Clean Harbors Inc (CLH) 2016 Q3 法說會逐字稿

Greetings and welcome to the Clean Harbors third-quarter 2016 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. Thank you, Mr. McDonald, you may begin.

Thank you, Jesse, and good morning, everyone. On the call with me are Chairman and Chief Executive Officer, Alan S. McKim; EVP and Chief Financial Officer, Mike Battles, and our SVP of Investor Relations, Jim Buckley. Slides for today's call are posted on our website and we invite you to follow along.

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 today, November 2, 2016. Information on potential factors and risks that could affect the Company's actual results of operations is included in our SEC filings.

The Company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in this morning's call other than through filings that will be made concerning this reporting period. In addition, 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, on our website and in the appendix of today's presentation. And now I would like to turn the call over to our CEO, Alan McKim.

Thanks, Michael, and good morning, everyone. Thank you for joining us. I'm fighting a pretty bad cold so please bear with me as I go through my prepared remarks. Beginning on slide 3, our financial performance fell short of expectations in Q3 as we were affected by ongoing weakness in the energy and industrial markets and the effects of significant severance and integration costs.

Our results for the quarter also demonstrate our ability to continue to take cost outs and streamline our business. Despite the lower revenue, we delivered gross margins of 32.6%, our highest level since mid-2008. I think that speaks to the team's hard-work in reducing costs during a difficult period of our business.

The current macroeconomic environment has met lower waste volumes and limited project spending in Tech Services and Industrial Services and Field Services, while Oil and Gas and Lodging Services face continued headwinds. In sharp contrast, however, our Safety-Kleen segments delivered solid results in the quarter reflecting crisp execution of our growth strategy.

Safety-Kleen Environmental delivered its ninth consecutive quarter of increased profitability. KPP more than doubled adjusted EBITDA from Q2 as we continued to effectively manage our spread. Equally important, during the quarter we made great progress on several exciting strategic initiatives that we believe will enhance our earnings power. And these include completing multiple acquisitions to support our Direct Lube business and our Tech Service expansion, particularly on the West Coast, successfully divesting our Catalyst business, gearing up for our national launch of our closed-loop direct lube oil offering, strengthening our executive team, and advancing several new service offerings that I will discuss later in my remarks.

Turning to the segment review on slide 4, revenue and profitability in Tech Service declined, mostly due to the lack of remediation projects and landfill volumes, which were down 49% consistent with the market. Lower industrial production affected our volumes, and lower energy and production waste streams remain the norm. Incineration utilization was 90%, that's up from Q2 but down on a year-over-year basis reflecting the decreased volume at our Canadian location, which handles much lower-priced materials.

Our US incinerators saw an uptick in activity sequentially as we benefited from fewer down days. Turning to slide 5, Industrial and Field Service had another below-average quarter. We saw no major emergency response events or large unexpected outages at our customers' plants.

The base work at customer sites and day-to-day activities in this segment continues but remain under significant margin pressure, particularly in businesses exposed to energy. In addition, Western Canada still hasn't recovered from the Fort McMurray fire. Our team has done a good job pursuing what limited opportunities exist. We've continued to reduce costs in this segment, particularly in Western Canada.

Despite lower revenue, personnel utilization rate was 82% in Q3, reflecting the headcount actions we have taken. Moving to slide 6, Kleen Performance Products direct revenue was up substantially as we fully benefit from our move to charge-for-oil versus pay-for-oil a year ago. As a result adjusted EBITDA increased 88% from a year ago and margins nearly hit 25%.

We also benefited from higher prices as our posted base oil price was at $2.17 for the quarter, above the first half of the year. Blended sales come in as expected at 33% in the quarter as we continue to rely on distributors to move our blended lubricants and we will probably be at a similar level in Q4, after which we should start seeing that percentage climb over the course of 2017 as our closed-loop direct sales models drive our blended sales higher.

Turning to slide 7. Safety-Kleen Environmental Service was again a strong performer, registering healthy outside and direct revenue growth. That growth translated into an 18% increase in profitability based on business mix, improved pricing and the benefits of cost of reductions. On a trailing 12 month basis, adjusted EBITDA in this segment has grown more than 40% from the same period two years ago.

Parts washer services were up slightly in the quarter while waste oil collections were flat. In Q3, our collection costs were $0.04 per gallon higher than Q2 due to the increase in the price of crude and base oil. However our collection costs are down $0.27 a gallon from Q3 of 2015.

Turning to slide 8. Lodging Services saw its revenue increase for the first time in three years as we received a temporary boost in occupancy from the Fort McMurray fire with the utilization of sellable rooms up to 49% from 19% a year ago. Our Mobile Camp business continues to be hurt by the lack of drilling activity.

Adjusted EBITDA and margins were up in Lodging due to the cost reductions and higher revenue. Turning to Oil and Gas and slide 9. With the average rig counts in the US and Western Canada down 45% from a year ago, our 49% drop in revenue was expected. Our average rigs serviced and utilization reflect the poor market conditions. We have seen US rig counts slowly climbing in recent months but the industry has a long way to go to get back to the 2013 levels.

Our focus here remains on eliminating cost to at least achieve breakeven as we manage through this downturn and we are aggressively repositioning assets into other segments of our business as well. Turning to slide 10, during the quarter we completed a series of bolt on acquisitions we discussed on Q2 call and began the process of integrating their collective capabilities into our network. We also completed the sale of our Catalyst subsidiary, transitioning that business to the buyer and generating nearly $50 million in proceeds.

We have continued to execute against the 2016 $100 million cost reduction program we launched last December. We expect to conclude this year with better than $100 million in reductions and our run rate achieved. However, as I highlighted on our Q2 call, we have launched an internal initiative to take another $100 million of costs in annualized gross costs out of our expense structure by year end of 2017.

Synergies from recent acquisitions coupled with maximizing transportation efficiencies, centralizing G&A functions, reducing additional headcount, further optimizing our network and other targeted initiatives will enable us to achieve this 2017 goal. To support our cost savings efforts, we appointed Chris Melocik as Executive Vice President of Transportation, Logistics and Operations Effectiveness. During his 35 year career, Chris has held leadership positions at a number of companies, most recently at Republic Services and immediately prior to that he was an Associate Principal at McKinsey and Company, and he will be a key contributor to helping us achieve our cost savings targets for 2017.

We also added other seasoned executives, business executives to lead an array of other strategic initiatives. First, we continued to advance towards the national rollout of our closed-loop offering in our Lube Oil business. In Q3 we begin direct lubricant sales in upstate New York and more recently successfully launched in the Chicago market.

Several more markets are set to begin by year-end, followed by the national launch of our packaged product offering. In Q3, we appointed David Vergo as President of Safety-Kleen. Dave is a dynamic leader who joined us from Univar, one of the largest chemical distributors in the world, where he was most recently the President of Industrial Chemical Sales. Dave will oversee the rollout of our closed-loop offering as well as extend the momentum of our Safety-Kleen Environmental branch and KPP businesses.

Second, given the critical importance of our organic growth of our future success we have strengthened our sales team with the addition of Steve Mohan as Chief Sales Officer. Stephen joined us from Public Service were he was most recently SVP of Sales and responsible for more than $8 billion in annual revenues. His sales and business development skills will be an invaluable asset for us going forward.

Third, to enhance our customer service offerings and increase customer retention, we hired Grace Cowan as our SVP of Customer Service and Customer Satisfaction and she has held various senior leadership positions over a 30 year career including SVP of Customer Experience at Waste Management. And fourth, we are expanding our offerings in Healthcare Services.

Today we conduct millions of dollars of Healthcare Industry business in clean pack, drums and other lines of business. Moving further upstream into the area of sharps and regulated medical waste is a natural extension of our existing offerings and we believe will drive more waste into our network of disposal assets. Medical Waste is a service our customers requested for years and we are leveraging our existing infrastructure to launch our Healthcare services offering in several initial markets in the US and we will continue to expand our service offerings across the US and Canada in 2017 and 2018.

And finally, we've formalized our efforts in the daylighting hydro excavation market by shifting hydro vacs and other underutilized assets from our Industrial and Energy business, particularly in the Fort McMurray area. We're successfully introducing our daylighting services to several US markets. We have put an internal team together, spear headed by one of our strongest industrial services leaders. Daylighting is not new line of business for us but given our fleet of hydro vacs and our history of nondestructive digging work with utilities, refineries and other customers, we see it as an attractive long-term growth opportunity that required limited capital to initialize and get off the ground.

Turning to our capital allocations strategy on slide 11, we continue to make internal investments in our business such as the El Dorado incinerator. Our focus remains on investments that can generate meaningful long-term growth including some of the exciting new areas I just outlined. We look at all acquisitions on the same relative long-term return basis and continue to see businesses that can acquired at attractive valuations.

Share repurchases remain a fundamental component of our overall capital allocation strategy. Moving briefly to our outlook on slide 12, our overall focus in all of our segments will be a combination of pursuing organic growth and lowering our cost. With in Tech Services our focus is on the opening of our new incinerator in Arkansas, which remains on schedule for start up later this quarter and with its official commercial launch to follow. We remain excited about our expanded capability on the West Coast from the recent acquisitions and our sales teams continue to build a sizable project pipeline particularly in the remediation and landfill space, which have clearly struggled in recent quarters.

We intend to reverse that trend. In Industrial and Field, we continue to build our base business by expanding our footprint through a collaboration with Safety-Kleen and by winning critical insight awards for our personnel work at customer locations. We believe these embedded employees will be key to helping this segment rebound, particularly as the overall industrial markets begin to recover.

Within KPP, our primary focus is on the rollout of the closed loop I discussed, while continuing to aggressively manage our spread. The teams currently hard at work integrating our recent acquisitions and maximizing their collective capabilities. We can now process as much as 240 million gallons of waste oil a year, blend and package well over 100 million gallons annually and have an oil terminal network of more than 80 locations to support our collection and our distribution.

Within Safety-Kleen Environmental, we expect that over the next 5 years we can continue to increase revenues by more than 30%, while also achieving EBITDA margins of 30%. We can more deeply penetrate the customer base of our latest acquisitions as well as the general marketplace. On the Waste Oil Collection side, our focus remains on driving down total collection costs.

The outlook for our Lodging and Oil and Gas segment on slide 13 remains largely negative until we start seeing material changes in exploration budgets and the number of drill rigs. The recent trajectory is showing a little promise but until that growth accelerates our focus will be primarily around cost controls and reallocation of assets. And I mentioned on our last call, we need to structure this business to handle the lower-for-longer scenario the energy market finds itself in. In summary, our overall performance reflects the market conditions affecting many of our this downturn.

Industrial production in the US finally turned positive in September. Oil seems to be stabilizing at around $45 to $50 a barrel and both our Safety-Kleen segments are showing tangible momentum and generating profitable growth. Our new incinerator will soon begin contributing and we remain confident about prospects to fill it in the years ahead.

As an organization, we are aggressively reacting to this low-growth environment with the recent launch of multiple strategic initiatives such as the oil plus program, healthcare services and daylighting. We are taking the strategic steps necessary to effectively position Clean Harbors for the long-term. With that, let me turn it over to our Chief Financial Officer, Mike Battles. Mike?

Thank you, Alan, and good morning, everyone. Turning to our income statement on slide 15, revenue declined by 18% in Q3, primarily due to the $145 million contribution from emergency response activity in Q3 of 2015 as well as the continued industrial slowdown, softness in energy and fewer large project opportunities. Gross profit for the quarter was $237.6 million, which translates to a gross margin of 32.6%.

That's a 360 basis point improvement from a year ago and reflects the success of the aggressive cost actions we have taken in the face of weak market conditions and our corresponding lower revenue. In addition, our success in moving the Waste Oil Collection market from pay-for-oil to charge-for-oil benefited our current year-over-year in improvement in gross margin.

SG&A expenses in the quarter were up from a year ago, primarily as a result of incentive -- compensation adjustments we made last year, which is significantly reduced our SG&A in Q3 of 2015 on a whole dollar and percentage basis. In terms of absolute dollars, we now expect full-year SG&A expense to be up 3% to 4% from 2015 based on a variety of factors including increased severance integration costs, the sales investments we have made, a small amount of incentive compensation this year and SG&A related to acquisitions we have made, largely offset by substantial cost actions both early in the year and here in Q4.

Depreciation and amortization increased $4.3 million, reflecting a series of acquisitions we completed this year. As a result of our M&A activity, we continue to expect depreciation and amortization in the range of $285 million to $295 million for 2016. Income from operations in Q3 was $16.8 million inclusive of the $34 million dollar goodwill impairment charge we took for Lodging.

Our adjusted income from operations was $50.8 million, still well below prior year due to the lower revenue and business mix. Third-quarter 2016, adjusted EBITDA was $126.7 million, inclusive of $5.8 million in integration and severance-related costs related to headcount reductions, management changes, expenses associated with integration of acquired companies and other costs.

This compares with integration and severance costs of $2.5 million in Q3 a year ago. We reported a GAAP loss in the quarter of $10.3 million or $0.18 per share. Adjusting for the goodwill impairment, the sale of our Catalyst business and un-benefited tax losses in Canada, we recorded $9.3 million in adjusted net income or $0.16 per share. Turning to the balance sheet on slide 16. Before covering these items I wanted to point out that we recently amended and extended our $400 million credit facility.

It is a facility that we've never drawn on but we are currently using as collateral on approximately $140 million in letters of credit related to certain permits and insurance. The original facility was scheduled to expire in January, 2018, and we extended it through a new five-year structure at more favorable terms with slightly better covenants. We had a fair amount of interest in this facility and market rates were attractive.

Cash and cash equivalents as at September 30, was $257.9 million, which reflects the closing of several acquisitions during Q3 at a cost of approximately $150 million. DSO in the quarter was flat at 71 days. Our goal is to bring that number down below 70 this year.

While we have made some progress to process improvements related to collections, the combination of a challenging environment with many industrial and energy customers, some of which -- some of whom are stretching out payment terms well beyond 30 days, resulting in an overall lack of progress on DSO. We are making a big push to collect AR in Q4 and drive DSO down. Q3 CapEx, net of disposals, was $50.5 million, which includes $12.5 million of CapEx related to the construction of our El Dorado incinerator.

Last year we spent $64.8 million with $21.1 million of incinerator-related spend. We also invested capital this quarter in the growth initiatives that Alan highlighted, including the closed loop and a small platform for healthcare services and daylighting. We remain on track to hit our capital spend commitment in 2016 of $200 million of CapEx net of disposals, which includes nearly $50 million on the El Dorado incinerator.

While we have yet to complete our budgeting process, our intention is to set a net CapEx target for 2017 in the range of $160 million to $170 million. Cash flow from operations in Q3 was $58.8 million, down from last year's total, largely tied to this 18% reduction in revenue and business mix. Based on our year-to-date performance and our reduced 2016 adjusted EBITDA guidance, we are revising our expectation for cash flow from operations this year to be in the range of $270 million to $280 million. Given out expectation of net CapEx of approximately $200 million and proceeds from our Catalyst sale of nearly $50 million, we now expect free cash flow in the range of $120 million to $130 million for 2016.

Buyback activity was minimal in Q3 as we repurchased $6.2 million worth of stock. We have about $106 million remaining under our existing $300 million plan. Moving to guidance on slide 17, based on our year-to-date performance and our current market outlook, we're updating our 2016 adjusted EBITDA guidance range.

On our Q2 call we provided guidance in the range of $430 million to $450 million based on some assumptions for the industrial and energy-related waste streams and consumer spending not significantly worsening. However, certain lines of business, such as Landfills and Industrial Services, remain more challenged than expected.

In addition, as our cost cutting and integration efforts move forward, our severance and integration expenses are higher than we originally had anticipated. We now expect severance and integration costs to exceed $20 million for the full year. Therefore, based on those factors, we're reducing our adjusted EBITDA 2016 guidance to $400 million to $410 million. Here's how that revised guidance plays out from a segment perspective.

We expect Tech Services to be down 6% to 7% from 2015 due to the lower volume from both Energy and Industrial throughout the year and lack of 2016 projects, particularly in our Landfill business. This is down from our previous guidance of slightly down for the year. We are confident that 2017 will be a bounce back year for Tech Services as we see a large pipeline of projects on the horizon. Our SK Environmental segment remains on track to deliver record results in 2016.

We continue to expect that business to achieve 2016 adjusted EBITDA growth in the high teens from 2015. Within our Industrial and Field Services segment, excluding the effect of the emergency response in both years and based on pricing and margin pressures we are facing this year, we expect adjusted EBITDA in this segment to decline by approximately 33% from a year ago, consistent with our prior guidance. For Kleen Performance Products, we expect a solid finish to the year with a Q4 performance slightly below our seasonally strong third-quarter.

For the full year we expect adjusted EBITDA to increase approximately 70% from 2015. For our Lodging and Oil and Gas segments, we have further reduced our expectations. On a combined business -- on a combined basis, we now expect the adjusted EBITDA of those two segments to be breakeven to slightly negative for the full year.

Looking ahead to 2017, we do not intend to provide specific guidance today for the upcoming year. Given the variability in our business in recent years we're going to complete our budgeting process and set capital spend before setting official targets for 2017. However, we have a lot of positive factors heading into the next year from an adjusted EBITDA-perspective, including our planned cost-cutting initiatives, the acquisitions we have completed this year, the contribution of the new El Dorado incinerator, the roll out of our closed loop offering and the new revenue initiatives Alan outlined.

So at this point, we expect significant adjusted EBITDA growth from 2016 to 2017 and we are confident that the midpoint of our 2017 adjusted EBITDA guidance range will be in the high-$400 millions. We need to complete our budgeting process before we can get any more specific than that. With that, Jesse, please open up the call for questions.

(Operator Instructions)

Noah Kaye with Oppenheimer. Please proceed with your question.

Good morning and thanks for working through some of the high-level thoughts around 2017. I just want to pin down one element of the potential improvement and that is the cost reduction. I think you said on the last call, and you elaborated on this today, that you'd be exiting at more than $100 million annualized run rate. So you're getting at least, I would imagine, $50 million in incremental savings next year, and that's in addition to any further cost reduction efforts you could achieve, do I have that right?

Yes. So, no. This is Mike. At the end of the day, we've made good progress on the one we did earlier in the year, so we are going to exit the year achieving that, beating our original numbers of net $50 million. We are confident that we go into 2017 with that in the bag. As we look at the new cost actions we put in place here in Q2 and Q3, we are making really good progress to that end and that should be in addition to what we are doing.

It is tough to put an exact number, whether it is $50 million more or $30 million more. But certainly there's an uptick there from the cost [assets] we took both in the beginning of the year and here late in the year to right-size our business.

And maybe turning to KPP, you are seeing the EBITDA ramp that you had expected, you didn't mention you thought the blend rate would be in the 33% range again 4Q. I think that's down a touch from what you might have expected earlier in the year, you had said about trying to get into the mid-high 30%s.

How much of that is due to some of the additional capacity you have brought on and the timing of how that all works? Or is there something else that's taking a little more time to get the blend rate up? How should we think about that?

We have begun our national rollout of some of our products across 190 or so Safety-Kleen branches and that has taken a little bit of our time. And some of our product we are actually packaging now and putting it in inventory and moving that out into the networks. So probably a little bit of impact from that, but clearly there has been a great receptiveness to that service offering that we've been piloting and we're excited about that.

At the same token, we still have key wholesale distributors that buy a lot of our product that are partners of ours. There was a little bit of weakness in some of the volume that we sold to some of them in the third quarter. There has been so much uncertainty about which we pricing is going to go in base oil and we saw a lot of orders being held back, quite frankly.

So I think there's going to be a little bit of ups and downs every quarter we as report that blended number out. And I think as we get into next year we'll probably give you a better metric on how well we are doing with our direct blended quantity and volume, which I think will be more consistent with how well we are really doing with our closed loop system.

The path to glory is not a straight line, right? So there's going to be fits and starts here. I think that we've done a good job, and as Alan said in his prepared remarks, of really the rollout that we have and again putting out packaged product across our 190 branches is quite an endeavor.

And so that is just starting, and so we're confident as we go into 2017 that, that's going to be a success story we're going to talk about. And as Alan said, we'll get to more granularity in 2017 calls to document the success. Because at the end of the day, it's not just one number, it's a variety of factors.

Yes, because some of those volumes will swing up and down a little bit per quarter when you are selling it through wholesale. But the key is the direct number, will be a better reporting metric to give you better color on how well we're doing.

Okay. Thank you. Hope the cold gets better, Alan. I'll jump back in queue.

Thank you. Me too.

Joe Box with KeyBanc.

Good morning, guys. I just wanted to drill into the statement in the release that some of your customers are really reluctant to spend on large-scale projects.

Curious what these are, are these greenfield projects, turnarounds or EPA-required cleanups? And how much of these could be cyclically driven or just kind of timing related. Ultimately what I'm trying to understand is, what they are and why you are assuming that they will pick up in 2017 and result in higher EBITDA.

We have a dedicated sales organization that works with other -- many companies that are either directly working for the EPA or are directly working for customers on their remediation projects. Some of those are superfund-related, some of them have to do with remediation, enclosure of sites. We have a pipeline on that. We track that business very closely because it is so important for our landfill business and I would just characterize that as people being very concerned about spending money and trying to push what they spend money on as far out as they can and -- especially as it relates to the oil and anything to do with oil.

People just absolutely have tightened up every single dollar that they are spending and when you look at our landfills, whether it is in California on North Dakota or Alberta, particularly those three landfills we have that are right in the E&P market, those have been really, really hurt. And we still see opportunity out there where -- In fact, we had a nice win even this past week. A $12 million kind of project for us, which is a nice kind of win for us. That was great to see but we need to see $100 million of volume coming through that and we are not there yet.

So let's just say hypothetically, 2017 starts to look at little bit more like 2016 in terms of project deferrals, obviously they're not gone, they are just getting pushed, is it still fair to expect up EBITDA within the Tech Services business or could it be potentially flat to down?

We see as a industrial production comes back online, Joey, we have seen some light at the end of the tunnel. And we're hopeful that, as you go into 2017 that there is -- it is a bounce back year. We do have a lot of initiatives, not the least of which is the El Dorado incinerator, that's out there and that we hit good traction on filling that.

And so we're hopeful as we look at 2017 from a -- by segment standpoint. Again, we have to go through a budget process, as I said in my prepared remarks, but we are hopeful that, that's -- it's going to be a good year for Tech and we're going to reverse the trend of down revenue.

I appreciate that. And then just one quick accounting issue here so $18.4 million of severance and integration year-to-date. It sounds like it's going to be over $20 million for the full year now. Are you expecting any more integration and severance going into next year? Obviously, it matters when you guys include it into adjusted EBITDA.

Yes, Joe, so we're looking at certain cost actions, some of which are going to take place here in Q4 and some which will take place in 2017. So I don't think they are huge dollars but we would be kidding ourselves if we said there was none. But I don't think it's -- At this juncture, what I've seen -- the list I've seen and the analysis I've seen, it's kind of short money here in 2017.

I appreciate that, thank you guys.

Larry Solow with CJS Securities, please proceed.

Good morning. Just a couple of follow-ups on Drilling on the Technical Services side. On the incinerator, it looks like capacity utilization was at about 88% in the US?

As El Dorado comes on board, online next year in full, do you expect that this number to, I assume, obviously to come down a little bit on a relative basis? But is there sort of some waste streams that are not being processed today that will only go to -- will be aided by El Dorado and do you sort of need pickup in this industrial production, as an aside to really get things going on the Technical Services side? Or are some of your initiatives, including El Dorado, going to help without getting a necessary pickup in industrial production?

A couple things. We tend to have about $30 million in deferred waste in inventory so certainly we have capacity constraints with some of our plants today. Our drum business has been extremely strong. It has more been with our bulk business, although we've seen that picking up.

We've also seen some great opportunities on the captive side. The report that just came out last week for us from our team that's really focused on that, is looking at new proposals. I think we touched on it in Q2 with some of the recent chemical consolidations that have taken place, some of those captive incinerators will be looking now to outsource. So we feel very good about the capability of El Dorado and the demand and we are actually setting up long-term contracts with a number of key customers, particularly to do with the unique direct-burn capability that this plant now has.

I have no concern that El Dorado isn't going to find a great spot in the market here.

Okay.

So Larry, as you think of January as this thing comes online, we're not going to be at 88%. We will try to make sure we speak to that and talk about --

Right.

-- as we color it because it's going to take time. And day one if you put that much capacity online, it just doesn't solve itself. But Alan's points are spot on, though. I think that there's a good trajectory out there for that new incinerator. Because it's unique capabilities, you're going to ramp up relatively quickly.

Just turning quickly to the Industrial Field segment, the outlook for planned turnarounds. Obviously this year, or last couple years, we're supposed to get a little bit of a cyclical turnaround and things have been a little pushed out, more emergency turnaround or work, obviously that has helped you a little bit. What's your thoughts as you look into 2017?

I would characterize it again, Western Canada has really been essentially shut down with any kind of spending and any kind of delays that they could put in place to spend money there. And so our industrial business, both in the oil sands and the Alberta market particularly, has really been negatively impacted.

And we're not anticipating that to get any stronger, to be honest with you, so we're trying to get our business right-sized and focus on maybe even expanding outside of that energy space because so much of our industrial has been refinery- and oil-related so moving into some of the other industries that we probably haven't penetrated enough yet.

Lastly on the healthcare and medical waste initiatives. If I look back over the last 2 years, if I'm not mistaken, I know you had tried to -- or at least in certain areas ramp up these initiatives. Could you just give us a little bit -- what is different this time? I guess you'll assume you will be taking some share from competitors.

Well, number one, it certainly is a growth market, that you see. And number two, this is our first -- we were in the healthcare services back in the early 1990s and so we got out of that business a long time ago and so for the past four or five years, we certainly provide service to the healthcare industry, retail, pharmaceuticals, and so forth.

And we do in excess of $50 million in this space, but as far as going out and servicing sharps and red-bag waste, we have not done that in 20 years. It was about time, the demand is there, the market is growing and a strong number two competitor, quite frankly, is needed in the marketplace.

Great. Thanks, Alan.

Yes, Larry, we have made investments in -- small amount of investments in certain types of trucks, certain types of routings, to meet that demand in certain markets. And so it's going to be a slow roll as we roll into 2017 and beyond but we are excited about the opportunity.

Excellent, I appreciate it, thanks.

Michael Hoffman with Stifel, please proceed with your question.

Thank you very much. If we could start with the Technical Services, Alan, what is the percentage of revenues in your landfill business that's from an industrial production, recurring waste line versus project today versus what you thought it was going to be in 2016 when you laid out the original guidance?

I would be guessing, Michael, on the percentage.

Yes, it's tough to guess. A big part of our landfills are based on projects versus recurring. It's tough to put an exact number because it moves around so much. But I would say that -- I don't know, Jim, what have we said in the past? But it's --

In general, Michael, it's a 50% base and 50% project, that's how we've always presented landfills.

Okay, but that's not big portion. You just said big portion.

Well, if you look at the drop from last year, Q3 to Q3, it is a 49% drop. And if we were to dissect that, most of that is large projects that we worked on last year, some of which were oil and gas-related but they are projects that haven't been replaced this year and so that's why the volume drop off has been so significant.

I get that. I'm just try to understand, if I start with --this is -- you think it's near a bottom, is the landfill today filled 90% with recurring volume and 10% with project because that's how low it got? (Multiple Speakers)

That's not a crazy answer.

Okay. That helps. And then I know that there was a question about the turnarounds, I'm not sure I understood it correctly, so I'm going to ask it again. Did you not see a normal turn around season this year as anticipated?

Well, we did. We certainly saw some turnaround work but at the end of the day it was at what price point? Right? And so we under. Utilization in that part of the business is still pretty good but at much lower pricing. And certainly as it relates to Western Canada and other parts that are in the energy sector, we are under, as other companies in our space are, under incredible price pressure. So that is -- was a downward pressure.

The other thing I would add, Michael, is last year in both Q2 and Q3, our unplanned work in the turnaround group was larger than our planned work and that was not the case this year. So to Mike's point about even pricing and rates, clearly when we are on an unplanned outage it is at a much higher margin and work rate than it is on a planned basis. Most of the planned work went off as scheduled this quarter, there just wasn't the unplanned outages, as Alan mentioned in his script.

Are you anticipating a sequential decline in the margin in 4Q? You did 12.4%.

Can you repeat the question, Michael? I'm sorry.

Do you expect a sequential decline in profit margins in that business in 4Q versus 3Q? You did 12.4%, adjusted EBITDA margins.

I will have to get back to you with that specific number. I don't have the work paper in front of the.

Okay, but I guess what I'm actually trying to get to is, it would appear that you are getting -- the business now looks like it is structurally living in a 12% to14% EBITDA margins in the more active quarters and there's still a seasonal dip in the first quarter. That seems to be the trend at this juncture, given your commentary about pricing and activity levels?

That's fair to say, Michael.

Okay. And then with regards to free cash flow, don't want to get over my skis but do just want to frame this. If I take the midpoint of this year at $125 million, you don't spend El Dorado next year, I'm at $175 million, and there's gross of 3% to 5%, is that the right way to think about it?

Well, in that $125 million is a sale of a business, right? And so I want make sure we're on the same -- the Catalyst sale of $50 million.

Got it. So I got to take $75 million plus the $50 million and then some kind of gross -- so I'm basically looking free cash probably a flat year-over-year in 2017?

I think with the higher EBITDA you should --

Yes, we should have some more of that. And then also, Michael, I would say we are not done selling businesses and so -- just so we are on the same page. We are looking at other opportunities that are out there so it won't[ benefit] a population of one.

Okay, so, Alan, I apologize if this comes out too aggressive but I'm not sure how to ask it any differently. What gives you confidence that you can predict aspects of the business that are more nonrecurring in nature, so it is dependent on somebody making a decision as opposed to there's the stream of activity that happens and you participate in your share or better? What gives you confidence you can predict that?

We have biweekly calls here and key performance indicators across all of our different lines of business and, as you know, Michael, this past year, year and a half, we have substantially invested in sales. We have added a tremendous amount of sales and business development leaders. That certainly hasn't materialized in our top line but one thing we, I think, have today better than we've ever had is visibility into what lines of business, what is happening with our competition, what does the price line look like?

And I would say that coupled with our every other week forecast call, I think we're getting better and better visibility into what we, quite frankly, have just experienced. Because the last 24 months has been, as you all know, catching a falling knife here with how the price of oil has permeated through the reductions in spending by many, many customers of ours, directly and indirectly related to energy. So I feel pretty confident about it.

Michael, I would add to say that we've made investments in, as Alan said, we've made investments in sales headcount but also made investments in sales systems to help us track that better and to get more accountability, more metrics and investment in leadership, as Alan mentioned in his prepared remarks, to drive that sales across the organization.

Okay. I mean this next question with a little bit of humor but New England humor is, you say yonder and it can be 2 yards and 20 miles, so what's upper-$400 millions mean? $470 million or $490 million?

We have to go through our --

Maybe I'll just comment one thing. Over the last three years the Company generated $500 million-plus of EBITDA and that was certainly our budget this year. We were extremely disappointed we're coming in -- even if you add back the severance and integration costs, the team has worked extremely hard in a really, really difficult market.

All of us would be very, very -- it would be very important for us to get back to that level that we were at. But when you consider that we've lost about $150 million of EBITDA from our Oil and Gas and Lodging business over the last 2 years, it has been a very difficult market for us to work our way out of as that deterioration took place. So getting back to that $500 million-plus level, considering that $150 million is kind of not in that number anymore, I think it would be a wonderful win for the Company.

Mike, last question. What is the role over of the current $100 million to be captured in a -- if I was doing a waterfall on your EBITDA in 2017 and then what's your contribution of the new expectation in the 2017? So if I take $400 million as the floor, add what from the rollover of costs and then the new?

I get it. We have the old plan and I think we're going to exit the year well north of any number we've announced publicly, so -- and then we have the new plan which is still in the formation stages, as Alan said, it's a gross number. We're still looking working through that. I'd say we go into 2017 with it $30 million to $40 million of goodness based on both severance and both plans we're putting in place.

That's helpful. Thank you very much, I appreciate it.

Al Kaschalk with Wedbush.

Good morning guys. I want to focus, I know you don't want to talk about the guidance but you put it out there and I'm wondering if you could help us, just from a large bucket perspective? Talk about the components to the growth, and I know you've describes them as cost initiatives and acquisition but can you add a little more detail around that, whether it's 20%, 50%, the majority of it is coming from X, the majority is coming from Y? We're just out there with some numbers now that certainly need to come down from a consensus standpoint, but help us on the road map there a little bit. Without the formal guidance.

Sure. No Problem. We said high-$400 millions for a reason, right? It's because we got to go through a budget process and have to -- we know we can't just look at all the positives. I'd love to take -- add the closed loop and add the cost incentives and add healthcare and add El Dorado incinerator and do all the goodness and then come up with a number that looks awesome, but we have got to go through a budget process because there are some things go back and forth and we have got to be careful about that. I'd hate to go into very specifics, by pillar. I will say that we debated a lot.

That sentence was debated quite a bit and the people in this room and with our Board and so we felt confident that high-$400 millions is a good midpoint again. But we have to go through a process and go through it by pillar. We have a meetings going in November, people on my team and the Executive Team are working hard to work our way through that to make sure we come up with a thoughtful numbers so we can come back to you and give you good guidance. But I would say today it is high-$400 millions.

As Alan said, we have a lot of good initiatives that are out there. Some will go fast, some take longer. We are putting another cost action in place. We're working through that and executing against that here in Q4 and in Q1. And so we feel positive for the future from a dividend standpoint. And, as Alan said, no one is more disappointed about where we are landing here in 2016 than we are and we're hopeful that 2017 is going to be a good bounce back year.

Okay. (Laughter)

You want it by segment. You wanted segment says this and this --

No. No. Look, in fairness here --

The momentum in Safety-Kleen is going to continue and substantially improve, we believe, as I mentioned in my opening marks. We believe we can get that business at a 30% EBITDA business and we can see that. We are in the fifth inning here and we really believe that we have got some great opportunities in that business to grow both the top line and leverage the bottom line there and so I think you can appreciate, not only the cross-selling going on between Safety-Kleen and our legacy Field Service, Tech Service business.

But really the opportunity now to cross sell with KPP, to be able to go out and sell product directly to our customers. We are very optimistic about that, and not overly optimistic for next year. But I think you could say that, just look at the Safety-Kleen growth and EBITDA improvement over the next three or four years, we are really excited about that acquisition.

And as we put thoughts around 2017, we don't think there's a big bounce back in Oil and Gas and Lodging. We don't think there's a big bounce back in industrial. We're not anticipating those guides to be, everything's great.

We do expect some growth from Tech. We do expect KPP and SK Environmental to continue to produce. We have some very modest assumptions around new initiatives, whether it be Healthcare Services or daylighting. I think it's reasonable but, again, we got to go through a process to validate that.

Fair enough. I guess the two pieces I was hoping to get some color on, maybe to clarify for the market, is the contribution on the Tech Services side from El Dorado. And then secondly the acquisitions that you've announced.

I don't know if those were necessarily revenue-generating, per se, as opposed to capabilities and I'm thinking specifically about the packaging component. But are there specific things from an acquisition standpoint that you have on board now that will help you just from an execution standpoint, drive towards that upper-$400 million number?

Without getting too specific here, the El Dorado incinerator, I would say 5% to10%. I'd say on the acquisitions, 30% to 40% or 30% to 45% of incremental EBITDA coming out of those. And that is primarily around the closed loop, as Alan mentioned, but I don't want to get more specific than that. We have to go through a process.

I think it's important that the acquisitions we've made, and you continue to see their continued improvement with Safety-Kleen and KPP this year --

That's no accident.

They are not reported as under those particular acquisitions. It's sort of integrated in those two businesses and you're going to continue to see those numbers more and more show up in Safety-Kleen and in KPP. Right?

When I give you that type of number, it's going to be in SK Environmental and in KPP. That's where that' going to primarily show, even though there were some heartbeat permits and other things that we were using in Tech and in Industrial Field.

I don't know if it's fair to say or not, but you did comment at some point, either in the prepared remarks or in a question, but more asset sales or potential asset sales. I know everything is -- you're focused aggressively on getting the cost in line and looking out for the growth component but is there anything more you can shed on, in terms of the divestitures of non-core business and that process, please? Thank you.

Sure. And as you know, we went through a pretty elaborate review in -- a couple years ago and certainly updated the Board again in September. We still do have a number of lines of business that we feel probably we are not the natural owner for and so we are looking at divesting some of those businesses and also looking at all -- certainly all the rolling stock and the assets that we have that have been tied up in the Oil and Gas business.

And repositioning it, reallocating it to other parts so there has been a lot of effort on both externally looking at selling some of those non-core businesses as well as moving assets out of these markets that have been decimated with the price of oil. It would be premature for us to talk about which ones here because we need to go through the process, but we will certainly keep you informed as we go.

Thanks guys, good luck.

The next question is coming from the line of Sean Hannan with Needham and Company

Thanks, good morning, folks. First question here, primarily for Mike, just wanted to see if I could get some type of a number around normalized SG&A when you're pulling out that outside severance integration from the quarter. What would that have been versus the $111 million? And really what can you get to from a [balanced spend] standpoint?

So Sean, I'd say in the -- of the $20 million we have this year, I'd say, is it --

In the quarter, Sean, it was $5 million on the SG&A side. That was severance and integration. Year-to-date, it's about $13 million. I'm not sure what it would be in Q4.

And looking into 2017, we have cost actions in place that, if you can think of the early-2016 cost action plan, I would say a majority of those costs were coming out of, let's say cost of goods sold. They were direct headcount, they were areas that affect travel costs with indirect sales and so direct head count. And so that was, I would say 70/30, right?

This second -- this new one we're talking about now is more focused on G&A than on, let's say, direct headcount. And so we are hopeful as we go into 2017, that's going to be -- you will see a 2017 number that is below what we are looking at here for 2016.

That's helpful. If you could, perhaps Alan, expand a little bit more. Haven't heard too much today on the news that -- the progress you're making in pulling out that Oil and Gas business and Lodging.

Should we incorporate that, maybe on one side of the coin, some of the tie-ins with Utility and Energy to provide a little bit of optimism in getting that accomplished in some near quarters? Or, on the other side of the coin, the actions you are taking pulling out some of the assets there, re-purposing them, should that be interpreted as maybe some signals you're [path] has been pulling back more recently? Just some more color there would be great.

We are really keeping all of our options open as you can -- we have spent quite a bit of money auditing that business, being able to meet the new international accounting standards position, the options that we now have, so I would say that in light of the deterioration in the market and then certainly the Fort McMurray fire and how that particularly shut down one of our major customers who haven't not started back up again, quite frankly, and that had a big reduction in our Industrial business but also a huge reduction in one of our landfills.

So just that one incident set us back quite a bit in that market so I think we have several options. We want to make sure that we do everything that's right for employees and customers we are servicing today, first and foremost, and then make sure that we are positioned to have alternatives. But right now we are running that business, it's our Company, and we're running it and we want to make it a profitable business.

Okay, and last question here. In terms of the daylighting efforts can you perhaps remind us what type of revenues you're generating already in that type of an effort today. And then a little bit more specificity around the types of drivers you are putting to use to build that out and what you can see as relevant revenue opportunities? Thanks.

I don't have that number -- the revenue on top but we have about 130 units and, as we mentioned, we have been repositioning as the market has changed in the Oil and Gas space. We repositioned that into the Gulf and into the Western US market and we're actually opening up a couple of other branch locations. All of this is done at an existing location.

One of the things, whether it is healthcare or daylighting or you're looking at Safety-Kleen's expansion, the Company has over 700 locations and we can really leverage that infrastructure, leverage all that transportation, maintenance, everything. And so even though we are opening up new branches it's always at an existing location that we just are leveraging and expanding. So moving those 130 rigs -- in comparison to -- we have got a couple of competitors who probably have 400 of those rigs and Badger's got 1,000 of them, right? So we have been in that business predominantly in Western Canada and now we're expanding it into the US. We expect to continue to add more trucks to that fleet as this takes off.

I don't think, Larry, it's a huge capital investment -- excuse me, Sean. I don't think it's a huge capital investment as we look at 2017 to get into these markets. It's repositioning assets. It's [mostly] leveraging our current footprint.

We can stay within that $160 million to $170 million capital and still meet our needs on both ends, on Healthcare and daylighting.

That was done in contemplation of those two initiatives.

Thanks for taking my questions.

Thank you, Sean.

David Manthey, Robert W Baird.

Hey, guys, I hoped we could talk a little bit about strategy here. I'm wondering why you decided to sell the Catalyst business. I thought that was a tie-in with your other industrial services and turnaround businesses, does that imply that you are backing out of Industrial Services as well or just the energy part as you referenced earlier, Alan?

The Catalyst business, it just seemed to fit with another company that bought it, obviously, who does a lot more of that specialized reactor work. Bolt. The whole bolt tightening, the work that goes onto these catalyst treatment units. It was more synergistic than it was with our disposal and our normal day in and day out industrial work, if you would. And so it just seemed to make more sense when we looked at it and we made a good gain when we sold those assets. I think the gain, Michael, was --

$60 million.

$60 million. So I think we did a good job of divesting that. I don't think we are backing out of Industrial, per se, but really just look at that was a one-off.

Dave, this is Jim Buckley. In talking with the industrial team about it, they had said that this was much more of an a la cart type of sale for us.

That, because these things are done on a 12 month,14 month-type interval, they're and not directly tied to the turnarounds as much as our pigging and chemical cleaning and some of the work we do with furnaces and others. So that it was much easier to separate from industrial. It wasn't, you are taking something out and it's going to unravel the whole ball of yarn.

Just for accounting here, can you tell us what segment that was in, in your previous reporting and then if you could give us an idea of the run rate, the quarterly run rate of revenues and EBITDA?

It was in our Industrial and Field segment. The EBITDA number was very small. It was, for the first eight or nine months, it was --I don't know, Jim, if you know the number. I think it was tiny.

Yes, I think the --$55 million was the revenue last year, which was what we mentioned when we announced the sale. That, that was sort of the annualized revenue and the EBITDA was --

1% to 2%.

Yes, I think from last year it was in the mid-single digits.

Okay, thank you. And then finally on the closed loop offering, when you say you are launching this, I'm wondering, when you say you are launching it, is that you already have contracts lined up that you are going to begin servicing? Does it mean that you are just putting the trucks out first and then offering to sell it? I'm just trying to understand how you are rolling it out and how it should look as it comes into your P&L?

Our initial launch is really to do with our packaged products, so our drums, our totes and our packaged products being distributed through the distribution centers and the Safety-Kleen branch network. And so that is underway as we speak. And so we've been training our sales organization. Safety-Kleen has about 450 sales people and so we've training.

That sales organization, who already sells close to $100 million of other allied products, which include other chemicals and supplies. So, it is first and foremost selling our packaged products and then, like Chicago and like out in New York, selling bulk material, where we are actually putting bulk trucks that deliver large, full-truck load quantities or square trucks out there. That is our rollout over the next three or four years across those 80 terminals that we have.

Right, but as we put those trucks into the markets, do you already have contract lined up or are you putting the trucks out and then going out to the market?

It depends. In some markets we have strong relationships with our distributors, who provide the services for our customers and those markets today and we'll continue to work with those good partners that we have. In other cases we have very limited distribution and have the capability to distribute, so we will do it ourselves. Some of the contracts exist and it is just flipping them over and in other cases it is building new contracts. And we are working on that as we speak.

It sounds like it layers in over time and there's no step function here.

Right.

It depends on the customer, David. If you are talking about a mom-and-pop oil change shop, there is no contract, per se. It is going out there and offering these products to that shop. If it is through a national chain, well then, yes, it's more of a negotiated contract.

Thank you very much.

(Operator Instructions)

William Griffin with Barclays.

You noted that CFO had decreased by $0.04 this quarter. I was just wondering what you're seeing out there in terms of competitors charging for oil and how is that impacting the CFO price you are able to get? And secondly, I'm wondering if you could talk about the sensitivity to CFO -- of CFO to oil prices and at what point you'd expect that to swing back to either neutral or even pay for oil? Thanks.

I think it's a long ways away before we would see that get back to neutral or pay for oil. The markets are extremely volatile, as we all know, and we have lost some volume as anticipated, particularly in some of those large national accounts where some other service providers may be willing to provide that service at a no charge or a less charge than what we are currently providing.

We've actually recently got re-awarded some business, placing our tanks back at some of those sites now where they could not get the service they were looking for. So I think during this time of change in the market you have a lot of churn and a lot of customers unhappy about receiving a check and now charging for oil. But we also think that they've moved more towards a charge directly to their customers, realizing that the price of oil is costing them to get rid of oil, it is costing them money to get rid of their oil filters.

The price of metal, recycled metal is way down. So price to get rid of waste antifreeze has gone up, so all these commodities have been under so much pressure that you would lose a little bit of volume during all this transition but I think all-in-all customers are now adapted to it and I think our competition has adapted to it as well, quite frankly.

Thank you. It appears we have no additional questions so I would like to pass the floor back over to Management for any additional concluding comments.

Thanks for joining us today, we will be attending a number of upcoming events with investors starting with the Baird Industrial Conference in Chicago and a Stifel event in Baltimore next week. We look forward to seeing you there at other conferences in the months ahead as well. So thanks again for joining us today.

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