Clean Harbors Inc (CLH) 2017 Q3 法說會逐字稿

Greetings, and welcome to the Clean Harbors Third Quarter 2017 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Sir Michael McDonald, General Counsel for Clean Harbors. Thank you, Mr. McDonald. You may now begin.

Thank you, Manny, and good morning, everyone. On today's call with me are Chairman, President 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 1, 2017.

Information on potential factors and risks that could affect our 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 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. Good morning, everyone. Thank you for joining us.

Our third quarter results were affected by several headwinds. The most significant of these was the recent hurricanes, which impacted our facilities, increased transportation costs and temporarily limited production and associated waste volumes at customer locations across Texas, Florida and Puerto Rico.

While we're disappointed in falling short of EBITDA expectations in Q3, I believe it's important to keep in mind the underlying dynamics of our overall business remain positive. We're seeing favorable trends in the volumes of waste into our networks; more large project opportunities in our pipeline; greater waste oil collection; a growing interest in our Performance Plus brand, including more repeat customers; and improving rig counts in our oil and gas business.

The majority of the challenges we faced in Q3 were either temporary, such as the negative effects of the hurricanes; or in areas that we can address, such as making the needed changes at El Dorado. El Do is the first new incinerator built to meet the new MACT 2 standards, including a complex air pollution control system that is the first of its kind.

Our favorable long-term outlook is unchanged. As a result, today, we announced that we're doubling our existing share repurchase program from $300 million to $600 million, and share buybacks will remain a key component in our capital allocation strategy.

Before going into the detail on our segments, here on Slide 3, you can see the extensive network of our locations that were affected by these 3 storms. This is a snapshot of our internal mapping software of our locations. We have more than 1,300 Clean Harbors employees in the areas that were affected. We also had more than 40 locations in Texas, Florida and Puerto Rico, including our largest plant in Deer Park just outside Houston, multiple TSDFs and numerous Safety-Kleen and Clean Harbor branches.

Given the industrial customer base we service, particularly in the Gulf, we maintain a large operational footprint in that part of the country as well as 2 service locations in Puerto Rico. In 2016, for example, the affected areas across the Gulf and Florida represented more than 20% of the company's revenues.

So now let's now turn to our results, starting with a summary on Slide 4. Total revenue increased 4% in the quarter, as Tech and Safety-Kleen each contributed year-over-year growth of $15 million or more. Adjusted EBITDA of $123 million was down 3% from a year ago, with the hurricanes impact felt across several businesses, but particularly Tech Services.

More than 80 of our employees filed for financial assistance from the company due to severe damage to their homes or property. In the wake of the storms, we continue to pay, support and aid those affected, including sending fuel, water and generators to our employees in Puerto Rico.

Several of our facilities were shut down for a week or more, and some suffered minor flood damage. Our Deer Park facility did not process waste for over a week, which forced us to reallocate and transport waste headed there to other locations in the network to continue to service customers outside that region.

Across the Gulf Coast industrial corridor, hurricane-related downtime at customer plants and facilities resulted in diminished waste streams and pushed out industrial and environmental projects. What limited emergency response work we saw as a result of the storms was predominantly flood cleanup, with limited releases of hazardous material.

In anticipation of the storms, we had staged a lot of resources into the regions from as far away as Canada, but no large chemical or other emergency response events materialized.

Our bottom line performance in Q3 was affected by other factors, including higher-than-expected costs within our incinerator network and weaknesses in our Industrial Services group even beyond the hurricanes. In addition, our OilPlus closed-loop offering did not ramp up quickly as we had anticipated.

From a segment perspective, one bright spot was Oil and Gas and Lodging, which grew revenue and profitability for the second consecutive quarter as a result of the strengthening in the drilling environment.

Looking at Tech Services segment on Slide 5. Strong volumes into our incinerators and landfills for the second consecutive quarter drove a 6% increase in revenues. And if you exclude our Transformer Services business, which we sold this year, from the 2016 results, this segment grew 10% from a year ago due to the record volumes that we're taking in.

We've been impressed with how quickly the team has been able to drive volumes into the network. Incineration utilization was 92% in the quarter. We also grew our landfill tonnage 40% on incremental gains in our base business as well as supported by stronger project volumes.

On our 2 -- on our second quarter call, we discussed some additional expenses at the new incinerator as part of the shakedown process. These costs continued in the third quarter, as we addressed the design flaw that needed to be corrected. To fully tackle these issues, we recently took an unplanned Q4 shutdown at El Do, which should now enable the facility to end 2017 strong and start 2018 in a great position.

Turning to Slide 6. Our Industrial and Field Service segment had a challenging quarter, following a strong Q2. The top line was hurt by hurricane-related slowdown in the U.S. industrial services market and a weakness in the Canadian industrial service market. The sale of our catalyst business in 2016 resulted in lower revenue this year.

These factors more than offset growth in our Field Services, our daylighting and production service business. For the quarter, our Field Services team generated approximately $4 million in revenue related to hurricane response work.

Adjusted EBITDA and margins declined from a year ago based on the lower revenue and our mix of business in the quarter as some projects canceled, mostly due to flooding, and others due to current environment. And at the same time, margins in this business remain under pressure as customers continue to demand better pricing. The industrial slowdown in the U.S. and Canada contributed to a decrease in our personnel utilization, which was at 81% in Q3 compared to 82% a year ago.

Moving to Slide 7. Safety-Kleen grew revenues by 6% due to higher base oil and lubricant pricing and contributions from 2016 acquisitions. Revenue in the core offerings of our Safety-Kleen branches was adversely affected by the storms in Florida and Texas, and parts washer services declined because of that to 247,000 in the quarter.

Despite disruptions from the storms at our own branches and customer sites, the team really still did a great job and collected 59 million gallons of used motor oil in Q3, slightly above last year. Our Charge-for-Oil rate declined just $0.01 from Q2 to Q3, as the team continued to work hard on price despite an increase in the fuel market, driven by the higher crude prices.

Adjusted EBITDA in the segment was flat year-over-year. And in recent months, we've made investments in Safety-Kleen, including centralization of Safety-Kleen's functions to a national customer care center, and expanded the closed-loop through additional salespeople, infrastructure and distribution expansion. And this past quarter, we launched our closed-loop offering in 3 new metropolitan markets.

In terms of the sales mix for Safety-Kleen, direct sales accounted for 4% of total volumes sold in Q3, flat on a sequential basis and lower than expectations. Blended sales accounted for 29% of our total versus 33% last quarter and a year ago. The slow [rise] in lubricant sales, while disappointing in the near term, does not lower our confidence in the considerable value we expect to derive from this program.

We see a good pipeline of opportunities, and I believe it's just a matter of time before we reach that tipping point where we start to consistently move larger volumes, which will help further unlock the value of the acquisitions that we made in 2016.

Turning to Oil, Gas and Lodging Services on Slide 8. An improved drilling environment helped fuel an 8% increase in segment revenue. Our surface rental business more than doubled from a year ago, as we capitalized on opportunities in both the U.S. shale plays and Western Canada. Average rig service increased to 105 from 73 a year ago, and average utilization of our key equipment was 43%, up from 26%.

This improvement in our solids control business more than offset seasonal weakness in our lodging business. Occupancy of our saleable rooms at our fixed lodges was 27%, which is down from a year ago when we benefited from the demand related to the Fort McMurray fire. While segment margins remain low, we once again generated positive EBITDA and increased our top and bottom line.

Here in Slide 9, just a quick update on some corporate initiatives. Revenue growth remains the top priority for us, as we've made good progress on our top line year-to-date. In response to our new incinerator, we've driven some large volumes into our network. Our challenge now is to shift those volumes into a more profitable and higher-price mix. Our El Dorado facility will continue to play a key role in that going forward.

Within closed loop, we anticipate a positive finish to the year, particularly given the current pricing environments for lubricants. For daylighting, we acquired Lonestar in Q3, and moving forward, we're completing that integration and growing our presence in that growth market.

Given our results, we're continuing to look at ways to smartly reduce our costs and improve efficiencies without hindering our growth prospects. We're continuing to look at acquisition opportunities that will support and accelerate that growth. And while nothing is currently planned, we'll continue to evaluate opportunities to divest smaller, maybe noncore businesses. We raised nearly $100 million in the past year with the sales of our Catalyst Services and our Transformer Services business.

Turning to our capital allocation strategy on Slide 10. We're carefully deploying our capital with a focus on creating value and improving our returns. The expanded buyback program gives us the flexibility to allocate more capital in that direction, but we'll also continue to evaluate acquisition candidates, consider opportunities to invest in the business as well as reduce our debt.

So to conclude my remarks, as we enter the final quarter of 2017, we're focused on achieving profitable growth and margin expansion. We see favorable trends across much of our business, particularly on our waste disposal business. So therefore, we anticipate continued growth in Q4, and we're really excited about our prospects as we enter 2018, with both positive top and bottom line momentum.

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

Thank you, Alan, and good morning, everyone. As Alan mentioned, the hurricanes had a significant impact on our business, likely costing an estimated $6 million to $8 million of adjusted EBITDA from lost revenue at our locations, project deferrals or cancelations at customer sites and additional costs.

Turning to the income statement on Slide 12. Despite the headwinds, we continue to post good year-over-year top line growth, led by Tech Services and Safety-Kleen. Gross profit was $236.3 million or 31.3% of revenue compared with 32.6% of revenue in the prior year. The decrease is principally related to business mix as well as hurricane-related costs and repairs at our El Dorado facility.

We were successful in our continued focus on driving greater volumes through our disposal network and, similar to Q2, saw higher volumes but lower price streams. Our challenge going forward is to improve that mix by shifting toward higher-margin waste.

SG&A expenses were up slightly at $113.3 million year-over-year, reflecting higher overall revenue, the impact of the 2016 acquisitions and some hurricane costs. On percentage basis, however, SG&A improved by 20 basis points to 15%. For the full year, we continue to expect SG&A expenses to increase on an absolute dollar basis, with higher incentive compensation being largely offset by lower integration and severance expense.

Depreciation and amortization was $73 million, slightly below a year ago. For 2017, we now expect depreciation and amortization in the range of $287 million to $290 million. 2017 will have the benefit of lower CapEx and divestitures, but are being offset by the addition of the El Dorado incinerator and recent acquisitions.

Income from operations was $47.7 million, up significantly on a GAAP basis from a year ago when we incurred a goodwill impairment charge. On an adjusted basis, income from operations was down slightly year-over-year, reflecting the higher cost of revenue this year.

Adjusted EBITDA was $123 million, down from a year ago, as Alan outlined, and certainly below our expectations. The primary factors were the impact of the hurricanes, along with facility costs, slow ramp in the closed loop and overall weakness in Industrial Services. As a result, these factors -- as a result of these factors, third quarter EPS was $0.21 a share.

Turning to the balance sheet on Slide 13. We ended Q3 with $361.7 million in cash. This is down from the $446.4 million we reported in June, but that delta is largely related to the financing of our debt in August. As you can see on the slide, our total debt was reduced by approximately $100 million, a variance that reflects the timing of some of those refinancing activities. If you look at our balance sheet from a year ago, our cash position has risen more than $100 million from $257.9 million at the end of Q3 2016.

DSO came in at 70 days, which is up from the prior quarter but lower than year-end. Our team is working hard to reduce that number, but the increase is partly reflective of payment terms at some of our larger -- of some of the larger projects we have won as well as customer disruptions caused by the hurricanes. We will work to bring DSO back into the high 60s in the quarter ahead.

Q3 CapEx, net of disposal, was $35.7 million. That number a year ago was $50.5 million, of which $12.5 million was related to the new incinerator. The team has done an excellent job this year of managing capital, yet still funding strategic initiatives. For the full year, we are continuing to target CapEx, net of asset disposals, of $160 million to $170 million.

Net cash from operating activities for the third quarter was $104.5 million, up 78% from the same period in 2016. As a result, our adjusted free cash flow in Q3 was $68.8 million compared with $8.3 million in Q3 of '16. Year-to-date, we have generated $99.1 million of adjusted free cash flow, reflecting the increase in operating income, a significant reduction in capital expenditures and lower cash taxes.

For 2017, we now expect adjusted free cash flow in the range of $140 million to $160 million, excluding the sale of transformers as well as any cash taxes related to the gain on that sale. During Q3, we repurchased $12.2 million of stock. As Alan highlighted, we doubled the size of our buyback authorization to $600 million.

Moving to guidance on Slide 14. Based on the Q3 results and outlook for Q4, we are lowering our full year 2017 adjusted EBITDA guidance to $420 million to $430 million. The midpoint of that revised range represents a 6% increase from 2016. Here's how our guidance translates into a segment perspective.

Adjusted EBITDA for the Tech Services segment is now expected to be flat to up just slightly in 2017. This reduction from the previous expectation is due to the effects of the hurricanes and costs at our facilities, including the new incinerator as well as the fire we suffered at one of our solvent recycling facilities in October.

The Industrial and Field Services segment is projected to see a mid-single-digit decline in adjusted EBITDA compared with 2016. The combination of hurricane-related delays in projects, along with a softer-than-expected environment for Industrial Services in Canada, has resulted in this segment taking a step back after a relatively strong first half.

Field Services should generate some incremental growth in profitability related to the hurricanes, but that will be more than offset by challenges we have seen in the industrial side.

For 2017, Safety-Kleen is expected to generate adjusted EBITDA growth in the low to mid-teens. Driven -- driving this increase are higher pricing, our 2016 acquisitions, the closed loop and contributions from our SK branch network.

For Oil, Gas and Lodging Services, adjusted EBITDA is expected to be slightly positive for the year. Higher rig counts are driving profitable growth in our surface rental business, which will be mostly offset by seismic and other energy businesses. Our Lodging business will likely be close to neutral for the year, as recent weaknesses counterbalance some of the profitability we generated in the first half of the year.

We continue to expect our corporate segment adjusted EBITDA loss to be slightly higher in 2017, with costs from acquisitions and higher incentive compensation balancing off expected cost savings and lower integration and severance expenses.

As Alan noted, we expect profitable growth in the fourth quarter and enter 2018 with positive momentum. We are not providing any preliminary guidance or ranges for 2018 at this time, as we will be going through our year-end budgeting process in November and December.

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

(Operator Instructions) Our first question is from Brian Lee of Goldman Sachs.

Maybe first off, just bigger picture, I know you don't want to get into specifics around 2018 guidance, but you're cutting the EBITDA guidance for '17 by 7%. It implies mid-single-digit growth for this year versus mid-teens before. So I guess the question just is, if we do normalize for the hurricanes and some of the El Dorado and Safety-Kleen mix improvements that are ongoing, as we think about 2018, again, not asking for guidance, is the base case to start budgeting expectation for next year to be back to growing at a mid-teens level like you originally expected heading into this year versus having some onetime issues here this year that's brought you down to a single-digit level? Just trying to get any sense here on cadence given the year-end softness here, which wasn't all in your control, obviously.

Yes, thanks, Brian. This is Mike, and I'll start. Alan, feel free to jump in. Yes, when thinking about '18, we've had challenges, as you know, Brian, with guidance and maintaining guidance. We felt it was important kind of just to take a step back and think about kind of how we go into '18. That being said, though, as Alan said in his prepared remarks, there's a lot of positive momentum, whether it be kind of the revenue generation that we're seeing in the marketplace, some good traction we're seeing in maintaining a spread in our oil business and SK, a lot of -- rig counts improving. So a lot of good things. I can say that we're going to end -- we're going to do '18 better than we did '17, but it's really tough for us to kind of get very specific as to what kind of margin percentage improvement year-over-year. I think that it's premature to kind of do that. And I think we've tried to do it in the past, and we'd end up having to kind of revise and change and so forth. So we're going to go through a budget process and come back with kind of a better number. But that being said, hurricane was awful this quarter. It really had an impact on our business. Kind of many kind of hard and soft costs that are out there. And at the end of the day, we feel good about '18, but it's really tough to kind of put a number on it yet.

Okay, fair enough. Just a second question from me, and then I'll pass it on. In Industrial and Field Services, you had the hurricane-related closures at the sites in the U.S. And then you also mentioned a weak environment for specialty industrial services in Canada. Is the Canada weakness the hydro excavation portion of the business? Or is that some other component? And then can you give us a bit more color just on growth trends going forward there, both in the U.S. and Canada? And what you expect your share might be as you're positioned there just on the hydro excavation opportunity?

Sure. I think the hydro excavation business is a bright spot, certainly, for us. It's a growing market, both in the U.S. and Canada. We continue to expand our footprint and put more equipment to work out there, and the demand is pretty good. I think on the Industrial side in Canada, as well as in the U.S., we expect a real strong turnaround season next year. I think as we look at the forecast from all of the 130-plus refineries out there particularly, we anticipate to have a very good 2018, much better than '16 and '17, for sure. But we did see some delays. And part of what we are experiencing, particularly with any of our energy-related customers, is just that margin pressure that we've got. And so we've been working a lot on meeting those expectations and lowering our cost structure and reorganizing our business in a way to deliver those kind of services, realizing that we're in a different environment now as a result of what's taken place over the last 2 or 3 years in the oil market. So we're optimistic, but I would say that the turnaround season, in general, for our industrial business should really be strong next year.

The next question is from Luke Junk of Robert W. Baird.

First question, Alan, just with some wind at your sails from the industrial economy for the first time in a few years here, just wondering how you're thinking about incinerator pricing looking out into 2018 and, I guess, mix in that business as well. And just how you balance that with continuing to ramp the El Dorado facility.

Yes, it's a great question, Luke. I mean, we clearly know that with the investments that we've made and continue to make to meet customers' expectations and to meet the regulations, particularly to do with some of the new in air pollution control requirements, we have been raising prices again. We took a little bit of a pause as we built up some volume. And certainly, we're pleased at the 92% utilization rate. We're actually ahead on volume burned at our new El Dorado facility. And so the team's done a great job. But as we said, this year was going to be really a start-up year for us. And we've got, I don't know, about 15,000 tons or so for that plant, and it's a 70,000-ton plant. So we brought in some lower-price volume. But we are in the process of raising our prices throughout our incineration waste streams because we didn't do that over the past year and our natural costs have increased. And so I think we're out in the market right now with price increases.

Yes, Luke, I would add to that and say that we want to fill the incinerator. We've done a good job with that. Now the challenge is to get kind of higher-margin waste. We took a lot of bulk and a lot of bulk solids this year, which helped us kind of -- part of the shakedown process at the new incinerators is put different waste streams through that network to see if it works and how it works. And so we've done that. And so I think we'd go into '18 with our ability to kind of capture market share, drive waste into the network. And now, as we go into '18, I think we'll see better pricing now.

And we have a lot of backlog of waste in our network throughout our 100 plants. We've got a lot of waste there. So we feel very good about our volumes right now.

Okay, helpful. And then second question, within Safety-Kleen on the re-refinery side. Just in the wake of the recent hurricanes, certainly, the outlook into year-end looks pretty good in terms of what base oil pricing has done recently. Just curious, on the ground for you, what virgin base oil production supply looks like to you right now. And what that might mean for pricing, I guess, less so in the next couple of months, but more so as we get into early 2018? And really the question is how sustainable you think the current higher prices are?

Well, certainly, pricing is difficult to track on a long-term basis, as you know, because of crude and the connection with crude. But there's still a very tight market on the virgin side, and we're allocating volumes ourselves. Even this morning, we see a number of companies raising pricing on the blended side. So we're seeing crude move up. We're seeing a tight market, we're seeing increased pricing. And quite frankly, our team is working with, particularly our distributor customer clients, in putting in price increases to reflect that. On the other hand, we do get pressure when crude runs up and the fuel market improves a little bit. So we got to manage our spread, and I think the team has done an excellent job of managing the spread between what we're paying or charging customers out in the market on the collections side versus what we are getting on the sale of our base and blended products. Clearly, to get away from this commodity side of the business, we need to shift and continue to move more and more of our recycled products into the blended space. And that's where we're a little behind on where we wanted to be. But still, about 5 million gallons this year is what we sold. I mean, that -- we've made good progress. We would've liked to have been closer to 8 million to 10 million gallons by now. But I think there's a very good pipeline, the investment is there. We don't anticipate to need any more investments in both the distribution, packaging and blending next year. So we're ready, positioned. We got a great team in place. And I feel very good that we can certainly double, if not more, the volume of blended, which will offset that commodity side of the base oil business.

The next question is from Michael Hoffman of Stifel.

Alan, Mike and Jim, can we bridge the $30 million (inaudible) investments to El Dorado MACT 2 adjustments, other, contribute to the change?

Michael, this is Mike. You got about halfway through that, your comment, and then you broke up a bit. And so can you just repeat the question briefly?

Sorry. Yes, so the question was on your guidance revision, the $30 million. How much of that is closed loop, El Dorado or other? You gave us $6 million to $8 million as hurricanes, so that leaves $22 million to $24 million is something else. What are the -- what's the mix?

Yes, so thinking out loud, right, just the hurricane, we said $6 million to $8 million. We said -- I think the El Dorado kind of shutdown and closure costs were probably kind of $5 million of that. I'd say that maybe the fire we experienced here in Q4 was about $1 million to $2 million. I'd say that the industrial slowdown that Alan mentioned is probably closer to $5 million or $6 million. I'd say that the closed loop is probably only like $2 million or $3 million. And then there's a bunch of other things, small things, whether it be our re-refinery had a small -- some small cost. Corporate costs are a little higher. But that kind of gets you kind of most of it.

Commission costs.

Oh, yes, with commission costs, that's right. Commission costs.

And I think it's important to mention that we incurred a significant increase in outside transportation costs for 2 reasons. One, we had to reposition a lot of waste. We lost rail down in the Gulf for at least couple of weeks, so we had big disruptions. We had to move waste around a lot, and that cost us a lot. And I think that created even some outside disposal cost increases for us. So there's some operating costs, Michael, that are sort of in deep, deep down in some of those numbers that Mike probably shared with you.

Yes, Michael, one more point. When I said $6 million to $8 million from the hurricanes, and that's -- it's really tough to put a number on it, to be fair. I mean, we took a yeoman's effort, and we said it was an estimate. But really, what outside disposal costs, because of rerouting from one site to another to offset that, that doesn't get marked as a hurricane cost, it's just a rerouting cost, is really hard to put a number on that. When I give you the $6 million to $8 million, that's really the kind of costs we know, like lost days at Deer Park and a bunch of other small -- relocating assets from Canada down to the Gulf, that's another thing. Those are costs we know. But again, it's really hard to put a number on that. And so we continue to try to -- I wanted to give you a number just so we had one, but it's really hard to kind of put kind of a fine point on that. And as Alan said, some of the costs that are in here, whether it be in the industrial business or in the tech business, because of some of the mix issues, it's hard to put a finger on that.

Okay. But fair enough, and I appreciate that. I think it's -- I applaud you for giving a number because I think you have to. But let's say it's $10 million. You still had 2/3 of this difference is unrelated to that. And so you're going to have to revise guidance regardless. I mean, the hurricane adds insult to injury, but you're going to have to revise regardless.

Fair enough. Fair enough, Michael. But with -- another factor that was a surprise to us was the incinerator kind of having kind of a major shakedown. And especially in Q4, we just had a long turnaround work, unplanned outage, as Alan said, in Q4 here. So you're right. We would have -- outside the hurricane, even you put a $10 million number on it, we still would have had to take down guidance. But there are a fair amount of other outside factors that caused us to -- caused this miss.

So to that point, and I'm not trying to drive -- kick a dead horse, is how much of that -- or let me word it differently. Of the original guidance, the $435 million to $475 million, in 2018, should you -- are you just pushing 2017 into 2018 at least? Or can you improve on $435 million to $475 million?

You're referring to 2018, Michael, is that what you're referring to?

Yes, right. Yes, it's -- and therefore, that -- this $20 million that's unplanned gets made up plus some growth. So midpoint to midpoint, I go $425 million, add $20 million, that's $445 million. And then there's 5% growth, I'm now above the upper end of your old guidance for '17. That's what I'm trying to frame. Is that a reasonable way think about it?

Yes, Michael, I appreciate the question. It -- I know that -- as I said before, we're kind of not providing preliminary guidance. I would say that, certainly, some of these impacts, whether it be the hurricane or the shutdown in El Dorado, did -- hopefully won't repeat themselves in 2018. But it's tough for me at this time to kind of say, "Okay, take the midpoint of our new guidance, add $20 million, then add another $20 million, $30 million, $40 million on top of that." I don't know.

I think one thing, Michael, too, is that if you take the hurricane and El Do out of our numbers, which were really sort of onetime, we would have been at, at least, the bottom of our range that we gave out back in January. So the other color that I think we're giving you certainly gets into how we're not getting up to that $470 million number that we originally hoped for in the full range, the high end of the range. But I think we would have been pretty close there at the bottom end, right, Mike?

That's right. Absolutely.

Okay, fair enough. So I was encouraged by the strength of the free cash, because when all else fails, follow the cash. So what is -- what do you have to do to hit $50 million of free cash to hit the bottom end of this viewpoint of your old guidance, to hit that [$440 million] number?

I think that if you look at kind of -- so we get $99 million through 9 months, Michael?

Yes.

And I feel like last year, we generated $54 million, $56 million in Q4 in cash flows, and our guidance puts us at a higher EBITDA number than last year. So it doesn't seem crazy that we're going to get on the low end of the range. Again -- and I feel like it's due to a variety of factors, is that, first of all, we've had a good -- kind of good kind of free cash flow for the year around cash taxes. That continues. I think we had the bonus depreciation on the incinerator as well as some other things we put in place that really helped us from a cash tax perspective. I also think that some of the reasons for DSO in Q3, given some pushouts from some payments here at the end of September, came in October. So again, I feel pretty good about kind of our ability to generate kind of free cash flow here in Q4 and beyond. We did revise the upper end of our range down, as you know, so we felt that was maybe a little aggressive. But again, I feel like the cash flow generation has been really strong. And again, I feel good -- for a variety of factors, I feel good about it going to 2018.

That's a strong focus of the company. I mean, we're meeting regularly and focusing on CapEx, surplus equipment, trying to really focus on return on invested capital and DSO and receivables. So clearly, that is a top priority of the company with, certainly, safety being at the top.

Yes, and I applaud that, Alan, because in the face of challenges, if you can prove that the business model's cash conversion is manageable with a bias to a favorable trend, that helps mitigate at least some of the short-term challenges.

Yes. And I think we're still making $160 million to $170 million investment in the business. And we're improving our asset base. We're maintaining it well. We're making growth investments in rolling stock and infrastructure. But like I did point out, particularly as it relates to Safety-Kleen, the investments have been made over the last 2 years between the acquisitions and the build-out of a number of distribution locations, both bulk and drum. So we're in a really good shape from a network standpoint right now.

Yes. The good thing, Michael, is we spent 100 -- where we end the year at $165 million of net CapEx while making the fixes in the El Dorado facility, while building out the network for the closed loop. So I feel good about it. We haven't sacrificed our strategic investments, and we certainly haven't sacrificed our asset maintenance to kind of keep this CapEx at a much lower level than it was, let's say, a year or 2 ago.

Okay. Speaking of El Do, I thought it was a good move to fill it at a lower price point, but has it had any success in walking the ASP at El Do up, even marginally, as the sales force isn't spending time trying to fill it, now they're spending time focusing on upgrading it?

Yes. And I think we've got a tremendous amount of experience over the past year now that we've been going through the start-up. And when you're bringing a plant like that online and you have some disruptions, particularly to do with the air dryer, the wet dryer that I mentioned to you in the past, we churn through our refractory on the plant. And normally, we'd get 18 to 24 months out of that. And unfortunately, we got 9 months out of it. And so we had to take the plant down, refractory the plant. And we're back online, we're heating. And we feel really good about that investment we've made in the -- and how well that plant can run outside of the spray dryer issues that we've had there.

Yes, Michael, if you look at the growth minus the sale of the transformer business, the tech business grew 10% in the quarter, which is -- obviously proves that we are -- we can kind of fill it. And so now the challenge, as I think you've identified in previous discussions, is that kind of getting kind of higher-margin waste. And that's a luxury that we're going to have. The team understands that, and the team is already starting to do that and turning it -- kind of upping our price -- either refusing lower-priced -- lower-mix items, lower-priced items or improving price.

Okay. Moving to closed loop. What do you think the resistance has been? When I talk to all my solid waste companies, public or private, and you tell them about what you're doing here, they spend $1,500 a truck in lubricants and would love the pitch of walking into residential contracts saying, "Not only have I got automated [cyclers], blah, blah, blah -- or (inaudible), but now I'm using recycled oil on my trucks."

Yes. I think the pipeline is strong. We see -- we don't really see any significant resistance, to your point. There has been a requirement for us to expand our product offering to have a greater portfolio than just the products that we were providing our sales force to sell. So expanding into some other third-party things like grease, like synthetics. Because when customers are looking to switch, they don't want to just switch for part of their need, they want to have the full offering of what they need to switch to their lube supplier. And quite frankly, that fits really well into our whole strategy of going to the customer, picking up their waste and delivering the products that they need. It's what Safety-Kleen, for the last 30, 40 years, has built their whole business on. And so I think we've now expanded our products. And we're really in, I think, a very good shape. We've also added quite a bit in experienced sales professionals, about 40 new sales professionals across the network. So I think, Mike, there's not any resistance per se. I think it's around those areas.

Okay. In Industrial Field Services, in the weakness in Canada, is it sector-specific or broad?

I'd say it's broad, Michael, both in the U.S. and in Canada, the U.S. and Specialty Services in Canada. The Oil sands is doing okay. It's kind of holding on its own. It's really the industrial -- Canadian industrial specialty work that we're

struggling.

Yes. And we have about 60% market share on the industrial side in Canada. I mean, we are, by far, the #1 player out there. So we're going to get the business as the opportunities present themselves there.

Yes, right. Last one for me. Incentive comp, is it -- given the adjustment in the outlook, you're adjusting incentive comp numbers as well, that's why the SG&A is coming in a little bit in the fourth quarter relative to the third quarter?

Yes.

The next question is from Noah Kaye of Oppenheimer.

Just starting with CapEx. What portion of the $160 million to $170 million for this year should we think about as being kind of a maintenance level?

So Noah, this is Mike. When I think of CapEx, whether it's maintenance or growth, at the end of day, there's always growth projects that are out there. And I don't really try to distinguish between growth and maintenance. And I think that, that is a good kind of run rate for the future. There's always something. If it's not closed loop or the El Dorado incinerator, it's something else. But I don't have any -- we don't have any big plans for a major new incinerator coming online in 2018 or beyond. So I think that CapEx kind of continues at a modest growth pace over the next few years.

Well, what was the CapEx for this year associated with El Dorado?

$7 million, I think, in Q1, Q2.

Right, right, right. Okay. So the outlook would be for modest growth. On the -- on El Do, you mentioned it was basically the -- one of the points of, I don't know if you want to call it shutdown requirement, was the refractory. Why did it wear out faster? Just technically, was is just higher heat rates than you expected, or the variance there? I mean, is there something particular about that incinerator design? Or...

It was really more about just the overall thermal shock that, that plant was going in. As you know, these high-temperature incinerators, they like to be lined out and they just run. And this plant was continuously starting up and coming down over a period of time to address the spray dryer issue that we had, which we actually have been working with our engineering -- outside engineering design firm on to modify that, to fix the issues that we were having. So as we cycled the plant, it doesn't like that to happen. And so we subsequently had refractory failure in parts of the unit. We replace refractory in all of our kilns periodically. It's something we're very experienced on how to do. But this one came as a surprise. We didn't appreciate the thermal shock that was incurring with all the shakedown that was going on because of the spray dryer.

Yes, makes sense. And then, you -- I think you mentioned -- although I wasn't exactly clear, so I need some clarification, having put in some pollution controls, incremental pollution controls. What was that, basically? Was that additional CapEx? Or how was it treated?

Well, the whole design of that plant, and we put $120-plus million in that plant, and a significant part of that design is the back-end air pollution control system, where there's sort of a dual-train system to meet these new MACT 2 standards, which, quite frankly, are much more stringent than the standards of any grandfathered incinerator, both commercial or customer-owned. And so operating a back-end unit like that required to have a significant investment in the spray dryer that we've talked about. And so managing a complicated multi-train back-end is something that kind of created some of that design flaw issue that we referenced. And to replace a refractory is a $2 million or $3 million cost for us. It's an extra 17- to 20-day turnaround. So that's sort of the stuff that really impacts the business that we wanted to talk about here on the call.

Yes. And I mean, on sort of the fundamental macro trends, I mean, you had 40% up landfill volumes in the quarter year-over-year. I guess, this is really a 2018 question, isn't it? I mean, how do you think about, kind of normalized for some of the headwinds that you have, kind of expectations for kind of the core business in terms of whether it's volume-driven or price-driven growth? Are we thinking about kind of mid-single digits on the top line? Is that reasonable?

Well, one thing I'd mentioned on the landfill side, and maybe, Mike, you can chime in here, is that we still have not seen a significant increase in landfill volumes at a couple of our landfills, the high-margin landfills, as a result of the downturn in the drilling sites. So even though drill counts are up, nowhere near the level and no near -- no way -- we're not seeing anywhere near the level of waste coming into our hazardous waste landfills as a result of that. Mike, did you want to...

Yes. So no, I think that the -- since we're talking about 2018, again, no preliminary guidance. But it is a good trend, right? I think the waste projects being up a lot kind of year-over-year, our landfills filling up, I mean, I think that just proves that we can fill this network. We can get the thing up -- or can get the revenue growth. Now the challenge is, as I said before, is getting kind of profitable growth. And I think that coming from this position of strength, when we've proven to ourselves we can do it, have the sales team in place selling these projects, getting good project wins, now the challenge is turning that -- turning those -- that incremental volume into incremental higher pricing and higher margins. And we've done this before. We've added incinerator capacity to our network before, and this is exactly the same thing that happened. We filled it up with kind of lower-margin stuff, and then got better and higher-quality waste into our incinerators. And Alan said, not all waste is created equally. Some of the higher-margin landfills continue to struggle a bit in the oil patch. But certainly, it's a positive factor as we go into 2018 with this type of revenue generation, the type of cash flow generation, and we feel good about that.

The next question is from Joe Box of KeyBanc Capital.

So it's not exactly clear to me. So I guess, I'll just ask you directly. Do you guys expect any cost or revenue drag from hurricanes to spill into 4Q?

Yes, I think it's a little bit, maybe $1 million or $2 million, Joe.

Okay.

We do in Puerto Rico, Joe.

Yes, Puerto Rico startup, we're still kind of helping those guys out.

Got it. So it'll be a negligible top line impact?

Yes.

And then, Alan, I want to go back on your comments on Slide 9. I think I heard you correctly, but you'd mentioned that revenue growth is your top priority. Can you maybe put some color around why revenue growth is more important than other metrics?

We historically had seen a much better pull-through in margins as we look at sort of the fixed-cost nature of our business. And so we made a big investment in our sales force. We put in salesforce.com 18 months ago. And honestly, we -- from an organic revenue growth standpoint, that is certainly the priority for the company right now. We know we can grow through acquisitions and we can do a good job of integrating acquisitions, but the best growth that we think we can get to drive more volumes through our fixed facilities is by expanding our sales force and growing organically. So -- and we think the margin pull-through typically is much better on the waste disposal side of our business than it is anywhere. Is that helpful?

Yes, that's helpful. And I guess, I just wonder if historical precedent is really applicable here given how different the business looks now relative to how it's looked in past cycles.

So Joe, I would just say that if you look at kind of going back a couple, 3 years, our challenge has been revenue growth. I mean, we've been able to -- we've got some acquisitions, we did some good things, but revenue growth has been our challenge. And so that's been kind of the problem we faced in previous years. The good thing about -- what I feel good about kind of '17 and '18, even though we are taking down guidance, is that we've gotten the revenue growth now. And I think that, that -- we've gotten the team focused on it and moving in the right direction. So I feel good about it. So when you talk about kind of the priorities for the company and why that's so important, it's because it's been a weakness. And led by Alan and the management team, we've tried to push the team to get revenue growth. And we have. We have a new incinerator and we filled that new incinerator. So again, that was the goal. And that was -- and I think it's achieved. Now the challenge is, okay, we did what we asked you to do, now you got to turn that around and make it kind of more profitable.

And I certainly get that. And I would assume that there's really no change to the operating leverage of the Tech Services business. If anything, maybe it's just going to be greater given the new incinerator once you get beyond some of these onetime costs. But I would think that the rest of the business maybe has a lower incremental margin, just given some of the characteristics there. And I guess that's just [enough].

I think when you look at some of our landfills, you look at some of our treatment plants, we still have opportunities to grow more volumes into our fixed facilities. So as much as we focus on incineration in these calls, we have a lot of treatment, recycling and disposal assets that have a lot of opportunity to expand and drive for better margins than we're seeing in the business right now.

The next question is from Jeff Silber of BMO Capital Markets.

I know you're kind of downplaying the Field Services cleanup work that you had. But going back to prior catastrophes, how much of an impact had that been? I know it's hard to compare. But should we expect this to continue? How long do you think that'll continue for?

So Jeff, this is Mike. So the -- I would say that the -- normally, what happens in a large event like Hurricane Harvey is that, that results in some form of spill at a large customer, or some form of chemical spill or oil spill that results in us kind of getting -- got engaged with companies like the Coast -- with entities like the Coast Guard to kind of get their boats out and the boom and clean up that spilled oil. Here, in Hurricane Harvey, luckily, it wasn't that large kind of industrial event that occurred. And frankly, we were planning on that when you think about kind of the -- as Alan said in his prepared remarks, around moving assets from as far away as Canada and staging them outside of the hurricane zone to be able to go in quickly and address the needs that were out there. We ended up incurring a fair amount of cost to kind of get that [rate] that, frankly, didn't happen. And so unlike Hurricane Sandy or other types of -- Katrina or other types of disasters, where there was a spill associated with that event that resulted in us getting a large project to clean that up, this was more household hazardous waste, which -- what that is, is really going through kind of county-by-county, town-by-town and cleaning out the garbage for areas that are hazardous like paints and aerosols and so forth, that needed to be disposed of in a hazardous landfill. So that is, on balance, a low-margin business. And so -- and that incurs a fair amount of cost. And so when I think about this, again, we're happy that no releases happened. We're happy that none of our employees were injured or hurt. And we're really proud of our Deer Park team to kind of be on site with cots and blankets, spend the night without power in the facility, keep the generators, keep the plant running, and so we're proud about that. But at the end of the day, there just wasn't a large event that normally would happen, and that really kind of put a -- that really puts some cost into the business and without the incremental revenue.

All right. That's really helpful. And then just one quick follow-up. On the increase in the share repurchase authorization, when can the company be back in the market buying shares?

Friday morning.

The next question is from Tyler Brown of Raymond James.

Alan, I may have missed it, but did you say that 20% of company revenues are directly exposed to the Gulf Coast?

Derived from 2016, approximately 20% of our revenues came from that area.

Okay, great. The...

Tyler, it's an estimate. It's an estimate, Tyler. 2016 revenue, we did it by state. So it's not perfect, right, because some parts of Texas were unaffected by the hurricane. So...

Yes, directionally.

Yes. No, great data point. But you guys are clearly uniquely positioned in the Gulf Coast. And obviously, you have a very strong incineration presence there. But I think there's been some $200 billion of ethane cracker investments in that region, which, to my understanding, produce a fair bit of waste that needs to be incinerated. So can you talk about some of those opportunities, when we might see the benefit? Is that an '18 story or more of a '19, '20 story?

I think it's an '18 and a '19 story. I think we're going to start seeing those investments pay off. And we made our investments because of those investments that we saw going in. With the cheap price of natural gas, we see a lot of investment being made here in the U.S., and we're pretty well positioned for that.

Right. Okay, okay. That's good. And then, Mike, this is a conceptual question, maybe even goes back somewhat to Joe Box's question. But do you believe that -- given the current asset base, current oil prices, current FX rates, do you think that this portfolio can go back to, call it, generating $0.5 billion of EBITDA? And if so, what do you think the biggest puts and takes are to get us there (inaudible)? Or is it more of an improvement in tech services despite already strong utilization, quite frankly? Or maybe further rightsizing SG&A despite some headcount reductions of the past? But any color there would be helpful.

So Tyler, I'll start. And Alan, feel free to jump in. The answer to the question is yes, of course. I think a lot of things -- the one thing I've had a concern about over the past few years is our ability to generate organic revenue growth. And that ability, along with kind of good opportunities we see in the closed loop, along with good opportunities we're seeing even in our Oil and Gas and Lodging business, I feel really good about going into '18 and beyond with our ability to kind of leverage this business and drive incremental EBITDA and cash flows. I mean, I think $500 million is not crazy. Over what time horizon? We got to go through a budget process. We got to understand that. I'm not here -- again, we have to go through that. But I feel good about it. Honestly, I feel very positive about the future.

The next question is from Hamzah Mazari of Macquarie.

This is Kayvan filling in for Hamzah. Could you give us any color on the capital allocation going forward in terms of M&A and buybacks?

So I'll start, Kayvan. And Alan, feel free to jump in. We did -- we upped the authorization, doubled it to $600 million now. I think that we, as we said in our prepared remarks, look at kind of return on invested capital, whether it be acquisitions or share buybacks or investing in our CapEx based on what returns they generate. And so the good thing about it is that we're generating a fair amount of cash flows and we can make those intelligent investments and maximize return to our shareholders. What that -- I have nothing big on the horizon as far as acquisitions out there, but we're very opportunistic. And I think we have the balance sheet and the cash flows to, if we wanted to get something that's on the table, to quickly [close it].

And we have no further questions in the queue at this time. I would like to turn the conference back over to management for closing remarks.

Okay, Manny, thank you. And thank you all for joining us today. We are presenting at the Baird Conference in Chicago next week, and we'll be at other events this winter. And we look forward to seeing many of you there. Thanks again. Have a great day.

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