Clean Harbors Inc (CLH) 2014 Q3 法說會逐字稿

Greetings and welcome to the Clean Harbors Incorporated third 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, General Counsel for Clean Harbors Incorporated. Thank you, Mr. McDonald, you may now begin.

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

We have posted our slides for today's call to the IR section of our website. 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, November 5, 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 measure 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 and in the appendix of today's presentation. And now I would like to turn the call over to our CEO, Alan McKim. Alan?

Thanks, Michael. Good morning everyone. Thank you for joining us today. Starting here on slide 3 with a summary of our Q3 results. Revenue for the quarter was below our expectations and down 6% from a year ago.

We saw a reduction in activity in the Oil Sands and a slowdown in overall projects, due in part to the declining crude oil prices throughout the quarter. We've been focusing our resources on our highest margin opportunities and our cost reduction efforts.

Despite the revenue shortfall, we nearly achieved our adjusted EBITDA target for the quarter and at 18%, delivered our strongest EBITDA margin in two years. Improve profitability, primarily in Tech Services in both Safety-Kleen segments, drove a 190 basis point EBITDA increase from Q3 of last year.

Looking at our segment performance in more detail, beginning with slide 4, Tech Services revenue increased 2% in Q3. This number would have been higher, but we completed scheduled maintenance shutdowns one quarter earlier than planned on two of our largest incinerators.

As a result, our Q3 incineration utilization was 90%. But we exited the quarter with a strong backlog of drums and other waste streams. Adjusted EBITDA increased 10% from a year ago with nearly a 200 basis point improvement.

Our Canadian incineration facility operated near capacity for the third straight quarter, so hats off to that team at that facility. Landfill volumes were off 5% from a year ago due to less project work. Overall, Tech Services performed well in the quarter and continues to benefit from Safety-Kleen volumes.

Turning to Industrial and Field Services on slide 5. You can see the effect of the Oil Sands slowdown on this business along with the lower Canadian dollar. Revenue was down 7% in the period with profitability down even more based on our mix of business.

In Q3, we again didn't see any major emergency response events. In fact, only a limited number of smaller events. Even so the Field Services component of the segment enjoyed a relatively good quarter. Cross-selling to the Safety-Kleen customer base remains strong. Overall utilization for our billable personnel in this whole segment decreased several points to 81% from the second quarter.

Turning to slide 6. Revenue in Oil Re-refining and Recycling edged up in the quarter. Margin enhancement strategies, including lowering our PFO costs, improve efficiencies, and taking advantage of opportunistic pricing opportunities have been paying off.

Adjusted EBITDA was up 15% from a year ago and margins exceeded 24%. Clean Harbors captured good margin base oil business particularly early in the quarter when prices were higher. At the same time, we walked away from some low-margin, high-volume blended business as we raise some of our blended prices.

The result was that blended products only accounted for 33.5% of volumes, down from Q2 and below our target going forward. Increasing our blended mix remains a priority. And while the sales cycle is long and we're in the early stages of our EcoPower program we continue to believe that customers are looking for eco-friendly products.

Moving to slide 7. Safety-Kleen Environmental Services remained a steady and reliable performer. The segment grew incrementally from a year ago primarily due to the gains in containerized waste services. Service members increased 10% on our parts washers from Q2.

We collected 55 million gallons of waste oil, consistent with Q2 and reflecting the seasonally strong period. Even at this elevated level of collection in the quarter, we continue to lower our average price per oil [price]. We now succeed -- excuse me -- we've now succeeded in lowering the average PFO price by $0.06 year to date. We believe that we have a long way to go to get PFO down further, but the recent decline in crude prices will accelerate our efforts.

Moving to slide 8. In Lodging Services three factors lead to lower revenues in Q3. Currency translation, weakness in our drill camp business, and a limited contribution from our manufacturing facility. As they have for the previous two quarters, our fixed lodges perform well in the market where a number of our larger competitors have really struggled.

Even as activity has slowed in the Oil Sands our fixed locations have maintained our room utilization in the 70% range. The quality of our locations, facilities, and service and our ability to be flexible with customers has allowed us to keep room rates fairly strong. Due to the performance of our fixed lodges, our EBITDA margins rose above 40%, 400 basis points higher than a year ago.

Turning to slide 9. Oil and Gas Field Service revenue reflected ongoing softness due to the market pressures and compounded by the currency translation effect. We've talked about our seismic support business on the past several conference calls as that continues to be a weak spot for us.

The exploration marketplace remains in a down period, particularly with the recent step down in the price of crude. Our average number of rigs serviced in our service rental business in the quarter was 138, which is slightly ahead of our seasonally weaker second quarter. Average utilization of our key equipment, which is predominantly our centrifuges for processing waste, increased to 54% from 40% in Q2.

We continue to make good progress in the US, particularly in some of the smaller shale plays. I'd like to point out that the team recently surpassed 50 solids control packages in the US, which is an important milestone that we've been after for some time. So congrats to that group for getting us over that hump.

Moving to slide 10 and our corporate initiatives. First, we remain on track to achieve $75 million in annualized cost reductions by year end. We continue to expect that in 2014 we'll likely see savings of approximately $40 million.

We completed our strategic review during Q3. As you know, we brought in two strategic advisory firms during the spring and summer months. Working with all the top leaders in the Company, we assessed all of the elements of our business model. The process was thorough and well documented and we looked at all of our lines of business.

The collective data and findings gathered by the consultants were recently presented to our Board and the review by our Board is continuing. We are not at a point today where we can provide much in the way of specific details on our plans.

For the protection of our business, our employees, and our customers, it would be premature of us to comment at this time. I can say that the actions that we will take will be driven by a goal of improving return on invested capital and improving our EBITDA margins and building shareholder value.

Moving to our outlook on slide 11 and 12. I'll briefly touch on some of these. Within Tech Services we expect to extend our momentum in capturing waste streams from atop verticals such as manufacturing and chemicals. Our plan is to expand in markets where we are getting good penetration, including retail and mining.

In addition, we 're making progress on our new El Dorado incinerator, where we officially broke ground in September. Startup is still expected to be in late 2016, with commercial operation in early 2017. Within Industrial and Fields, cross-selling our services to Safety-Kleen customers will continue to be a primary focus.

Within the Oil Sands, we believe that some new pipelines plan to come online in 2017, should improve Oil Sands customers sending in the second half of 2015. Within our Oil Recycling and Re-refining segment, we're going to be laser focused on lowering our transportation and PFO costs, particularly in light of the tremendous pricing pressure in the base oil market.

Turning to slide 12. On the Safety-Kleen branch side, we're in the process of opening a number of new branches along with collating -- co-locating with existing Field Service locations. We also have a number of branch optimization programs underway to further improve margins in that business. However, our top priority here remains lowering our PFO costs.

For Lodging, we're pursuing opportunities to capitalize on the upcoming busiest winter season to really maximize our occupancy at our fixed locations. We're also exploring opportunities created by the new oil and gas pipelines to either deploy some of our underutilized mobile camp assets or to build facilities for our energy customers.

Within Oil and Gas, we're continuing to pursue our strategy of US expansion on the solids control and production services side. Our primary focus is getting our existing equipment out in the field working. While crude price may limit companies oil exploration budgets in the near term, we remain heavily involved in the gas side of the market, which appears to be a bit more promising.

And we continue to see a number of emerging opportunities around potential gas exploration and drilling in Northern BC. Jim will be providing you with our revised 2014 guidance. Clearly, we are countering some near-term headwinds in some of our businesses, which is why we are reducing our 2014 guidance.

Looking at slide 13, base oil pricing continues to drop to levels not seen in many years in the face of two significant changes. A dislocation from crude oil pricing and certainly now with the lower crude oil pricing hitting us. I've been in this business for over 40 years and I've never seen such a dramatic change in such a short time frame.

Our team has worked tirelessly to counter these unprecedented events. I'm proud of their efforts that they put forth. The current environment gives us an opportunity to really reset our PFO pricing structure with our customers, as they recognize the current market conditions.

That said, we head into 2015 knowing that we'll need to continue to drive down costs across our business. I'm challenging our organization to reduce our costs by more than $75 million this year. We have many initiatives underway and I would expect to see our margins continue to improve next year even with the headwinds we face.

Our Technical Services business is as strong as ever and the containerized waste volumes we're gathering through Safety-Kleen are driving our margin improvements. In fact we believe we'll be timing the market just right when our new incinerator comes online. I'm confident that the Safety-Kleen branch business has a lot of margin upside and organic growth opportunities going forward.

Cross-selling with Field Services is working and we're on the front edge of that success. Our Industrial Service business is seeing a strong pipeline of activity in the US, particularly in the Gulf region and next year should really see heavy turnaround business.

Due to the low cost of natural gas, the chemical and petrochemical industries in that region are expected to steadily expand next year and beyond. So with that, let me turn it over to Jim for his financial review. Jim?

Thank you, Alan, and good morning, everyone. To start here on slide 15, here's a quick snapshot of how our verticals performed in Q3.

Due to a reclassification of a number of accounts now that Safety-Kleen has been operating on our platform for several quarters, automotive now represents the Company's largest vertical accounting for 18% of our revenue in Q3. This vertical was up slightly from a year ago as we continue to cross-sell disposal and other services to Safety-Kleen's legacy customers.

Refineries in Oil Sands customers accounted for 12% of Q3 revenue. This vertical was down about 3% from a year ago as increased activity in the US and expansion at refinery customers was offset by lower Oil Sands activity.

General manufacturing was 11% of total revenue with stable base business and higher customer spending helping to drive 8% growth compared with the year ago. Customers are focused on on-site cleaning activities.

The chemical vertical represented 11% of Q3 revenue and was up 4% from a year ago. This reflects healthy base demand, driven by strong chemical exports resulting from the low cost of natural gas, which serves as both fuel and raw material for petrochemicals.

The third quarter was also helped by a number of remediation projects. Oil and gas production accounted for 7% of revenue and was down 21% from a year ago as we experienced sizable declines in our drill camps, drill support, and production services.

Looking at our smaller verticals, one where we continue to experience great success, is utilities. Where we generated double-digit sales growth for the third straight quarter. With winter approaching, we saw higher project spending by utilities in the quarter.

On slide 16, here is how our Q3 direct revenue breaks out among our six segments ranging from Lodging at 4% to Technical Services at 37%. This revenue split was not surprising as it is seasonally -- as it is the seasonally strongest quarter for our environmental business and some of our other businesses were hurt by the macroeconomic trends Alan described.

Turning to slide 17 and the income statement, we reported Q3 revenue of $851.5 million, which is down more than $50 million from a year ago. Growth that we achieved in certain business lines was not enough to offset the foreign currency translation impact, Oil Sands, and the oil and gas slowdown, and weaker base oil pricing.

Gross profit for the third quarter was $253.1 million or a gross margin of 29.7%, which represents a 100 basis point improvement over the 28.7% we reported in the same quarter last year. The margin improvement reflects our success in significantly reducing our cost structure compared with a year ago.

SG&A for the quarter was 11.7% of revenue and was below $100 million for the first time since we acquired Safety-Kleen. The 90 basis point improvement from a year ago was due to Safety-Kleen cost synergies, our expense reduction plan, and lower incentive compensation.

Excluding severance and integration costs of nearly $1.5 million recorded in SG&A in Q3 2014, our SG&A percentage was 11.5%. For the full year, which obviously includes the previous quarters, we are still projecting our SG&A percentage to be around 13%. Depreciation and amortization was essentially flat with a year ago at $70 million. We remain on track for full-year D&A of approximately $275 million.

This morning we announced that we are taking a pretax non-cash goodwill impairment charge of $123.4 million related to our Oil Re- refining and Recycling segment. We are taking the non-cash charge based on the significant recent price declines for both our base and blended oil products.

While the team has made tremendous headway in lowering our operational costs and our input costs through better PFO pricing, we are at a point where the goodwill on our balance sheet for the Oil Re-refining and Recycling reporting unit needed to be written down based on accounting rules.

Excluding the impairment, adjusted income from operations increased to $80.7 million or 9.5% of revenues, compared with 8.1% of revenues in Q3 a year ago. That 140 basis point improvement reflects the success of our cost and efficiency initiatives in our -- in both operating cost of revenues and SG&A.

Our adjusted EBITDA was $153.4 million or a margin of 18%, as Alan highlighted. If you add back the $1.8 million of severance and integration costs, we would've met our adjusted EBITDA guidance for the quarter, despite the revenue shortfall. The effective tax rate for Q3 was 55.6% compared with 34.7% in Q3 a year ago.

With respect to our tax provision in Q3, we recorded a $9.2 million charge to adjust a deferred tax asset acquired as part of the Safety-Kleen purchase price allocation related to pre-acquisition goodwill. The effective tax rate for Q3, excluding this adjustment and the effect of the $123.4 million impairment charge, was 40.7% compared with the 34.7% in Q3 a year ago.

This effective tax rate remains above our historical levels due to the reduced profits in Canada which is subject to lower tax rates than the US. We expect our effective tax rate in Q4 to be approximately 40% given this mix of relative profitability. On an EPS basis, excluding the impairment, we would have reported an EPS of $0.45 per share.

Turning to slide 8, our balance sheet remains strong. Cash and marketable securities as of September 30, 2014 totaled $258 million, down from $278.6 million at the end of Q2. We generated positive cash flow in the quarter and invested $37.6 million in share repurchases during the quarter. Year-to-date we have purchased nearly 923,000 shares at a total cost of $53.8 million. Total accounts receivable were up slightly since the end of Q2.

DSO increased by two days during Q3 to 70 days. The changes we have made to enhance the Safety-Kleen billing process have added some days to our Safety-Kleen invoicing, but will ultimately result in more accurate billing going forward, while capturing revenue opportunities. As I said this quarter, we expect DSO will remain in the mid to high 60-day range for the near term.

Environmental liabilities at September 30, 2014 were $213 million, down approximately $6.6 million from the beginning of the year. The decrease is primarily due to environmental expenditures in excess of accretion by over $4 million. The rest of the decrease is due to environmental credits achieved since the beginning of the year and foreign exchange translation.

CapEx was $60.7 million, down from $66.2 million in Q3 of last year and $63.2 million in Q2 of this year. For 2014 remain on track for our CapEx spending target of approximately $250 million.

Our cash flow from operations this quarter was lighter than we expected at $81.1 million, which is down from a year ago. I should point out that our cash flow performance this quarter reflects an increase in our receivables and inventory working capital. For the full-year 2014, we now expect our cash flow from operations to be in the $300 million range.

Moving to guidance on slide 19, we are updating our full-year 2014 guidance as a result of our year-to-date performance, recent headwinds, and current market outlook. We now expect revenues in the range of $3.40 billion to $3.42 billion.

We expected adjusted EBITDA for the full year to be in the range of $510 million to $520 million, which is down from our previous guidance. With that, operator, could you please open the call up for questions?

(Operator Instructions ) Al Kaschalk, Wedbush.

Good morning, guys. Excellent job on the margin side. However I want to focus on visibility here, in particular Q4 and into 2015. Perhaps I think if I look at the math is right you're cutting revenue about $150 million and EBITDA around $30 million.

So what's changed from maybe the -- I don't know if it's mid September timeframe to where you're at today, in particular on projects. I guess this is highly related to the Oil Sands area or if not could you share some color on that?

If you want, Alan, I could just start? First of all, the $50 million shortfall in revenues in Q3 impacts the full-year guidance, clearly. And also we had indicated at the last call that we expected to be at the low end of our $3.5 billion to $3.6 billion in revenue. So it really is the performance year to date and the expectation for Q4 that's driving it down.

But I think it is the factors that we talked about. I mean we've seen some horrific price declines in base oil as you know from -- during the quarter we saw $0.25 and then we saw a recent announcement that we believe is $0.25. And we're getting updated on how that'll flow through. But these are big, big declines in base oil pricing that affect our Re- refined Oil and Recycling business.

Clearly the Oil Sands, we're looking at and we see the reduced activity and that's having an impact and that's affecting both our Industrial Services business and our Lodging business up there. And then in the Oil and Gas segment, particularly in the seismic part of the business on the land expiration that's going on, the reduction in projects has been huge, because spending is being cut back.

Our outlook for longer-term in the Oil Sands is clearly as it is with many of the players out there, is positive. But the logistics up there, certainly the price effects it a little bit, although after the differential the prices haven't changed dramatically up in the Oil Sands. But it still is all about logistics and getting a lot of that out of there a lot of the oil transported out of there, which is being worked on.

But our long-term outlook is good, but certainly there's some short-term impacts. I don't know Alan if you wanted to add anything?

No I think that's great.

So were there any specific -- not that you want to provide specific customer reductions, but did you see projects get canceled now that oil prices hit these levels that would get them out of the Oil Sands business?

Yes. We did see projects gets canceled. We were literally were on site on a couple of projects. One in Alaska and those projects were canceled. We saw funding scale back several million dollars on another project.

So this is somewhat of a moving target for us, Al, in some parts of our business here because really the decline in oil and what we're all reading about even in the Journal this morning, a very important article there. So I think we're being conservative and we're kind of up to date at least in regard to what we're hearing and seeing out there.

My follow-up, although I would've thought CapEx would come down from that, but my follow-up is on the strategic review. And I realize you're not going to share anything, but if the actions are completed, when should we look for something to come from the Company or from the Board on this decision time? Whether it's --

We didn't want to set -- we really did want to set an expectation or a time frame on that, Al. I think we made it clear in the beginning of this year of what we were going to do and we have completed that. We've accomplished that and we're spending quite a bit of time, thoughtful time in regard to the short-term headwinds that the Company is facing, but also the long-term strategy for the business.

And we will communicate that in a way that will be clear I think to everybody involved as best we can. As you can imagine, we are dealing with important customers that we cross-sell to. We have a lot of employees that we share across the organization. And so this is going to be -- as we continue to analyze and make decisions, it's a fully integrated Company and it's not an easy decision for us as we move down the path here. I would say though, Al, just to comment on your CapEx comment there. Last year was about $280 million, this year at $250 million, that includes the incinerator project too. So we have significantly reduced capital spending in light of the fact that we've got a big project going on here. And we continued on our growth cap, we continue to look very closely at that. Meeting regularly, reviewing that and managing that closely.

Very good. Thanks a lot, Alan.

Yep.

Thank you.

Jim Giannakouros, Oppenheimer

Good morning, Alan, Jim. Incineration utilization was down versus 2Q and landfill volumes I believe were also down. How are you able to maintain such high margins in Tech Services? Are there mix benefits you could speak to are there changes to the cost accounting between segments that affect that comparison to the last year?

No. There is no changes with respect to that. Clearly what is driving a lot of the high margin in both areas is we're getting a lot more volumes now that are being processed through the Safety-Kleen organization, a lot of drum volumes are up. And you see the benefit of both of that showing up in the margins of Tech Service and the Safety-Kleen Environmental.

So you're getting a better operating leverage that you're getting. Now one of the things that I would also point out is that our deferred revenue went up during the quarter because there was the backlog from the two plants doing an advanced schedule shutdown. So we are able to recognize some revenues for the waste streams getting into the TSDF, but not all the way through to the incinerator.

But we do have a nice backlog as evidenced by the deferred revenue going up. So that should help us going forward like for the rest of the year. There is a little bit of a mix to your point about mix in the landfill. We had a little bit of a better mix. Some of the projects that were off were lower margin. So some of the routine projects that were flowing through and in fact the more base business flowing through landfills was higher, as it typically is in the quarter.

But projects brought it down and some of those projects had a lower margin so there was a mix impact. But that's more in the landfill than anything. So it's a combination of a few things. Sorry for the long answer on that, but that's basically what's driving that.

Got it. Okay. And just one follow-up, if I may. We're use to getting a preliminary next year guide from you guys. I don't know if you held off on that just because of where you are in the strategic review. But any comments on the consolidated or on a per segment basis as far as what you see trends indicating for either topline or EBITDA, would be extremely helpful. Thanks.

Sure. We're in the budgeting phase both at the sales and operating levels so we're going through that effort and we'll be presenting that budget to our Board in the middle of December. Jim, do you want to talk a little bit about some of the thoughts on segment?

Absolutely. Yes, I think if you look across our businesses, clearly on the environmental side, what we've talked about in terms of our normal growth which follows industrial production and GDP, we expect things to be fine there. That would go across both Technical Services obviously, Field Service within Industrial and Field Services and also I would say in SK Environmental, as well.

We have some nice growth going on in those areas. But clearly a lot of the uncertainty in where we're analyzing as part of our bottom-up budget process. It's a very much a bottom-up process looking across customers and rolling all that up. We hope to have better visibility on where oil and gas will be across seismic surface rentals, solids control, and production services and then also in the Oil Sands. We're taking a very good look, by customer, of what the expectation is for the year and with our sales force and operating management we should have some pretty good estimates.

And then also in Lodging, clearly that's all in Western Canada for us so that supports the Oil Sands, as well as drill camps and the drilling activity and even some pipeline activity. So we're looking at all that. Really we were thinking at this point even absent the strategic review, there are some things that we really want to go through the bottom up and finish that up rather than giving a preliminary as we've done in the past which was top-down.

And with all these macroeconomic factors going on and I didn't even mention base oil pricing. We think we'd know that right now, we can estimate some things around that, but still will there be anymore price decreases. We want to make sure it doesn't occur before we start putting out numbers for next year. I don't know, does that help at all, Alan?

I just think one of the things is we anticipate the Industrial business to be stronger next year. As you look at the last three or four years on turnarounds, this year was a relatively soft market for turnaround services. And we're booked very heavy for next year, so I would expect our Industrial business and Field Services to be much better than this year here.

I agree with that and then you always have emergency response that could be on top of that as you know,.

The currency is the other issue that we haven't talked about. The Canadian dollar two years ago at par and now we are at $0.86, $0.87. That has had probably the greatest revenue impact. We do close to $1 billion in Canada, so it's had a big impact on our revenues across our entire businesses up there.

Absolutely.

That's all very helpful. Thank you.

Thanks, Jim.

(Operator Instructions )

David Manthey, Robert Baird.

First off, given the TS maintenance shutdowns that you pulled into the third quarter, it would appear the results could have actually been better this quarter without that. And I'm just thinking about the normal seasonal cadence as you look third quarter to fourth quarter.

Because you pulled that forward and it won't be in the fourth quarter now plus you noted you have somewhat of a stockpile of waste that you'll be able to run through, should we expect that the normal seasonal third quarter to fourth quarter pattern, you may be able to offset that almost completely based on the helpings you're setting appear?

Dave, I would agree with what you're saying there because you even look at the deferred revenue, I mean at the beginning of the year it was like $55 million and we're at $64 million now almost. Certainly that represents revenue that'll come through as we process waste. That difference there. So yes I think we'll see several million dollars of revenue and profit coming through that could offset that normal seasonal slowdown that you see as we go into the winter.

Yes. Okay and I guess the logical conclusion would also be with utilization being higher than in the fourth quarter you're adjusted EBITDA margins, they could actually be greater sequentially just because of the assumed higher utilization in the fourth quarter versus the third where you had the shutdowns?

Yes. We went through that. Obviously there's some parts of the business like in landfill and other parts that are not affected like the incinerator is. And typically you do see a little drop-off in landfill and other areas of the environmental business, including SK Environmental.

When you see the driving season -- seasonals, you see less oil changes and things like that, that'll affect the waste coming out of a lot of those shops in fourth quarter. So I would be cautious with that one and that's why we're cautious with the guidance that we put out.

Okay. And just under $75 million cost-cutting, if you could tell us what you think the run rate of that was in the third quarter and what you expect for the fourth quarter? I assume you expect to achieve the first the full run rate at some point in the first half of next year?

We had indicated that we were going to be at about $40 million and that's turning out to be true of what we captured in the year and it was part of a total $75 million program. So we're at that run rate now on an annual basis.

We expect next year to achieve the full $75 million but obviously the only incremental part of the $40 plus million that is in this year will show up as a variance. Does that make sense?

I guess to follow that through, if you expect to get $40 million this year, could you tell us what you've already achieved through the third quarter total?

Yes. The headcount was about a third of the total program and that we had achieved most of that by the end of April. We had some headcount reductions in our business.

Then a lot of the operational efficiency sees whether they be reducing subcontractors, office consolidation, equipment rentals, and maintenance internalization. All of those we've been going through the year with. I would say that by the end of the third quarter we were about, I would say more than three quarters of the way through what needed to be done.

So there is just a little bit left in Q4 to do to get to that total run rate of $75 million. We're pretty close. I would say we might be just at $20 million shy of that total run rate. That's an estimate. That's a high level estimate.

Okay. Thank you very much.

Thank you, Dave.

Michael Hoffman, Stifel.

Alan, why can't you take price for oil down faster than you are?

I think there is a historical index and pricing strategy that Safety-Kleen employed that is no longer valid in this market. And it is really in our control and our responsibility to affect that change and that is my number one priority.

So the answer is you will take it down faster then, because you're going to break out there that historical structure.

Yes. We have, I think, given the team some of the tools that they need to look at not only the PFO cost, but also the total delivered cost to the facilities that we have. And those are tools that they never had before.

And I think we will change our incentive programs, we will change our customer indexes. And we will do everything we need to do to reduce that cost and that is a big part of the $75 million of additional cost savings that you'll see come through next year.

Okay. So you've just answered my other question. We have $75 million in 2014 and we're going to get another $75 million in 2015.

Yes. As you know, we always have a number of operational excellence programs to deal with, not only the standard increasing cost that we get from wages and healthcare costs and other costs. But we know for us to continue to improve our margin, even in light of the markets headwinds that we've been talking about here this morning, we need to continue to drive the cost out of our business.

We can do better. We're only just completing our second year. Safety-Kleen has got a powerful franchise, a wonderful network, a great opportunity for us to leverage those assets and to work across their organization.

And I think being a very strong sales and marketing organization now with a Company like ours, which is a very strong operationally-based Company, I feel very, very excited about the Safety-Kleen business moving forward here. And there's some real opportunities for some cost savings there.

Okay. And then are you prepared to shrink this Company to grow it?

Yes. Yes. And that is certainly part of the thought process I think between the management and the Board. We've had a strategy, a 5-year strategic plan, to grow our business to $5 billion and beyond. And really to try to leverage our infrastructure and leverage our systems and our processes to get to that 20% EBITDA margin and better.

I don't think we're going to change that, but certainly how do we get there? Are we in the right lines of this business? And should we change that long-term goal is all really in our thinking. And we want to commute to that to people as openly and as transparent as we can, but certainly do it with the Board's support.

Last one for me. When does capital spending, all-in, growth maintenance get to $180 million to $200 million as a range?

It's a great question. We continue to see great opportunities to grow our business and with that and as you know some of our lines of business are very capital intensive. And we've really constrained the growth in some of our business, to be honest.

And that's one of the issues that we're dealing with right now is how do we continue to provide the capital necessary in some of these capital intensive parts of our Company? And at the same time recognize that we need to improve returns and get a better return on our new capital being deployed. So that's a moving target, Michael, and I'm not going to commit to one. But I can just tell you that it is a real focus of ours.

Okay. Thanks, Alan.

Yes.

Joe Box, KeyBanc Capital Markets.

Question for you on the cost front. It seems to me that most of the headcount reduction really came in Q2. So I'm a little bit surprised by the big move in SG&A this quarter, I guess specifically within corporate expense.

So I just want to ask how much of this was fixed cost takeout, as opposed to maybe some variable expenses like bonus accrual that could eventually come back in time?

There was, Joe, a whole myriad of projects, some 30 projects as part of our cost reduction plan. And some of it like for example, I'll just give you one example during the quarter, our IT costs, which we have been working on and certainly are a part of our headcount but they involve other contractors some hardware software, that was like $3 million that we experienced the reduction just in that quarter alone.

We had some good experience with our healthcare costs coming down a bit. We're on a new program that's more efficient overall so we saw some reduction there. Some of the other, there was some incentive compensation that we had taken down. And the headcount, as you point out, has been some what level because we took most of that reduction already. But it's a lot of one-off items like that, we also have reduced travel.

We're trying to be more efficient, we use our tele-presence more and having our people travel around less just to be more cost-efficient and things like that, that we're able to operate at.

So I appreciate that, Jim. Can you maybe just give us directionally, 50% of it is sticky where as 50% of it could come back in time? Just to maybe now that down a bit.

I think I would say that we're probably at about a 12% -- I would say I feel pretty comfortable between a 12% and 12.5% of revenue kind of run rate. We'll finish up 13% for the full year because we had higher costs in the beginning of the year. But I think we're around that 12% to 12.5% of revenue. So that incorporates it and I think that's our rate.

I mean obviously that would change if there is any decrease in the size of our business or say an increase from an acquisition, for example. Either way that would cause some decreases. But we're good at holding the line on SG&A costs. And the organization is very good with that and but I think that 12%, 12.5%, just looking out in the short-term, I think is reasonable. And we'll confirm that all when we do guidance for next year.

I appreciate that. Thank you. And I certainly appreciate that you guys didn't want to share your findings on the strategic review, so I'm not going to ask that. But I do want to ask some background questions.

I guess first does the new energy outlook change your view on any of your businesses or is it incorporated in that if energy prices are at $80, it suggests this with the business? And then second, with Relational winding down, I'm curious if they had involvement right up to the end of the process or if they stepped away prior to the conclusion?

I guess in regards to Relational, we don't have any comment whatsoever on what they're doing and it wouldn't be appropriate for us to comment about Relational.

I think regarding energy, quite frankly the real problem that we went through this year was more of the disconnect between how we sell and market our base and blended oil products, in conjunction where crude oil was. All of our pricing, for the most part, was based on crude oil on the feed side. On the source of our product side. But also it's also what's driving all of our costs for our diesel, our gasoline, our fuel surcharges. All the things are driven by that.

Over the last three months there has been a significant change in Gulf Coast number two, in crude oil, and in essentially in our indexes. So we see real benefits in some parts of our business with lower prices of fuel. Gasoline, we burn 25 million gallons of diesel fuel a year, for example. So we're going to see some real benefits there.

Natural gas has been holding relatively firm and so as we go through the winter months that's a higher cost for us because of all of the facilities, the 100 plants that we run. So we see higher cost there over the winter. But we are looking at all of those different kind of components of energy and how they impact our cost structure, as well as impact our topline revenue growth for parts of our business.

And quite frankly all of that change that's been taking place over the last three or four months is why we're hesitant about giving out some guidance today.

Understood. Thank you.

Okay.

Thanks, Joe.

Sean Hannan, Needham & Company.

Good morning. Can you hear me?

Good morning, Sean.

Good morning. So I'm sorry if I'm going to beat a little bit of a dead horse here. But if I think about the guidance it seems like the revenues for the fourth quarter would be pretty flat, gross margins maybe down, SG&A maybe that's down a bit but not much, if I work towards what I'm understanding from the implied EBITDA expectation.

While your EBITDA would be down a fair bit, quarter over quarter and trying to understand what drives this more in the order of magnitude. You've mentioned a few things. I expect there was an earlier question that got to this but there'd be at least a little bit of an offset in Re-refined Oil with some PFO costs coming down.

You're probably going to still have your revenues in Lodging and Oil and Gas up a little bit in the quarter, even though disappointing. So I'm just trying to understand exactly what's weighing here and why and that degree of magnitude? Thanks.

I can start, Sean by just saying that areas that I talked about clearly as you alluded to, the base oil pricing at tremendous decrease just in recent months, tremendous amount of decrease, more than the whole year or so. I mean the base oil pricing is at a four-year low right now where it went to. So that does have an impact on the revenue line, as well as dollar for dollar on the EBITDA line.

So then you have the cancellation of some of the projects within Oil and Gas. You have the reduced activity in Oil Sands, so you have all those things contributing to it. Clearly our cost savings program continues to help. But what we have seen historically in our Environmental business and our overall business, is that as you approach the winter months you see some decline. You see it in the margin.

Q3 is our strongest quarter of the year and Q4 is our second weakest of the year. So you do go into a quarter where it's best for us to have our outlook be at the lower side of margins given that. Because winter can be severe, it can start early and all those things.

But just effects our overall business there. That's the best that I can really give you. But we've certainly gotten into this pretty detailed, but typically we do see a drop-off in margins. Hopefully we can do better but we're certainly doing a lot to try to. We do that all the time.

Okay. So it's just really typical step down quarter over quarter in terms of mix impact on margins and that you've got a couple things in the background that are really just not performing?

Holidays in the way that the holidays hit us in November and December as well has an impact on some parts of our business more than others.

And then a quick follow up here. If you can talk a little bit more about your presence and expectations in gas. I might be wrong, but Alan I think I sense a greater emphasis on this versus how you've referenced the market in the past. Can you talk about differentiation of activity related to gas where and how there might be some sustainable momentum and any progress there if that's the case? Thanks.

Well certainly Canada is doing much stronger for us right now because of gas and because of the expectations of moving gas West. And so we have been picking up new contracts and expanding particularly in the BC Province.

But, in general the oil issue is sort of evident by everybody but the gas side has stayed relatively strong. And if we have another strong winter, cold winter, we continue to think that gas will continue to require the kind of services that we offer.

Got you. Okay. Thanks so much.

Thanks, Sean.

Charles Redding, BB&T.

Just thinking about occupancy right now with lodging right now at 76%. What portion of the current occupancy do you consider long term and really can you shift that focus more towards short-term oriented occupancy given the pullback in projects?

I'll start this. It's Jim. The bulk of that occupancy that we're reporting is longer term. We have contracts that go out two to three years. Clearly with Ruth Lake, they're shorter-term now to your point in trying to fill that facility with. In the current environment, we're doing shorter-term.

But I would say probably anywhere from maybe two thirds of the occupancy that we're talking about as a rough estimate of how much is longer-term.

Okay. Thanks. And thinking about the current outlook for refinery turnarounds, I know you're pretty bullish there for next year. Is that really more due to contracts that are already locked in or is that really more a function of higher expected maintenance just given the decline in crude that we've seen?

It's really both and I don't think it's decline in crude necessarily. It's just the way that the schedules were rolling out. And most of those refineries all post their schedules and try to make sure that they have an adequate amount of contractors able to help do their turnaround work.

So we've got a number of contracts already signed. And we're planning and we also see a lot more sort of an ad hoc demand for them as well.

Okay. Thank you very much.

Thank you, Charles.

Larry Solow, CJS Securities.

Most of my questions have been answered. Just quickly on activity in Oil Sands. It's been obviously weak for a few quarters and I know the long-term growth projections are obviously very bullish. What do think it will take?

Is it going to take a recovery in the energy markets or is it really going to take sort of an improvement in the gluttonous supply chain and the transportation chain that's going to improve that? And a follow-on to that, will the more Republican, the Republican-led House and Senate will that maybe help move the Keystone pipeline forward and be a potential catalyst for that?

I think, Larry, a couple of things to comment. We are bidding on some nice work up there. There's still a continuation of spending, make no mistake about it. Instead of at the $20 billion range we're probably at the $15 billion or so range in spending throughout the Province up there.

So huge amounts of spending going on still and we're bidding on a lot of work and we're doing a ton of business up there. We're the largest player, as you know. That being said, there is a real frustration in being able to move product. And so the government is working with industry to do everything, including reversing pipelines, and putting in new pipelines, and really making it a priority because it's important for the country.

And we think as they sort that out and we think they're going to sort that out, there's a lot behind it, we will continue to have a strong business there. And we are very well-positioned in that market. Not only for growth, but for the ongoing maintenance that's taking place within the Oil Sands regions.

Just quickly, just on Oil Services, in the last couple years one of your strategies has been to shift some equipment obviously out of Canada into the US.

With more competition that you've noted in last couple quarters in the US falling prices of energy, is that somewhat been hampered and where do you stand with that? And maybe Canada -- maybe you don't want to shift as much or can't as you probably thought you would?

I think one of the strengths of our business model really is the ability to not only cascade assets across border, but really across businesses. We are repositioning assets underutilized assets out of Canada into our Industrial and Field Services businesses. So moving them out of our Oil and Gas business, moving it out of our Oil Sands business and putting them into other markets.

And that's a real strength that we have to be able to cascade our hydrovacs and our vacuum trucks and we're very strong in that asset management area. And that's a real benefit I think that we have in our business.

Great. Thanks, Alan.

Yes.

Thank you.

(Operator Instructions )

Barbara Noverini, Morningstar.

Hello good morning, everybody. Just kind of as a follow-up to the last question. Are your efforts in expanding Oil services in the US primarily focused on the natural gas area versus the oil areas?

I know that even a couple of years ago you guys were in the Marcellus and pulled your assets out of there. Where do we stand with that? Is that primarily where your focus lies today, is the natural gas areas?

Not necessarily, but the drilling rigs whether they're drilling for gas or oil the types of services they need and the types of assets that we have to support their needs really can work in both areas whether it's liquid rich or gas or oil.

We're really trying to partner with a larger number of producers and a larger number of contractors to be subcontract to. And we've been really pretty successful here after now having over 50 packages. And we'd like to get to 60 as our next hurdle. So I would say that it really doesn't matter to us.

Okay. Thanks a lot.

Yes.

Thank you.

At this time I will turn the floor back to management for additional or closing comments.

Well thank you all for having the call with us today and joining us today. We really appreciate your questions, your comments. We hope to see you many of you at some of our upcoming conferences that we're participating in. And look forward to updating you on our year end, early next year. Thank you.

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