Clean Harbors, Inc. (CLH) Q4 2011 Earnings Report, Transcript and Summary

Greetings, and welcome to the Clean Harbors, Inc. Fourth Quarter 2011 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Musselman, General Counsel for Clean Harbors, Inc. Thank you, Mr. Musselman. You may begin.

Thank you, Jessie, and good morning, everyone. Thank you for joining us today. On the call with me are Chairman and Chief Executive Officer, Alan S. McKim; and Vice Chairman and Chief Financial Officer, Jim Rutledge. Matters we are discussing today that are not historical facts are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Participants are cautioned not to place undue reliance on these statements, which reflect management's opinions only as of this date, February 22, 2012. Information on the potential factors and risks that could affect the company's actual results of operations is included in our filings with the SEC. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's press release or this morning's call other than through SEC filings that will be made concerning the reporting period. In addition, I would like to remind you that today's discussion will include references to non-GAAP measures. Clean Harbors believes that such information provides an additional measurement and consistent historical comparison of its performance. A reconciliation of the non-GAAP measures to the most directly comparable GAAP measures is available in today's press release, which can be found at our website, www.cleanharbors.com. And now I'd like to turn over the call to our Chairman and CEO, Alan McKim. Alan?

Thanks, David, and good morning, everyone. We delivered another strong quarterly performance, concluding what was an outstanding 2011 overall for the company. On the strengths of the acquisitions we completed during the year, combined with a steady organic growth across our segments, we grew Q4 revenues 31%, and for the year, nearly reached $2 billion in revenues. Our profitability was higher in Q4, as we achieved an EBITDA margin of 17.8% and, our net income was up 64%. This was partly related to a tax benefit that Jim will detail in his remarks. For the year, our consistent efforts to lower our cost structure and drive margin improvements while growing revenue was reflected in our annual EBITDA margin of 17.6%. And we're confident there are significant opportunities to capture additional leverage going forward. As we saw throughout 2011, our growth in Q4 was driven by broad-based contributions across our business lines. Geographically, Western Canada was particularly busy this quarter, but we also experienced healthy levels of seasonal activity throughout much of the U.S. The levels of investment by many of our customers in our key verticals, particularly on the Energy and Industrial sides of our business continue to climb in Q4. Turning to our performance by segments. Our Technical Services segment had a notably strong Q4 in what can seasonably be one of the weaker quarters. Incineration utilization for the quarter was 91%, which is above the 89% we recorded in Q3. Since I mentioned in our last call, I should point out that we did carry through with our plan to temporarily idle our Mercier, Quebec incinerator, which we mothballed at the start of December. Similar to what we saw in Q3, our landfill business had a great quarter. Volumes were up slightly from Q3 and marked our highest levels of 2011. Our Sawyer facility in North Dakota continues to benefit from the concentration of activities in the Bakken oilfield. The remainder of our landfill saw nice volumes from the mix of large-scale projects and remediation work. As it has for the past several quarters, our Field Services segment turned in another consistent performance in Q4. Our growth strategy of geographic expansion, expanding our service offerings and capitalizing on cross-selling opportunities proving to be effective. In Q4, when you exclude the emergency response work, Field Services recorded 17% organic growth. We continue to see a nice mix of base business and projects throughout the quarter. Emergency response revenue in the quarter was limited with about $4.1 million in residual work, primarily related to the Yellowstone River cleanup efforts. Our Industrial Service segment grew more than 50% from Q4 a year ago based on our recent acquisitions, increased oil sands activity and a high volume of turnaround work at our Refinery customers. Several of our specialty Industrial Services also were at high demand during the quarter. With our Lodging business, we experienced another solid quarter of high-margin business. And with the addition of the Peak, the acquisition of BCT Structures and the internal investments we've made, Lodging now represents more than $200 million of annual revenues for us. Equally as important, it serves as a differentiator for us in managing our own internal accommodation needs and enables us to attract and retain talent in a highly competitive field for skilled labor. Our top performer in Q4 was clearly our Oil & Gas Field Services segment, which exceeded our expectations with year-over-year growth of greater than 140%. While the addition of Peak and smaller acquisitions played a larger role in the year -- excuse me, in the year-over-year growth of the segment, our core Oil & Gas Field Service business had an outstanding quarter. We increased the activity in Western Canada in Q4 from substantial levels in investments by major energy companies contributed to our performance. We also benefited from shale-play-related work throughout the U.S. and Canada and captured numerous cross-selling opportunities, particularly as a result of the addition of Peak. Peak Services, which are primarily concentrated around the drill rig itself, were in high demand in Q4 and a complement to our existing offerings. We couldn't be happier with how Peak has performed since the acquisition. They've been a great addition to our Energy and Industrial business. To give you some more perspective on Q4 results, here's how our key vertical markets performed. As expected, Oil & Gas production was our largest vertical this quarter, rising to 20% of revenue. This was driven by the seasonal activity in our legacy transport, downhole and exploration services combined with the addition of all the Peak assets. Refineries and upgraders was our second largest vertical at 12%, as we performed several large projects in the quarter. This business has come on strong for us throughout 2011. During the full year, we provided our services to 147 of the 159 refineries operating in North America, and we have increased our market share. Turning back to the quarter. Oil and gas exploration increased sharply to 11% of revenues, reflecting the addition of Destiny, along with solid growth in our directional drilling and legacy exploration businesses. The chemicals vertical at 11% of revenue was a little light, as we saw a few projects pushed out and some lower production at certain clients in the quarter. Other significant contributors in Q4 included our general manufacturing at 7%, our broker business at 6%, utilities at 4% and our environmental engineering consulting at 4%. With the exception of our chemicals business that we saw a little bit lower slightly year-over-year, virtually every single one of our verticals grew by significant percentages from Q4 a year ago. Some like our construction vertical more than doubled in the past 12 months. I want to take a moment to touch on pricing, which I know many of you are interested in. Pricing gains still tend to be market and business line specific, but overall, the pricing environment was good for us in Q4. Within our Energy and Industrial segments, our services are, for the most part, in high demand, and much of our specialized equipment is solidly booked going forward. In many cases, this offers us some near-term pricing leverage. We're also looking at ways to bring some of the pricing at our recent acquisitions more in line with Clean Harbors' traditional levels. Within our Environmental business, we continue to generate high levels of utilization and steady volumes. And it's at those times that we're able to best manage our mix, maximize our margins through some incremental price gains. For 2012, the guidance Jim is going to provide later on the call, assumes a price increase of roughly 3%, but again, that's not implemented across the board, it is more of an average. Overall, 2011 was another year of significant achievement for Clean Harbors. We set new records across all of our key financial metrics. We generated organic growth across all 4 of our segments. We successfully acquired and integrated several valuable acquisitions including Peak. We advanced our organizational structure and internal systems to prepare the company for its next stage of growth. We entered 2011 with approximately 6,800 employees and even though we ended the year with a headcount of roughly 8,300, we still have several hundred open full-time positions we're -- continue to look to fill. As we highlighted in this morning's release, our commitment to excellence in safety and service remains a key element to our success. We exceeded our key safety metrics for 2011, besting the good scores we received in 2010. This is a credit to the entire organization, and I'd like to publicly thank all our Clean Harbors employees listening today. The company-wide SafetyFirst! program we've implemented has been a great success due to your efforts, and we recognize its importance as do our customers. Looking ahead, we're excited about Clean Harbors' prospects as we enter 2012. Obviously, the Energy sector is an area showing great promise. Levels of activity remained very high in both the U.S. and Canada. Rig counts are continuing to climb on both sides of the border and investments are showing no signs of slowing down. Some investors have asked us about how the sharp drop in natural gas price is affecting our business and are we losing projects as a result. What we are particularly seeing is just a shift in our project flow from dry gas installations to more liquid-rich plays. We aren't seeing the pool of investment shrinking, just redirecting. In fact, a recent study issued by oilfield market research firm Spears & Associates on the U.S. energy space showed $145 billion were spent drilling and completing U.S. wells in 2011. This is nearly double the $73 billion spent in 2009 and is more than 10 times the $13 billion spent in all of the U.S. in 2000. The Bakken oilfield, the Marcellus Shale formation and a number of energy-rich areas of Texas continue to offer us a broad variety of opportunities. The story is similar north of the border where massive Oil Sands projects, numerous long-term investments throughout Western Canada are continuing unabated. While the Keystone pipeline project has been temporarily delayed, there's no doubting the rest will bring more energy-rich products out of Canada into the U.S. And all of this activity is supported by an environment that continues to drive oil prices above $100 a barrel and shows no signs of weakness. In conclusion, we're continuing to see evidence to support that the general economic recovery has taken hold in North America. And as a result, we intend to continue to aggressively execute our two-pronged strategy of internal investments and select acquisitions. Even with the acquisitions we completed in 2011 and the level of capital we're investing internally, we concluded the year with more than $260 million in cash, which we plan to put to work. We'll remain active and selective on the acquisition front in 2012, and we have a variety of attractive candidates both large and small in our pipeline. We're currently evaluating potential acquisitions within all 4 of our operating segments. We also will continue to make internal investments with a target of $175 million to $180 million in capital expenditures for 2012. With that, I'll turn it over to Jim for the financial review and 2012 guidance. Jim?

Thank you, Alan, and good morning, everyone. Clean Harbors delivered another great quarter achieving Q4 revenue of $545.9 million and reflecting a strong performance across the board. As Alan outlined, our 31% growth was driven in large part by our recent acquisitions. However, if you back out revenue related to 2011 acquisitions and emergency response events from both periods, our year-over-year organic growth was again strong at approximately 14%. I should note that for the acquisitions we made in 2011, such as Peak and Destiny, we don't intend to break that revenue out going forward, as they are fully integrated with our core business. Also, our cross-selling activities also make it more difficult to designate what's organic and what's pure acquisition related. Gross profit for the quarter was $172.7 million or a gross margin of 31.6%, which is up 130 basis points from 30.3% in the same period last year. This improvement is due to the higher revenue, as well as our cost control programs and margin improvement initiatives. Turning to expenses. Our SG&A in Q4 was $75.4 million or 13.8% of revenue compared with 13.4% a year ago. Our SG&A percentage this quarter was above our target range of 13% to 13.5% due primarily to about $3 million in acquisition-related expenses, severance costs and the implementation of some key enhancements to our centralized information systems. Looking ahead to 2012, we believe we will gain more economies of scale from our recent acquisitions and our ongoing cost-reduction efforts. Therefore, we are targeting our normalized SG&A range of 12.5% to 13% of revenues going forward. At the outset of 2011, we set a goal of eliminating $20 million in company-wide expenses as a way of offsetting higher labor and commodity costs. I'm pleased to announce that we reached that goal for the year. We also captured the synergies we expected from the acquisitions we've made. We exceeded the $5 million in synergies we expected from Eveready, and we're on track to hit the $10 million target we have set for Peak. Looking at 2012 as a whole, including the remaining Peak synergies, we are targeting about $30 million in overall cost reductions in areas such as internalizing vehicle and equipment maintenance costs, turnover reduction, lower recruitment costs and transportation. We believe these will offset expected increases in labor, commodity and health care costs. In order to hit that $30 million figure, we have a number of comprehensive programs underway, and we've made some key hires to support these efforts. We're excited to have recently brought on board Tom Seeger as our EVP of Asset Management. Tom is a results-driven, veteran executive, who brings substantial experience at a variety of growth companies. One area in which we see him having a significant effect is our growing transportation fleet. Tom spent more than a decade working at both Hertz and Budget, overseeing supply chain activity, asset management, and vehicle utilization. We believe he's a great fit for Clean Harbors as we continue on our growth trajectory. Turning back to the numbers. Depreciation and amortization increased 43.8% year-over-year to $35.7 million, which primarily reflects our acquisitions, particularly the 4,000 pieces of equipment we added from Peak. Full year, D&A of $122.7 million was in line with our expectation of $120 million to $125 million. We expect our D&A in 2012 to be in the $140 million to $145 million range, which excludes any additional acquisitions we may make. Income from operations was $59.2 million or 11% of revenues compared with $43 million or 10% of revenues in Q4 2010. We generated EBITDA growth of 38%, as we nearly hit the $100 million mark for the second consecutive quarter coming in at $97.4 million compared with $70.3 million in Q4 of last year. This amounts to a Q4 EBITDA margin of 17.8%. This reflects the success of our pricing initiatives, productivity gains within our asset base, economies of scale from our acquisitions and ongoing cost control initiatives. Our full year 2011 EBITDA margin of 17.6% was well above our initial goal of 17% for the full year. Our effective tax rate for the quarter was 21% compared with 37% in Q4 of last year. Our provision for income taxes in Q4 included a $6.5 million benefit or approximately $0.12 per diluted share related to the favorable release of unrecognized tax benefits that are related to an earlier acquisition. Looking ahead to 2012, we currently expect our effective tax rate to be in the range of 37% to 37.5%. Q4 net income was $38.2 million or $0.72 per diluted share compared with $23.3 million or $0.44 per diluted share last year. The increase reflecting our profitable growth and the favorable tax benefit. As a reminder, the company completed a 2-for-1 stock split in July and the per-share amounts I just mentioned for last year's Q4 had been adjusted retroactively to reflect the split. Our balance sheet remains healthy, with cash and marketable securities of $260.8 million as of December 31 compared with $305.4 million at year-end 2010 and $257.3 million at the end of Q3 2011. The decrease from the end of 2010 is directly related to our acquisition activity, which totaled a use of cash of nearly $340 million during the year, partly funded by the $250 million in secured senior notes that we issued back in March. The sequential increase of $3 million in cash during the quarter was less than we expected, as our day sales outstanding grew with the integration of the acquisitions. We are ascribing this to 2 primary factors: A number of customer arrangements in the acquired businesses have longer payment terms than we typically allow for; and secondly, many of these new customers are on a month-end billing cycle. Total accounts receivable was $478.9 million at quarter end, and our DSO for Q4 rose to 82 days compared with 74 days in Q3. Our target DSO remains at 70 days or less, but it will likely take us several quarters to work our way to that level due to the acquisitions and the time it will take to work through the existing contract cycles. CapEx for Q4 was approximately $35 million, and for the full year, it was approximately $149 million. We continue to have a broad pipeline of attractive, high-return opportunities available to us. As Alan mentioned, we are targeting CapEx for 2012 in the $175 million to $180 million range. A majority of this CapEx is related to growth capital, and within our full year number is approximately $70 million of maintenance CapEx. Moving now to our guidance. Based on our 2011 performance and current market conditions, we are raising our 2012 annual revenue and EBITDA guidance. We are currently targeting 2012 revenues in the range of $2.2 billion to $2.25 billion, up from our previous guidance of $2.15 billion to $2.2 billion. We expect EBITDA in the range of $400 million to $410 million, up from our previous guidance of $390 million to $400 million. This guidance implies an EBITDA margin of greater than 18% for the full year. And I should note that this is also exclusive of any potential future acquisitions. And with that, Jesse, could you please open up the call for questions?

[Operator Instructions] Our first question comes from the line of Hamzah Mazari from Crédit Suisse.

Just a question on pricing. You spoke of 3% price this year. If you could give us maybe a sense of where you are in terms of pricing your portfolio? Are you in early innings of this? What percent of your contracts are inflation-indexed versus discretionary pricing? And how does price -- how do you feel about pricing power across your various verticals? Just a little more color as to how investors should think about price in your business.

Sure, Hamzah. This is Jim, I'll start it, and if Alan wants to add anything. But we did, as Alan mentioned, achieve 3% pricing this year. And this year, in 2011, it was targeted toward high-utilization areas. For example, in our incineration, our Western Canada business, where previously there had been discounts, and now with the increased utilization in both those areas, we've made some nice gains. But with that, at the same time, we have been putting in place through our VPs of commercial operations, initiatives to improve their toolbox in approaching the markets whether they be volume-related or time- and materials-based-type services or even spread businesses, for example, in our recycling businesses. And in 2012, the way we're approaching those areas is with a very tailored program to approach pricing there, with higher utilization being the main thing. If it's a high utilization area, where we think that pricing is deserved and where there are cost increases that make pricing deserved, we're hitting it. Again, we're looking at 3%, maybe we can do a little bit better than that in 2012. Maybe it's 3% to 3.5%, but that's kind of what we have built into the guidance of about 3%.

Okay. And just a follow-up question on the acquisition pipeline. You spoke of that pipeline being pretty robust. Maybe if you could give us a sense of how valuations are trending relative to a couple of months ago? And any vertical you're particularly interested in or are you looking at all of them right here?

I think all of them, Hamzah. We certainly have been spending a lot of time on strategy and growing the business through acquisitions and looking for partners out there that culturally fit well with us. And we've had some ongoing discussions with a number of firms, both in the U.S. and Canada and really across the various segments of our business. I would think that last year we completed about 6 acquisitions, which was pretty aggressive, particularly in the second and third quarter. And I think we've got a great team here able to not only perform these -- put together these fields, but also integrate them timely and to bring them together with the company here. So we're excited about the potential going forward.

Our next question comes from the line of Rodney Clayton of JPMorgan Chase & Co.

So first of all, on the guidance, it looks like you're guiding to something around -- I guess just a touch above 18% EBITDA margin. Given the fact you exited the year at about 17.8%, is that just that a dose of conservatism? Or are there any potential headwinds that you're being cautious about?

Rodney, I think you're right. We are being conservative as you know, when we set our guidance we like to express it in terms of what we see a clear path to executing on our plan. So -- but it is a bit conservative, considering our pricing and our cost reductions that -- and our plans going forward, so we might be able to top that a little bit.

Okay, very good. Secondly, you mentioned some project delays in your chemicals vertical, can you just talk to maybe what some of the reasons that your customers gave to you for those delays? And is this, I guess, an ongoing concern for you? Do you think it's more of a one-off event in the quarter?

Yes, I would say more of a one-off. Sometimes the project side of our business tends to be a little lumpy and can be pushed due to funding or regulatory change. So I wouldn't read anything more than that. The chemical vertical for us had a wonderful year. We exceeded over $40 million of cross-selling revenues from our chemical customers. So I think, overall, very, very pleased with what we're doing with the chemical vertical.

Okay. And then just finally going back to the previous question. You were asked about the valuations on the acquisition front. Obviously, we saw Flint Energy in the ERS [ph] deal yesterday, and we got a data point there in terms of valuation, but just what are you seeing on valuations? Have they moved materially? And is -- I mean, given how you categorize the pipeline as being robust, I'm assuming you like what you see there?

Yes. I think there are some deals out there that from a value standpoint work for us. We tend not to be at that high multiple that we saw -- as you mentioned recently, that would probably be significantly beyond what our typical acquisition target would be on the valuation. We certainly want to look at synergies and other -- both on the cost side and revenue side, so we'll work together with the company on valuations, if there's some significant areas there. But overall, I don't see we've see anything material different in the last couple of years on valuations at this point.

Our next question comes from the line of Matt Duncan from Stephens Inc.

The first question I got is just some housekeeping stuff, Jim. Can you run down the revenues and EBITDA by segment for us? And also if you could break out what organic growth was and then total acquisitions?

Sure. The revenues in Q4, Technical Services was $219.5 million, Field Services was $69.1 million, Industrial Services was $122 million and the Oil & Gas Field Services was $135 million. Those were the revenue figures. On the EBITDA side, Technical Services was $57.3 million; Field Services, $11 million; Industrial Services, $23.7 million; and the Oil & Gas Field Services was $33.8 million. And corporate, which obviously is a decrease on EBITDA is $28.40 million. As far as the acquisitions, I mean, clearly, we had -- the business is starting in June, which was the Peak acquisition which was mid-June, and then the rest of the acquisitions were in Q3. So we haven't seen a full year of that. But the acquisitions in Q4 roughly totaled about $90 million in revenues. So hopefully, that helps with your modeling.

All right. And remind us Jim, which segments those will be found in. So maybe if you could give us organic growth rates for the segments that they'd be in. I'm assuming it's probably industrial and oil and gas field, mostly?

Yes, I'd say about 60% of the $90 million is in the oil and gas segment and about 30% -- a little bit more than 30% is on the Industrial Services side. And then the balance is the smaller acquisition that we had in Technical Services, which is like $8 million or $9 million.

And then last thing here, and I'll hop back in queue. If you can just give us some insights into what you're seeing so far in the first quarter specifically on the refinery turnaround side? We've heard a lot of indications that the turnaround season has started off strong, started off early and maybe how is that impacting your business so far this quarter?

I would say that the weather, certainly, in Canada has been much warmer than expected, and that will have some slowdown in some of our oilfield service work. But on the other hand, we see a very strong shutdown season ahead of us and looking at staffing and moving forward with a number of large turnaround projects. So our first quarter is very strong, and we expect that to continue right into the second quarter because of shutdown work.

Our next question comes from the line of Al Kaschalk from Wedbush Securities.

Just to follow-up on -- or touch around some of the edges on some of these questions. In terms of mix and utilization of assets, are you seeing any changes from a competitive environment that would -- while your utilization rates remain high, you may need to shift or boost some investments to keep share or to gain share? And if so, where are you seeing those pressure points?

I think if you look at the vehicles and equipment and the large fleet of assets that we now have which is about 26,000 pieces, when we look across roughly 130 or so categories of assets, and within that 26,000, we're looking at utilization. We're driving improvements. There still is a lot of opportunity, particularly with some of the acquired businesses we have with improving on overall utilization. In some of the businesses, we've acquired like Peak, we have expanded our capital expenditures with them, because they see real growth opportunities, particularly in the U.S. And so we're, I think, a great partner for them as they look at growing in the U.S. with the Oil & Gas Field Service side of the business. So we're deploying more capital there. But I don't think anything significant more than that, Al. I just think that we have a continuing opportunity to improve overall utilization. I think Tom Seeger, as Jim mentioned is a great add for us. And he's going to help certainly drive that initiative for us.

Is there -- well, it's probably too early, with Tom coming on board. Is there an average or utilization rate that you're targeting?

I think we've historically communicated utilization of our incineration facilities, because it's so well defined. And I think, as you look at all these varying assets that the company has, we haven't really broken them down as there would be so much detail behind that. But I think, overall, when we look at a lot of our rental assets and a lot of our oilfield-services-related assets, both Eveready, Peak and some of the other acquired companies that we recently have made have underutilized assets that we're in the midst of refurbishing, redeploying, improving on utilization. That really goes across all of our operations here. So I think it's hard for us to kind of give you a sort of a broad number -- what would be 50% or 60% or something like that. I think that would be too general. But we are -- and have always measured utilization at the detailed asset level. But I think what we are going to see is really an improvement in cross-border utilization of assets, as we try to take out the seasonality of the business.

Very good. And then just finally, on the pricing front, if you look at it on the flip side, where are you still seeing challenges on pricing, either functional industry or business segment? Where are your most -- your higher challenges there? Where you're going to have to work a little bit harder at?

We've got full-time people dedicated to driving pricing improvements. Some are targeting contracts that may have been unimpacted by an '10 or '11 price increase that will be coming up and available to change in 2012. Others are focused on the fuel surcharge, and as you know, that's a very important part of our pricing initiative here -- is to make sure we have the flexibility to deal with the rising fuel costs. In the case of Peak, they still had a significant discount to book in some parts of their business, so really trying to eliminate as best we can those discounts and really look at book rates and put in some more formalized pricing strategies for their business. But I think whenever you're doing acquisition as we've had, there's ways of putting better systems in place and better controls in place for pricing. And so we're really in the early stages, particularly to do with the acquisitions we've made there.

Our next question comes from the line of Larry Solow with CJS Securities.

In terms of your CapEx outlook, clearly, you're sort of a hard-pressed prong, spending a lot of good -- making a lot of good investments. Can you maybe outline just a couple of the sort of the key investments over the next couple of years? And maybe update us a little bit on the potential additional kiln in El Dorado?

Absolutely, I'll talk a little bit about that, Larry. And then if Alan wants to join into that We're going to -- we're continuing our expansion of the fleet. So tractor-trailers, containers, roll-offs and intermodals, we're continuing to invest in. Some of the opportunities in the Lodging side of the business to be able to invest in not only Western Canada, but we're looking into North Dakota as well for what's going on in the U.S. Also in our landfills, we're doing some expansion -- some cell expansions, with our increased volumes that we have coming through the system. And then also in our systems, we talked a little bit about what we're doing in the vehicle and maintenance side, so we're improving some of the systems there to be able to internalize a lot of the maintenance costs and to be -- as far as how we acquire our parts and so forth. So those are the big items. I don't know if, Alan, if you wanted to add anything?

On the permanent, we certainly hope that we're continuing in the permanent process to expand our incineration capabilities. There are wave streams today that we as an industry have limitations on the volume and quantity that we can handle a lot of the ozone-depleting kind of chemicals, for example, and some of the more difficult hazardous streams. So we're looking to expand our facility to put another kiln and to be able to have more capabilities to handle more difficult-type streams, as we've talked about in the past. So that project is going forward. We actually had our board at one of our incineration facilities last quarter. And we're pretty excited about the opportunity there.

Okay. And just a related question. Can you just remind me on the Québec facility, the incinerator you closed, the capacity there? I believe that was a sort of a stream that was not very profitable, is that right?

Yes. It was less than probably $200 a ton, where today our average price is much higher than $600. And so it was about 60,000 tons, but a very low margin operation for us.

And just a clarification question. On the weather in Canada, if you get sort of an earlier thaw, it would just sort of be a timing issue, I imagine. It would just sort of push, I guess, the slowdown, unless I guess it's wet for a long time. But it would sort of just -- once you thaw and you melt that then the roads, I imagine, should in theory clear, is that...

Well, I think that -- once the drill program could end early this year as a result of -- that the weather has been very warm, and we're sort of looking at that week by week. On the other hand, it's been very dry. We haven't seen anywhere near the kind of rain or snow as we did last year, so the flooding that we saw that really prevented us from doing a lot of work particularly like in the Estevan area, we don't see that this year. So I think overall it will be neutral for us.

Our next question comes from the line of David Manthey of Robert W. Baird & Co. Incorporated.

First off, on the refineries, I think you mentioned that you're doing something for nearly every refinery in North America. And I'm just wondering, based on the current set of capabilities you have right now, how deeply penetrated do you think you are of that total opportunity? And then as you look at the refining space, overall, I guess upgraders and so forth, are there ancillary services that you think you can either provide via greenfield applications or acquisitions that will be able to expand that total available market as well?

I think expanding through cross-selling is certainly the first thing that we're focused on because we have a lot of capabilities across our catalyst business, our decoking business, a lot of our Specialty Services. And so when we talk about the work that we're currently doing for our refineries, we certainly don't have the share that we want to get to. There is a significant opportunity to take our existing service offerings and expand that even more across refineries and upgraders. So we're really in the early stages there.

So you have, I mean, significantly less than say 50% or 30% of the share that you could have with your current capabilities through cross-selling?

Yes, I would say so at this point for sure. And that's with the existing services that we offer, not expanding any particular new services that we're not offering today.

Got it. Okay. And second question, is there anything on frac water treatment? Any changes in regulation or technology? I think last quarter you said it's not a big contributor, but you're trying to figure it out. And I think people view that as having fairly high optionality. Is there anything you have to report there?

Nothing new at this point. Certainly, no new regulatory -- federal regulations yet although there's a lot of activity in that area and a lot of proposed regulations, but nothing yet that we can kind of sink our teeth in and put our mobile treatment technology in place for yet.

So you're still serving that market by taking frac water off site and treating it?

Predominantly, and it's not a big part of our business still, particularly in Pennsylvania and so forth. So we are still doing it, but I think there's a lot of uncertainty still on what's the ultimate regulation's going to be there.

Our next question comes from the line of Rich Wesolowski of Sidoti & Company.

I wanted to get a picture of how your thermal desorption operation has improved, the mix with your incinerators? Would you have any idea as to how many tons of waste is diverted from Deer Park or any incineration plant to your thermal fleet, and what that was a year ago?

We're probably looking at 20,000 to 25,000 tons as a rough guess there, Rich. It's not a huge number.

Okay. A landfill competitor recently cited price increases of 4% to 7% for their base business as distinct from the event project business, which is always very competitive. What has changed during the past year to allow any pricing at all in the landfill sector? That's been an area that is separate from your incineration as far as your bargain leverage.

Our landfill business, for the most part, is pretty local. So each market has somewhat of a story. So it's kind of hard to give you generality. I think you're right, in regard to the larger projects that become more of a logistics and large-event projects. Those tend to be much more competitive. But I think in each of our landfills from a local market standpoint, there's a story behind each one. And in some cases we've had some nice opportunities to improve our pricing, in other cases they may be more competitive. So I think -- for example, in Western Canada and then the Bakken, we've got a lot of volumes, we've got a lot of waste coming out of it, so that we have a little bit more opportunity there, as an example.

And then lastly, regarding acquisitions, does the broadened service line offered by the company today versus 5, 7 years ago naturally lead to fewer deals for fixer upper targets or assets that you could buy at cents on the dollar and more targets that are chosen more for the service line and how that fits into the portfolio?

Well, I certainly think there's still opportunities for us to buy organizations that may have a need for information systems like we have, where we can really layer in our technology and help our business become much more efficient and more cost effective. There are what I would call a lot of smaller acquisitions, singles and doubles that we could do. And there are certainly some home runs that we see out there also. But for the most part, I would say that it really hasn't changed that much. It's -- and we're certainly interested in paying a fair multiple but not a high multiple, and we have seen some transactions at a much higher multiple than we're willing to pay.

Right. Sorry, one more. you mentioned you have a few hundred open positions you're looking to fill. Is there any geographic concentrations of where those are?

It's clearly in the field. A lot of the Western U.S. and Western Canada area continues to be a big area of need for us. We do have a seasonal workforce, and we're trying to convert more of them to full-time employees as well. But I think, when we look at adding more equipment and more resources and try to improve on overall utilization, we have equipment sitting today due to the lack of availability of labor, so it's a big area of focus for us.

Our next question comes from Sean Hannan of Needham & Company.

So you've touched on the Lodging offering a few points this morning. Can you give us an update on the progress of the fabrication efforts to expand those offerings? I know that you're looking at Bakken, as well as Western Canada. Just looking to see if we can get little bit more detail, as we think about those geographies, the agree that perhaps they maybe morphing one versus the other as you get further into the effort, thoughts around production goals and perhaps how you might think about capacity utilization in that business today and exiting the year?

So our Lodging is made up of 3 different components. We have our permitting camps, we have over 60 drill sites, and we have over 400 well site units. And as we look at utilization of those assets, we see opportunities for growth. And the BCT acquisition was made as a way of number one, having a facility to refurbish assets as they come into the end of their life cycle, we can bring those assets and refurbish; number two, be able to control our -- the quality of the manufacturing and also be able to create assets that we can move into the U.S. that will meet U.S. codes like in the Bakken. But also, to really manage the cost side of the Lodging side of the business, we can do it much more efficiently if we manage and build these facilities ourselves. And so we've got a great team there. We've hired a new manager for our manufacturing facility. We are -- I wouldn't say we're booked out, but we're very busy, very strong volumes there. And we also have a number of projects of our own that are on the drawing board, for both Western Canada and the U.S. And throughout this year, part of our capital expenditure that Jim talked about will include investments in all 3 of those segments of our Lodging business. And as I mentioned, it's about a $200 million or so business for us today. That's probably going to continue to grow, maybe 5% or so per year, as we add more camps and add more of those facilities. And we see this as a very nice business, but also helps us keep our people.

Okay. And so just to briefly follow up on that. Last comment, if I think about 5% growth on that business, is that really a matter of expansion on what it is you're able to offer as actual sites, given an assumption of you're kind of near full capacity for many of them and just kind of keeping up with that? Or are there any pricing schemes that can be worked in there that could perhaps add to that growth? How to think about that?

I mean, the level of utilization is very good right now. And there's a significant demand for additional housing, and we expect to continue to grow. We've kind of felt like, if we can keep this side of our business at roughly 10% or so of our revenues, it's probably a good amount of exposure that we want to have in this side of the business. But for right now, we not only are pretty high-level utilization, but we see some opportunities for pricing. And we are still outsourcing needs of our own with subcontracting. So there's a fair amount of opportunity there.

Okay. That's helpful. Then jumping to another side of your business, I think you had mentioned last quarter, you already had 10 turnarounds booked for '12 -- I'm sorry, for 2012, you've talked about turnarounds looking strong already on the call. Has that number changed? And can you share with us your expectations for turnaround this year and the degree your business could see perhaps something higher as we move forward?

I think -- I might have made -- mentioned that at the time at least when we were talking that we were booking turnarounds right up to September of '12, and which was unusual for us to be out that far with guaranteed contracts and commitments. And so I think that's just reflective of the fact that there's a lot of opportunity there, there's a lot of needs. And I would say that it hasn't changed other than it continues to be, I think, strong for us. And the outlook looks strong for us.

Our next question comes from Jamie Sullivan of RBC Capital Markets.

Question, you talk about some of the shift in projects you've seen from the gas side to oil and liquids. Just wondering -- my understanding was that your gas exposure was relatively small, maybe 1% of the overall business or maybe even less. Is that the right characterization?

I would not say it was that low. But clearly, in Canada there had been a trend away from gas going back to when the prices were first coming down years ago. And that was when the -- like, for example, with the Peak services business, they brought a lot of their growth into the U.S. I would say probably we're talking -- as far as Peak business in the U.S, it's probably somewhere around $100 million -- I would say around $100 million, I don't have a precise figure, but clearly the minority of that is gas, but maybe a little bit more than 1%, maybe a couple more percent than that, yes.

And we're shifting the assets that we have to -- from the gas plays to the oil plays and moving with our existing customers. And certainly, that's what they're doing. They were looking at crude at $100 plus and natural or gas at $240 or $250, and so they're shifting as well. But we're shifting with them.

And then I think Destiny had won, I think it was a $50 million contract in the Marcellus prior to the acquisition. Just wondering what the status of that is? Is that already contributing to their business?

That contract is ongoing, and that work will be kicking in here. We've had a very mild winter, and so that activity actually should be accelerating because of that here in the U.S.

And then Alan, maybe just from big picture perspective, you talked about some of the energy investments in 2011, do you have any sense for your customer budgets and plans for investment? How much they're expecting to be up in '12 versus '11?

I think everything that we've seen and from our marketing people, everything that we've heard, investments will continue to exceed 2011 investments both in the Oil Sands. We've got a lot of projects that were impacted by the great recession that now will get back on the drawing board again. And capital is being invested in them. Even in some of the gas plays in D.C., those continue even today, very strong. So not all gases has certainly been impacted. And so I would say that the general theme is a larger investment in capital in Western Canada and the U.S. and the areas that we're particularly focused on. I think that's the best way to characterize it, right Jim?

Our final question comes from Michael Hoffman of Wunderlich Securities.

On the subject of free cash flow, can you help us with what you finished the year fiscal '11 in free cash flow? And then can you talk about sort of long-term capital allocation strategy? Seeing the need in the value and investing in growth, but how does dividends and buybacks factor in over time?

Sure. Michael, the -- our cash flow from operations, just maybe to start there was about $180 million for the full year 2011. And the expectation was for that to be higher. And I think I talked a little bit in my remarks upfront about our days sales outstanding going up in the quarter, 6, 7, 8 days. So clearly, cash flow from operations we would have expected $30 million to $40 million higher, I would say. So free cash flow, it'll probably be -- we're finishing up the numbers, free cash flow for 2011 will probably in the $40 million to $50 million range, whereas we were thinking more in terms of $70 million to $80 million. But again, we're deeper into some verticals where there are some arrangements that the acquired businesses had with customers to have extended terms, and we'll be working on that. And clearly, the outlook looking ahead for free cash flow, I think it'll top $100 million or be in that ballpark. I do believe that cash flow from operations will probably be up in the $270 million range cash flow from operations there. So I think there's a really good outlook there. As far as capital allocation, I think that we believe that the best use of our capital for our shareholders is to continue with our acquisitions. We're not considering at this point any dividends or share buyback programs. We think that we can really leverage with some nice accretive acquisitions, some nice shareholder value for our investors. Does that answer what you're after there, Michael?

It does. So tying that in, I think you're coming up to an opportunity to refinance your high-yield debt. And in context of that, sort of what is the timing? And two, what do you think of is your buying power -- or maybe differently, what target leverage would you be willing to move to, if acquisitions really kind of get robust this year?

Good question, Michael. I think looking at our existing debt it does become callable in August at a $1.038, I think, it is price. And clearly, that would fit into any of our acquisition plans on how we do that and how we position that. So clearly, that's part of our strategy there going forward.

Okay. And then do you have a target leverage that you operate the business?

Yes. What we look at there, again, having a strong balance sheet, as we talked before is very important to our customers, along with just being prudent and being able to take advantage of any downturns or whatever. So we would not want to exceed like 3x EBITDA, in terms of our leverage. We look at our debt to total cap of that 35%, 40% as being a place where we think is fine to be. We might go north of that if we see a good opportunity and see our way clear with an acquired business to bring it down, but generally, we like to run a nice prudent balance sheet and be able to do it. But clearly, our leverage is low right now. Clearly, with $520 million of debt and having cash of $260 million on hand, our net debt is less than 1x EBITDA right now. So there's a lot of debt capacity and a lot of room for us to continue to do as we have been doing to expand the business.

There's been a lot of talk on this call about pricing. And my memory has always been about your business model that pricing's more opportunistic than a strategy, and that mix tends to shift as the business fundamentals improve of your customer and that helps to drive average selling price. And then as you talked about asset utilization tends to allow you to price opportunistically. But as a strategy, the real driver is to drive more volumes through the business model. Am I wrong about that? Or is that...

Well, I think on the waste disposal business, there are different levers there than maybe on the Energy side or the Industrial side and I think -- so I think pricing is today a little different than that. And I think if we take a step back and say we did a full-blown pricing study across our entire business, we instituted 6 new Vice President level positions within the company whose sole responsibility is to drive margin improvements and pricing improvements across their respective segments for the business. And the company today has 35 different lines of business, service offerings than it has. And there are pricing strategies across each one of them that we're focused on. And certainly, when we talk about incineration, that's a lot different than looking at large-event business for landfill. So we have to kind of -- in the context of pricing when we talk to folks like you, we have to really explain through a little bit more broader detail that there's a lot of levers and we're really focusing on all of them. And looking at it on an ongoing basis to try to improve overall the profitability of our business. We have also gone to our customers and share with them the information about the capital expenditures, the compliance requirements, when have you -- particularly running these fixed base facilities and getting them to buy into the fact that they want us to be a strong company. We need to be a profitable company. Today, to replace an incinerator, the current pricing environment does not provide an adequate return on investment. And so we're communicating that, and we're trying to drive improvements across incineration business, particularly very strong.

We do have a follow-up question from the line of Sean Hannan.

So I just wanted to go back to the M&A topic quickly. I know that there's been a lot of time you've spent around this today, Alan and Jim. When you look at the 4 business areas, can you perhaps give us a little bit of your perspective? How do you characterize what maybe more important for you in some of -- in those 4 segments, reporting segments when you look at perhaps relationships, capabilities, growth prospects, margins, what might be of more relative importance in each one of those. If you could help to differentiate, that would be helpful.

I think our environmental business, which is about $1.1 billion this year is an area where we continue to see opportunities to expand. The permits are very difficult to get. So acquiring firms that have those permits. Those unique permits are important for us, and we have systems that we have built out, as I've mentioned in the past. We put $100 million into our homegrown information management systems that we can deploy and leverage across acquired companies and particularly in the environmental space, where we've got 25 years of process -- management process improvement across our -- using our systems. That would be certainly the best for us right now, if that's what you're asking.

That type of logic is helpful, yes. Is there a way to still walk for all 4 segments? Could you perhaps give us a little bit more detail on what might stick out in some of the others?

Well, I think asset management is something that we're excellent at. I think that when we look at managing utilization, tracking assets, tracking availability of our people, equipment, materials, supplies, all those things, we can bring to a company some -- I think some significant tools. And in many cases those tools don't exist today in their respective businesses. We've seen recently a lot of companies out there trying to put ERP Systems in. Whether it's SAP or others, and they have very complicated systems and oftentimes really don't support the kind of business that we're all in. And so we built some super systems, great technologies that we can leverage. And if there's one thing that we want to do is continue to drive our overall SG&A, less than 10% of revenue. And we can do that by acquiring firms, leveraging our systems, managing them more efficiently and still provide that kind of service quality that those customers are looking for. And thanks everybody. We appreciate you joining us on the call today. We look forward to updating you again.