Michael R. McDonald - Former Senior Vice President of Clean Harbors Environmental Services, Inc and General Counsel of Clean Harbors Environmental Services, Inc Alan S. McKim - Founder, Chairman and Chief Executive Officer James M. Rutledge - Vice Chairman, President and Chief Financial Officer.

Joe Box - KeyBanc Capital Markets Inc., Research Division Lawrence Solow - CJS Securities, Inc. Hamzah Mazari - Crédit Suisse AG, Research Division Luke L. Junk - Robert W. Baird & Co. Incorporated, Research Division Sean K.F. Hannan - Needham & Company, LLC, Research Division Charles E.

Redding - BB&T Capital Markets, Research Division Albert Leo Kaschalk - Wedbush Securities Inc., Research Division Brian J. Butler - Stifel Nicolaus Barbara Noverini - Morningstar Inc., Research Division.

Presentation:.

Greetings, and welcome to the Clean Harbors, Inc. Second Quarter 2014 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 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 and Corporate Communications, Jim Buckley.

We have posted some slides in the Investor Relations section of Clean Harbors' website that we will be reviewing during today's call. We invite you to open the file and follow the presentation along with us.

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, August 6, 2014.

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?.

Organic growth, acquisitions and share buybacks. What the balance is between those 3 elements will be determined by a number of factors, including valuation, risk and opportunity. As anyone who has spoken to us in recent months knows, we are firmly committed to improving our ROIC and overall returns.

Our incentive compensation depends on us doing that, so we are closely aligned with shareholder interest. In order to improve our returns, we know we need to invest our capital efficiently, whether that be to buy back stock, build an incinerator or acquire another environmental service company.

Moving to our outlook on Slides 14 and 15, within tech service, we expect to continue to capitalize on the positive trends in the sector, such as manufacturing and chemicals. As our utilization climbs, we'll look to optimize mix to maximize profitability. We are moving forward with the El Dorado incinerator project.

We have completed the detailed design and have now completed our construction, material and supply agreements, and project management teams are in place. We are breaking ground this quarter.

The recent direction of the market, the steady and increasing waste volumes pulled through Safety-Kleen and recent regulatory rulings, have further strengthened our decision to invest in the incinerator.

Because the new incinerator must meet the new MACT 2 standards, the estimated cost of the project has increased from what was our original $80 million estimate to more than $100 million, predominantly due to the back-end air pollution control systems, again, needed for MACT 2. Start-up is now expected to be in late 2016.

And given the positive market trends, we're confident that the facility will deliver a very good return and be a valuable asset for decades to come, even with this higher capital cost.

Within industrial and field, we will look to cross-sell our services to the Safety-Kleen expansive customer base, continue to grow in the Oil Sands and capitalize on some emerging opportunities in the Gulf region. For Safety-Kleen, we're excited about both the segments of that business.

In our oil re-refining, we believe the systems and the new tools I've mentioned will have a considerable impact on margins in that business. We continue to see tremendous opportunity to drive our profitability in that business, even without improvements in base oil pricing.

We also see substantial opportunities to sell more blended products, particularly EcoPower. Turning to Slide 15 on the Safety-Kleen brand side, 5 new locations are tentatively scheduled for the second half of this year. Our priority here is to continue to lower our PFO costs. We believe the programs we're rolling out will drive that success.

For lodging, it will come down to maximizing occupancy at our fixed locations and deploying as many mobile camps as possible. Ruth Lake was full for May and June, and our client base was extremely pleased with these new facilities.

And our employees who reside at this lodge know it to be real first class, and we believe the future is really bright for our lodging business. And for oil and gas, we're confident in the future market opportunities, and external trends are favorable as we move into the latter half of the year. In particular, U.S.

expansion initiatives will continue, so will preparations for the winter drilling season in Canada, which will include pursuing some emerging opportunities, particularly in gas drilling in Northern Alberta and Northeast B.C. The trends in many of our businesses and key verticals are encouraging.

Our business model is built around driving waste streams into our disposal network, so it's exciting to see our utilization and our incineration business continue to climb. Our focus on the bottom line is proving to be effective.

The guidance that Jim will discuss in a moment demonstrates how even with the challenges in certain markets, we are successfully growing EBITDA margin of our company as we ultimately build towards our 20% goal in the years ahead. So with that, let me turn it over to Jim for the financial review.

Jim?.

Thank you, Alan, and good morning, everyone. As I do every quarter, let me start with some brief perspective on how our verticals performed. Looking at Slide 17, general manufacturing remained our largest vertical in the quarter, accounting for 20% of total revenue. This vertical grew at a strong 12% year-over-year.

That increase was primarily on the Safety-Kleen side, as revenue from base oil sales and containerized waste rose more than 20%. Automotive was our second largest vertical, accounting for 13% of Q2 revenue. While flat year-over-year, one area of strength in automotive was again containerized waste, which grew 15%.

We continue to drive more and more volumes into our disposal network. Refineries and Oil Sands customers accounted for 12% of revenue. Fewer scheduled refinery turnarounds and lower Oil Sands activity resulted in a 5% revenue decrease from Q2 2013. Chemical represented 10% of Q2 revenue and was essentially flat with a year ago.

While we haven't seen a large surge in new plants, our base business remains solid, supported by the low cost of natural gas. A number of projects, particularly in the area of remediation, were pushed out due -- out to the second half of the year.

Oil and gas production accounted for 7% of revenue and was off slightly from a year ago, as declines in our drill camps, drill support and downhaul services more than offset some gains in our bulk waste business in this vertical. We service an attractive and highly diversified mix of industries.

Among the smaller verticals, one of our top performers was our utilities vertical, where we generated double-digit sales growth on the strength of project wins in both the U.S. and Canada. Congratulations to that team on generating excellent organic growth in the quarter. Turning to Slide 18 and the income statement.

We reported Q2 revenue of $858.5 million, which was essentially flat compared to last year. I should point out, however, that the foreign currency translation impact related to the weaker Canadian currency this quarter compared to last year, reduced our revenues by approximately 1.8% this quarter.

Gross profit for the second quarter was $251.5 million or a gross margin of 29.3%, which represents a 70 basis point improvement over the 28.6% we reported a year ago. The margin improvement reflects our success in reducing our cost structure. I should note that our gross profit was reduced by $800,000 of severance and integration costs this quarter.

SG&A totaled $115.7 million this quarter or 13.5% of revenues. This compares with $122.6 million or 14.2% of revenue in Q2 a year ago. This favorable $6.9 million reduction, or 70 basis point improvement in SG&A, is due to a combination of the effect of last year's Safety-Kleen cost synergies and our 2014 expense reduction programs.

Excluding severance and integration costs of about $3.2 million recorded in SG&A in Q2, our SG&A percentage was closer to 3.1%. For the full year, we are projecting our SG&A percentage to be approximately 13%. Depreciation and amortization declined slightly from a year ago to $66.1 million.

The reduction is primarily related to decreased landfill amortization. For 2014, we continue to project full year depreciation and amortization to be in the range of $275 million to $280 million. Income from operations was $67.1 million or 7.8% of revenues, compared with 6.2% of revenues in Q2 a year ago.

Our operating margin increased significantly from a year ago due to the reductions we have made, both in cost of revenues and in SG&A. Our adjusted EBITDA was $135.8 million or a margin of 15.8%. As Alan noted, this was just above our guidance range.

And when you add back the $4 million of integration and severance costs, we would have further exceeded our Q2 guidance and our margin would've have been 16.3%. The effective tax rate for Q2 was 39.1%, compared with 35.1% in Q2 a year ago.

As in Q1 of this year, our tax rate remains higher than our historical levels due to our lower income in Canada, which is subject to lower tax rates than the U.S. In addition, our tax expense increased by $1.2 million this quarter, due to the resolution of a Canadian tax audit relating to previously acquired businesses.

We expect our effective tax rate for the full year to be in the 38.5% to 39% range, which represents a 1% increase from our earlier expectation, due to the factors I just described. Turning to the balance sheet on Slide 19. We continue to maintain a healthy financial profile.

Cash and marketable securities as of June 30 totaled $278.6 million, up from $249.2 million at the end of Q1, as we generated strong cash flow in the quarter. Total accounts receivable were up slightly since the end of Q1. DSO increased by 1 day during Q2 to 68 days.

The enhancements that we have made to the Safety-Kleen billing process this year have added a few days to the issuance of our SK invoices. Therefore, we expect DSO will remain in the mid to high 60-day range for the near term. However, we continue to be focused on improving our collections to ultimately reduce our long-term DSO.

Environmental liabilities at quarter end were $217.7 million, flat with the end of Q1. CapEx was $63.2 million, compared with the $69.2 million we spent in Q2 of last year, and down from the $75 million we spent in Q1 of this year. For 2014, we are now targeting CapEx spending of approximately $250 million.

This is $10 million above our previous estimate, as we decided to move ahead with about $10 million of equipment we bought out, which were on short-term rentals. The $250 million consists of maintenance CapEx of approximately $140 million and growth CapEx of approximately $110 million, including work related to the El Dorado incinerator project.

We were pleased with our cash flow from operations this quarter, which came in at $110.3 million, compared with $98 million a year ago and well ahead of Q1. Our cash flow performance is even more impressive when you consider that our accounts payable balance declined by $22 million from Q1 due to the timing of payments scheduled before quarter end.

For the full year of 2014, we expect our cash flow from operations to be in the $400 million range. As we announced earlier in the year, our board authorized the first share repurchase program in our history, with an allotment of 150 million. During Q2, we purchased approximately 250,000 shares at a total cost of $15 million.

Moving to guidance on Slide 20. For the third quarter, we are expecting revenue in the range of $890 million to $910 million, with corresponding adjusted EBITDA in the range of $155 million to $160 million. In addition, we are updating our full year 2014 guidance.

As a result of our Q2 performance and the current market outlook, we now expect to be at the low end of our revenue guidance range of $3.5 billion to $3.6 billion. At the same time, we are still increasing the low end of our full year adjusted EBITDA guidance, which is now $535 million to $555 million.

The change reflects our cost savings and margin improvement initiatives that Alan outlined in his remarks.

With that, Rob, could you please open the call up for questions?.

[Operator Instructions] Our first question comes from the line of Joe Box, KeyBanc Capital Markets..

A question for you on the rationale for breaking out lodging.

Should we be thinking about this as maybe the first step to strategic alternatives for this asset? Or is this more just a function of the valuation of this business has been different from the industrial services component, and maybe by breaking it out, it's easier to do the sum of the parts here?.

Joe, this is Jim. I could start, and if Alan wants to add anything. The reason for breaking out lodging is because we are managing it now separate from the industrial business, which is under Eric Gerstenberg. So David Parry continues to manage the lodging side.

It has also grown to a size that we think it deserves separate attention when we talk about it with analysts and so forth, the lodging business. That being said, we are watching what is going on with the spin-out of lodging business from oil states. I think that you're aware of that.

We're not -- we don't have any strategic plans at this point, but clearly, we're watching what's going on with that particular transaction..

Understood. Just switching gears to the cost side. Alan, I think you said your planned headcount reduction is complete. Can you maybe just give us an update on some of the other projects like the branch consolidation and the transportation expense? Just curious on the progress on that front.

And then I'm not sure if you just quantified what the savings was in the quarter, sorry if I missed that..

I don't think I quantified the savings in the quarter..

No, we did not..

Yes. But I think in regard to your first part of your question, we are re-looking at our entire network, again, as part of our now combination of the 2 companies and now having everybody up on 1 system. Everything from routing to logistics, all of our rail and waste movements.

There's a number of key projects and probably about 4 major initiatives, that I'm part of a steering committee on that, that's driving improvements, and we're really trying to accelerate some of those efficiencies that we know are out there. So there are many, many opportunities here when you have the scale now that we have.

And we're pretty excited about the list of them and the fact that we still continue to see really good opportunities to improve our margins. I would say, probably my #1 priority for the company and what I'm driving is really revenue, organic growth and cross-selling.

And so part of Dave Parry's role now as one of my direct reports, and again, one of the reasons why lodging is here, is that we really believe there's tremendous opportunity to begin getting the company growing again. We, this particular past year, have really reduced a lot of customers that were just not profitable business.

So it's showing up as lower revenue for us, but it's the right thing for us to do because we really inherited quite a bit of customers that, really, were just not profitable. And we still have some more work to do in that area, so that's a little bit of a headwind on the revenue growth, but it continues to be my #1 project that we're driving..

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

Just to follow up on that -- on the line of question, on the cost reduction, the -- I guess, you have $35 million to $40 million realized in 2014.

Is that now all incorporated into your revised guidance? Or can you sort of help us parcel out what is in guidance currently?.

Yes, that is incorporated in the guidance, and that is why we took the lower end and raised the lower end of our EBITDA guidance to account for some of that. And also the fact that we saw the revenues at the lower end. Clearly, that's not having any impact. In fact, it's helping EBITDA on the cost savings side..

So the prior guidance did not incorporate any of this, is that correct? Or you actually did incorporate a little bit that you achieved in the first half, isn't that right?.

It was -- it did, of what we had in the first half. So it's really what we've introduced now is what is in the second half..

So it's probably like a plus or minus $25 million benefit on the cost side or give or take?.

It could be in that range. I don't have the exact, precise figures. There are over 40 projects involved in this. But it's probably almost to that range..

And we -- there is some offset to that. We're hoping to pay incentive compensation this year. We didn't pay last year at all. So the team is working extremely hard. And there is some offset, Larry, to the savings we have..

Great, excellent. Technical Services, particularly incinerators, had an outstanding performance with the 95% utilization. It sounds like you're getting a lot of nice benefit from the containerized waste.

Is this number -- it seems like it's -- is this a sustainable-type number? And as you get the El Dorado plant, that should, obviously, help that in the long run.

And is pricing, because of this high utilization, benefiting from that?.

Yes, it absolutely is. We're extremely strong in volumes. Our deferred revenue, actually went up $5 million to $30 million on the tech service side, and our deferred revenue overall is about $60 million right now. So we're -- we have a lot of volume. We have a lot of material to move and a lot of projects coming in the door.

So we're excited to move forward with the new incinerator, and we are also looking at our product mix and trying to move some of the low-profit materials out of our network and into third-party disposal if need be..

Okay. And then just last question. You cited some additional weakness or increased weakness in the Oil Sands.

And it sounds like it's a lot of -- the pipeline logjams, and is there any visibility on timeline on when that might improve? And is that also causing the weakness in the oil and gas services in Canada, or the additional weakness there?.

Well, you knew that we lost a pretty significant contract at this time a year ago. So I think moving forward into third quarter, you won't see the big variances as much as you have in this quarter. There is a lot of contract work that we're bidding, new business, particularly in British Columbia.

There is a lot of activity going on with moving more products to the West Coast. So we're optimistic about not only the Oil Sands, but some of that Northeast B.C. area, and we're bidding a lot of work up there.

So our hope is that we'll continue to not only maintain a good book of business that we have, but we'll see some nice new projects that we're currently bidding. I mean, it's still a huge investment going on in the Oil Sands. It's not at that $20 billion a year range, but it's still significant..

Our next question is from the line of Hamzah Mazari of Crédit Suisse..

Alan, a question on the U.S. shale basins. Could you give us a sense of whether you can build that exposure organically, or do you need to really do that acquisitively? And over the long term, how big do you think your U.S.

footprint could be relative to the Canadian market, which is where you have most of your exposure currently?.

Yes, so Hamzah, we have the assets that we could put to work, coupled with some capital that was allocated for that business this year. But we have a lot of unutilized assets that we can put to work in the U.S. And we have transferred a good number of assets out of Canada as their activities slowed down.

The team -- in a recent discussion with the team in the U.S., we feel very confident that we can grow that business organically, not through acquisition. And I think that's where you're going to really see the best margin improvements for the business and improvement on return on capital there.

As far as size, I mean clearly, when you look at the drill count in the U.S. versus Canada, it's 4x or 5x the size. So we -- I think we feel pretty confident that we can max out the level of utilization of the assets that we have in that business.

And then I think at that point, we could take a look at whether we want to continue to make more capital investments to grow it or whether we're going to stay at that size that we'd be at..

Great. And just a question on capital allocation strategy. You mentioned organic growth, acquisitions and share repurchases, and also mentioned that the mix will be determined, on a relative basis, by what you see in the market on opportunity and cost of capital.

Maybe as it currently stands, when you look at your acquisition pipeline and organic growth investments and share repurchases, where do you see the most attractive use of capital currently?.

Well, I think, clearly, organic growth is the #1 area of our focus when we're talking about making investments to leverage our customer base and the cross-selling that we see us an opportunity there.

But if we were looking at acquisitions and we've really tried to focus on integration, particularly with -- over the last 18 months, with the Safety-Kleen deal, this has been a very, very difficult integration for us, as we had dealt with significant downturn in the price and value of our oil products.

So we've kind of come out of that now, and I think we're doing much, much better even at the same pricing that was in place a year ago. So our real focus would be to grow our environmental business, because we could continue to improve the volumes going into our network of facilities, and that's our focus.

But our -- we feel our stock is undervalued, and so we're participating in purchasing our stock and we're in the early innings of that. We've been -- did a limited purchase in the second quarter, and we will be back in the market and continue to execute the plan that we put forth..

Just a last question, I'll turn it over. It's more clarification. Out of the $75 million cost takeout, how much of that essentially comes back if revenue growth comes back? You mentioned incentive comp will net against that number.

Do you start to increase headcount again? So is that $75 million fully structural cost takeout, that when revenue comes back, a portion of that doesn't come back? Or any sort of clarification there?.

Sure. So our billable headcount certainly will fluctuate with our top line revenues, but I think we've said that we really would like to get our SG&A down to that 10% of revenue level. And we can do that by continuously looking at our network, regionalizing or centralizing some of the various administrative processes that we have out there.

We're really taking a very hard look at our sales organization, where we -- over 950 salespeople are part of that 4,000 sort of non-billable headcount. So I would like to think that we could continue to get our sales force to grow their respective customers without adding more non-billable heads and really leverage SG&A..

Our next question is from the line of Luke Junk from Robert W. Baird..

Jim, on the cost reductions, did you guys previously say that, that was going to be about 2/3 in SG&A and 1/3 in COGS? And then on the second quarter here, did I miss the estimated dollar amount?.

Yes, we didn't provide an estimated dollar amount that is in this year. Although we had said, I believe, in the script that it would be in the $35 million to $40 million range. That would be for the full year..

Full year, yes..

For the full year..

And then on the makeup of that?.

Yes, I would say that the -- probably 25% to 1/3 of it is in cost of revenues, and the rest is in SG&A..

Okay, great. And then similar topic, the pay-for-oil cost reduction program.

Just to clarify, that is in the overall $75 million cost savings program, correct?.

That's correct. We had some decline in our budget. But with more aggressive projects that we have going on around PFO, some of that is in there, the excess, and we're actually achieving that. We're doing larger reductions that were -- than were assumed in our budget for the year..

And then so you guys had noted the $0.02 gallon reduction this quarter, and I think $0.05 year-to-date..

That's correct..

Do you have a rough number for what that translates to on a pretax basis or an EBITDA basis?.

Each cent is about a couple million dollars. It's right around that..

Okay. And then last question for me would just be the Evergreen Oil, just an update on the operations there, your efforts to make the facility run smoother, et cetera..

So Evergreen has been, for the last 2 or 3 months, really ran at some record volumes. And the capacity of that plant when we acquired it was operating about 12 million, 13 million gallons, and I think it's trending right now over 20 million, 21 million gallons. And we continue to believe that we can get it up into a much higher level.

There's still bottlenecks in that plant. Its cost on a per-gallon basis is still much higher than we expected and want it to be. So there is still much work to be done, but they are -- the team out there has really done a nice job of running that facility safely and at a very high level of production. Our collection volume in California is very strong.

But because of the increase in capacity utilization in that plant, we're still bringing more material in from outside the region, and that's costing us a little bit more to move product there.

So we're intending to put more trucks out on the street in California and to go after that market in a bigger way, to fill the needs of that facility and to service our customers out there that we have..

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

Great. All right, so Alan and Jim, can you folks talk a little bit more about bigger picture growth? So a few times during this call, we've heard about organic growth, certainly, optimism on projects in Canada for a little further down the road, also focusing on environmental services.

But we do have the midpoint of guidance indicating a slight revenue contraction again sequentially for the third quarter.

I realize some of that's currency, but where do we really stand, as we step back, on an aggregate basis for growth? And does that inflection point for what we could see in the fourth quarter, based on kind of what would seem to be implied guidance, could that really truly be sustainable in '15, and what do you explicitly point to?.

Well, I think we had a lot of headwinds last year, and some of those headwinds are behind us now. And we're certainly starting to see that in both our Q3 and as well, as you said, the implied Q4. But I think the team, in general, feels like we have a very strong 2015 in front of us.

The company though, from an organic revenue growth standpoint, putting aside maybe the $100 million of revenue that we've kind of lost with the currency translation, we really have been focusing on profitability and not just revenue growth. We're really focused on margin.

And so I would say that walking away from some business, not winning some contracts that maybe in the past, we would've been otherwise a little bit more aggressive on, we've really been trying to focus on our margin improvement first.

If you look back over the last 10 years and look at sort of the compounded growth rate of the business, there's been a good percentage of growth, both in organic growth as well as through acquisition. And we'd really like to get back to that trend that we were at, because we can't cut our way to glory here. We needed to grow our top line.

And there, we see opportunities, but we first wanted to get our profitability squared away, particularly to do with the Safety-Kleen business.

I don't know, Jim, if you have any other color there?.

Yes, I thought that was great, Alan. The only thing I would add is that, I think with the Oil Sands, which affects our industrial and field service business, as well as our lodging business, that we did see a slowdown of the amount of investment out there.

Not huge, but the growth rate, the trajectory, is actually what you've heard and what folks are talking about, is actually higher than what it's been. And what drove that are the bottlenecks in transportation that Alan referred to.

I think if you look at the differential of Western Canadian crude price to WTI, for example, that was just -- that differential, that discount, if you will, was as high as $40 early in the year. That is now about $20 a year.

So I do think that -- I think from a macro perspective, I think the growth going into 2015, from what I've heard, certainly you should look at what analysts say about the Oil Sands opportunity, but I think we're well-poised to enjoy, once again, that growth in that region.

And then I would also -- the only other thing I would point to is that I think that the resurgence of manufacturing here in North America, we're going to be able to benefit from the things that we're doing right now, by investing in our incinerator, investing in our fleet, investing in our containers, that all of that is -- we should be able to be ready to be able to handle the growth that we're -- that we see that potential for in the U.S.

So that's really -- those are 2 points that I would talk about in the macro market that I think that we're going to be well-poised for..

That -- those are great points.

And then if I -- I realize you're not providing guidance around '15, but if I were to think about your EBITDA guidance for this year, and then as I try to kind of extrapolate a base correctly as we look into next year, should we assume -- let's say, we were to factor no growth or mix improvement or revenue leverage, it seems like we'd at least be thinking of a base of about $580 million EBITDA, given the additional cost actions you'd get a full year's benefit for.

And otherwise, the rest of the opportunity comes through what could materialize through then, that top line and down flow?.

Yes, I think we're going to go through our budgeting process in September. We've got a lot of work going on, as we mentioned, with the new North American sales group that Dave's heading up. And I think we'll probably have more color for you for that in the third quarter.

And rather than just kind of shoot from the hip here, we'd rather wait until we've gone through that..

That's fair. And then last question here. So you talked a little bit about unfavorable mix and some of the headwinds within Safety-Kleen.

Can you elaborate on that a little bit more for us?.

I think in the -- in Safety-Kleen, we did see -- and you see this in, if you look at the outside revenues, you do see a large increase due to the containerized waste volumes that they brought in. So that was a very favorable part of the mix.

What made it not as favorable was that because we're internalizing more waste oil in our network, certainly now with the Evergreen plant in California, our RFO sales have gone down, and that is recognized now within Safety-Kleen Environmental. So you saw a reduction that offset some of that. And parts washer business was mildly off.

It wasn't off a lot, but it was mildly off. But the biggest part was really RFO sales that were down..

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

Just a follow-up on the lodging side.

What portion of this business is directly attributable to manufacturing? And where do those margins stand relative to the 35% aggregate seg margin?.

Yes, the manufacturing is a very small piece of that. That can range anywhere from $30 million to as high as $60 million or more than that in any given year, depending upon the amount that we're manufacturing for our own use, like for example, when we were building the Ruth Lake facility, versus what we're doing on the outside.

And clearly, the margins are not that -- as high. They're probably better than half of the margin that you're seeing from the overall lodging business, but it's certainly not at the same level as the basic lodging revenues that we get through our fixed sites and camps..

And then is it possible to get kind of an update, just generally speaking, on guidance by seg, margin guidance by segment?.

Yes, it's probably about where you're seeing the Q2. Q2 is a good quarter to look at, other than the Oil and Gas Field Services business, to look at the margins. Q3 tends to be strong, a little bit stronger.

But I think if you look at Q3 for the most part, you should -- you're kind of seeing what's embedded in the guidance there, except for oil and gas. Oil and gas, clearly, with the breakup in Western Canada, that is their seasonally weakest quarter, just because you're taking equipment out of the oil fields, and then it starts picking up again in Q3.

So with that exception, I would say Q2 is representative..

That's great. And then just really quickly on the Oil Sands. We looked at the Baker Hughes counts on rigs, and those were up significantly.

Can you talk just a little bit more about the bottlenecks on the transportation side you mentioned? And just kind of given the disconnect that we've seen a little bit between really strong rig counts and perhaps project deferrals or lighter growth in that segment?.

Well, 2 points there. One is the bottlenecks that we were referring to is more related to the Oil Sands work, which is not really the drilled -- drilling wells. It's really the Oil Sands, which is the mines and the SAGD operations that go on in Western Canada.

So a lot of that bottleneck that drove the discount that I talked about before, has reduced the level of activity in the region. The rig counts, however, as you point out, are up quite a bit year-over-year. So that would affect our Oil and Gas Field Services segment.

And that clearly, as you know, has been more or less a Q3 event, that our rig -- that we've seen those rig counts. So we are seeing increased level of business and quotes right now in our Oil and Gas Field Services business that we're working on right now. So we're -- we hope to see some gains there..

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

I wanted to follow up on the capital allocation, in particular CapEx question. What I'm hearing is that, and I think it's Oil and Gas Field Services, utilization is down, but you're talking about investing in the fleet.

So could you square where this specific CapEx is going to in terms of segment? And are you pulling dollars out of oil and gas, yet we still have $250 million of CapEx for the year?.

I could just start here, and if Alan wants to add anything. I think if you look at the Oil and Gas Field Services, given the lower margin that we've seen there, we're not spending as much CapEx. And clearly, with the -- that lower profitability is reflective of the low utilization. So there's not a huge need for CapEx in the oil and gas business.

But where we are adding fleet are in 2 areas. One in the environmental business. That includes both the tech services, legacy Clean Harbors business, given the higher volumes of waste and our projections for volumes to grow, and also in the Safety-Kleen business.

We're trying to make sure that we can respond to all those higher drum volumes that are coming through from our small quantity generators that are part of that business. So there you see investment. The other segment that, where we're investing in fleet, as well as specialized equipment, is in industrial services.

And we do believe that there will be a higher growth rate in Oil Sands. And also, our cross-selling of industrial services into environmental customers is going to require us to have that fleet and equipment to be able to respond to that. So those are the areas where we're pretty much doing the bulk of our investment there..

Are you willing to put percentages along the growth CapEx dollars that are going into the segments for us?.

I'm not prepared to do that, Al. But we'll take a look at that and see if there's another way we can give analysts an idea of that. But I'm not prepared to do that right now..

My question is directed at, if I look at cash flow and the ability of you to grow that item, it seems like the CapEx for growth, given the challenges that are in some of the end markets, that, that $110 million should be coming down ex the incineration business, as we look out over the next 12 months.

It feels on this side that the CapEx being allocated is perhaps not at what you've been saying in terms of the highest return areas. And so that's where we're looking for maybe some clarification..

Yes, well, the way I -- maybe the way I would look at this, Al, or the way I'd look at it is, last year, we spent about $280 million, and roughly $130 million of that to $140 million was maintenance CapEx. So then if you look at our growth CapEx there, we were at $130 million, say, rough range, in that ballpark.

If you take the incinerator out of our growth CapEx this year of $110 million, you're like at $85 million or so, because we have about $25 million dedicated to the incinerator. So we've definitely decreased our CapEx, excluding the incinerator, of what we have been spending.

Does that tie with what you're saying?.

Yes, that's fair. If I may just shift gears to industrial and field service....

I think Alan wanted to add something to that..

I mean, we also have to replenish our landfills, our landfill volumes. We have cell reconstruction every year that there's a significant amount of capital, over $20 million a year. So we're spending upwards of $15 million a year on new parts washer machines. So those are both maintenance as well as growth.

So we're -- we had a capital budget review yesterday, Al. We look at every single dollar we spend here. And we're looking at driving the highest return investments we can. And as we said in our script this morning, we added $10 million this year because the demand on certain assets that we don't have was so great, that we were renting them.

And we decided that they were going to be needed for a very long period of time. It was much better for us to buy out those leases and invest in those equipment. And we run the numbers on each of these capital projects, I can assure you..

Right. Smart decision there. On the industrial and field services business, while you didn't talk about percentages, it is the first time that I really hear you talking more about base business versus project.

And I'm wondering, if you could maybe shed, percentage-wise, how much -- what do you feel is base business and what is project, such that maybe we can get a little bit more underneath that business in terms of understanding where it's going?.

I think, probably, just at a high level, Al without getting into percentages, I mean, let's face it, a lot of the work that we do, both in industrial and field services are project-related work. What we're really saying here is that particularly the turnaround work. Turnaround is going to be very strong in 2015.

The turnaround has not been as strong this year and that, you can look at industry publications. But next year, we're being booked already quite heavily for our turnaround work, which drives not only our industrial, but a lot of our specialty work, our catalyst business, our high pressure work. And so that's the kind of big project work.

There's been very little turnaround work in the Oil Sands. And so we kind of look at -- think of it more as part of that turnaround work..

[Operator Instructions] The next question is from Brian Butler with Stifel..

On the strategic review, as it's progressing, do you have an update just on the timeline on when you expect to be able to come back to the market and give some more color on what the results have been?.

We have a board meeting in September where we'll begin kind of sharing a lot of the work that was done. We spent an awful lot of time with 2 different firms helping us with our analysis, really to try to accelerate it so that we could come back and have better information to share.

But I wouldn't even expect in the third quarter for us to communicate anything, honestly. Because as we start thinking about executing on our plan, there will be certain confidentiality issues and customer issues, employee issues, that we're going to have to address.

All we can tell you is that we are very focused on improving the returns of our business and looking at the portfolio of services we have here..

Review should be completed sometime in kind of September, October, but not -- might not hear about anything until...?.

We do it..

Until 2015?.

Well, I think to be fair, I mean, it's a process, and we're not expecting any life-changing event here as part of this process.

But we do believe that, as you would imagine, a company that's grown as much as we have, through 40 different acquisitions, and some of the acquired companies that we've acquired over the years also did a lot of acquisitions. There are some pieces of our business, probably in the end that don't fit, and we're not the natural owner for.

And we're taking a hard look at those and trying to look at where are those businesses going to be short term and long term, and looking at our capital investment for them and our returns.

And I can only tell you that we're working really hard to, as we said at the end of the fourth quarter last year, to review and to do everything we can to improve our returns..

Okay, fair enough.

On the guidance raise, the bottom or the bringing up the low end of the EBITDA, was that all from just the $75 million coming faster? Or were there some segments performing better that kind of drove a little bit of that improvement?.

I think a lot of it was generated by the cost savings, to be honest with you. And what we were -- partly offsetting that, but not completely, is clearly we're now saying we'll be at the low end of the revenue range, which we're conservatively saying. So that's offsetting some of it and muting some of it..

And that strategic review cost is not in the $4 million on top of that. So there was another $2.5 million of other costs in SG&A day that we can mention, it wasn't called out in our press release because it's not one-time sort of severance and integration costs, so....

Right. That's a good point. So our professional and consulting fees have gone up as a result of the strategic review. That's an excellent point, Alan..

Yes, so you're not going to see that as much in the third and fourth quarters..

That's right..

Okay, that's helpful. And then on the re-refining business.

Do you have an average for the pay-for-oil and base lube price that you saw in the second quarter? And how does those 2 numbers kind of compare to what you're seeing in the third quarter?.

Yes, we're talking about our changes, but we're not announcing out there what the ranges and averages are, Brian. The way we prefer to do that, just because there is a market involved here, that we don't talk about explicit pricing out there on a call like this..

Okay, another way to ask it then, I guess. In the second half, when you're looking at like, let's say, pay-for-oil, you've seen $0.05 of improvement on lowering that.

What's kind of the trend you're seeing in the third quarter, and kind of what's baked into guidance for the second half?.

Well, we continue to drive it. And any large -- I actually mentioned this before, that any large improvements that we make in PFO is part of our cost reduction plan, because we had a lower amount, clearly in our budget that we knew we could do.

But we have projects built around, many systems projects and a lot of investment going around bringing down, including our incentive comp plan, of bringing down PFO. So some of that is in the cost savings. So that's how it's coming in.

But just to give you a feel, each cent is worth about $2 million of savings for the company that we can achieve there..

And customers are being more willing to listen, particularly in regard to where base oil pricing has been, based on sort of published ICIS reports. And also where crude oil has been, where crude really became significantly over $100. And a lot of our PFO is indexed against crude.

So we've been pushing real hard on reducing those indexed contracts out there to get away from that spread that we've been in..

And then on the used oil or the base oil prices, did you have a change for that for second quarter? And again, what's kind of baked into the second half?.

No, we're just working off current pricing..

All right, just off of current pricing. Okay. And then last on the Oil Sands, where you're seeing the weakness.

Is that all market-related? Or what is Clean Harbors' market share looking like? Is that changing, and what might be driving it?.

Except for the 1 customer that we've talked about quite a bit that we lost last year, our market share is very good. So more of it is due to the discount of pricing of Canadian crude, what it's been due to the bottlenecks in transportation that has affected the region.

But the plans are to correct that and to get back up to normal growth rates, clearly, if you look at some of the research around the area..

And what's normal growth rates?.

A normal growth rate there, I think right now, the region produces, I think it's 1.7 million barrels a day. And I know a lot of the projections going out anywhere from 10 to 15 years from now, that they'd like to bring that to 5 million to 6 million barrels a day.

So there's a lot of growth projects underway that we did see a little bit of a slowdown to, because of the discount that we just talked about, among the major oil companies up there..

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

You've successfully demonstrated the ability to reduce PFO costs in the quarter and mentioned earlier that new incentives are proving to be effective. I understand that those incentives are really related to your internal incentives regarding that cost savings program.

But are there any other customer incentives involved in this process? I would imagine that if you're asking customers to accept a lower PFO rate, there must be some give-and-take in that process in other ways..

We service customers in many ways, as you know. And we can certainly look at some of those other lines of business that we're selling to try to look at the total package. Probably the most important thing is to get many of our PFO customers to buy our recycled EcoPower oil.

And as we continue to expand our blended product sales, we believe the most logical is to our customers that we're paying the most amount of oil for, particularly our national accounts. So that is absolutely an incentive that we are working towards..

At this time, I would just turn the floor back to management for closing comments..

Thanks, Rob. Thanks again, everyone, for joining us today. We appreciate your questions and comments and have a great day and a great summer. Thank you..

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..