Clean Harbors, Inc. (CLH) Q3 2013 Earnings Report, Transcript and Summary

Greetings, and welcome to the Clean Harbors, Inc. Third Quarter 2013 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael McDonald, Assistant General Counsel for Clean Harbors, Inc. Thank you. Mr. McDonald, you may begin.

Thank you, Kevin, and good morning, everyone. Thank you for joining us today. On the call with me are Chairman and Chief Executive Officer, Alan S. McKim; Vice Chairman, President and Chief Financial Officer, Jim Rutledge; and our SVP of Investor Relations and Corporate Communications, Jim Buckley. Matters we are discussing today that are not historical facts are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Participants are cautioned not to place undue reliance on these statements, which reflect management's opinions only as of this date, November 6, 2013. Information on the potential factors and risks that could affect the company's actual results of operations is included in our filings with the SEC. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's press release or this morning's call other than through SEC filings that will be made concerning this reporting period. In addition, I'd like to remind you that today's discussion will include references to non-GAAP measures. Clean Harbors believes that such information provides an additional measurement and consistent historical comparison of its performance. A reconciliation of the non-GAAP measures to the most directly comparable GAAP measures is available in today's news release, which can be found on our website, cleanharbors.com. And now I'd like to turn the call over to our CEO, Alan McKim. Alan?

Thanks, Michael. Good morning, everyone. Our third quarter results reflect strong revenue growth across a number of our segments, as we exceeded $900 million in quarterly revenue for the first time in our history. From a margin perspective, we continued on an upward trajectory from the first and second quarters for both operating and adjusted EBITDA margins. However, our adjusted EBITDA fell a little short of what we're expecting, primarily due to the delay of our new Ruth Lake camp and lower-than-expected EBITDA contributions from the Oil Sands region. Synergies from Safety-Kleen are on plan, resulting in an improved SG&A margin performance this quarter, and Jim Rutledge will touch on this in more details in his remarks. Looking at our performance from a segment perspective, I should first make note that we've integrated Safety-Kleen onto our WIN platform for the majority of business, and Safety-Kleen has now adopted our intersegment policies. So the result of this is a small shifting of margins between segments. This is all within Safety-Kleen, Environmental, Tech Services and the Re-refining segments. Let me start with the Technical Services performance. Revenue grew 20% from Q3 a year ago, as we continue to benefit from the addition of Safety-Kleen, delivering another quarter of high utilization and volumes into our disposal network. Utilization at our incinerators was 93.5% in Q3, our highest level in more than 5 years. By region, our Canadian operation was again essentially running at maximum utilization as it did in Q2, while our U.S. locations come in just shy of 92%. In what is this segment's seasonally strongest quarter, tonnage at our landfills grew 40% from Q2 and 7% year-over-year. The addition of Safety-Kleen's volumes, in conjunction with several large projects, drove the performance of Technical Services this quarter. From a margin perspective, Technical Services increased its margins to 25.8% in Q3, up 130 basis points from Q2. Some of the sequential increase was at the expense of our Safety-Kleen Environmental business as we integrated Safety-Kleen onto our WIN platform, as I just mentioned. If you look at Safety-Kleen, the total third-party revenues in our press release, it increased 4% in Q3 from Q2. Our Oil Re-refining and Recycling segment led the way in that increase, rebounding from a slow Q2. Segment revenue increased from Q2 as a result of higher total volume of base oil and blended oil sales, improved base oil pricing and a slightly higher volume of byproduct sales. Consistent with Q2, our level of blended sales remained in that 37% to 38% range, and we're continuing to target improvements that -- improving that mix between the base and blended, particularly as it relates to our fully blended EcoPower motor oil, which should boost this segment's EBITDA contribution. Our adjusted EBITDA margin in this segment in Q3 was 21.8% and that is a 500 basis point improvement from Q2. That was mainly driven by improved pricing, higher base oil and blended volumes. As we've discussed in prior calls, we're also focusing on enhancing margins in the Re-refining segment by reducing the prices we pay for waste oil collected from thousands of Safety-Kleen accounts, thereby reducing our input costs. Our pay-for-oil costs were essentially flat in Q3 from Q2. The progress we made in lowering our pricing was somewhat offset by the rise in the price of Gulf Coast #2 oil during much of the quarter, which ultimately increased our pay-for-oil costs from our index customers. Our efforts with our major national accounts to reindex those accounts, the base oil pricing continued in the quarter, but that remains a longer-term process. And as we highlighted at our Investor Day in September, we also have successfully been seeking new and less expensive sources of waste oil, particularly in Western Canada, where legacy Clean Harbors has a strong presence and key customer base. Our goal remains to enhance the margins in this segment over the next several quarters, even without any improvement in the price of Group II base oil. Safety-Kleen Environmental Services performed in line with our expectations this quarter, as we continue to see steady activity across the more than 150 Safety-Kleen branches. Demand for our containerized waste services, parts washers, vac services and allied products was consistent with prior quarters. In addition, our waste oil collection volumes were up slightly in the quarter, increasing approximately 1% or so from Q2 levels. Within this segment, we continue to focus on reenergizing our parts washer business, and we're in the process of rolling out new internal sales campaign designed to recapturing market share in this business. The margin declined from above 17% in Q2 to just over 12% in Q3, again reflecting the integration of Safety-Kleen on our WIN platform that I just mentioned, as well as some higher health care costs and less favorable product mix than Q2. Turning to Industrial and Field Services. Overall, this segment had a disappointing quarter. Despite revenues being up 13% and adjusted EBITDA increasing 11% from a year ago, we expected better results as the Oil Sands region underperformed. As a result of uncertainties surrounding a threatened work stoppage by a recently certified labor union, a significant customer chose to rebid existing contract work. We successfully resolved the labor negotiations without a work stoppage, but a competitor was successful on winning this rebid work. And while we have since won back a small portion of these services, the loss of this contract is a setback for this segment, particularly in the near term. As I mentioned, our Lodging business was impacted by the delay in completing the construction of the Ruth Lake Camp, mainly due to flooding and the weather issues. Today, that lodge is up and running. It's being utilized by more than 100 of our internal staff and a small number of customers. But with the construction delay, we missed signing several large contracts for winter drilling and planned work in the oil sands. The facility is a showcase location for us, and we have high expectations in signing multiyear contracts, but we are behind this year based on our construction delay. Another factor in the performance of this segment in Q3 was our turnaround group. They had a good quarter overall, but activity could have been even higher, except that U.S. refineries have been operating at 92% capacity in the quarter and that really limited some of our opportunities. Our Field Services group also contributed nicely to the quarter with a diverse mix of projects, and it continues to benefit from the cross-selling opportunities to the Safety-Kleen customers. I should note that we did not participate in any major emergency response events in Q3. Lastly, turning to Oil and Gas Field Services. This segment had a strong quarter as revenue grew 27% year-over-year, while adjusted EBITDA increased 48%. These results demonstrate the type of leverage we have in this business due to the underutilized equipment. Growth drivers behind oil and gas this quarter were major seismic work the team won in Western Canada, continued expansion in the U.S. and some flood and oil spill cleanup work. Rig counts in the Alberta region rebounded from a slow start in the quarter to finish above last year's levels, and industry experts are still predicting an increase of 5% or so in this year's winter drilling season in Canada. On the U.S. side, we continue to build our presence in several plays, and particularly, we are growing our market share for Surface Rentals in the Rockies. Before turning to our outlook, here's a quick update on our Safety-Kleen integration. As noted in today's release, with $25 million in synergies recorded in Q3, we remain on track to hit our target of $70 million to $75 million in 23 cost synergies, which will translate into $100 million in savings next year. We have successfully integrated Safety-Kleen's waste disposal and vehicle maintenance into our network. We've also reduced Safety-Kleen's reliance on outside transportation, while making important gains in areas like procurement. Lastly, we've realized considerable savings by migrating their systems onto our industry-leading WIN platform. Our process is just being completed. As we move into 2014 and have the benefit of managing Safety-Kleen's assets and resources through WIN, we're confident that we'll realize additional savings through efficiency gains, better utilization of Safety-Kleen's people, vehicles and facilities. With that, let me turn to our outlook. We're anticipating a solid finish to 2013 as we build momentum into 2014. Jim will be providing our preliminary guidance for next year in his remarks, but looking ahead for each of our segments, we expect Technical Services to continue to deliver high utilization and consistent volumes into our disposal network. The addition of Safety-Kleen has significantly impacted that segment in a very positive way. Industrial and Field Services has a solid pipeline of prospects, particularly on the turnaround side where a number of projects were pushed into 2014. The recent opening of Ruth Lake is exciting for the company. I recently visited the lodge with several executives and we're wowed with the finished product. Given its prime location and accommodations, we expect this first-class facility to be in high demand in the years ahead. Oil and Gas Field Services are coming off a strong Q3 and heading into Canadian winter drilling season. We see significant expansion opportunities in the U.S. and continue to target new plays in areas such as Texas and Oklahoma. Within the Oil Re-refining and Recycling, we are quickly moving ahead, integrating Evergreen Oil in California into our re-refining network. We see that acquisition as an ideal complement to our existing Re-refining business. Recent increases in our base oil and blended products position us for profitable growth in 2014. And finally, we continue to maintain a positive outlook for our Safety-Kleen Environmental Service segment, particularly now that it's on our WIN platform. We intend to reinvigorate profitable growth in that business through better price management, cross-selling and asset utilization. So with that, let me turn it over to Jim for the financial review. Jim?

Thank you, Alan, and good morning, everyone. Revenue for the third quarter increased 70% to $907.5 million from the $533.8 million we reported in Q3 a year ago. As Alan mentioned, our revenue performance was strong across several of our segments, with oil and gas delivering a particularly good quarter for us. To provide some additional perspective on Q3, here's a snapshot of how our key verticals performed. Overall, the percentages were similar to what we saw in Q2. General manufacturing was again our largest vertical in the quarter, accounting for 18% of total revenue. We saw a stable core customer base, particularly in areas such as parts cleaning and vac services, with some softness on the project side, as customers were cautious with their spending and pushed some project work into 2014. Refineries and oil sands customers accounted for 13% of our Q3 revenue. This vertical could have been even stronger if, as Alan mentioned, U.S. refineries were not running at such a high capacity in the quarter. Organic growth in this vertical was supported by strong cross-selling activity. Safety-Kleen is slowly building a presence in Western Canada due to our strong footprint there. So we should see additional opportunities for growth. The automotive vertical accounted for 10% of Q3 revenue. As I mentioned last quarter, this vertical was not a meaningful contributor to Clean Harbors in the past, but Safety-Kleen provides a basket of services, including used oil collection, containerized waste collection and vacuum services. The chemical vertical also represented 10% of Q3 revenue with continued solid base business, driven by the low cost of natural gas, particularly in petrochemicals. Remedial and industrial projects were a little light again this quarter, which was offset by strong incineration volumes and cross-selling. Oil and gas production accounted for 9% of revenue and achieved double-digit year-over-year growth. This was driven by the overall growth in our Oil and Gas Field Services segment, particularly our U.S. Surface Rentals business. Other notable Q3 contributors, each at about 3% of revenues, included utilities, brokers, government, as well as terminals and pipelines, which grew more than 25% from the same quarter a year ago as the strength of several large projects -- on the strength of several large projects in California and Alaska. Returning to the income statement. Gross profit for the quarter was $260.4 million or a gross margin of 28.7%, compared with a gross profit of $160.9 million or a gross margin of 30.1% in the same period last year. This margin decline was expected due to the impact of Safety-Kleen. On a sequential basis, our gross margin percentage was essentially flat with its 28.6% we reported in Q2. Turning to expenses. We have a great story in SG&A this quarter, as we totaled $114.5 million or 12.6% of revenues. This compares with $122.6 million or 14.2% of revenues in Q2 of this year. The 150 basis point sequential reduction in SG&A percentage is not only due to the higher revenue, but more importantly, the ongoing effect of cost synergies with Safety-Kleen, a large part of which fall in this area. Excluding integration and severance costs of about $2.7 million recorded in SG&A in Q3, our SG&A percentage would've been closer to 12.3%. Even with those costs included, we achieved our target SG&A range of 12.5% to 13% of revenues in the quarter. As we move into Q4 and additional synergies take hold, we expect this percentage to continue to decline incrementally in the quarters ahead. For the full year 2014, we are projecting our SG&A percentage to be in the mid-12% range. In Q3, depreciation and amortization increased 68% year-over-year to $69.4 million. Again, this is driven by the addition of Safety-Kleen and other acquisitions completed during the year. Through the first 9 months of this year, we are currently at D&A of $196.9 million. So we remain on target for our full year expectation of D&A in the range of $255 million to $265 million, although we will likely be at the high end of that range. Income from operations for Q3 was $73.6 million or 8.1% of revenues, compared with $53.2 million or 6.2% of Q2 revenues. This sequential improvement in operating margin reflects the significant improvement we've made in our SG&A percentage and the overall impact of the cost synergies with Safety-Kleen taking hold. Our Q3 adjusted EBITDA was $146 million or a margin of 16.1%. This is up 45% from Q3 a year ago. I should point out that our adjusted EBITDA this quarter includes the effect of the $2.7 million integration and severance costs. Turning to our taxes. Our effective tax rate for the quarter came in slightly better than our expectations at 34.7%. This compares with 33.8% in Q3 of last year and 35.1% in Q2 of this year. Year-to-date, we have an effective tax rate of 34.5% and now expect our effective tax rate for the year to be approximately 35%. Third quarter net income was $35.4 million or $0.58 per diluted share compared with $12.4 million or an EPS of $0.23 per share a year ago. Our Q3 2013 net income includes the pretax $2.7 million in integration and severance costs. Net income in last year's Q3 included a $26.4 million pretax charge related to the refinancing of our senior debt at that time. We continue to maintain a strong and healthy balance sheet. Cash and marketable securities as of September 30 were $260.4 million. This is only down slightly from the $273.8 million we reported at the end of Q2, despite the fact that we acquired Evergreen Oil for approximately $60 million in cash during the quarter. Total accounts receivable were $645.2 million at quarter end, and our days sales outstanding increased to 66 days compared with 62 days in Q2, partly due to the increased revenues in the quarter and the addition of Evergreen receivables at the very end of the quarter. We are continuing to focus on collections and improving our billing processes going forward. So we are maintaining our target DSO level of 60 days or less. Environmental liabilities at the end of Q3 were $219.6 million, up slightly from the $218.3 million at the end of Q2. CapEx for Q3 was $66.2 million, which is slightly less than the $69.2 million we spent in Q2. At about $210 million through 9 months, we remain on pace for a full year CapEx in the neighborhood of $280 million, which includes maintenance CapEx of approximately $130 million and growth CapEx of about $150 million. Our cash flow from operations in the quarter was strong at $142.5 million, up significantly from the $98 million we reported in Q2 and $39.6 million in Q1. Moving to guidance. We are reiterating our 2013 revenue guidance and lowering our adjusted EBITDA guidance based on Q3 and our outlook for the remainder of the year. We continue to expect 2013 revenues in the range of $3.5 billion to $3.55 billion. We now expect adjusted EBITDA in the range of $523 million to $528 million, down from our previous guidance of $535 million to $545 million. As we announced in this morning's press release, we are providing our preliminary 2014 guidance today. For 2014, we currently expect revenues in the range of $3.7 billion to $3.8 billion and adjusted EBITDA in the range of $610 million to $640 million. And with that, Kevin, could you please open up the call for questions?

[Operator Instructions] Our first question today is coming from Sean Hannan from Needham & Company. Sean K.F. Hannan - Needham & Company, LLC, Research Division: So a question around the guidance. As we move from September and into December here, it seems like the implied range with where we are now, and I realize you're reiterating for the year, but as we back into what's implied here for December, we could see revenues pull back a little bit in the fourth quarter. So just wanted to see if we can get a little bit more of an explanation around that, particularly as we have Ruth Lake now. I think they came on, what, on the first -- last Friday and some other, I think, seasonal factors that should be in favor. So just a little bit more clarity around that will be helpful.

Yes, I can start that, Sean. It's Jim. Certainly, what we've done in looking at the guidance for the rest of the year, considering the delays that we experienced in Ruth Lake, we're certainly having very good meetings with customers and high interest level with companies taking blocks of rooms there in contracts. But we're being a little conservative about how much we'll achieve of that during the fourth quarter. So you're right, that we're expecting to be more at the level of Q3 with revenues in that segment. Certainly, we'll see oil and gas come up a bit as we get more into the winter drilling season in Canada. But slightly offsetting that is in Technical Services and the environmental side of the business, that gets seasonally a little weaker as you get into Q4. Sean K.F. Hannan - Needham & Company, LLC, Research Division: Okay, that's helpful. And then as you look to '14, that preliminary guidance, how do you expect the growth there to be weighed? I think it's about 6% growth at the midpoint x any deals. So your comp should arguably be easier in the first half, particularly with what we saw in the oil and gas kind of headaches in this 2013 year. You should have some price increases. You're going to have Ruth Lake. So should we see a better than 6% in that first half with kind of that backlog of turnarounds that you're looking at and all other factors and then a little bit more tempered in the back half of the year? What's the thought process behind this?

Yes, I can start on that, Sean. I think if you look at our total revenue guidance, the $3.7 billion to $3.8 billion, the way that I would divide that up between the first half and second half is probably somewhere a little bit more than half of it, say, 51% is in the second half of the year, I would say, and the 49% in the first half, with each of the quarters being maybe 24.5% in that range. And the reason why I say that is that the environmental side of the business in both Safety-Kleen and in Tech Service, you do have the first quarter, which is -- which tends to be the weakest quarter in that segment -- clearly, in those segments. But then, that's offset to some degree by oil and gas with the winter drilling program and the winter is very strong in the first quarter, but it's not enough to offset that. So I still put a little bit more of the weight in the back half of the year. Certainly, from a margin perspective, looking at our overall margin for the year, I expect that when we're in Q1, probably to be in that high 15% range, given that the Environmental business is seasonally slow in the first quarter, I think to be in that high 15% range is -- it feels right. I think as you get into Q2 and the environmental parts of our business start picking up in the spring and Q2 gets stronger, we're going to be near 17%, I expect, in Q2. And then when you get into Q3, which is probably the strongest of the year, you're going to see us in the 17.5% to 18% range and then probably 17% range in Q4. So that's the way we're kind of looking at it, recognizing -- I wanted to give some of that color because there are some offset seasonality in our business, but hopefully that gives you some color around the cadence of our business through the year. Sean K.F. Hannan - Needham & Company, LLC, Research Division: Okay, that's great. Just -- and when you back out the integration and the severance, it seems like your earnings number would have otherwise been about $0.61. Just want to validate that and I'll hop back in the queue.

Yes, that's right.

Our next question today has come from Hamzah Mazari from Crédit Suisse. Hamzah Mazari - Crédit Suisse AG, Research Division: The first question is just on the Industrial and Field Services segment. If we adjust for some of the acquisitions you've done and anything in there Safety-Kleen related, I don't think there's much in there. But it seems like the underlying organic growth in that segment has slowed pretty significantly. I realize you mentioned there are some projects that are being pushed back into '14, but maybe give us a sense of what's going on in that segment. Is this all activity related? Is there an execution issue? I realize that some of your BCT capacity has gone to building out Ruth Lake, but just give us a sense of what's going on in that segment.

Yes, I would say, Hamzah, that, that's true, that we built the camp ourselves. That was a facility that took up all of our capacity and manufacturing so that, that revenue was lost and we are now back building commercial facilities, and we'll see revenues for the next 6 to 12 months as we build out more camps. I think you're right, that our gross load and that had to do with both some of the weather-related issues that impacted our business, particularly in the oil sands, but the lost contract that I mentioned as well had a negative impact. On the other hand, our specialty business, the business that does the catalyst work and a lot of our turnaround work, continues to do extremely well, but we could have done even a lot better. As we mentioned, a lot of the refineries are running real strong and our turnaround work has been delayed. So I would expect next year that you'll see our Industrial and Field business really pick up again like it was growing in that double-digit level. Hamzah Mazari - Crédit Suisse AG, Research Division: Great, that's helpful. And then just a follow-up question on the Safety-Kleen business, it's a 2-part question. On the Re-refining side, could you give us your updated view on incremental capacity coming online in that marketplace and your ability to keep margins within that Re-refining business? And then on the parts cleaning side, washing side, you mentioned loss of market share. Could you maybe talk about who you're losing market share to, why you're losing and how you're going to get it back?

Sure. I'll just touch on the parts washers for a second. I think over the past 10 years, we've mentioned that Safety-Kleen was going through its difficulties, that they did lose market share in the parts washer business and there's been regional competitors out there that have taken advantage of that. And so we really want to go back after our lost accounts. And we currently have about 200,000 parts washer machines out there and that was over 300,000, I believe, in the late '90s, when Safety-Kleen was running on its peak. So it's not necessarily a big growing market but there's clearly opportunities for us to go back. And Safety-Kleen really has done a tremendous job of improving its service, its quality. And now with our recycling facilities tied together with the Safety-Kleen brands business, we think we can really add a lot more value to those customers, not just on parts washers but particularly on the container waste side of the business. On the incremental capacity, we feel very confident in our position. We've got 3 re-refineries. Our Breslau facility expanded by 10 million gallons, and that plant, just coming out of a turnaround, is running extremely well. The acquisition of our West Coast refinery, the Evergreen facility, we have just turned around both of those units there as we took on that acquisition in September. And we believe, from a capacity and processing quality standpoint, that our products are second to none in the marketplace. We do know that Chevron in Pascagoula is coming online with their plant. We believe that most of their product is going to go export. We also believe that, that is more of a risk to the Group I players out there that our Group II product is very well -- a very high demand product in the marketplace, and we believe we're going to continue to be a great source of that product for our customers.

Our next question today is coming from Larry Solow from CJS Securities.

Just a couple of follow-ups on the loss contract on the Oil Sands customer, is that -- is there potential -- you mentioned you took back a little bit. Is there a potential to take some of that business back, are these long-term type of contracts? And just a follow-up, how is the Oil Sands in general outside of this -- it sounds like a pretty fairly sizable loss, but how is the region holding up?

Yes, unfortunately, that loss could have offset a lot of the gains. And the team has been working extremely hard and done a great job of servicing not only that customer but other companies, and we are growing. As you know, the market is growing, Larry. There are new contracts that are being led, and we're winning those new accounts. So we expect our utilization of our people and equipment to continue to grow. This was probably more of a short-term issue for us. The Oil Sands in general is a very expensive place to do business. And all of our customers, as well as ourselves, are doing everything we can to manage our costs and very aggressive in how we do that. And so we had a short-term issue here that we had to get through, but our long-term perspective there is we're going to continue to grow, and we've made a big investment in that area.

Okay. And then just switching gears, just to the SK Environmental and the uploading onto the WIN platform and you mentioned some impact on margin and I guess also some shifting into the Technical Services, could you just give a little more color on that? Did you expect sort of that impact? And I guess, obviously, over the long run, it should be a lot more positive gains than there's negative. But was there sort of an additional negative temporary hit this quarter as you went onto the platform?

Yes, I can start that off, Larry. I think if you look at going onto the -- our WIN platform, having the Safety-Kleen waste stream processes, how they get flowed through the network, conform to the WIN way that we do it, the WIN platform. And 2 examples, just to give a little color on that. For example, one of the things that Safety-Kleen had done was they gave credit for transportation revenues as part of waste streams going through the network to the distribution centers, which is in the SK Environmental side. The way the WIN system works is that the transportation revenue is credited to the first manifested location, which is typically the recycling center, which is in the Technical Services side of the business. That's the facility. And the reason why that's better is that it enables us from a logistical standpoint to see the transportation going through along with the waste stream and hence, enables us to optimize logistics. So there's a difference, but it does hurt the margin on the SK side and improves the margin and revenues on the Technical Services side. Another quick example is the way, when we take solvents in, spent solvents, waste solvents, to be recycled. Typically, the way the accounting system within Safety-Kleen would handle that would be a charge and a credit within operating expenses between the 2 segments. We handle that as intercompany revenues. So you'll see intercompany revenues go up during the quarter. And what that's associated with is bringing up those revenues up to the revenue side rather than just handling it as a plus and minus within operating expenses. Again, these are all associated with the WIN platform. I think that the SK margin on direct revenues during the quarter of being at that 12% range is probably a little low. I think they're more at about a 14% range because they were impacted by higher health care costs. And to some degree, it was a catch-up because we switched -- they switched over to our health care provider and there was some catch-up of some of the claims coming through in the quarter. And also, the product mix was not as favorable as it was in Q2. So I'm kind of thinking that they're probably in about 14% range currently.

Okay. And if I could just squeeze one last one, just on the oil and gas. It sounds like, obviously, the U.S. improving capacity utilization. It seems like I think you sort of bottomed in the middle of last year. Can you just sort of give us some color on where you are today versus where you were maybe some kind of figures? And it sounds like there's still a lot more room to grow there.

Absolutely. In the oil and gas, I think that the margins that you'll see in that business will be in the upper teens and approaching 20% and exceeding 20% in the winter drilling season. I think that, that's key there. But we're still probably in the teens, I would say, mid-teens in the offseason, particularly Q2, that will go down into the low teens that you'll see there. So that will generally be the cadence there. But the margin...

And utilization, we still have a ton of opportunity from a utilization standpoint. We've been repositioning more units to the U.S., and we'll expect to continue to grow that business in the U.S.

Our next question today is coming from Michael Hoffman from Wunderlich Securities.

On Safety-Kleen environmental, can you bridge for us what 2Q could have been on a comparative basis if the WIN system had been fully integrated then, so we understand what this displacement looked like? Ideally, both had a revenue and a margin side, but it's just so -- it is such a big difference that bridging that would help.

Yes. I would say that the -- on the revenue side, the direct revenues in Q2 would've been very similar to what you're seeing as direct revenues in Q3. I do think that the margin, though, would've been a little higher at 14% because Q2 was hit with some of those items, as I've mentioned before.

Okay. And then just to clarify, all of that shifted into Technical Services, that's where it went?

For the most part. Most of it in the recycle centers that are part of the facilities there, although there are some benefit in the oil re-refining side as well.

Okay. And then second question, in your guidance -- thank you for giving that perspective. At your conference in September, you suggested that there would be a substantial free cash flow improvement but didn't really quantify it then. Can you come up with a little bit of quantification this time? I mean, you're running kind of in a, call it, low $100 million range for this year. Is it possible that number doubles in 2014?

Yes. I think, obviously, with the cash flow from operations that we talked about in the comments upfront, we've seen a nice improvement there. And I would estimate that the free cash flow during the quarter was above $50 million for just this quarter. But it does bring our year-to-date rate at almost $100 million. So we'll probably get a little over $100 million this year. But next year, I do believe that you'll see the cash flow -- free cash flow exceed probably $160 million level, and our CapEx we're expecting to be lower. What I'm estimating there with CapEx is about $200 million of our base CapEx, but there might be as much as $40 million on the new incinerator that will span 2014 and 2015. So that's implicit in my numbers, about $240 million, but it could be lower than that. Our target for regular CapEx is $200 million. So I would say we should exceed $160 million and perhaps better than that.

Okay. So just so I understand that correctly, x El Dorado, you are talking about nearly doubling free cash flow next year and El Dorado will fight [ph] back?

That's right.

Our next question coming today is coming from Al Kaschalk from Wedbush Securities.

Is it possible to talk further about or quantify the contract loss on the Industrial and Field Services area?

Just in dollars, we're probably talking $20 million revenues.

Okay. And in terms of the ability, is your understanding that, that contract is a multi-year contract? I know you talked about getting some of that revenue back, but is that something that, from a practicality standpoint, is going to be a challenge to recover?

No, no. I mean, we could be -- next month, we could be back in there. It could be 60 days, it could be 6 months. But it's not anything that -- there is nothing that prohibits us from -- and this was a multi-year customer, nothing that prohibits us from getting back and getting that customer's business back. And when we are back and then we are doing -- that's still a considerable multi-million dollar account still for us, but it did hurt us here.

All right. And then, it's good to see Ruth Lake open. But did I interpret your comments, Alan, correctly that the ability to get 100% utilization or occupancy rates in the near term will be a challenge, given the delays? Or is there sufficient work that maybe you're working on optimizing the rates next year, given the seasonality? Can you just clarify?

Yes. As you can imagine, building a facility in such a remote area and dealing with the multitude of agencies to get occupancy, that -- and I encourage people to visit that facility because it's just a first-class facility. We've been told by people who are in that business that it's the nicest facility in that region in Alberta. So -- but to get occupancy and to go through all the approval processes and particularly, to deal with all the weather that we were dealt with, particularly through June and then July and then the impacts of construction, it was week-to-week, hoping to get all of our occupancy permits and get this up and running. And so we couldn't commit and guarantee any capacity to customers who truly are interested in the site. And so I think because of that, we really didn't want to leave anybody short. And so we feel very confident. This is a 600-room camp. We're going to occupy about 100 to 125 rooms of that for our own needs because we have a major maintenance facility and our Fort Mc logistics operation right there. We feel very confident that we can fill the rooms up. It's just sort of a timing issue for us because of the delay.

And then, I don't know, maybe we can pick one of these to answer but it's a two-part question, I guess, it's more on the margin side for the segments. But SK Environmental and Oil Re-refinery moving around, is there -- are you comfortable where that business is performing in terms of the margin perspective? I know the pricing has some variation and impacting that, but from what you get and how you operate, should this be more of a mid-teens EBITDA-type business or should we see something in the low 20s over time? And then secondly, the same parts of that would be in Oil and Gas Field Services, which had a pretty, pretty strong performance in the quarter.

So I think it's important to mention that when you move Safety-Kleen onto the Clean Harbors platform and get off of SAP and get off of UNIX and get off these different systems and you really streamline the processes and adopt our 404 work, our Sarbanes-Oxley kind of processes and controls, we've got to be consistent on how we run the business, how we go through our audit process and what have you. And so with that comes some changes. And so I think it's -- to absorb a $1.3 billion business within that first year and implement all those changes, we had to do it, and it takes a little bit of time for us to get it done. That being said, we've also had to address the issues of pricing, particularly in the oil side of the business. We are, obviously, disappointed with the level of profitability that we've been running at when you look at the overall Safety-Kleen business, however, very encouraged by the amount of costs that we've been able to take out by putting them on our systems and by implementing those initiatives and those programs. And so we feel very good, even in light of where the pricing is for oil, that we've got a very good business here and one that we can really build on.

Great. It's good to hear that fundamentals, x disintegration, is still strong.

Our next question today is coming from Adam Thalhimer from BB&T Capital Markets. Adam R. Thalhimer - BB&T Capital Markets, Research Division: The increase in seismic activity was in the Oil and Gas segment. How do I read that? Because that -- I always thought that was a smaller piece of your business. I'm surprised that it could have this kind of an impact. I mean, is that a positive for future drilling activity? Is it a sustainable improvement? Any color there would be helpful.

Yes. I mean, this business is sort of 3 years out, right? I mean, the work that we do in this area is really supporting future activities that may be happening from a pure exploration. The work, as you know, with our seismic exploration, is all about doing more studies and supporting more investigation on where to drill in the future, and it's a leading indicator. And quite honestly, that business has been slow. It has been slow for a couple of years. The team has done a very good job of winning -- it's their share of the limited amount of work. But if you look back 5 years ago, that business was much bigger before even we acquired it. So I would say that we're still another year away before that business really turning on, and we expect it to benefit when that does turn on. Adam R. Thalhimer - BB&T Capital Markets, Research Division: Great. And then there had been a lot of questions asked about the Safety-Kleen Environmental Services margin. And I just wanted to ask one more. Where do you think -- so you kind of say you feel like on a normalized basis, you're may be at 14% now. Where do you think that goes in 2014?

I think you'll see an improvement there into the mid to higher teens. And the way we kind of look at that business once -- now that we're on our platform and optimizing and looking for additional cost savings or maybe the way I think about it is margin expansion, that we should be able to bring that up to where our Clean Harbors margins are in the Environmental business. So I do think over the longer term, our goal would be to bring that into the 20% range. But I think you'll see maybe a couple of hundred basis points or so improvement into next year.

Our next question is coming from Jamie Sullivan from RBC Capital Markets.

So with the EBITDA guidance for this year, it looks like you took out about $12 million to $17 million in that range. Can you maybe bucket those in the adjustment between the lost contracts, Ruth Lake, turnarounds, sort of the major contributors to it and maybe size it for us?

I'd say probably 1/3 of it relates to Ruth Lake and maybe 2/3 to the issue with the contract and that labor issues that Alan referred to before.

Okay, that's helpful. I know you don't give segment guidance, but as you look in 2014, maybe you could just talk directionally about kind of the level of variance you're putting around each segment, given some of the differences and predictability and seasonality across them. Just some color there will be helpful.

Yes, I think if you look at the Technical Services business, we're looking at mid- to upper-single digits there in growth for the year in revenues. If you look at the Safety-Kleen Environmental business, looking at about that same growth rate, mid-single digits. If you look at the Oil Re-refining side of the business there, probably more mid-teens, and what's driving that just obviously is the addition of Evergreen Oil that we brought in, our third re-refinery that we brought in during this quarter. So you'll see an increase into next year. We were conservative in the Industrial and Field Services business also in probably the mid- to upper-single digits, as far as growth rate. And we were conservative in Oil and Gas. There, we were thinking, at least now on a preliminary basis that, that would be flat to slightly up next year.

That's really helpful. And then, just Evergreen, what -- is there kind of a run rate contribution on the existing business we should expect from them?

Probably be in about the -- close to $70 million. I don't have it all right in front of me, but in that range of revenue, it's roughly about $70 million.

Our next question today is coming from Scott Levine from Imperial Capital.

I hope you might be able to provide some additional color on the amount of your business that's tied to the turnaround activity. And it sounds like the high efficiency and run rate on units is maybe driving some weakness in that activity this year. But some comments on the outlook for next year, whether there's any reason to expect improvement and maybe order of magnitude.

In just talking with both our chemical and our refinery vertical leaders, our sense is we continue to win business, grow that side of the business, have contracts lined up. And so I think that we're well positioned across the U.S. and Canada. Of the 150-or-so refineries, we're doing business essentially with every one of them in some shape or form. And we believe on the turnaround side that we're going to continue to grow that business with our Specialty Services group. So I think we feel very good that if the business is there, we're going to win our fair share of that.

Got it. And as a follow up, maybe you've been clear about where the upside, your initial cost synergy target has been and what it is for Safety-Kleen. But maybe a little bit more elaboration on the revenue synergy potential. You talked about parts washing today, but a qualitative comment, if you don't want to provide specific targets, but your thoughts on what the revenue synergy potential is today versus what your initial expectations were.

I think that the cross-selling opportunities is certainly in the early stages with Safety-Kleen and the customer base that they have and particularly to do with our Field Services business. We're pretty pleased with the amount of activity and the calls that we're getting. On the cost side, we're really challenging the team to reduce our costs another $50 million or so next year. We have other costs, obviously, that increased regarding wages and health care. And so every year, we've had a number of initiatives to take costs out of our business. And historically, that's been in the $20 million, $25 million range. With our scale now and with the opportunity that we see, we really believe that there's a lot more costs that we can take out of our combined operations. And we've been, obviously, in the early stages going through the budgeting process and looking at where each of these areas are going to come from. But I think the team feels very confident that there's a lot of costs here that we can keep taking out of this business.

Our next question today is coming from Sean Hannan from Needham & Company. Sean K.F. Hannan - Needham & Company, LLC, Research Division: Just to follow up on some of the comments that you've provided around lodging and as we have this late entry in '13, is there any risk or is there any thought you can provide around, as you look to fill those rooms, would there perhaps be discounts or impacts to pricing or EBITDA in order to get those rooms filled for the busy season? What's the thought process there as we enter into the seasonal period for the business?

I don't think there's any need for us to do that. I think the facility will sell itself. We're having tours daily. We've got major customers visiting. We have over 350 customers that have historically used our lodging facilities. And we believe that it's really just getting those customers. Now that the site is finished, opened, ready for occupancy, serving food, managing the needs of our own workforce up there, it's just a matter of time at this point, and not a matter of price. Sean K.F. Hannan - Needham & Company, LLC, Research Division: That's great feedback, Alan. And then in terms of the oil and gas viewpoints for '14, looking at that to be flat, we had some comments from you folks from the Analyst Day where there's a little bit more of a growth expectation in the longer term for that business. There's certainly a redeployment of assets, I think, that you had referenced that a little bit earlier such as some of the centrifuges into Texas and some of the other shales here in the States. Can you provide a little bit more color behind that flattish outlook? What drives that? Is it really conservatism based on the volatility we've seen in the business? Is there something fundamentally that perhaps has changed a little bit? Any color would be helpful.

Sure. I mean, I think, first, we're being conservative. And I think second is that we have done a great job of growing our sales control business in the U.S. And the team there is excited about the opportunity to keep growing it, again, in some of these new areas. The Canada business has really been soft, particularly to do with the weather. And so that's -- that has improved. We had a real wet season. And that -- there were a lot of rigs that were down, and so that has improved. But we have a long way to go to put those -- that equipment to work, particularly in Canada. Our seismic business has had a nice run here, but we're a little conservative for next year. We haven't got that contract in our hands, so to speak. So there certainly is upside. But I would tell you that we said that looking out over the next 3 to 5 years, we want to get this business to $5 billion and beyond. And you can see the leverage as the company continues to grow its top line. You see it recently in oil and gas, but you really see it, even looking at the last 2 or 3 quarters and looking at the margin improvement and how those costs coming out of the business, and that revenue really has flown through. So I still am very optimistic about where we're taking the business and achieving that longer-term goal, but we are trying to be more conservative and beat our estimates next year. Sean K.F. Hannan - Needham & Company, LLC, Research Division: That's very helpful. And then lastly, from an emergency response standpoint, are any numbers baked into that '14 outlook?

No, we did not include emergency response in '14. Sean K.F. Hannan - Needham & Company, LLC, Research Division: Okay. So from an annual guidance, kind of entering a year, that's kind of a change now in your process. You're just fully removing that and whatever we get is upside.

That's correct. As we would typically put events, some estimate for the events in there at $15 million, $20 million. We've done that in the past, but we decided to have that just to be kind of like upside as you just alluded to.

Our next question today is coming from Michael Hoffman from Wunderlich Securities.

Alan, is it logistically possible to sell out Ruth Lake in the fourth quarter, or on a practical basis, it will roll into '14?

No, I'm just going to say that I think mostly, we should be there in Q4. It's just a little bit hard because you have the holidays coming up and people -- you could sell out. But from an occupancy standpoint between the holidays, it's a little bit softer. But certainly, going into the beginning of the year, we could be full.

Okay, I just wanted to understand the perspective. And then on oil and gas, you mentioned in the press release, alluded to in your comments, there was some flood work. So if I took a flood work out, what does that look like that also limits the growth rate?

It's not a lot. I mean, we just referenced it the fact that our production services team was working on some event work as it related to the great floods that happened in Alberta and helped out some -- helped out a lot up there actually with the communities. We set up a camp in High River. And so we were impacted negatively and positively, but it's not material on that, Mike.

All right, fair enough. And then I remember having a conversation with Laura about the capacity utilization, and we talked about sort of 2 ways to do this: one was just get units in place; and the other was upsell the asset intensity. Can you frame for us how you're thinking about that, as you look into 14, but also where are we in terms of progress with that?

Yes. Laura has been with us 6 months or so. And I think that she continues to work with the team to implement those strategies and to improve our intensity of asset utilization, as she says. And I feel confident we'll continue to see that progress, and we're in the early innings.

Our next question today is coming from Dan Craig from Coe Capital Management.

Two quick questions, first on both on Safety-Kleen, I guess. What's the assumption for the incremental synergies that you think you could potentially get in the $610 million to $640 million EBITDA guidance for next year?

The incremental synergies are they -- that $25 million to $30 million next year because then we'll be at the full run rate next year. So that's where we go from the $70 million, $75 million up to the $100 million.

Okay. But I thought you mentioned earlier in the call that there was potentially some additional synergies beyond that?

Yes, absolutely, in terms of margin expansion. And so we do expect to see the margin in Safety-Kleen increase next year as a result of a lot of those efficiencies on the WIN system. But I haven't put a strict dollar amount on that at this point. We should see -- I think I mentioned earlier that we should see perhaps a couple of hundred basis point increase from that 14% range that we saw in the -- that I estimated for Q3 in Safety-Kleen Environmental. We hope to do better than that.

Okay, okay. And you're assuming that extra couple of hundred basis points in the $610 million to $640 million EBITDA guidance for '14?

For '14, yes.

Okay. And then what's the base oil price assumption that you guys used?

We did not adjust it. We kept it under current, where things are at now, with price increases that already occurred, as you're probably aware of, over the last month or 2. Just assuming those stay flat for next year is what we assumed.

Our next question today is coming from Larry Solow from CJS Securities.

Quickly, on the pricing assumptions for next year, do you have anything you can share with us?

We -- particularly on incineration with the level of utilization that we're operating at, we continue to look at rationalizing that capacity and improving our mix and improving our pricing in that area. Our landfill business, as we've said in the past, continues to be competitive on the large projects, but we've been able to improve pricing on our local business. And I think in general, we feel that Safety-Kleen has an opportunity to improve its pricing. And by having them on our platform, we think our team can work together now to implement better pricing for their various lines of business. So I would say, overall, those are not baked into these numbers, but those were some of our early thinking.

Got you. So there's not really much increase in price or negative -- more like the other baked into the preliminary guidance.

That's right.

Great. And then just 2 housekeeping questions. Any -- do you expect any more severance in Q4? And tax rate, is 35% a good number to use going forward?

Yes. I think -- actually for 2014, I think the -- just opening up my -- for 2014, I would use that -- we're thinking 35.5% to 36.5%. So on average, 36% for next year, given the mix of U.S. and Canadian business, so it's up slightly there. But for the fourth quarter, that 35% range seems right.

And there shouldn't be any substantial severance costs at all in the fourth quarter.

We have reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further closing comments.

Well, thanks again to everyone for joining us today. We look forward to updating you on our progress as we close out 2013 and head into the new year. Have a safe day. Thank you.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.