Clean Harbors Inc (CLH) 2016 Q4 法說會逐字稿

Greetings and welcome to the Clean Harbors, Inc., fourth-quarter 2016 earnings 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, Inc. Thank you, Mr. McDonald. You may begin.

Thank you, Tim, and good morning, everyone. On today's 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, February 22, 2017.

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

Thanks, Michael, and good morning, everyone.

Before I discuss our results, I want to touch upon changes we've made to our reporting segments, as outlined in this morning's press release. First, we combined our Safety-Kleen Environmental Services and Kleen Performance Products businesses together into a single reporting segment labeled Safety-Kleen. This decision was driven by the increase in the interdependencies between these two organizations with the launch of our OilPlus closed-loop initiative, as well as the roll-up of the business under our new Safety-Kleen President, Dave Vergo.

Second, we combined our Oil and Gas Field Services and Lodging Services businesses for external reporting purposes.

And third, we moved our Production Services line of business out of our Oil and Gas business and into Industrial and Field Services. This is a logical move because the services performed by Production Services are very similar to our Industrial and our Field Services business. We'll cascade equipment, such as our hydrovacs for Daylighting, and other assets into our Industrial and Field group to increase utilization during seasonal market changes.

Turning to slide three and our Q4 performance, top-line results were mostly in line with our expectations, reflecting tougher year-over-year comps due to the continued weakness in energy and industrial. Adjusted EBITDA came in at the low end of our range, due to the higher-than-expected severance and integration costs as we accelerated some planned 2017 cost reductions into the fourth quarter. Our Adjusted EBITDA was also slightly lower due to business mix and startup costs associated with our growth initiatives. And even with year-over-year revenue being lower, our successful cost-reduction efforts drove a 150 basis-point improvement in gross margins.

Reviewing our segment performance in the quarter, Technical Services was down from a year ago on industrial weakness and continued lack of projects, particularly into our landfills. Industrial and Field Services was flat with a year ago, with improved margins. Safety-Kleen capped another solid year with a strong quarter, both in terms of the branch business and Kleen Performance Products. Oil, Gas, and Lodging Services was down as expected, as U.S. rig counts were lower year over year, and Western Canada, particularly the Oil Sands, has yet to see the benefits of the recent rebound in crude prices.

Turning to more detail on the segments, starting on slide four with Technical Services. Margins improved due to our cost-reduction efforts. Revenue and profitability declined from a year ago as we experienced similar conditions to prior quarters, with a weak industrial environment and an ongoing lack of remediation projects. That was reflected in our landfill volumes, which were down 28% from a year ago. However, incineration utilization remains strong at 90%. That's up slightly year over year, reflecting higher utilization within our U.S. incineration network.

Turning to slide five, Industrial and Field Services showed some positive signs in the quarter, as the margin declines we have experienced over the past two years begin to reverse. The lower revenue is attributed to the September divestiture of our Catalyst Services business. When you exclude the nearly $1 million of Adjusted EBITDA contribution from Catalyst Services in Q4 of 2015, profitability is up approximately 15% year on year.

As a reminder, Industrial and Field Services now includes our Production Services business in both periods. No major Emergency Response events or large, unplanned outages at our customers' plants occurred in Q4. There was a small pickup in base work and day-to-day activities at customer sites. But we still have a long way to go to return to prior-year levels, particularly in Western Canada.

Personnel utilization was 79% in Q4, which is typical, given the seasonality in this period. The utilization rate is up for Q4 a year ago, reflecting the headcount actions taken in 2016.

Moving to slide six, Safety-Kleen delivered another strong quarter for us, led by the branch network. Revenues were up 15% due to a combination of organic growth and acquisitions, supported by year-over-year base oil and blended pricing. Profitability was up 35% and margins increased 300 basis points, driven by higher revenue, improved pricing, and good spread management.

Our Charge For Oil Rate was up both sequentially and year-over-year in Q4, despite higher crude prices. And we collected 2 million gallons more of waste oil than a year ago, aided by acquisitions made in 2016.

Parts washer services were down a bit, but we had one less working day than a year ago, which equates to about 4,000 service visits, or about half the decline.

As expected, our percentage of blended products was down from a year ago to 27%. The largest factor here is that through the acquisitions we made in 2016 we added two more re-refineries, which are contributing more base oil production, causing the denominator really to get larger.

Another factor in Q4 was typical quarterly variability, as we were affected by the timing of some purchasing this quarter, particularly as buyers assessed recent fluctuations in lubricant pricing during a seasonally weaker period. During Q4, we saw a 20% increase in our direct sales through our SK branches, but the numbers are really small as we are still in the early innings of the program's launch. We fully expect our direct sales efforts to ramp up significantly in 2017 and we will continue to partner with key distributors of our blended products.

Turning to slide seven, revenue in our combined Oil, Gas, and Lodging Services declined as expected year over year. Lower rig counts, tight exploration budgets, and continued price pressures were the primary reasons, coupled with the fact that the temporary boost in occupancy from the Fort McMurray fire faded in Q4. We also experienced weakness in both our mobile camps and our manufacturing business.

So despite our aggressive cost-reduction efforts within these businesses, Adjusted EBITDA was negative, based on revenue being nearly cut in half. Our average rigs serviced and utilization reflect the poor market conditions, although we have started to see a pickup in rig counts in recent months and hopefully that trend continues.

Turning to slide eight, during the quarter we moved forward with the integration of the series of bolt-on acquisitions that we completed in 2016, several of which closed in late summer. We have now integrated their collective capabilities into our network and expect to more fully realize the benefits in 2017.

Just briefly touching on cost, the team continues to execute well against our cost programs. During the fourth quarter, we accelerated some headcount reductions planned for 2017, which is why our severance costs were more than expected in Q4. Our key areas of savings in 2017 will come from acquisition synergies, transportation efficiencies, the centralization of G&A functions, and further network optimization. Our primary focus as an organization will be to grow the business organically this year and beyond.

And as I outlined on our Q3 call, we have a number of important strategic initiatives underway to drive growth, and I won't cover all of them here this morning, but I did want to touch on the new incinerator, as well as the closed-loop OilPlus program. The new incinerator at our El Dorado facility is up and running. We have begun processing hazardous waste through the kiln. I attended the incinerator's opening ceremony in December and it is an impressive operation, featuring advanced pollution control equipment. It's going to add about 70,000 tons of capacity to our network.

I'm especially proud that the expansion was completed on budget and adds about 120 quality jobs to the Arkansas economy. It was an important investment for us to make and I'm certain that it is going to be a winner for our customers, our shareholders, and the local community for decades to come.

In Q4 and early Q1 this year, we initiated the national rollout of our OilPlus program and we now have a variety of lubricants in packaging of many sizes available at all 190 Safety-Kleen branches, including drums and totes and cases of quart bottles and containers, all packaged at our facilities.

Based on customer response, we are confident this will be a highly successful initiative for Safety-Kleen in the years ahead. We are making progress on additional sales and marketing efforts, and while our packaged products are now available across the Safety-Kleen network, we also continue to roll out our bulk delivery of lubricants in select metropolitan markets.

In Q4, we launched our OilPlus offering into a number of regions, including Phoenix, northern California, New Orleans, Seattle, and Chicago. We expect momentum in our closed-loop offering to continue to build throughout 2017 as our marketing efforts gain traction, our sales teams gain experience, and our teams increase efficiencies and economies of scale. Over the next three to five years, we will be shifting our mix of oil sales from bulk base oils to blended-loop sales direct to our customers and distributors. We will continue to update you on our progress.

Turning to our capital allocation strategy on slide nine, we've added a fourth element to our mix in 2017. As we look ahead to the coming years and our expected free cash flow, repaying debt is likely to be an element that we will carefully weigh against internal investments in our business, acquisitions, and share repurchases.

Moving briefly to our outlook on slide 10, our focus across all four segments in 2017 will be growth and improvements in margin. Within Tech Services, our two key elements to success will be driving volumes into our incinerators, particularly given the new capacity, and capturing large-volume projects that feed our landfills. In Industrial and Field Services, we're continuing to expand our field footprint through the Safety-Kleen network and by winning critical InSite contracts with our Industrial customers. We also plan to capitalize on the expected recovery in industrial production and the ongoing investments in new or expanded plants in the chemicals space, particularly in the Gulf region.

For Safety-Kleen, our primary focus will be the ramp-up of the OilPlus closed-loop program I discussed, while continuing to aggressively manage our spread and grow our parts washer business. Within our branch network, we are working to more deeply penetrate the customer base of our latest acquisitions, as well as the general marketplace.

The outlook for our Oil, Gas, and Lodging Services remains challenged in the near term. But we believe we have reached the bottom of the market. Signs of life in exploration budgets and higher rig counts suggest an improving picture, but the pace remains slow. We will continue to control cost and reposition assets until we see a sustained rising tide there.

In conclusion, our Q4 performance outside of Safety-Kleen was largely uneventful, as it again reflected the market conditions affecting many of our energy- and industrial-related businesses. As we enter 2017, however, we've seen a lift in overall customer activity as US economic expectations have begun to rise. Equally as important, the rise and subsequent stabilization in oil prices has provided an opportunity for customers to be more confident about making spending decisions. U.S. industrial production is expected to rise this year after finally turning positive towards year-end of last year.

Our Safety-Kleen business continues to deliver profitable growth. The new El Dorado incinerator is now online and the recent launch of our growth initiatives should drive more revenue and volumes into our network.

So with that, let me turn it over to our Chief Financial Officer, Mike Battles. Mike?

Thank you, Alan, and good morning, everyone.

Before I begin my prepared remarks, I want to mention that we intend to issue today an 8-K that will contain two years of recasted quarterly segment information, reflecting the segment changes that Alan highlighted. Our 10-K will also reflect the new reporting segments.

Turning to the income statement on slide 12, revenue declined by 3% in Q4 as a result of year-over-year decreases in the industrial and energy sectors, which resulted in project deferrals and fewer opportunities. The vast majority of the revenue decline occurred in Western Canada.

Gross profit for the quarter was $195.5 million or 28.2% of revenue. Gross margins improved 150 basis points from Q4 2015, reflecting our cost actions during the past year. We also benefited from the price increases in our charge-for-oil program within our waste collection business.

SG&A expenses in the quarter were up year over year, although a significant environmental benefit we received in Q4 of 2015 skewed that comparison. SG&A also was impacted by higher severance costs in the fourth quarter, which offset lower short-term incentive compensation.

Full-year 2016 SG&A expenses were up 2% as a result of higher severance and integration costs and the large environmental benefit in 2015, along with sales investments. For 2017, we expect SG&A expenses to be flat on an absolute dollar basis, driven by higher revenue and short-term incentive compensation, offset by lower severance and cost actions.

Depreciation and amortization increased $2.3 million in Q4 and $12.8 million for the full year, as a result of the seven acquisitions we completed in 2016. For 2017, we expect depreciation and amortization to be flat to 2016, in the range of $280 million to $290 million, despite the addition of approximately $5 million related to the new El Dorado incinerator, as well as the full-year impact of the 2016 acquisitions.

Income from operations in the quarter was $21.9 million, slightly below Q4 of 2015. For the full-year 2016, income from operations was down sustainably, reflecting lower year-over-year revenue and the absence of emergency response events.

Fourth-quarter 2016 Adjusted EBITDA was $95.9 million, which included $5.9 million of integration and severance costs related to the headcount reduction and expenses primarily associated with the integration of the acquired companies. For the full year, Adjusted EBITDA was $400.4 million, which came in at the low end of our guidance, as we accelerated some cost reductions planned for early 2017, as well as start-up costs associated with our growth initiatives.

The GAAP net loss for the quarter was $12.7 million or $0.22 per share. Adjusting for the non-cash, tax-related valuation allowances, we recorded $3.4 million in adjusted net loss or $0.06 per share.

Turning to the balance sheet on slide 13, there is a good cash story this quarter as we concluded the year with cash and cash equivalents of $307 million, up nearly $50 million from September 30 and up $122 million from year-end 2015. The higher balance year-over-year reflected free cash flow generation, the issuance of the $250 million of senior notes, and the $47 million sale of our Catalyst business, partially offset by $207 million in acquisitions and $22 million in share repurchases.

DSO in the quarter was 74 days, partially due to our lower revenue. The team did a good job focusing on collections in Q4. However, we continue to face an environment where many industrial and energy customers are stretching out payment terms well beyond standard. DSO has been a difficult metric to improve in recent quarters, but we are hopeful as conditions normalize in the energy and industrial markets that we see better traction.

Q4 CapEx net of disposal was $27.2 million, which includes $7.7 million of CapEx related to the completion of our El Dorado incinerator. For the full year, net CapEx was $198.6 million. We achieved our goal of keeping it at or below $200 million. The full-year number is even more impressive when you consider that it includes nearly $43 million for the El Dorado expansion. We are targeting CapEx net of asset disposals for 2017 of -- in the range of $160 million to $170 million.

Cash flow from operations was $80.8 million in Q4 and $259.6 million for the full year. Excluding the sale of Catalyst, free cash flow for the quarter was $54 million and for the year was $61 million. Based on our higher 2017 Adjusted EBITDA and our lower expectations of net CapEx, we now expect free cash flow for 2017 to be in the range of $140 million to $180 million, excluding any divestitures.

We repurchased $6.3 million of stock in Q4 and $22.2 million for the year. We have approximately $100 million remaining on our authorized $300 million buyback plan. Share repurchases remain an important part of our capital allocation strategy.

Moving to guidance on slide 14, based on the current business environment, we are targeting full-year 2017 Adjusted EBITDA of 143 to -- $435 million to $475 million. We are encouraged by recent energy pricing trends and the volume of opportunities we see in the marketplace. But before we officially call those tailwinds, we would like to see more concrete signs of recovery in the industrial and energy markets and a return to customer spending on projects, particularly in Canada.

At its midpoint, our guidance suggests 14% growth in Adjusted EBITDA. We believe this target is appropriate, given the acquisitions we've concluded in 2016, our comprehensive cost-reduction efforts, and our growth initiatives, including the opening of the new incinerator and the rollout of the OilPlus program. All this should be supported by improving U.S. economic outlook.

Here is how the revised guidance plays out from a segment perspective. We expect Tech Services to be up low single digits in 2017 from 2016, due to increased revenue resulting from the addition of the El Dorado incinerator, nominal GDP growth in the U.S., and the stabilization of the U.S. industrial production volumes after the past several years of volatility and overall declines. Our margins in this segment should also improve, based on our comprehensive cost-reduction efforts.

We expect the Industrial and Field Services segment to be approximately flat with 2016. While we are seeing some good regional opportunities in some of our Field Service and Industrial branches in the US, we have not yet seen concrete evidence of improving market conditions in Western Canada. Signs within the overall energy space are promising, including rig count, but given the pricing and margin pressures over the past several years, our guidance did not assume higher Adjusted EBITDA in this segment in 2016 -- as compared to 2016.

For our combined Safety-Kleen segment, we anticipate continued strong growth in the 15% range compared with 2016. This growth will be driven by contributions from the seven acquisitions we made last year, as well as the full rollout of the OilPlus closed-loop program within SK and continued benefits from our charge-for-oil program. We are excited about the momentum that this segment continues to demonstrate.

For Oil, Gas, and Lodging Services, we are expecting this segment to return to positive Adjusted EBITDA in 2017. Given the struggles of this business over the past several years and the accompanying decline in revenue, we are taking a wait-and-see approach in 2017. We continue to maintain an excellent asset base within this business and should benefit from sustained rebound in energy, particularly in Canada. However, our guidance only assumes a breakeven or slightly positive performance from these combined businesses.

We expect our corporate segment to be approximately flat for 2017, as costs from acquisitions and higher incentive compensation are offset by cost savings and lower integration costs.

Overall, we see a number of positive signs and reason to be optimistic heading into 2017. We are launching the growth initiatives that Alan outlined. The team continues to do a good job streamlining our cost structure, which should enable us to deliver strong margin increases as revenue improves. The investments we've made in sales headcount in 2016 should help us drive returns for us in 2017. And the macroeconomic outlook in our key markets is improving. While the outlook for Western Canada remains somewhat lackluster, the energy and industrial markets over the past two years are beginning to improve on stable oil prices, increased rig counts, and higher exploration budgets.

With that, Tim, please open up the call for questions.

(Operator Instructions). Hamzah Mazari, Macquarie.

Just a question on further self-help around the cost side in your business. It looks like EBITDA has been coming off the last couple of years, despite significant cost take-out. And I realize there has been a lot of cyclical headwinds, maybe some structural. But just curious, how much more room do you have on the cost side as you look at this business over the next two to three years?

Yes. We continue to look at programs to take out cost and to consolidate our operations here. Part of our initiative this year is to take out an additional $75 million of cost, and some of those actions actually were taken in the fourth quarter, so streamlining headcount, consolidating locations, and then well over 50 other initiatives, quite frankly.

And some of those were generated as a result of the acquisitions we made where there's a lot of integration and savings across a network. But I think just in general our feeling is that, particularly with the Safety-Kleen business that we acquired back in 2012, we're coming up on five years and really feel very strongly that there is still quite a bit across the network that we can leverage with the Safety-Kleen organization.

And so, I think we still have some runway over the next two to three years to further reduce our network costs. We still operate about 450 locations. We still believe that there is further consolidation with the number of service branches we have. Hopefully, that gives you a little bit of color.

And one more point on top of that, so there's still a fair amount of centralization we can do within the Safety-Kleen network.

And so as far as taking costs out and streamlining as revenue has declined, we certainly have done that over the past year or two. As revenue has declined, we've gone over and made our business smaller and our headcount smaller to match that.

There is a limit to what we can do there, as I think you are alluding to. But there are still things we can do around the network, whether it be in transportation, in centralization of call centers, in consolidation of sites between the Safety-Kleen organization, the legacy Clean Harbors, and the new acquisitions that we have. There's opportunity there. Are there home runs? No, but there's a lot of singles and doubles out there that we can do to help drive margin improvement in 2017.

That's very helpful and I appreciate it. And just to follow up, I'll turn it over, if you could just touch on what your appetite is for M&A outside of the current segments that you are in, or maybe complementary segments or adding critical mass to existing segments. I know most of the focus has been on this closed-loop system. I'm just curious, given where the current balance sheet is and your focus on the closed-loop, does that take other M&A off the table?

At this point, we have all of the investments needed for us to execute our three- to five-year plan on our closed-loop, outside of maybe some investments in some distribution assets, some rolling stock as we continue to roll out our bulk business. But as far as being able to meet the 120 million, 130 million gallon blended oil kind of target that we want to get to, we are in pretty good shape.

We are a Company that a lot of people come to in regard to acquisitions relating to the waste disposal side of our business, so we're going to continue to look at those opportunities. But I would say that in 2017 we're really going to drive margins and drive organic growth and continue to integrate the deals that we did last year and particularly to continue to integrate Safety-Kleen.

Great. Thank you so much.

Joe Box, KeyBanc Capital Markets.

Alan, how would you typically define the normal lag period between when you see a pickup in industrial and energy end markets and when that starts to flow through to the tech services and the industrial and field services business? Ultimately, what I'm trying to get at is just the cadence of revenue in these businesses as we go through the year.

We implemented Salesforce as our new CRM across the entire platform last year. And as we have been mining a lot of that data, we have seen the pipelines building across really all of our businesses.

We're still honing in on timing of close dates and predictability by month of what those pipelines are going to look like. But all in all, I think we are definitely seeing an uptick. We have well over 900 salespeople across the organization. And so, we've made a lot of investments. We didn't really cut costs in those areas at all in the last 12, 18 months; in fact, we've actually made quite an investment there. So, I would say that we are seeing that in our pipeline.

I guess I would add to that and say that we are seeing -- in our pipeline, again with Salesforce helping us out, we are seeing a large volume of projects and a higher -- so last year we had a large volume of projects as well. The dollars were a lot smaller. This year, the pipe is still there. The project size, especially as it relates to waste projects and remediation, is up; the dollar amounts are up a lot higher. And so -- especially in the United States.

In Canada, it's still more kind of anecdotal. I really haven't seen -- certainly, we hear good stories and we are excited about it. We are not ready to say that we are there yet in Western Canada. But certainly in the United States, we are seeing a pipeline, a more robust pipeline with higher dollars as we go into 2017. And how that translates into a lag, which is what your specific question was, it's tough for me to put a finger on it. But, certainly, the pipe is there.

I recognize that waste lags and it's going to be tough to say whether it's one or two quarters. But, clearly, you guys have some historical context here within Tech Services and Industrial and Field. Is it typically a two-quarter or a three-quarter lag, or can it be even more than that?

That makes sense to me. One to two quarters does make sense to me, based on my understanding.

Okay, thanks. And one last follow-up for you, I recognize that this is still a ways out. But as you guys shift toward more blended, away from bulk oil, can you just help us understand maybe the difference in revenue and profitability from base oil versus blended, maybe on a per-gallon basis, just to give us an understanding of how that mix could change and flow through over the next couple of years?

Without probably getting into the details of the margin, but I would say that it's certainly less volatile and at a much higher margin than -- base oil is essentially a commodity, as you know. And although pricing has inched up a little bit here in the first quarter, it is still much more of a volatile commodity and a very low margin, at that. And so, there is an absolute pickup in margin.

I'd just rather not guess to you right now on what that actually is. I'd rather not share that margin information from a competitive standpoint, quite frankly.

Understood. Okay, thank you.

Michael Hoffman, Stifel.

If I could, Alan, given all the deals that were done to support the rollout of OilPlus, could you frame the blended in gallons so we understand how many gallons you are really blending at this point and not get so fixated, maybe, on percentage at the moment, given you have increased the denominator?

Yes. We have been selling about 40 million gallons or so of blended oil and our goal is to get to about 120 million.

And the timeline, given the incremental assets that were added, what's in the guidance? 40 million goes to 50 million in 2017? 40 million goes to what?

I don't have the exact number here to share with you. But, clearly, that is -- we have a model. We built out a model that we've shared with the Board, and certainly we are looking at that on a quarterly basis and making adjustments.

And as we've communicated, I think in the last couple quarters, sometimes we've seen a shift in some of our blended volume as we've moved into certain markets, seeing some of that shift away from wholesale buyers, distributors to direct. So there's a little bit of that going on. But I think, directionally, I think we are trying to share that there's about 80 million gallons more of blended that we are going after.

Yes, Michael. And if you think about where we are for Safety-Kleen, they are up 15% and we are guiding on that number, and we feel like a lot of that is on parts washers and containerized waste, but a lot of that is on the execution of the closed-loop.

Okay. Just to be clear, when you say 15% in the context of your messaging, like that was the EBITDA year-over-year change?

Yes, sir.

Okay, I just wanted to make sure I got that right. And then to follow through with that, in your guidance are you using posted prices as of when, so we have a sense of where we are on a year-over-year basis?

Over the past week or two. When we put the guidance together, we've been working on that here in February, so it is (multiple speakers)

Okay. So Motiva is at about $2.17. That's the posted number that we have to figure out what proportion of that you are getting.

That's right.

Okay. So you're not -- you haven't built in -- that's the good news is you haven't built in there could be a seasonal upside to that, that happens March, April, May, June because of the summer driving season.

We tried to do that and we had a lot of discussions around that, Michael. But we just have been wrong more often than we've been right when we've tried doing stuff like that.

Yes, so that's upside. If I get a seasonal move and if any of the capacity is coming, like Pascagoula is supposedly coming off-line for a maintenance cycle. We'll see if that actually happens, but if it is, that will constrain supply. That could favorably move price.

Sure. And Michael, this is what we've done every year when we've set guidance. We try not to speculate on the movement in currency, the movement in oil prices, these macroeconomic factors. Again, when we've tried to do it and we've tried to set up a set analysis around it, we end up more wrong than right.

Yes. And we are certainly managing the spread, and I think we've shown over the last two or three years now the ability -- when you look at Safety-Kleen's performance in light of where crude has come from and where base oil has gone, as you mentioned, at $2.17. But back during the acquisition, it was about $4.25. So we have really done a good job of managing the spread and we will continue to manage the spread. But the real opportunity in margin expansion and the reduction in volatility is really when we are dealing direct with our customers with blended product.

Fair enough. And then, Mike, could you talk about what's in the midpoint for the mix between U.S. EBITDA and Canadian EBITDA?

Well, you know --

And how that compares to 2016?

I don't have a super answer as to the breakout, but I will tell you in 2016, right, 20% of our revenue is from Canada, but 100% of our losses. And so, we are not anticipating as we go into 2017, Canada being this huge EBITDA contributor.

If you look at what we said around the businesses that have a strong presence in Canada, whether it be Oil and Gas and Lodging or in Industrial and Field Services with the Oilsands, those -- which are, as I say, 80% of Oil and Gas and Lodging is in Canada and maybe 20% of Industrial and Field Services is in Canada, those are -- we are not anticipating those guys to come back anytime soon.

Okay. Asked differently, do you expect to be more profitable in Canada in 2017?

Modestly, modestly profitable.

Modestly.

As you saw in our numbers, for the year we were negative in Oil and Gas and Lodging, $2 million or $3 million. We are going to be positive a small amount. That's the goal. And that's going to be on the back, Michael, of more cost actions than on incremental revenue. We would say incremental revenue is nothing there.

Right. But the 20% that's Industrial and Field Services lost money as well. So does that lose money at the same rate in 2017? I'm just trying to understand.

I understand your question. And I say that, as we said in the prepared remarks, it's going to be flat. And so, again, we are not anticipating a lot of goodness coming out of Canada in both the Oilsands or in Western Canada. So we are saying essentially Oil and Gas and Lodging up a little bit on cost action, Industrial and Field Service flat because of some goodness we see in the United States in Field Service, offset by some continued softness in Western Canada.

Fair enough. And then, could you look forward into 1Q and give us some thoughts about what you think 1Q trends look like in the context of your overall guidance, so how we proportion it?

So thinking out loud, Michael, if you take our numbers, $400 million, and you say our guidance is $435 million to $475 million, which is, just based on math, is a 9% to 19% increase, Q1 is right there in the middle of that, just like it is for the rest of the year.

So we felt that because we gave annual guidance in that range, it is the same range as it is for Q1, we didn't go down the path, but that's why we did it. We just -- it just read weird that the guidance in Q1 is the same as the guidance for the year, essentially.

Okay, cool. Thanks for that visibility. Appreciate it.

Al Kaschalk, Wedbush Securities.

Two quick housekeeping items, first on the CapEx, $160 million to $170 million. I think you said that's a net number. What have you assumed in terms of proceeds from potential sales? Said differently, what's the gross spend right (multiple speakers)

So we will come out with a 10-K, hopefully later today. But it will say -- for 2016, just to ground you there, we were about $218 million, with $20 million of asset sales, of property in Connecticut, some other assets we have in our network that were just -- needed to be sold that weren't being utilized properly, so that's how we landed. So that's the $198 million number you see (multiple speakers)

(multiple speakers) not acquisition sales?

It's not acquisition sales.

It's all just assets?

It's just trucks and some land and some other things we have.

So in 2017, I'd say that's going to be -- if you say the midpoint is $165 million, it's going to be $185 million and $20 million again. And we have a line of sight for different asset sales, just like we did in 2016. Again, assets, and Alan can speak to this better than I can, but they're assets that are just being underutilized in our network that can be sold. And we made some money on those during the course of the year.

So as we have been consolidating locations, 700-plus locations, a number of those, over half of our locations we own, and some of those consolidations have resulted in us having surplus assets that are valuable, but just duplicative. And we're divesting those, and we have shown in the financial statements gains on a couple of those from sales last year.

So we are making good decisions about which ones. And you will see us continue to do that, excluding selling a business like we did with our Catalyst business that was sold for approximately $50 million. It's not included in that number.

Maybe it's not a fair question because of where the business is sitting or the volume there, but maintenance CapEx for the Company now, is it -- are we at the $120 million to $140 million range? Or how much of that $185 million is pure maintenance related versus growth CapEx?

So, Al, I think you and I have talked before. It's tough to lay out exactly what is our growth CapEx versus -- it's kind of undefined, so we try to take a crack at it. And I would say that we do have a little more El Do fallover that came into 2017, not much. We do have a handful of issues around the closed-loop and building out that distribution network.

But I'd say of the $185 million, $140 million, $145 million, Alan, I'm not sure what you thought, we did some analysis on this a week or two ago to break that out. But that's not crazy, $140 million as maintenance.

Yes.

Then the $45 million is closed-loop, El Do, and other things like that.

Yes, and we are really driving free cash flow again this year. And I would say that that's been a primary driver of some of our decision-making here as well.

Okay. The other -- Mike, you had mentioned some startup costs. I don't know if that was bracketed to 2016 or some in 2017, but if you could maybe -- I'd call that inefficient costs, but obviously it has a cost to get things going. I don't know if you have that number available. We can always follow up off-line on that.

It's a relatively small number. But as you think about our daylighting business, our healthcare, some of the expansion that we are doing in our retail business, there's some losses early on as you staff up and you build out your network there. But it's not significant, Al.

Al, all I was trying to do is walk back from the midpoint of the $405 million down to the low end of the $400 million. So, there's a little higher severance cost and a little higher startup cost, and really that was the context of the comment. It's not material to the 2016 numbers and certainly not material to the 2017 numbers.

Okay, fair enough. I appreciate that. I guess then my question, then, Alan, in the light of how things have gone over the last 12, 24 months, in the context of the growth that you -- I think maybe growth is the first time I've heard that word in a few conference calls. But in terms of 2017, what gives you the confidence or maybe should give us the confidence that this range that you've put out looks pretty achievable in terms of 2017 in light of what still remains a very challenging energy market for you in Canada?

Yes. I think there's been a lot of effort across the organization to right-size the business based on the new realities of what we are dealing with here. And that has touched everybody in the organization.

We certainly feel from a positioning standpoint we are in a good position. I think we have always been able to manage our costs. The downturn that hit us with crude oil over the last two, 2-1/2 years has been really catastrophic to us and our customers in many ways, and we feel like we have seen the bottom of that.

And, again, based on what we see from our sales force and the pipeline that we are looking at, I feel like -- and the fact that our guidance is less than our budget, so we feel more optimistic, but I think we are being conservative and we want to beat our numbers and realize that we are tired of missing, probably like you guys are tired of hearing us report bad numbers. So the team is really, I think, looking for a really good year this year.

Thank you very much, and good luck, guys.

Noah Kaye, Oppenheimer.

I think you had talked about it in the previous conference call. But now that we actually have had the administration transition, or at least the beginning of it, we know who the EPA pick is, there's some voicing of increased support for items like Superfund, can you tell us what your views are on this point and how those changes might be impacting some of the remediation project work opportunities that you are seeing?

I think it's so early in the change in administration, to be honest with you.

We certainly read, as everyone else does, about, for example, Keystone being -- potentially going to be approved. I know that that application is going to be resubmitted and some of the other pipelines look like they are going to be approved. So, that will certainly help us down the road. But I think it's really too soon and too early to predict.

We are certainly a business that is created from EPA regulations, quite frankly, from the days of RCRA in 1976 to today. And so, it's somewhat a two-edged sword. We are a highly regulated Company, but also our customers rely on a lot of us to perform services for them to meet these regulations. And quite frankly, I don't see the underlying regulatory environment changing. Maybe the enforcement level or maybe the permitting might be a little bit easier, particularly in the oil and gas space. But I think all of it is guessing at this stage, to be honest with you. I think it's just too early.

Yes, Noah. So as others have commented, some of our peers have commented, it is too early to come to this conclusion.

Clearly, macroeconomic factors of more jobs in the United States and more industrial production in the United States and lower corporate tax rates in the United States are all good guys, right? They will all be benefiting, including Clean Harbors, but way too early to get to that answer as far as what Pruitt does and what the EPA does and how that affects. And also, many states have their own RCRA programs and their own enforcement programs. Those are separate and distinct from the EPA.

So, it's going to be a wait-and-see approach. And certainly as we look at 2017, we haven't assumed any kind of goodness or badness in any changing regulatory environment.

Okay, that's very helpful. And then, I just want to go back to the cost question that was asked early on. You mentioned potentially taking out some of the costs within SK. You highlighted some of the cost-reduction actions that you are taking within Oil and Gas. Just where exactly are we on a run-rate basis in some of those cost-reduction initiatives, and how should we be thinking about the cadence of getting to that $75 million type annualized rate over the course of 2017?

So we track those and we meet on those bimonthly and review those.

I would also tell you that that is built into our culture here over the last 15 years. We are always looking at improvements in business process and operational excellence and other initiatives here to continue to lower our cost structure and be more efficient, as most other companies have to be as well, particularly when you are in a GDP kind of environment, which is what we have been operating in here, plus the headwinds of oil.

But I would say offsetting, sometimes, our cost reductions are the things that are outside our control, like healthcare costs, which continue to be a significant expense for the Company, as well as other costs like that that just have natural inflation.

So I would say you should anticipate us to continuously drive costs out of our business as we continue to invest in topline growth as well, so we are trying to balance between those two.

Yes, Noah, $75 million, too, just to be clear, $75 million is a gross number, right, is a gross number. And as Alan said, there are bad guys coming in here with healthcare costs or investments that we are making, even small dollars, in areas like daylighting and med waste. So it's not -- we are thinking $30 million is more of a net number as we look at 2017, cutting through it all. But that's a rough estimate because you've got to think about acquisitions and what's their impact and we are making investments in certain areas, should they be counted or not? But I think all in on a net basis, $30 million, as I think about the business going forward, that's probably a good number to work with.

Okay. Thanks very much, Alan and Mike. Appreciate that.

(Operator Instructions). Sean Hannan, Needham & Company.

So first question here in terms of Tech Services and El Dorado, appreciate some of the color you provided a little bit earlier. I just wanted to see if we can get a little bit more detail with respect to around how you are expecting at this point now, given that it's live, how this should ramp through the course of the year.

What are you looking at in terms of the incremental volumes coming in there today? What are your perspectives around margins and pricing so far? And how do we think about that in terms of utilization? Don't know if there is a way to think about, hey, what would 4Q have been if El Dorado was operational during that full quarter. Any more perspective around where we are today, how that's going to proceed on a few fronts in contributing to the business?

I would just probably give you one number. It's probably about $7 million of EBITDA contribution that we would expect this year. Literally, we are just starting up. We are burning waste, but we have no -- we are still in a startup mode here and shaking down the plant. And so, we don't want to say that we are going to be running 70,000 tons this year, by any stretch.

But I would tell you that we are seeing a lot of opportunity both on the captive side, as well as on the growth side. We are winning contracts. Our deferred is up about $3 million year over year, so we are up about $64 million, $65 million of deferred revenue, so we are building waste inventory in the network. And we think from a timing standpoint that this was the right time to bring on additional capacity, in light of where we think our customers are going with their captives. And we are winning business from captives as we speak. So we are optimistic that this is going to be a good long-term investment for us, Sean.

But as we've said, Sean, before, it's going to take some time to get the incinerator capacity as we go into Q1, adding 70,000 tons online here in Q1 is not going back to 90,000 tons in Q2. It's going to take time to do it. And if we are -- the timing might be just right, as the market seems to have kind of warmed up a bit as far as opportunity, certainly in the US, for waste projects and remediation as they are related to our incinerator.

So we are excited about that. But it's going to take time to get a decent return, to get to kind of a -- really kind of get cooking, in fact, and get the network back up into the 90s.

Right. Thank you, and I fully appreciate that. Just to get some understanding, what should we think about in terms of how to use the utilization, what it drops to, roughly?

I guess you just take the --

I don't think it's a good idea for us to guess. So we'll come back with some thoughts on utilization probably in our first-quarter call.

We certainly will (multiple speakers)

We are really just in startup mode here, so it's not even -- it's not fair to add it into the equation just yet.

Right, right.

We still have to go through a trial burn and get our final permit, so we are -- we just don't want to get ahead of ourselves here.

Fair enough, okay. And then switching gears over to the Industrial segment, the sense I've gotten and, I think, a number of comments during the call today have supported this, is that there may be some aspects of turnarounds that you should get a little bit more activity this year. Did I make the correct assumptions? I know that turnarounds in terms of backlog have remained pretty strong for a while. So, just trying to get a little bit more color around the expectations for that.

Yes, turnarounds should be stronger this year than last and will be stronger even more so in 2018. So we have good visibility on that, and unless something gets pushed or changed, and that's not assuming any upsets out there and unplanned events, so yes, you are right. It should be stronger in both this year and next year.

And is that just simply a function of what we had previously as course of delays among a number of customers, or is there something a little bit more organic that's adding to that turnaround opportunity and thus what should translate as revenue flow?

I honestly think it's just timing more than organic at this point. I would say more of that.

Yes. The reports we are seeing before any kind of industrial production kind of even went up.

Okay, that's helpful. And then on the Oil and Gas business, obviously very much recognizing, hey, demand is challenged, when I look at the results for Q4 and the sharp decline year on year, just trying to see if I can get a good understanding of context, perspective, around the contributors to that, whether it's a function of -- or how much the function of a couple variables. Pricing, obviously that's been a factor out there. Don't know how much that contributed in terms of your overall revenue that was recognized there. Demand, year on year, how that changed, and then to what degree has there been business that's actually been walked away from, perhaps as a consequence of the pricing, all ultimately contributing to that year-on-year revenue decline.

Can you help provide a little bit of perspective around that, because I think it created some context since you are going to be looking at a flattish revenue year this year?

Yes. I would say that pricing has been severely discounted in the last 12 to 18 months, and in some of our rental business, upwards of 50%, 60% discount. And so even though utilization might be better, particularly with the rig count up, our discounting was substantial and we are going back to our customers now. We are walking away from some business.

Some of that business is coming back to us because I think, in general, it's just not sustainable to put a lot of these assets out in the oil patch at the kind of discounts in pricing that was being given back last year. So I think that's one thing.

I think utilization, particularly in our lodging business, was -- it's been pretty good this quarter. But, again, pricing has been pretty much under pressure there and we would anticipate that to continue to be under pressure.

I think overall we are feeling like from a cost standpoint that we've certainly taken out a lot of costs, particularly out of our Industrial business, as well as out of our Oil and Gas, Lodging business. But we continue to look at shrinking our size of our network up there, consolidating real estate. We still have some very expensive leases that we are going to be getting out of this year that are part of our cost reduction, and those are ready to go, planned.

And so, we continue to right-size the business to the new pricing realities that we are operating in. And if we see a little bit of rebound, then we are going to see some real benefit from that because our cost structure is going to be that much lower.

Yes, so when you quote is it pricing, is it demand, is it -- it's all. But I think Alan's point is the one that we would point to, is that the pricing is really what hurt us. I think that we ended up keeping market share or even gaining market share over the past year, certainly in Q4.

The idea now, as Alan said, is to go back to our customers and demand pricing and other types of incentives to try to get some margin back. And so, I think we worked with our customers to give them the discounts they needed and we are hopeful that we get this back as this area improves.

Okay. And then, so as you are making these competitive price adjustments within the market, to what degree I'd say -- I'd ask in terms of recent months, because obviously it has been a little bit of a longer trend where smaller competitors are basically having to exit the market? Is that still very much a dynamic that's at play today, or how do you think about that? Because, obviously, if you gain share, you lower your cost structure fundamentally, you are in better position for upside, that could really be amplified if there are some improvements in demand and less service providers in order to be able to help the market.

I guess I would just tell you that this was a $160 million EBITDA business 2-1/2 years ago and last year it was breakeven on an EBITDA basis. This business has got a long way to go, and we have just gone through the worst downturn that most people would say has happened in the last 40 years.

And so without getting some visibility into customer spending to understand where their capital is going to be, which, quite frankly, we are seeing a little uptick here, but that business is really, really, really under pressure. And it is just starting to see some activity here.

So we don't want you to think that there's anything positive to come out of Western Canada this year. And in light of where it used to be compared to where it is today, it's really a very small part of our business now.

So I know you are trying to get your arms around the upside and the downside. I would say that we don't see a lot of upside in 2017.

We are hopeful that -- we see -- as I said in a question earlier, in the US we see signs of life. In Canada, it's still anecdotal. It's still anecdotal. And so when I say that we are going to be flat to maybe up a little bit, that's really how we feel. That's not a -- we are not --

And I apologize if the question didn't come through as intended. What I was trying to understand is what are you seeing in terms of competitors. How much more continue to be squeezed out of the market?

There's always going to be small players that are going to come and go. It's tough to put a number on exactly. Is our share a bigger share? It's tough to say for sure.

All right, thank you very much.

David Manthey, Robert W. Baird.

When you talk about the energy markets improving, and you've alluded to this a couple of times, could you tell us what percentage of your, call it, downstream energy-exposed business is US versus Canada oil and gas versus Canada Oilsands? Because the recovery we are talking about here is primarily in the Permian, and I just don't know how much of an impact that's going to have on you.

Yes. We are not a major player in the Permian or in the US. When we talk about our rental business and what we can service, it's about 150 rigs of particular assets that would go around the drill rigs there. So when we look at utilization, we are probably running 40% utilization in Canada and probably 80% utilization in the US. And so, it's not a very big part of our business around the drill rigs, quite frankly.

Okay. So what you'd need for these businesses to get better is Oilsands?

Well, when you look at the overall business, it's got a number of components to it. And so, our Oilsands Industrial business, as well as our Lodging business, go hand in hand. And both the utilization of our lodges, our fixed lodges, as well as the Industrial business in the Oilsands is probably running at about half of where it used to be.

And so, yes, we would need possibly investments into new, but, more importantly, maintenance on existing, as well as maybe some additional outsourcing, which we've seen some, but not enough yet to drive utilization better.

Okay. And has the idea of a carve-out just died now? I assume you haven't found any buyers for those assets. What is the plan, ultimately?

We continue to run this business. We are trying to grow this business. We are investing in sales and we are putting some capital to make sure that we are maintaining these assets because we do have well over $250 million, $300 million book value of these assets. So we've got some wonderful assets here and we want to grow this business again and make this a profitable business for us. But the carve-out is off the table, based on how the market really has crashed in the last two years.

Okay. And then, finally, on the bridge from 2016 to 2017, so let's say EBITDA we are going from $400 million to $455 million, you've mentioned a number of moving parts here. But I'm hoping you can help us understand. The first $100 million of cost reduction, how much of that in terms of benefits flows over into 2017?

I think you said $30 million net of the $75 million will carry over. In the past, I believe you'd mentioned $30 million of benefit from acquisitions that carries over into 2017. And then, you've put a number, a $7 million number, on El Dorado. I'm just -- I'm trying to get an idea of the moving parts here between 2016 and 2017 and how we bridge that before we get to the operations of the business.

So I think you are on the right track. So if you think of, big picture, $30 million from closed-loop, acquisitions, Safety-Kleen continuing to perform well; $30 million on cost savings, which is we can talk about this $100 million and this $75 million, but at the end of the day we think it's $30 million; $7 million from El Do; offset by incentive compensation being higher than it is in 2016.

So let's say take a $20 million or $25 million off the top of that and you are going to get pretty close to the $455 million range. I mean, there's a million other smaller things; but, big picture, that's how we think about it.

And then, severance/integration obviously being down a bit. There's about another $10 million or so or $15 million of severance/integration less in 2017 than in 2016.

Okay, that's helpful. Thank you.

Bobby Burleson, Canaccord Genuity.

Most of my questions have been exhausted by this point, but just touching on the different moving parts here that the previous caller asked about. On the EBITDA shortfall, just can you parse out for us mix, in terms of the impact from mix versus the startup costs?

So you are talking about Q4, Bobby?

Yes, I'm talking about Q4, so mix, startup costs, and accelerated integration costs.

Sure. So if you think of $405 million down to $400 million, cutting through it all, simply it's S2 million to $3 million of severance integration costs, maybe $750,000 to $1 million of startup, and maybe $1 million of business things. And that's what we're talking about.

Okay, great. And then in terms of the closed-loop, you guys are talking about that ramping significantly in 2017. Just wondering the linearity of that ramp this year, any insights into whether or not it accelerates in the back half of the year? Are there some seasonal dynamics in terms of what the demand is for those products that factor in?

I'd say that certainly in the summertime is a much -- the business is much more oil changes, more production in the summertime. Obviously, this is a long-term plan, as Al mentioned in his prepared remarks, a three- to five-year deal. And so, tough to put a real number.

These numbers here in year-end and in Q1 are really small. We said it's up 20%, but on some very small numbers. So I would expect that this gets ramped up in the back half of the year, and certainly as we look into 2018 it's going to be a much more material number. And, again, we will keep the -- as these numbers get to become real numbers, we will give more clarity as to exactly what they are.

Just to add to that, if you think about the sale of the closed-loop, a lot of those will be repeat customers. So as we move through the year and you sign up new customers, then they become a repeating customer. And so just naturally by the way the model works, it's going to grow over the course of the year.

Okay, great. And just curious how you are priced versus some of the brand names that might be on the shelf. Is there a lot of incentive for the customer to -- and what, I guess, are the customer preferences? Does brand really matter? I know you guys have mentioned in the past that you're getting some decent kind of recognition there.

I think there are a lot of customers out there that like the concept of having the same truck that's providing their used motor oil service to be delivering the bulk products they have, as well as the reduction in costs that they gain by dealing with one supplier, one truck, instead of two. And I think just overall not only do we have 70 or so products of our own that we are now branded and packaged, but we are also distributing other customers -- other products that customers need.

Safety-Kleen had about a $100 million business of selling a variety of Allied products, including windshield washer and antifreeze, as well as handling waste antifreeze. So, this whole concept of servicing customers on the waste side, coupled with delivering them quality recycled products, is something that Safety-Kleen has been doing for 30-plus years. So we anticipate this to be very similar and also very competitive to what existing suppliers are charging for that service today.

Okay, great. Do you guys have an expectation for industrial production that's embedded into your guidance? Can you share with us what you think that -- what you're using for baseline growth there?

Yes. So, Bobby, it's not much, maybe a slight increase. But really we're not anticipating -- when we set this guidance, we weren't anticipating a large recovery and certainly in the Industrial Market as it relates to our Tech business or our Industrial and Field service business. We tried to be reasonable with a modest increase in GDP as it related to Tech, but that's about it.

Great. Thank you.

Michael Hoffman, Stifel.

I just wanted to clarify. All of the other incinerators except El Dorado should be in an 88% to 92% utilization because that's what you have been trending for the last few years. There shouldn't be any change in that view. And El Dorado has its up-and-down time to go through all the testing and all the things you have to do to get fully operational, and then -- and by the end of the year we should see that performing closer to a normal utilization. That's the right way to think about it, right?

Yes. I'm not sure if at the end of the year you will be at normal utilization, per se. But yes, that's the right way to think about it.

Yes, the incinerators are going to keep cooking at their 90% range, high 80% range, no change.

Okay. And then just on the waterfall commentary, you were responding to the 30 million that's closed-loop. That's just the acquisitions or that's the acquisitions plus incremental benefit from moving 40 million gallons towards 120 million?

The latter, Michael, it's (multiple speakers)

Okay, okay. Just wanted to be clear of that. Okay.

There are no further questions in the audio portion of the conference. I would now like to turn the conference back over to management for closing remarks.

Okay, Tim. Thanks very much, everyone, for joining us today, and we look forward to seeing many of you at conferences and other events throughout 2017. Have a great day.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your day.