Clean Harbors, Inc. (CLH) Q4 2014 Earnings Report, Transcript and Summary

Greetings, and welcome to the Clean Harbors, Incorporated, fourth quarter 2014 conference call. [Operator Instructions] It is now my pleasure to introduce your host, Michael McDonald, General Counsel for Clean Harbors, Incorporated. Thank you, Mr. McDonald. You may now begin.

Thank you, Rob, 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, Jim Buckley. ': 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, as well as in the appendix of today's presentation. And now, I'd like to turn the call over to our CEO, Alan McKim. Alan?

Thanks, Michael. Good morning, everyone. Thank you for joining us today. Turning to Slide 3, we produced a solid fourth quarter, particularly in light of the numerous headwinds affecting the energy markets. Revenue was slightly lower due to the effect of currency translation, was in line with our expectations. Q4 adjusted EBITDA was ahead of last year's pace. From a margin perspective, cost reduction initiatives and stronger business mix drove an 80 basis point improvement from the fourth quarter of 2013. It was a similar story for the full year, in the face of difficult market conditions, including a drop in the Canadian currency, a slowdown in the oil sands, a significant decline in base oil pricing and turbulent energy markets, our team responded with decisive steps that enabled us to increase our adjusted EBITDA from the prior year. During 2014 we implemented a major cost reduction plan, conducted a detailed strategic review of our portfolio, we shifted resources from underperforming markets to stronger areas of the business and created a regional sales structure that is enabling us to be more responsive and opportunistic. In addition, the Board authorized the company's first stock buyback program. Certain segments and business lines drove our results in 2014. In Technical Services, we crossed over 10,000 more tons of incineration waste than in 2013, while growing landfill volumes by approximately 170,000 tons. Safety-Kleen contributed significantly to a record year for disposal, generating approximately $120 million in intercompany disposal revenue for tech services. This result is nearly 40% higher than the approximate $85 million in intercompany disposal revenue captured in 2013. We also benefited from robust cross-selling of field services to our Safety-Kleen customers during the year. In all, our team has a lot to be proud of in 2014. We capped the year with a strong Q4 that enabled us to exceed our guidance. Now, let's move to Slide 4 and review of our segment performance. Tech services revenue increased 7% in Q4, but more importantly achieved nearly $100 million in adjusted EBITDA for the first time. You may remember that we had accelerated maintenance shutdowns at two of our largest incinerators from Q4 to Q3. That shift in the maintenance schedule combined with a healthy backlog heading into the quarter and really a terrific performance by our team led to record volumes in our facilities. Tech Service incineration achieved 96% utilization in Q4, one of the best quarters in our history. One factor in that performance was our Canadian incineration facility. We made several upgrades and enhancements in 2014, and due to these investments, we increased its practical capacity by approximately 12,000 tons to nearly 106,000 tons annually, which would increase our entire network to about 492,000 of annual capacity. Our landfill business also set a record in Q4, handling the largest single quarterly volume in our history, an increase of nearly 40% from a year ago. It also kept the best year in landfill in our history, with volumes up nearly 10% in 2014 versus 2013. Our focus and expansion into many oil and gas plays has really paid off with the increased volume in to our landfills. The result of these record volumes in Q4 was a 23% increase in our adjusted EBITDA and nearly a 400 basis point improvement in margin. So really congratulations to our entire tech services team on delivering these strong results for both the quarter and the year. Turning to Slide 5. Industrial and Field Services, reverse several quarters of declines by posting 4% topline growth, driven primarily by our U.S. business. This increase is particularly noteworthy, considering the lower Canadian dollar and weaker oil sands environment in Q4 compared with a year ago. We concluded 2014 with our second straight year of no major emergency response events, although we did respond to a few small spills in Q4. Profitability and margins were lower in the quarter, as a result of the mix of work, and pricing pressures we're facing from some energy clients. Overall utilization for our billable personnel was 81%, which is consistent with Q4 of 2013. Moving to Slide 6. Our results in Oil Re-refining and Recycling reflected decline in base oil pricing that culminated with a $0.50 drop in the early December. The posted price of our Group 2 base oil fell from $3.45 in August to $2.45 in December. This decline in base oil started at the time of the Safety-Kleen acquisition in late 2012, when base oil was closer to $4 a gallon. To address this major decline and margin squeeze, we announced our Zero-Pay and Charge-for-Oil initiative in mid-December. We needed to realign our price structure and manage our spread, and we believe our customers and our partners will continue to work with us through these very difficult times. Adjusted EBITDA in the segment was down significantly from a year ago. We continued to focus on increasing the percent of blended oil that we sell. Our blended percentage increased to 38% in the fourth quarter from 34% in Q3 and from 33% a year ago. Turning to Slide 7. Revenue in Safety-Kleen Environmental Services was down 6% in the quarter, but most of that decline was related to the business mix as well as lower intersegment contribution from SK Oil, as a result of the lower year-over-year PFO. Parts washer services increased 12% from a year ago, which is really encouraging. 2014 represented the first-time in four years that Safety-Kleen expanded the net number of total parts washers and service, which was a notable accomplishment. Really kudos to the Safety-Kleen team in regaining some market share this year. We plan to continue to be aggressive and regain more market share this year and have approximately $12 million of capital budgeted this year for this business. We collected $49 million gallons of waste oil in Q4. For the year we gathered close to 205 million gallons, which was flat with 2013. That is impressive, given how hard we've been pushing to reduce our Pay-for-Oil and walking away from some business. Even prior to our announcement of our Zero-Pay, we were driving down our PFO and seeking new sources of cheaper oil. And as a result, we lowered our average PFO in the quarter by $0.10 and $0.16 for the year. On Slide 8, the performance of the Lodging Services was similar to Q3. Revenue was down year-over-year, due to currency translation, manufacturing weakness and lower activity in our drill camp business. Our fixed lodges continue to perform reasonably well in a challenging market in terms of occupancy. We were at 73% occupancy of our outside rooms in the quarter versus 72% a year ago, but down from 76% in Q3. We've certainly seen some room rate pressure in recent months, but our margins were still up by 170 basis points from a year ago, as we continue to drive more of our revenue from our fixed lodges. So turning to Oil and Gas Field Services, on Slide 9, Q4 revenue declined 19% from prior year. This result reflected the overall downturn in the energy market compounded by the effects of currency translation. Reduced expiration budgets continue to impact our seismic support business. At the same time, our service rental business is performing well in the face of the challenging market. Our average number of rig service in the quarter was 173, up sequentially from Q3, but down from a year ago. We gained market share in Q4, as a number of smaller competitors struggled as customers eliminated vendors and gravitated towards larger quality operators like Clean Harbors. Average utilization of our key equipment centrifuges for processing waste increased to 57%. The team really has done a good job of eliminating cost and getting unutilized equipment in the field, which really enabled them to deliver the margin levels with a year ago. Moving to Slide 10 and our corporative initiatives. We achieved our targeted $75 million of annualized cost reductions in 2014, capturing a net benefit of approximately $40 million. In January, we announced the completion of our strategic review, which produce several important outcomes. First, we are planning to carve out our Oil and Gas Field Service segment as a standalone public entity, along with some drilling-related mobile lodging assets. Second, we intend to maintain the majority of our lodging segment, because our fixed lodges are an integral part of our industrial service footprint in the oil sands. Third, we determined that there are higher returns to be gained from the re-refinery business and that we are the best owners of that business. And toward that end, we are intensifying our focus on blended oil opportunities to a dedicated lubricants business to be led by Jerry Correll. We believe that with the implementation of our Zero-Pay and Charge-for-Oil program are highest margin routing initiatives and the goal of becoming a majority blended business in the coming years, that will see significant long-term upside in Safety-Kleen oil, regardless of what is happening in base oil pricing. Overall, the strategic review was designed to determine the optimum mix of business to achieve our EBITDA margins and improve our return on invested capital. In conjunction with the strategic review, Eric Gerstenberg, was named Clean Harbor's Chief Operating Officer. He will oversee all of our environmental operations, including Safety-Kleen's Environmental business. Eric has a long track record of success here, and has demonstrated an ability to consistently deliver growth and drive change. And we are confident that rolling up all our environmental and industrial operations under Eric, will increase efficiencies and generate margin enhancements. Moving to our outlook, starting on Slide 11. Within tech services, we'll seek to build momentum off our record finish in 2014. We look to further drive volumes from waste projects and to expand the penetration of our InSite program across a number of verticals. And we've stated previously, we believe that our planned startup of our new El Dorado incinerator in late 2016 will be time well, given where the overall incineration market is today. Within industrial and field, cross-selling our services to Safety-Kleen customers remains a primary focus and we intend to co-locate some new offices going forward to more tightly integrate those businesses. In the near-term, our industrial service group is carefully managing resources to maximize our opportunities for turnaround work in the U.S. and Canada. Within our refining segment, we are focused on increasing our blended product sales and continuing to build the pipeline of opportunities. We believe that creating a direct sales channel, where we sell our blended products back to the Safety-Kleen customer base is the most rapid path to significantly raising our percentage of blended products and moving away from base oil. Turning to Slide 12. On the Safety-Kleen brand side, we're committed to lowering our PFO through the full implementation of our Zero-Pay and Charge-for-Oil program. For lodging, we continue to see opportunities for additional occupancy at reasonable rates at our fixed locations. For our mobile camps, we've maintained a dialogue with several pipeline companies and there are plans for major pipeline projects in several regions, including British Columbia, where we see the potential to deploy some assets. Within the Oil and Gas Field Service, our strategy going forward is to take additional market share. Our sales pipeline, particularly in the solids control portion of this segment is fairly strong, but margins have remained under pressure. For example, we're currently still at close to 50 packages in the U.S. today, despite the fact that the U.S. rig count has come down by more than 500 in the past few months. We have carefully managed our cost and resources in this business, as we navigate this dynamic environment. So with that, let me turn it over to Jim for his financial review. Jim?

Thank you, Alan, and good morning, everyone. To start on Slide 14, here is a snapshot of how our verticals performed in Q4. Refineries and oil sands customers were our largest vertical in the quarter, accounting for 13% of Q4 revenue. This vertical was down about 2% from a year ago, as increased U.S. industrial activity, particularly our refinery customers, was offset by lower oil sands revenue. Chemical represented 11% of Q4 revenue and was up 5% from a year ago. As we have mentioned on the past several calls, the low cost of natural gas continues to underpin strong growth in this vertical. General manufacturing was also 11% of total revenue in the quarter. This combination or the combination of a stable base business and good project flow drove 17% growth in this vertical from Q4 a year ago. Automotive has been our largest vertical for past several quarters. However, beginning in Q4 we created a new category called base oil, blenders and packagers, in order to better represent sales of our re-refined products. This vertical, which is a subset of what we formerly called automotive accounted for 10% of our revenue in Q4. Base oil, blenders and packagers was down about 25% from the prior year due to the decline in base oil pricing. Automotive represented 7% of our revenue in Q4. We continue to cross-sell disposal and other services to Safety-Kleen's legacy customers, which drove a 16% increase in this vertical from the prior year. Looking at our smaller verticals, we saw great success in the fourth quarter in both terminals and pipelines and utilities, which grew by 24% and 16%, respectively. We've seen a strong flow of waste projects in both of those verticals, while utility customers continue to step up their project spending. On Slide 15, here is how our Q4 direct revenue breaks out among our six reporting segments. You can see where the trends in the energy markets, that Alan discussed, have affected some of our business, such as lodging and oil and gas. Meanwhile, our environmental businesses, which include tech services, SK Environmental Services and the field services portion of our Industrial and Field Services segment continue to grow. Turning to Slide 16 and the income statement, we've recorded Q4 revenue of $845 million, down approximately $34 million from a year ago. As Alan mentioned, the bulk of this decline was related to the foreign currency translation impact. Gross profit, defined as revenue less cost of revenue, for Q4 was $234 million for a gross margin of 27.7%. This represents a 110 basis point improvement from the prior year, driven by our success in lowering our cost structure. We've reduced SG&A for the fourth quarter to $103.5 million from $104.9 million. For the full year, our SG&A percentage of revenues was 12.9%. Looking ahead to 2015, our cost savings programs will enable us to hold the line on our total SG&A expense, despite the increasing cost we typically see for labor, healthcare and alike. Depreciation and amortization at $70.6 million was essentially unchanged from the third quarter. For the full year, our D&A was approximately $276 million. And looking ahead to 2015, we expect full year D&A of approximately $270 million. Income from operations in the quarter was essentially flat at 6.8% of revenue versus 6.7% of revenues in Q4 a year ago. Adjusted EBITDA was $130.8 million or 15.5% of revenues, up 80 basis points from Q4 2013. That is consistent with the level of improvement, we saw in our full year 2014 performance, as we generated adjusted EBITDA of $521.9 million or 15.3% of revenues compared with $510.1 million or 14.5% of revenues in 2013. The effective tax rate for Q4 was 29%, which compares with 31.2% in Q4 last year, reflecting favorable yearend tax adjustments. Our full year 2014 effective tax rate, excluding a charge to deferred tax assets and the effect of the third quarter goodwill impairment on pre-tax income, was approximately 40.6% compared with 33.6% in 2013. The higher full year tax rate is due to reduced profits in Canada, which is subject to lower tax rates than the U.S. For the full year of 2015, we expect our effective tax rate to be in the 39% to 40% range, given our current mix of relative profitability between the U.S. and Canada. On an EPS basis, we generated $0.46 per share in Q4 compared with $0.44 in the year ago quarter. In addition to slightly higher net income, we also benefited from a lower share count resulting from our share buyback program. The number of shares issued and outstanding as of the end of the year was 58.9 million shares. Turning to Slide 17. Our balance sheet remains strong. As of December 31, cash and marketable securities totaled $246.9 million compared with $258 million at the end of Q3. We generated strong positive cash flow in Q4 and invested $50.5 million in share repurchases during the quarter. In all of 2014, we purchased nearly 2 million shares at a total cost of $104.3 million. We have about 46 million currently authorized under our existing share repurchase plan. Total accounts receivable were down nearly $28 million since the end of Q3. However, DSO increased by one day during Q4 to 71 days. We believe the changes we have made for the Safety-Kleen billing process in previous quarters are now resulting in more accurate billing. This improved accuracy should capture additional revenue opportunities. As we move into 2015, our focus will shift more toward collections and gradually bringing DSO down into the mid-60 day range. Environmental liabilities at quarter end were $205.8 million, down more than $7 million from the end of Q3, as we took advantage of an opportunity to remediate a liability at one of our sites in Q4. For the year, our environmental liabilities decreased by nearly $14 million. I should point out that nearly $3 million of that decline is related to foreign exchange. CapEx was $58.7 million, down from $60.7 million in Q3 of this year and $72.6 million in Q4 a year ago. For 2014, our capital expenditures were $257.6 million, which included approximately $10 million for the new incinerator in El Dorado. We also sold $8.2 million of assets in 2014. So our net CapEx for the year was $249.4 million. For 2015, we are targeting CapEx of approximately $200 million. This excludes the construction of the incinerator, which will likely add approximately $50 million in 2015. We also intend to sell approximately $25 million to $50 million of non-essential assets, so that our net CapEx in 2015 will be approximately $200 million to $225 million. Cash flow from operations was $101.3 million, which was $34 million below Q4 a year ago, but $20 million above the $81.1 million we reported in Q3 of this year. For the full year our cash flow from operations was $297.4 million, down from 2013. The primary factors behind that reduction were an increase in our inventory working capital and a decrease in accounts payable. For 2015, we expect working capital to be a positive for us, with cash flow from operations north of $400 million. Moving to guidance on Slide 18. We are confirming the full year 2015 adjusted EBITDA guidance we gave, as part of our strategic review announcement back in January. Given that our revenue is subject to variability, based on a number of external factors, such as Canadian dollar currency fluctuations and base oil pricing, we are not providing specific revenue guidance for 2015. We will continue providing quarterly guidance this year, in order to help the Street better understand the seasonality of our business. Looking at the first quarter, we currently expect adjusted EBITDA in the range of $83 million to $90 million. We anticipate some headwinds in the first quarter, primarily related to working through two months of higher cost in waste oil and the inventory of our SK oil business. We will benefit going forward from the considerably lower Pay-for-Oil cost after we turn over that existing inventory. In addition, in our oil and gas business, winter breakup in Canada is happening in February this year rather than its typical late-March to early-April timeframe. The seasonality in Technical Services, where Q1 is typically our weakest quarter also has been exacerbated this year by the inordinate number of blizzards and snowstorms across the Northeastern U.S. Looking at our full year 2015 adjusted EBITDA guidance from a segment perspective, we expect tech services to grow in that mid-single digit range. We expect SK Environmental to expand its adjusted EBITDA contribution at a similar pace. At the same time, we expect our Industrial and Field Services segment to increase its adjusted EBITDA contribution at a double-digit pace, say, in the low-teens during 2015. We have experienced major project wins and turnaround opportunities on the industrial side of that segment as well as continued cross-selling opportunities and expansion of our field services organization. For SK oil, despite the slow start to the year, we expect a flattish overall performance in 2015, as we reap the benefits of lower PFO and transportation costs. In our lodging segment, we project adjusted EBITDA will decline at a double-digit pace from 2014, based on the current oil sands environment. And lastly, our oil and gas segment is likely to see a meaningful decline in profitability from the prior year in areas where we face market challenges, however, such as in Western Canada, we are taking cost actions to mitigate the effects on our profitability. Another metric we'd like to highlight today is ROIC, return on invested capital. We've talked on several calls now about how we have become more return focused as an organization. In fact, in 2014 we even incorporated ROIC into both our annual and long-term incentive plans for the extended senior management team. In the interest of transparency, we want to share with you our long-term ROIC target. Based on our five-year plan, we intend to increase ROIC to the 13% level and beyond. And with that Rob, could we please open up the call for questions?

[Operator Instructions] Our first question comes from the line of Al Kaschalk with Wedbush.

First of all, excellent job on tech service side. But my question, I want to be focused on PFO and re-refining side. First, could you give us a little more color or detail on the receptivity on the PFO universal no-pay? And in particular what type of pushback or volume lost are you anticipating in '15 relative to '14?

I think when you look at the history of the waste oil business and even thinking back over the last 20 years, customers have routinely gone from being charged for collecting oil to being paid for the oil, depending on the values of six oil and two oil and subsequently base oil. And so this isn't really anything new to customers. It's certainly a significant change that had to take place as a result of the significant decline in the oil markets that has taken place, not only in the last six months with crude oil, but really in the last two-and-a-half years with the value of our base oil. And so I would say that none of our customers certainly want to see less payment for their oils that they are collecting. But on the other hand, I think recognizing that they're seeing the benefits of those lower prices and their products that they are buying from their suppliers. And I would say that for the most part, we have not lost customers. Now, that being said, there will be churn and we're seeing churn on both, our own customer base as well as our competitors who are doing the same thing we're doing. They are absolutely recognizing that unless they address what they are paying for their oil and charging for their oil, their spread is gone and they won't be in business, if they don't make that adjustment. So I don't believe we're going to see a significant decline in volumes this year, and I think customers and our partners are cooperating with us.

Are you now through that customer base in terms of communicating and sort of then coming back to them for the next collection efforts, such that the price is fully intact here or implemented, such that you're working your way back to either zero or even to the case where they're going to pay you ultimately to take it away?

Yes. I mean the transactions that we do particularly for our branch accounts, they see those immediately on their handhelds. And the folks that are out there in the field everyday or talking to our customers everyday, and we're getting feedback everyday. Most of the national accounts have all been converted. There is a couple of ones that are still contractually obligated for some extra time period for us to adjust, but we really have been moving forward and continue to look at pricing by market, and in some cases have begun charging in certain markets, and so that will continue. And I believe that Clean Harbors and Safety-Kleen in 2015 and beyond are going to do a much better job of managing the spread moving forward.

And then my follow-up is, on the re-refining side, you made an acquisition this quarter. I think you're well above your capacity in terms of the volume throughput allowed, which would imply a lot more opportunity to be selective on the volume. But also we're heading in the driving season and I would expect that volumes in terms of used oil generation are going to increase. So there is a question here, but the question I guess would be we should start to see very good margin performance in SK Environmental and slightly better on the re-refining side in '15, I would imagine?

Yes, two things. One is that we have not closed on that acquisition. We did make that announcement and we hope to close on that soon. So that volume isn't necessarily in the network yet. We do expect to see some upturn in volume. And as you know, we not only take oil and recycle it and re-refine into various finished products, but we also sell recycled fuel oils to a number of end-users in certain markets. And so as we have in the past looking at maximizing our routings and providing essentially the best margin outlet for our oils is something that we're doing very, very aggressively and we'll do that when we complete that acquisition.

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

It's actually Arnie Ursaner backing up Larry today. So on behalf of Larry, one of the questions, if you could clarify it is, I believe, Jim Rutledge in your prepared you indicated SG&A could be flattish, but in your press release you have extensive comments about additional actions that can be taken. I just want to make sure I'm reconciling the two of those.

Absolutely. I mean clearly SG&A is impacted by labor cost, healthcare and so forth. So as we have in the past and we'll continue doing is to look for cost initiatives to offset that, and perhaps even offset it to the point where we could decrease it. But what we're saying at this point is that our overall SG&A, we're expecting that to be flattish this coming year. I mean when you consider for our corporation, for example, labor cost, the cost just 2% or 3% has $30 million impact on our company. Clearly, there are initiatives that we are undertaking to be able to reduce that effect. Also with our regional sales program that we put in place last year that we're seeing the full effect this year, so that has somewhat of an increased, but certainly well worthwhile the penetration that we're making in the regions around North America through our sales efforts.

Is there any way you can quantify what additional cost cutting actions are embedded in your fiscal '15 guidance?

Absolutely. But one of them, we've talked about, and that is PFO. When we originally talked about our cost savings, we've typically put that in. And as you know, last year we had about $0.16 decline in PFO, with that being one of our cost savings initiatives. Now clearly, we're helped by the reduced crude prices to be able to have a good background, to be able to push that even further, as Alan just talked about. But beyond that we have procurement cost that affect our company overall, not just SG&A, where we are consolidating vendors, where we are putting more bids out among our suppliers and isolating who are the best partners for Clean Harbors on the supply side. And we're talking savings in the $10 million to $20 million range here in procurement if you look at overall for the company. I think also consolidating some of our offices, where we have Safety-Kleen branches, for example, in the same regions where our field service and industrial service branches are, we're doing some consolidating and sharing offices, that you'll see a nice cost savings impact. And then lastly, another big one I would mention is in the area of transportation. Clearly with our high margin routing system that Alan alluded to, where we've upgraded our win system to be able to handle the Safety-Kleen routing, not only of waste, but of waste oil; not only containerized waste, hazardous waste, but also waste oil, that that will yield very significant transportation savings in 2015. So I think those are the major buckets that we're looking at this year.

Our next question is from the line of Scott Levine with Imperial Capital.

So I wanted to ask a little bit on capital deployment. It sounds like you're guiding your free cash flow number in the neighborhood of $200 million. You got something left there on the buyback, I think, you said $46 million, you've been active under the program so far. Maybe a little bit of elaboration on your thoughts on acquisitions versus capital returns, and could be looking at our new buyback program or just a little bit more detail on your thoughts there.

The way we're looking at our capital allocation across the three areas, if you will, are capital spending, that we do internally in our businesses, acquisitions and share repurchases. The approach that we've taken there is to look at the relative returns at any point in time as those opportunities are created. So for example, in Q4 and we're looking at where the stock price was and the returns that we expect on that over the longer-term for our shareholders. We invested over $50 million to share repurchases. That being said on the acquisition front, we are very focused on the environmental opportunities out there. And as you know, you have to take advantage of those opportunities when they present themselves and be opportunistic. So we try to also time the buying of those opportunities during those times, when those opportunities present themselves. And typically we don't overpay in acquisitions. We look for returns well in excess of 20%, where we can truly add value to the company that we're acquiring. And then lastly in CapEx, we're scrutinizing our capital expenditures and trying to bring our overall spend down. Our maintenance CapEx is still in that $140 million or so million dollar range, but there are growth projects. Like for example, the El Dorado incineration project that we're working on that has substantial future benefit to the company, that has very high returns that we're investing and as well as other projects. We look at our CapEx program, both in terms of the returns and also there is sustainability, which we call resiliency. We have a resiliency score that we give growth projects and we more or less have set up a competition for capital among our businesses to go for the higher return most resilient projects as far as our growth plan. So hopefully that gives you some color in the three areas that we're allocating our capital.

And here's my follow-up, I know you gave some good detail regarding the oil recycling outlook. Sounds like you expect EBITDA to be flat year-on-year. Maybe a little bit more with regard to, call it, the spread within that business, is your expectation is well that you'll be able to hold spread constant and/or a little bit more up with regard to this trajectory? Do we expect improvement in that off of a weak Q1 or maybe just a little bit more color regarding spreads in that business?

Sure, Scott. I'll start the answer to that, and if Alan wants to add anything. First of all, if you look at, you mentioned Q1, and clearly there is spread compression that we will see in Q1, that's caused by the fact that it was only in December, when base oil pricing came down $0.50 a gallon. Now, clearly, our aggressive PFO plan and that we're executing and reducing PFO has a lag of a couple of months, because we generally have about two months worth of PFO in our inventory from the time we bring it into our branches to the point where it's part of a product that we sell as a refined product. So during Q1 you will essentially see almost like a breakeven in SK oil, because you will see the full impact of revenues being hit and base oils coming down, but not yet seeing all the benefit show through, because we're selling the opening inventory, if you will, or what we have in inventory during that quarter, but right after that you will see a huge widening of that spread. And what we're seeing for the remaining three quarters of the year, therefore there's a widening of that spread that will bring it at least to, not a breakeven, but a level of EBITDA to where it was last year. So clearly, this is a spread business. We think we are managing it well. And I also would add to that, not only PFO, but also in the transportation savings that we're talking about in our better routing is also going to enable us to improve that spread. Alan, I don't know if you wanted to add.

I think that's great.

Our next question comes from the line of Jim Giannakouros with Oppenheimer.

As far as the $120 million intercompany revenue versus the $85 million that you captured the previous year in that Safety-Kleen to tech services, I'd expect the incrementals on that to be pretty healthy. How much did that impact the margin, if you can isolate it in tech services in 2014?

It's hard to isolate it as a single amount. But I will tell you this that it drove our utilization to a point that we saw that operating leverage in our business. So if you look over, since we acquired Safety-Kleen, in overall tech services you're seeing 100 basis points to 150 basis points improvement in their EBITDA over the last couple of years plus. And I will tell you that that volume coming into our plants is clearly showing that leverage. So how much is it contributing, maybe 100 basis points of it is clearly from Safety-Kleen, adding so much volume in. But you can't isolate it as one amount. But hopefully that color is helpful.

And Jim just to add on to that, just on a go-forward, you're going to lap, I guess, a pretty stellar volume growth and margin benefit that you got from flows from Safety-Kleen in maybe 2Q of this year. How should we be thinking about the margin potential in tech services in 2015? I mean, I'm assuming that incremental volumes, if there are any, that you can process or are you pretty much running at capacity now? And then within that is there still potential for mixed benefits?

I think there is growth still to be had there. And clearly with our expansion of El Dorado, that's one of the reason why we're dong it. And a lot of the cross-selling and the deeper penetration into the Safety-Kleen branches, whereby Clean Harbors standing behind those branches, we can handle almost any kind of hazardous or special waste streams that they have. So you will see growth as we go forward. And I think if you would ask, Eric Gerstenberg, he would tell you that in tech services we would like to be able to exceed 30% margin over a period of time. And I definitely believe it's doable with the kind of opportunities that we see in our overall network. Alan, I don't know if you want to add anything to that.

Yes. I would just add, Jim, that we've only begun to really benefit from the network that Safety-Kleen has. So much of what we've done over the last couple of years is really putting the companies together and building out that network, and as you mentioned re-looking at the network from a cost standpoint. But on the revenue side, the real opportunity is how do we grow our business across that network, what new lines of business can we launch that our customers are looking for? For example, on the retail side, we've really taken advantage of opportunities on growing our retail business, where the large retail operators out there both on the pharmacy side as well as on the home supply companies are looking for companies like us to be able to handle all the various stores and locations they have. So you're going to see Clean Harbors not only continue to get the kind of business that historically Safety-Kleen had, but really grow its new volumes from new lines of business.

And one more, actually two more, just small ones, if I may. Accrued expenses down $40 million quarter-over-quarter, what drove that delta? And Jim, how much did that influence your 4Q?

Accrued expenses, I think, some of this it's just the reduction in PFO. And right in front of me, right now, I think it was across the board that we just had a decline there in accrued expenses. I think you have seen some of the PFO, lesser PFO cost that we have accrued in there.

It could have also been things have moved into CapEx or APU side. I'm not sure exactly what area.

Let me just take a look quickly here, and it's not we can always follow-up with you Jim. We'll follow-up separately. And actually PFO would not have gone through there. I apologize on that.

It just seemed like a flow number and I thought there was some influence there. And two quick ones, one, how much is left in your share buyback authorization?

46 million, right now.

And FX impact in your 2015 expectations, I mean how should we be thinking about that influence the stronger U.S. dollar?

Well, what we've done in our projections, I mean, clearly seeing that the rate now is $0.80 per Canadian dollar, clearly that being a low rate, we assume that in our guidance. I think we have $0.81 or $0.82 in our guidance that we put forth. I mean from most of what I have seen, it seems to have bottomed-out there. But I think that crude prices do have somewhat of an impact, given the crude impact in Western Canada. So I think that's driving some of it as well as the strength of the U.S. dollar itself. But we didn't want to try to forecast down, so we basically went with the current rate there. The impact that we saw just in Q4 was over $20 million in revenues. Now, clearly, we have cost structure in Canada, so there is the opposite effect, where the decline in prices have made things costless in Canada. So the EBITDA impact in Q4 was probably more in the $3 million to $4 million area. So hopefully that helps.

And just to clarify, TFI is not in your 2015 guidance?

No, it's not. No.

Our next question comes from the line of Adam Baumgarten with Macquarie.

You had mentioned that oil and gas volumes help the landfill business in 2014. Have you begin to see any of those volumes kind of start to taper off now that we're into 2015?

Probably more from weather related slowdown than anything. So I would say that outside of that we would continue to see strong volumes we believe in a number of our landfills this year from that oil and gas area.

And then just can you kind of help us understand the margin tailwind from lower fuel cost in the quarter?

This is on the fuel for purchasing like our diesel for our trucks?

Correct.

We've purchased at least 25 million gallons a year of diesel. And we have outside transportation cost of about $175 million. So clearly there is a benefit. But the only thing, Adam, to recognize is that we do have a fuel surcharge to our customers that is adjusted for that. So I would say probably maybe about 75% maybe 80% of that we do pass along to our customers. So there is net savings. But it's not as big as the gross amount is the main point I wanted to make to you.

Our next question comes from the line of David Manthey with Robert W. Baird.

The midpoint of your first quarter EBITDA guidance that it represents about 16% of your full year midpoint EBITDA guidance. And when I look over the past two years, the first quarter has been more like 23% or 24% of full year EBITDA. And most of the companies that we've heard from that have exposure to Canada or energy are expecting conditions to weaken through 2015. And it sounds like you expect things just to get better and to get materially better from the first quarter levels. Jim, you outlined the few of those things. I think you talked about the temporarily higher PFO inventory, the winter break up coming earlier, and then the weather impact on TS. But if the first quarter was 23% to 24%, that would be a gap of about $40 million. I can't imagine that those three pieces are of that magnitude. Could you just help us understand, as we look at the full year coming off of that first quarter base, how you expect to see that type of acceleration?

And the key thing, Dave, in this whole area is the fact that the environmental business whether it's out tech services, our field services and SK Environmental is seasonally weak in Q1. And without the Western Canadian contribution from oil and gas field services, which we've seen in prior years takes away that offset. So what you're seeing is more of the seasonality showing through in Q1. That's one major factor. But that does come back clearly, as you've seen. Actually, if you went back and look at just our environmental businesses, you will see that it's a lesser percentage in Q1 than Q3 and Q2 and then Q4 is after that. The second point, and it is a big point, is that is what you already did mention, and that is that PFO inventory, because that's an impact of between $10 million and $15 million in one quarter that that compression that reverses itself when you sell-off that inventory. So if you take those factors into account and the seasonality of our business that is what gives you that kind of variation. For example, our overall corporation in Q1 will probably have an EBITDA margin of say in the 12% range. You will see that grow to 16%, 17%, 18%, as you get into the later quarters, particularly with the environmental leverage that you get from their more favorable season. Q1 is their worse. So I think those are the two major factors to think about. So we're not expecting any rebound of oil and gas or we haven't forecasted any of that kind of stuff in there. This is just really the base business really showing through and this inventory selling at the higher priced inventory that I just mentioned before out of in Q1.

It'd be important not to reemphasize the impact of weather that it had in the first quarter as well, which I don't think we've talked enough about that. We've had significant plant and branch closers, a have huge extra cost that we're taking on, having real difficult time moving some of our products around our waist around. That has been a big impact on our first quarter, yes. And let's not forget that, our people working in extreme temperatures. Now, as being a field company with a lot of people out in the field, there's very, very difficult environment to work. And that's clearly shown up in the first quarter guidance we gave.

And then on the PFO, I may have caught the number, I think you said $0.16 was the improvement you saw in 2014. Could you just tell us where you stand today on PFO? Where it was a year ago or a quarter ago, just to give us an idea of the trend there?

Clearly, as Alan alluded to, many of our branch accounts are at zero PFO cost. And if you look at the national accounts with many of the contracts they vary in there tenure. So we're working through those and even negotiating those that are longer-term to bring those down. So at this point right now, it would be difficult for me to give you an average of all of that, but clearly it's multiple of $0.10 reduction is a lot.

Yes. We just can't give an exact number.

Yes, I couldn't give you an exact number at this point, because we're in the middle of it. We implemented this by the way in early January that was the beginning of our programs, effective January 1. So we're almost two months into it. Clearly, when we get through the first quarter we'll be able to give more color on how we've done, but it's meaningfully reduced.

And just that $0.16, did I catch that right? Was that what you have improved it?

Exactly. If you look at during 2014, that's how much we reduced it during 2014.

Our next question is from the line Sean Hannan with Needham & Company.

First, want to focus on Technical Services segment, kind of a two part question here. Alan, I think I may have heard you earlier on in the prepared remarks mentioning that the incineration tonnage capacity exiting the year maybe around 492 million tons. And just wanted to get a check on where that tonnage was a year ago? And then as a follow-up around some of the landfill conversation today, there has been I think supportive views from you that we're still going to get some good Bakken in oil and gas volumes in '15. What I don't have a sense of is, as you are looking to the growth within landfill, are you expecting growth from that area or is that really all going to be driven by continue routing of Safety-Kleen?

492 is the new annual capacity, which we've increased by about 12,000 tons based on the capital investments that we've made and modifications we've made, particularly with one of our plants. But as you know, every year we spend capital on our facilities to really debottleneck and really try to get more throughput. So we have lot of deferred revenue tied up in our waste inventory and we're really trying to process more until we get our new plant on. Regarding the landfill volumes, we have nine landfills that not are all taking waste from the oil and gas area, but clearly there are three or four of them that have really, because of their location and transportation, have been able to get some significant volumes. And although the rig count continues to come down in some of the plays, we're not active in those plays with our landfill. So it hasn't had this much of an impact on our landfill business. But we would expect to continue to benefit from the activities in those areas, both on the West Coast, in Canada and the Bakken. And that has been a focus not only for our landfill business, but for a lot of our industrial and our oil and gas business. So I would expect us to see continued volume in that market, Sean.

Just to clarify, I understand that we should expect good volume there, but I'm trying to understand as we look into '15, the growth across the segment exposure that you would have for those that are providing waste streams into your landfills. I don't know if we necessarily would be getting growth from those areas. And whatever growth you'd be getting is that primarily going to be driven by Safety-Kleen or can we elaborate on how to think about how that would grow?

Well, there is a lot of different sources of waste that go into our landfills. And Safety-Kleen really isn't one of them. Most of the waste that we're collecting is containerized waste from the Safety-Kleen network and that feeds a lot more of our PSDF network in our incineration and recycling operation. But our project's backlog is strong. The remediation business is looking really strong this year. Like I said, the waste coming out of the oil and gas area, we believe we're going to continue to enjoy volumes there. So we have a record year in landfill volumes in 2015. I don't think we typically give out guidance on volumes for our landfills, Jim, but I'm just trying to give you some color, Sean, to kind of help you understand where the business is going in 2015.

Last question here, in terms of the share gains within oil and gas, can we get a little bit more clarity around the placement of those assets, oil or gas focused in terms of those packages here in the U.S.? I think that there may have been some commentary supportive of that being more bias toward gas. Just a little bit more color there would be helpful and the sustainability of being able to effectuate that trend?

I can't give you exact customers and locations of where the rigs, the 50 packages are operating at. But I do know that our team has done a really good job, as rigs have come down and laid down that they have moved to other customers. We are getting a lot of inquiries. As you can imagine with everything that's going on in the oil and gas area, we're getting a lot of enquiries for new business. And customers are looking for lower prices. They are trying to address their cost structures, as a result of what's happened in the crude oil market. And so the placement of our equipment and where our personnel are really is throughout a number of different oil and gas plays. And I wouldn't be honest with you, if I knew exactly where they all were today versus where they were even three or four weeks ago, because things are changing quite quickly in that market. But our team has done an extremely good job of taking the advantage of some of the new opportunities that are coming to us, as a result of customers looking for better pricing. And we have a lot of equipment to put to work and we're going to be aggressive in putting that to work in a lot of plays.

And geographically, to Alan's point, we've seen some strength in Pennsylvania and also in the south, are opportunities that we're hearing about just from a geographic standpoint.

Our next question is from the line of Michael Hoffman with Stifel.

Jim, a couple of housekeeping questions. What was the cash flow from ops in 2014?

Cash flow from operations, that was the $297 million, yes.

So $297 million is going to greater than $400 million. That's what I just want to make sure I got that message, great.

Absolutely.

And then, second, on the SG&A, when you say flat, that's $1, right? So you're roughly $440 million, you expect to be kind of $440 million again?

Yes, we'll certainly try to reduce that, but that's what we've [ph] implied to area.

I just want to make sure it wasn't margin, but it was dollars. And then with regards to the capital spending, help me understand what you're spending $60 million in growth on. And convince me, if not field of dream stuff, but you've got identified revenues, you've been awarded a contract, you got to buy equipments. So we're not doing field of dreams capital spending?

I think that's right. And I think we have gotten, as I pointed out a lot more selective about the growth projects. But some of the ones that you see that are clearly worth it, and not field of dreams kind of stuff. Vac trucks, for example, hydrovacs, we have an investment program that benefits our field services business as well as the business that we do on the industrial side. But clearly a lot of the day lighting and projects like that that are going on out there, that's a very well worthwhile and high return investment for us. Clearly, containers, as we're growing the business and we're servicing more growth in SK Environmental, for example, where we have access to more waste streams, that Alan alluded to, we're adding to our containers and our roll-offs intermodals, we continue to add there. We're also investing some money in technology, things like the high-margin routing and improving on that. We'll be doing some investments there, but they're lower obviously than the total. In roll-offs, I'm sorry, in our fleet, also as we expand the overall waste streams that are coming into our network, we're adding to tractors and tailors. So we have those kind of spending going on. Beyond that, I think Alan already alluded to parts washers, we're trying to -- I can't remember that all.

I can't recall of any field of dreams project. So I don't know what that means. But I think we scrutinize our capital spending line-by-line and have done that on a regular basis. And so I think we continue try to be prudent with where we're spending money on for capital.

On corporate overhead, given the $75 million savings, how do we think about that?

I would probably say, Michael, it's somewhere in about that $150 million range roughly in corporate.

And then when you think used motor oil and re-refining, couple of items. One, the refinery strikes that are happening, is there any sense that that's tightened up supply, headed into the driving season and you got lower gas prices, so maybe miles driven are up. Just any feel from what's coming from the field about the directionality of base loop.

I wouldn't comment Michael on it, as far as what's going on with workforce issues within the refinery base. The only thing that we would be concerned about is refineries pushing off turnaround work, because they don't have the staff to take the plants down and go through the turnarounds. And so we're certainly concerned about that. On the other hand, when they do have a upside condition, they might go into turnaround faster, because they need take the plant offline and they don't have the people there. So there is a lot of moving parts that certainly we are watching. We think, as evidenced by the price of diesel coming back quite a bit in the last three or four weeks, that there is a tightening in supply in finished products. And we think even the latest ICIS report this morning on base oil speaks for that as well. So we're optimistic about it. But as you know, we're not betting on that. Our plan is to look at where pricing is today and build our business around that from a margin standpoint and if things improved, then that will be great.

To clarify, the midpoint of guidance assumes 2.45 as opposed to price?

Yes.

Yes. I think that's good.

And then to be flat in used motor oil, you absolutely are going to be circling around zero plus a few pennies to -- as you're paying forward to zero plus a few pennies, you're being paid for it for full year 2015, otherwise you can kind of take a lot of money out of the transportation side --

I think if you look at 20 years ago, even where Safety-Kleen was, and you look at where crude was back at that point in time, $35, $40. They had upwards of $100 million of revenue for their Charge-for-Oil program. So this oil program is one that really needs to be fixed, and the margins need to be and the spread needs to be fixed in this business, not just for us, but really for all of our competitors, because we've all got substantial investment in infrastructure and facilities to manage this hazardous waste. So, yes, you're going to see substantial improvement in that area, and we think looking at history as evidenced that we're going to do that as an industry and as a company.

And I should think about margins or profitability, as Jim said, approximately breakeven in 1Q, $10 million to $15 million in 2Q, $15 million to $20 million in 3Q, and kind of $20 million in 4Q that get you to kind of a flat. That's the way to think about the progression. I'm not asking you to quantify the numbers, but that's the progression.

Yes. That's right. Without giving specific guidance to each quarter, you will see that increase, because as you sell the higher priced opening inventory, then you get the full benefit of the PFO reduction. And I think overall, if you think about it from a flat, our saying that EBITDA we expect to be flat year-over-year. And these are very high-level rough figures that I'm talking about here. If you have $0.01 drop in our base oil pricing, that's equivalent to about $1 million in EBITDA. But $0.01 drop in PFO is worth about $2 million of EBITDA, just because of the volume that we buy. So clearly, we've seen just since August the dollar drop in base oil pricing. So the objective clearly is at a minimum to see PFO pricing come down $0.50, and that get you to an even spread.

And just so I'm clear, I mean half of your volume was spot and that should be at zero already, the other half is contracts. You've got notification periods, but if I just took where the six oil was, do your discount, I mean you were at a healthy reduction just starting the year, even if you didn't give them notification.

Yes, just to your indexed accounts. Yes, you're right.

And then I take the notification and work in some timeframe, and it's not very hard to get to some time in 2Q you're at zero for everything and the remainder of the year you're zero or plus a little bit.

Yes.

TFI, things that nobody seems to be asking about. There is like $25 million of Safety-Kleen Environmental business there. That seems like the hidden jewel in that 50 million gallon used oil collection business. What's the opportunity in that?

We really can't comment on TFI yet. We are going through a government approval and regulatory approval. And we have an agreement and we hope to close on TFI as soon as possible. But we probably really can't -- we'd probably have better color for you Michael on the second quarter call, once we close and we can talk to it.

And do you expect to get a second review from Hart-Scott or should this just be a normal 30-day cycle?

My attorney is sitting here. Michael, what do you say about that?

We're going through the process now, and there has been no final word yet. But we have no indication other than they'll complete their review in this 30 day period.

Yes, we're going through the review process right now.

So that would put us in somewhere in the early part of March to do the close?

Approximately, yes.

And then on the oil sands, am I right in thinking that you've taken your head in 2014, whatever that level of business was exiting '14. You can probably annualize that for '15. It's not deteriorating further from that exit point or do you think it does deteriorate further? I just want to understand your commentary.

I think the base business up there, the existing mines upgraders and refineries are moving right along. So most of the reduction that we saw was in the expansion projects, where we do a lot of work as they are doing, adding on to those facilities. So I would say at this point looking out that that's correct Michael.

And corresponding lodging with that -- it corresponds to that same pattern.

Well, in fixed lodges, but clearly the camps and the manufacturing, we'll continue to see declines there. And perhaps some in the rates, we're getting pricing pressure, as Alan alluded to on his comments in the lodging side of the business that will effect, even the fixed lodges will effect some of the revenues going forward. So we expect some decline there. And I think I pointed that out in my remarks.

Our next question is from the line of Charles Redding with BB&T Capital.

A quick follow-up on the environmental services side, if I may. Can you just kind of tell us a little more about what's driving the improvement in parts washing from a fundamental perspective? What has been the primary focus here in terms of driving growth? And have you seen a material impact on raw material cost within this segment from cheaper crude?

So just on the parts washer side, we implemented some new initiatives almost over a year ago, where we began performing a lot more of the maintenance and service out in the field rather than the past practice of bringing a lot of the parts washers back to a central depot. We also have invested capital in building our inventory and building capacity, so that as our sales force is out there growing that business, because we have about 135,000 our own machines and we service another 65,000-plus customer-owned machine. So we really changed some business model and that's starting to pay off for the team. Your second question Charles was about crude oil. Again, could you ask that?

Just thinking about raw material cost within environmental services, can you quantify the impact there from cheaper crude or is that a non-issue to this point?

Pretty small. We spend maybe $15 million to $17 million a year on our mineral spirits, our solvent for our parts washer machines. So I would say we've seen a little benefit there, but not a lot.

And then on incineration really quickly, is El Dorado still on track for kind of early '16 or is this more back-half event at this point?

It's late '16 or early '17. We're in the ground, a lot of components are being delivered this year and being constructed. So I would say that's the timeframe we are thinking right now.

Our final question is from the line of Barbara Noverini with Morningstar.

Can you talk a little bit more about what strategies you put in place to drive the increase in percentage of blended oil sales? And also can you remind us of your long-term target percentage mixes or is it just that you'd like to get as high as possible, because of the price differential on that product?

As you know, we sell a majority of our products through distributors, but we also have over 200,000 accounts that we service under the Clean Harbors Safety-Kleen customer base that today are not customers of Safety-Kleen oil. We are not selling oil to the majority of our customer base. So we are rolling out a plan to sell those products. And you'll be hearing more about that in the coming months and quarters here, certainly. But our goal is to expand the direct sale of our blended products to our Safety-Kleen and Clean Harbors customers, and really with the long-term target of 80%-percent of blended products. When you look at what's happened in the base oil market, if we look back into June of 2012 or July of 2012, base oil was about $2 a gallon more than it is today. And making 120 million gallons of base oil and suffering $2 a gallon decline has had a major impact on us. The blended side of the business has not had that bigger change, and there is a lot more less price sensitivity to the commodity side of base oil. And for us to be able to continue to manage customer's waste on the waste oil side and give them a consistent service, we need to have a better price on the blended oil side and get away from the commodity side of the base oil business. And that is our number one goal in the oil business right now and we're executing on that right now.

Thank you. I would now like to turn the floor back to management for closing comments. End of Q&A

So thank you again for joining us today. We appreciate your questions and certainly your comments. Jim Rutledge and Jim Buckley will be at the Raymond James Conference early next week, and we hope to see many of you there, and at our other upcoming conferences that we are participating in. So thanks again everybody.