that we are currently bidding.

Got it, thank you very much.

I mean it's still a huge investment going on in the oil sands. It is not at that $20 billion a year range, but it's still significant.

Got you. Okay, thanks, Alan.

Hamzah Mazari, Credit Suisse.

Good morning. Thank you. Alan, a question on the US shale basins. Could you give us a sense of whether you can build that exposure organically, or do you need to really do that acquisitively? Over the long term, how big do you think your US footprint could be relative to the Canadian market, which is where you have most of your exposure currently?

Hamzah, we have the assets that we could put to work coupled with some capital that was allocated for that business this year. We have a lot of unutilized assets that we can put to work in the US, and we have transferred a good number of assets out of Canada as their activities slowed down. The team, in a recent discussion with the team in US, we feel very confident that we can grow that business organically, not through acquisition. I think that's where you're going to really see the best margin improvements for the business and improvement on return on capital there.

As far as size, clearly, when you look at the drill count in the US versus Canada, it is four or five times the size. We feel pretty confident that we can max out the level of utilization of the assets that we have in that business. Then, at that point we could take a look at whether we want to continue to make more capital investments to grow it or whether we're going to stay at that size that we'd be at.

Great, and just a question on capital allocation strategy. You mentioned organic growth, acquisitions and share repurchases and also mentioned that the mix will be determined on the relative basis by what you see in the market on opportunity and cost of capital. Maybe as it currently stands, when you look at your acquisition pipeline and organic growth investments and share repurchases, where do you see the most attractive use of capital currently?

I think clearly, organic growth is the number one area of our focus when we are talking about making investments to leverage our customer base in the cross-selling that we see as an opportunity there. If we were looking at acquisitions, and we've really tried to focus on integration. Particularly over the last 18 months with the Safety-Kleen deal, this has been a very, very difficult integration for us, as we had dealt with significant downturn in the price and value of our oil product. We've come out of that now, and I think we're doing much, much better even at the same pricing that was in place a year ago.

Our real focus would be to grow our environmental business, because we could continue to improve the volumes going into our network of facilities and that's our focus. We feel our stock is undervalued and so we are participating in purchasing our stock. We are in the early innings of that. We did a limited purchase in a second quarter, and we will be back in the market and continue to execute the plan that we put forth.

Great. Just a last question, and I will turn it over. It is more clarification. Out of the $75 million cost takeout, how much of that essentially comes back if revenue growth comes back? You mentioned incentive comp will net against that number. Do you start to increase headcount again? Is that $75 million fully structural cost takeout that when revenue comes back a portion of that doesn't come back -- or any clarification there? Thank you.

Sure, our billable headcount certainly will fluctuate with our top-line revenues, but I think we've said that we really would like to get our SG&A down to that 10% of revenue level. We can do that by continuously looking at our network, regionalizing or centralizing some of the various administrative processes that we have out there. We are really taking a very hard look at our sales organization, where over 950 salespeople are part of that 4,000 non-billable headcount. I would like to think that we can continue to get our sales force to growth their respective customers without adding more non-billable heads and really leverage SG&A.

Great, thank you.

Luke Junk, Robert W. Baird.

On the cost reductions, did you guys previously say that, that was going to be about two-thirds in SG&A and one-third in COGS? In the second quarter here, did I miss the estimated dollar amount?

We didn't provide an estimate dollar amount that's in this year. Although, we had said, I believe in the script, that it would be in the $35 million to $45 million range, that would be for the full year.

Then, on the makeup of that?

I would say that probably 25% to one-third of it is in cost of revenues and the rest is in SG&A.

Okay, great. Similar topic, the pay for oil cost reduction program. Just to clarify, that is in the overall $75 million cost savings program, correct?

That's correct. We had some decline in our budget, but with more aggressive projects that we have going on around PFO, some of that is in there, the excess. We are actually achieving that. We are doing larger reductions than were assumed in our budget for the year.

You guys had noted the $0.02 gallon reduction this quarter and I think $0.05 year to date?

That's correct.

Do you have a rough number for what that translates to on a pretax or EBITDA basis?

Each cent is about a couple million dollars. It is right around that.

Okay. Then last question for me would just be at the Evergreen Oil, just an update on the operations there? Your efforts to make the facility run smoother, etc?

Evergreen has been, for the last two or three months really, ran at some record volumes. The capacity of that plant when we acquired it was operating about 12 million, 13 million gallons and I think it is trending right now over 20 million, 21 million gallons. We continue to believe that we can get up in to a much higher level. There's still bottlenecks in that plant. It is cost, on a per-gallon basis, is still much higher than we expected and want it to be, so there is still much work to be done. The team out there has really done a nice job of running that facility safely and at a very high level of production.

Our collection volume in California is very strong, but because of the increasing capacity utilization of that plant, we're still bringing more material in from outside the region and that's costing us a little bit more to move product there. We are intended to put more trucks out on the street in California to go after that market in a bigger way to fill the needs of that facility and to service our customers out there that we have.

Great, thank you.

Sean Hannan, Needham & Company.

Yes, good morning, folks. Can you hear me?

Yes.

Okay. Great. Alan and Jim, can you folks talk a little bit more about bigger picture growth? A few times during this call, we've heard about organic growth, certainly optimism on projects in Canada for a little further down the road, also focusing on Environmental Services. We do have a new point of guidance indicating slight revenue contraction again, sequentially for the third quarter. I realize some of that's currency. Where do we really stand as we step back on aggregate basis for growth? Does that inflection point, for what we could see in the fourth quarter based on what would seem to be implied guidance. Could that really truly be sustainable in 2015 and what do you explicitly point to?

We had a lot of headwinds last year and some of those headwinds are behind us now. We're certainly starting to see that in both our Q3 and as well as you said the implied Q4. I think the team, in general, feels like we have a very strong 2015 in front of us. The Company, though, from an organic revenue growth standpoint, putting aside the maybe $100 million of revenue that we've lost with the currency translation, we really have been focusing on profitability and not just revenue growth. We're really focused on margin, so I would say that walking away from some business, not winning some contracts that maybe in the past we would have been otherwise a little bit more aggressive on. We've really been trying to focus on our margin improvement first.

If you look back over the last 10 years and look at the compounded growth rate of that business, there's been a good percentage of growth both in organic growth as well as through acquisition. We'd really like to get back to that trend that we were at because we can't cut our way to glory here. We need to grow our top line. We see opportunities, but we first wanted to get our profitability squared away, particularly to do with the Safety-Kleen business.

I don't know, Jim, if you had any other color there?

I thought that was great, Alan. The only thing I would add is that I think with the oil sands, which affects our Industrial and Field Service business as well as our Lodging business, that we did see a slowdown of the amount of investment up there. Not huge, but the growth rate, the trajectory is actually, what you've heard and what folks are talking about, is actually higher than what it is been. What drove that are the bottlenecks in transportation that Alan referred to.

I think if you look at the differential of Western Canadian crude price to WTI for example, that differential, that discount, if you will, was as high as $40 early in the year. That's now about $20 a year. I think from a macro perspective, I think the growth going into 2015, from what I've heard, certainly you should look at what analyst say about the oil sands opportunity, but I think we are well poised to enjoy, once again, that growth in that region.

Then, I would, also, the only other thing I would point to is that the resurgence of manufacturing here in North America, we're going to be able to benefit from the things that we are doing right now, by investing in our incinerator, investing in our fleet, investing in our containers, that all of that, we should be able to be ready to be able to handle the growth that we see that potential for in the US. Those are two points that I would talk about in the macro market that I think we're going to be well poised for.

Those are great points. I realize you are not providing guidance around 2015. If I were to think about your EBITDA guidance for this year and then as I try to extrapolate a base correctly as we look into next year, should we assume -- let's say we're to factor no growth or mix improvement or revenue leverage. It seems like we'd at least be thinking of a base of about $580 million EBITDA given that the additional cost actions you get a full year's benefit for, and otherwise the rest of the opportunity comes through, what could materialize through, then, that top line and down flow?

I think we're going to go through our budgeting process in September. We've got a lot of work going on, as we mentioned, with the new North American sales group that Dave is heading up. I think we will probably have more color for you for that in the third quarter. Rather than just shoot from the hip here, we'd rather wait until we've gone through that.

That's fair. Then last question here. You talked a little bit about unfavorable mix in some of the headwinds within Safety-Kleen. Can you elaborate on that little bit more for us?

In Safety-Kleen, we did see -- and you see this if you look at the outside revenues. You do see a large increase due to the containerized waste volumes that they brought in, so that was a very favorable part of the mix. What made it not as favorable was that because we are internalizing more waste oil in our network, certainly now with the Evergreen plant in California, our RFO sales have gone down. That is recognized, now, within Safety-Kleen environmental, so you saw a reduction that offset some of that. The parts washer business was mildly off. It wasn't off a lot, but it was mildly off. The biggest part was, really, RFO sales that were down.

Okay, that's great color, that make sense. Great. Thanks so much.

Charles Redding, BB&T Capital Markets.

Hi. Good morning, Jim, and thanks for taking my call. Just a follow up on the Lodging side. What portion of this business is directly attributable to manufacturing? Where do those margins stand elective to the 35% aggregate seg margin?

The manufacturing is a very small piece of that. That can range anywhere from $30 million to as high as $60 million or more than that in any given year depending upon the amount that we are manufacturing for our own use. Like for example, when we were building the Ruth Lake facility versus what we are doing on the outside. Clearly, the margins are not that as high. They are probably better than half of the margin that you are seeing from the overall Lodging business, but it is certainly not at the same level as the basic Lodging revenues that we get through our fixed sites and camps

Okay, thanks. Then is it possible to get an update, just generally speaking, on guidance -- margin guidance by segment?

Yes, it is probably about where you are seeing the Q2. Q2 is a good quarter to look at. Other than the Oil and Gas Field Services business, to look at the margins, Q3 tends to be strong, a little bit stronger. If you look at Q3 for the most part, you are seeing what's embedded in the guidance there, except for oil and gas. Oil and gas, clearly, with the breakup in Western Canada, that is their seasonally weakest quarter just because you are taking equipment out of the oil fields and then it starts picking up again in Q3. So with that exception, I would say Q2 is representative.

That's great. Thanks. Then, really quickly on the oil sands. We looked at the bigger use counts on rigs, and those were up significantly. Can you talk to so a bit more about the bottlenecks on the transportation side you mentioned? Given the disconnect that we've seen a little bit between really strong rig counts and perhaps project deferrals or lighter growth in that segment?

Two points there. One is, the bottlenecks that we are referring to is more related to the oil sands work, which is not really the drilled, drilling wells. It's really the oil sands, which is the mines and that SAGD operations that go on in Western Canada. So a lot of that bottleneck that drove the discount, that I talked about before, has reduced the level of activity in the region. The rig counts, however, as you point out, are up quite a bit year-over-year, so that would affect our Oil and Gas Field Services segment. That, clearly as you know, has been more or less a Q3 event that we've seen those rig counts. We are seeing increased level of business and quotes right now in our Oil and Gas Field Services business that we are working on right now. We hope to see some gains there.

All right, great. Thanks a lot.

Al Kaschalk, Wedbush Securities.

Good morning, guys.

Morning.

I wanted to follow up on the capital allocation, in particular CapEx question. What I'm hearing is that, and I think it is Oil and Gas Field Services, utilization is down, but you are talking about investing in the fleet. Could you square where the specific CapEx is going to in terms of segment? Are you pulling dollars out of Oil and Gas, yet we still have $250 million of CapEx for the year?

I can just start here, and if Alan wants to add anything. If you look at the Oil and Gas Field Services, given the lower margin that we've seen there, we are not spending as much CapEx. Clearly, with that lower profitability is reflective of the low utilization, so there's not huge need for CapEx in the oil and gas business. Where we are adding fleet are in two areas.

One in the environmental business. That includes both the Tech Services legacy, Clean Harbors business, given the higher volumes of waste and our projections for volumes to grow. Also in the Safety-Kleen business, where we are trying to make sure that we can respond to all those higher drum volumes that are coming through from our small-quantity generators that are part of that business. So, there you see investment.

The other segment where we are investing in fleet, as well as specialized equipment, is in Industrial Services. We do believe that there will be a higher growth rate in oil sands. Also, our cross-selling of Industrial Services into environmental customers is going to require us to have that fleet and equipment to be able to respond to that. Those are the areas where we are pretty much doing the bulk of our investment there.

Are you willing to put percentages along the growth CapEx dollars that are going into the segments for us?

I'm not prepared to do that, Al, but we will take a look at that and see if there's a way that we can give analyst an idea of that. I'm not prepared to do that right now.

My question is directed at, if I looked at cash flow and the ability of you to grow that item, it seems like the CapEx for growth, given the challenges that are some of the end markets, that, that $110 million should be coming down ex the incineration business as we look out over the next 12 months. It feels, on this side, that the CapEx being allocated is perhaps not at what you've been saying in terms of the highest return areas. That's where we are looking for. Maybe some clarification?

Maybe the way I would look at this, Al -- or the way I look at it is. Last year we spent about $280 million and roughly $130 million of that to $140 million was maintenance CapEx. Then, if you look at our growth CapEx there, we were at $130 million, say rough range, in that ballpark. If you take the incinerator out of our growth CapEx this year of $110 million, you are like at $85 million or so. Because we have about $25 million dedicated to the incinerator. We've definitely decreased our CapEx, excluding the incinerator, of what we have been spending. Does that tie with what you are seeing?

That's fair. If I may just shift gears to Industrial and Field Service?

Alan wanted to add something to that.

We also have to replenish our landfills, our landfill volumes. We have cell reconstruction every year that there's a significant amount of capital, over $20 million a year. We are spending upwards of $15 million a year on new parts washer machines. Those are both maintenance as well as growth. We had a capital budget review yesterday, Al, we look at every single dollar we spend here. We are looking at driving the highest return investments we can. As we said in our script this morning, we added $10 million this year because the demand on certain assets that we don't have was so great that we were renting them. We decided that they were going to be needed for a very long period of time, it was much better for us to buy out those leases and invest in those equipment. We run the numbers on each of these capital projects, I can assure you.

Absolutely.

Right. Smart decision there. On the Industrial and Field Service business, while you didn't talk about percentages, it is the first time that I really hear you talking more about base business versus project. I'm wondering if you could maybe shed, percentage-wise, what do you feel is base business and what is project? Such that maybe we can get a little bit more underneath that business in terms of understanding where it is going?

I think probably just at a high level, Al, without getting into percentages. Let's face it, a lot of the work that we do both in Industrial and Field Services are project related work. What we are really saying here is that, particularly the turnaround work, turnaround is going to be very strong in 2015. The turnaround has not been as strong this year. You can look at industry publications, but next year we are being booked already quite heavily for our turnaround work, which drives not only our Industrial but a lot of our specialty work, our catalyst business, our high-pressure work, so that's the kind of big project work. There's been very little turnaround work in the oil sands, and so we think of it more as part of that turnaround work.

Okay, thank you for the time.

Thanks, Al.

(Operator Instructions)

Brian Butler, Stifel.

Good morning, guys. Thanks for taking my questions. I'll try to make this quick.

Sure.

On the strategic review as it is progressing, do you have an update just on the timeline on when you expect to be able to come back to the market and give some more color on what the results have been?

We have a Board meeting in September where we will begin sharing a lot of the work that was done. We spent an awful lot of time with two different firms helping us with our analysis, really to try to accelerate it so that we could come back and have better information to share. I wouldn't even expect, in the third quarter, for us to communicate anything, honestly. Because as we start thinking about executing on our plan, there will be certain confidentiality issues and customer issues, employee issues that we are going to have to address. All we can tell you is that we are very focused on improving the returns of our business and looking at the portfolio of services we have here.

The review should be completed sometime in September/October but might not hear about anything until 2015.

I think to be fair, it is a process. We are not expecting any life changing event here, as part of this process, but we do believe that -- as you would imagine, a company that's grown as much as we have through 40 different acquisitions. Some of the acquired companies, that we've acquired over the years, also did a lot of acquisitions. There are some pieces of our business, probably, in the end that don't fit and we are not the natural owner for. We're taking a hard look at those. Trying to look at out where are those businesses going to be short term and long term and looking at our capital investment for them and returns. I can only tell you that we are working really hard to, as we said at the end of the fourth quarter last year, to review and to do everything we can to improve our returns.

Okay. Fair enough. On the guidance raise, bringing on up the low end of the EBITDA. Was that all from just the $75 million coming faster or where there some segments performing better that drove a little bit of that improvement in?

I think a lot of it was generated by the cost savings, to be honest with you, and what we were [gave] -- partly, offsetting that, but not completely, is clearly we are now saying we'll be at the low end of the revenue range, which we're conservatively saying. That's offsetting some of it and muting some of it.

That strategic review cost is not in the $4 million on top of that, so there was another $2.5 million of other costs in SG&A that we can mention. It wasn't culled out in our press release because it is not one-time severance and integration costs.

Right, that's a good point. Our professional and consulting fees have gone up as result of the strategic review. That's an excellent point, Alan.

So, you're not going to see that as much in third and fourth quarters.

Okay. That's helpful. Then on the re-refining business, do you have an average for the pay for oil and base lube price that you saw in a second quarter? How do those two numbers compare what you are seeing in the third quarter?

We are talking about our changes but we are not announcing out there what the ranges and averages are, Brian. The way we prefer to do that, just because there's a market involved here, that we don't talk about explicit pricing out there on a call like this.

Okay, another way to ask it then. In the second half, when you're looking at, let's say pay for oil, you see the $0.05 as improvement on lowering that, what is the trend you're seeing in the third quarter? What's baked into guidance for the second half?

We continue to drive it and any large -- as I actually mentioned this before, that any large improvements that we make in PFO as part of our cost reduction plan. Because we had a lower amount, clearly, in our budget that we knew we could do, but we have projects built around, many systems projects and a lot of investment going around bringing down, including our incentive comp plan, of bringing down PFO. Some of that is in the cost savings, so that's how it is coming in. Just to give you a feel, each cent is worth about $2 million of savings for the Company. That we can achieve there.

Customers are being more willing to listen, particularly in regard to where base oil pricing has been based on published ICIS reports and also where crude oil has been. Where crude really became significantly over $100, and a lot of our PFO is indexed against crude, so we've been pushing real hard on reducing those indexed contracts out there to get away from that spread that we've been in.

On the base oil prices, did you have a change that for second quarter? Again, what's baked into the second half?

No, we are just working off current pricing.

All right, just off of current pricing, okay. Then last, on the oil sands where you've seen the weakness, is that all market related? What is Clean Harbors' market share looking like? Is that changing and what might be driving it?

Except for the one customer that we've talked about quite a bit, that we lost last year, our market share is very good. More of it is due to the discount of pricing of Canadian crude, what it is been due to the bottlenecks in transportation that has affected the region. The plans are to correct that and to get back up to normal growth rates, clearly, if you look at some of the research around the area.

What's normal growth rates?

A normal growth rate, right now, the region produces, I think it is 1.7 million barrels a day. I know a lot of the projections, going out anywhere from 10 to 15 years from now, that they'd like to bring that to 5 million to 6 million barrels a day. There's a lot of growth projects underway that we did see a little bit of a slowdown to because of the discount we just talked about among the major oil companies up there.

All right, great. Thanks for taking the questions, again.

Excellent, take care Brian.

Barbara Noverini, Morningstar.

Good morning, everybody. You've successfully demonstrated the ability to reduce PFO costs in the quarter and mentioned earlier that new incentives are proving to be effective. I understand that those incentives are really related to your internal incentives regarding that cost savings program. Are there any other customer incentives involved in this process? I would imagine that if you're asking customers to accept a lower PFO rate, there must be some give-and-take in that process in other ways?

We service customers in many ways, as you know. We can certainly look at some of those other lines of business that we are selling to try to look at total package. Probably the most important thing is to get many of our PFO customers to buy our recycled EcoPower oil. As we continue to expand our blended product sales, we believe the most logical is, to our customers that we're paying the most amount of oil for, particularly our national accounts. That is, absolutely, an incentive that we are working towards. Okay, great. Thanks a lot.

Thank you, Barbara.

Thank you. At this time I will turn the floor back to Management for closing comments.

Thanks, Rob. Thanks, again, everyone, for joining us today. We appreciate your questions and comments. Have a great day and a great summer. Thank you.

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