Michael Robert McDonald - Clean Harbors, Inc. Alan S. McKim - Clean Harbors, Inc. James M. Rutledge - Clean Harbors, Inc..

Patrick Tyler Brown - Raymond James & Associates, Inc. Michael E. Hoffman - Stifel, Nicolaus & Co., Inc. Scott J. Levine - Imperial Capital LLC Joe Box - KeyBanc Capital Markets, Inc. Sean K. Hannan - Needham & Co. LLC Al Kaschalk - Wedbush Securities, Inc. Adam Michael Baumgarten - Macquarie Capital (USA), Inc..

Greetings and welcome to the Clean Harbors, Incorporated Second Quarter 2015 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Michael McDonald, General Counsel for Clean Harbors, Incorporated. Thank you, Mr. McDonald. You may begin..

Thank you, LaTanya. 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.

We've posted our slides for today's call to the Investor Relations' section of our website. 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 5, 2015. 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. And good morning, everyone. I'm happy to be sharing our good results with you today. Beginning on slide three, we reported Q2 revenue of $936.2 million, up 9% year-over-year. This growth was driven by our response to a number of emergency events in the quarter.

It has been nine quarters since our last major ER event with Hurricane Sandy, but we had a bundle of activity here in Q2. Let me start by thanking our team for their accomplishments this quarter.

We pulled resources including people, equipment, and vehicles from across the company to safely and seamlessly handle events that occurred in the Midwest, on the West Coast, in the Northwest and the Northeast. These unplanned events accounted for approximately 18% of our revenue in the quarter.

It was quite an achievement that once again showed the power of Clean Harbors to effectively respond to multiple large-scale events. I'm sure many of you will have questions about what we did and how much revenue was related to specific incidences.

However, due to the sensitivity and ongoing nature of some of this work, as well as the customers involved, we'll not be breaking out revenue by category as we have done in the past.

While avian flu was the largest single contributor in the quarter, in aggregate, these events totaled $170 million in revenue for the company, which more than offset the headwinds we face from weakness in the energy markets, currency translation, and lower base oil pricing.

Demonstrating the leverage in our business model, our adjusted EBITDA grew at more than twice our rate of revenue growth, increasing 20% from a year ago.

While the segments will be covered in the upcoming slides, I did want to highlight two other strong performers this quarter, whose contributions may have been overshadowed by all the emergency rework. Safety-Kleen Environmental recorded another excellent quarter.

Profitability and margins increased sharply, supported by the recent addition of the Thermo Fluids acquisition, which is already performing well in the early stages of integration.

Also, our Safety-Kleen Oil business rebounded nicely from Q1 as we started to experience the benefits of our lower used oil collection and transportation costs initiatives. Looking at the segments in more detail beginning on slide four with Tech Services. Revenue, adjusted EBITDA, and margins were down from 2014, which was disappointing.

Those declines were caused by a combination of issues including several waste project delays, lower energy-related waste volumes, and unplanned outages at two of our largest incinerators. These factors more than offset gains we registered in drum volumes and in bulk solids.

In terms of the outages as – was a total of eight unplanned days at our second largest plant, we also suffered a power outage in May at our largest plant, which caused some damage to the facility and resulted in seven days of unplanned repairs and upgrades. As a result of all these unplanned days, our incineration utilization for the quarter was 91%.

Landfill volumes were down 29% from a year ago, primarily due to lower energy waste volumes, as well as the project delays I mentioned. We're confident that our landfill business will be back on track in the second half of the year as delayed projects come online along with strong pipeline of upcoming opportunities. Turning to slide five.

Industrial and Field Services revenue nearly doubled in Q2 based on the ER contribution. Without the $170 million of large events and emergency response work, we would have been close to flat from a year ago. This is impressive when you consider the substantial amount of resources that were dedicated to these ER initiatives during the quarter.

Growth in our U.S. industrial and specialty groups, as well as our base field service business essentially offset the decline in the Canadian Oil Sands work and the Canadian currency effect. Turnaround activity picked up in the quarter, particularly in the U.S.

While the industry continues to recover from the refinery strike that occurred in Q1, and some plant turnarounds have been pushed, we are seeing a significant amount of unplanned work.

In fact, between outages and crisis work, our turnaround group participated in more unplanned work than planned work in Q2 as refiners continue to run their plants hard and try to delay spending as long as possible.

The unplanned work tends to be at a higher margin for us, because it comes at a higher price and frequently involves a larger scope of work. Our team also done a great job of taking market share in some of our key business lines, particularly some of our high margin areas.

Profitability and margins in Industrial and Field Services were up substantially based on our ER work, as well as the revenue mix in the industrial side. Utilization for our billable personnel was flat at 87% compared to a year ago.

Moving to slide six, our revenue in Oil Re-refining and Recycling was down from a year ago as expected, with a sharp decline in base oil pricing. Today, our posted Group 2 pricing stands at $2.35 a gallon versus $3.45 a gallon a year ago. Our team continues to execute well on the Zero-Pay and Charge-for-Oil initiative we have announced in December.

Despite the greater than a $1 drop in base oil pricing, we still generated increased profitability in Q2 and margins were up significantly from a year ago. Our results were also in sharp contrast with Q1 when we were still flushing higher pay-for-oil inventory through our plants.

Our blended sales in the quarter were below our expectations as we continue to rely heavily on our distributor network and government sales. We were flat with Q1 at 33%, but down from a year ago. Turning to slide seven. Direct revenue in Safety-Kleen Environmental Services was down 14%.

But similar to Q1, this decline was entirely due to the lower intercompany cost resulting from the reduced pay-for-oil. Outside revenue in this segment, as shown at the top of the slide, was up slightly as the addition of Thermo Fluids and gains in base business offset a drop in recycled fuel oil sales.

Profitability was up an impressive 32%, reflecting an improved business mix, pricing gains, the TFI contribution, and the cost reductions we've implemented in the past year. Parts washer services were up about 10% from a year ago as we continue to grow our revenues in that business.

With the addition of Thermo Fluids, our collection volumes grew from a year ago. We brought in 59 million gallons in Q2, of which TFI accounted for just over 11 million gallons.

Bringing in such high level of collection gives us a buffer above what we need for our three re-refineries to run full, which enables us to be more efficient with our sourcing and routing. It also allows us to maintain our commitment to further lowering our average price for oil. In Q2, we reduced our average PFO cost by $0.03 from Q1.

And while we don't share a specific number for competitive reasons, I can say that we're edging closer to zero, but are not quite there yet. We are now moving forward with charging for oil in some markets, and charging stop (10:17) fees for servicing remote customers.

Turning to slide eight, as you can see from the charts, Lodging Services clearly continues to underperform, with revenue dropping nearly 50% and profitability down even greater than that. The challenging conditions in the Oil Sands only worsened in the quarter, as turnaround activity in that region was light and projects were severely limited.

This segment was hit by declining occupancy at our fixed lodge combined with a fall-off in drill camp activity. In addition, our camp manufacturing business had limited sales.

With our primary fixed lodging registering an average occupancy rate of just 31% in the quarter, we're taking steps to weather this downturn until more work returns to the region and rates begin to normalize. One of the advantages of our facilities is that they are modular and we can – be moved far more easily than many of our peers' lodges.

We'll continue to take additional steps to eliminate expenses and seek opportunities in British Columbia and outside our traditional markets to generate revenue and possibly relocate our assets.

Turning to Oil and Gas Field Services on slide nine, the 32% drop in revenue from the prior year was largely anticipated, as energy markets and the customer spending associated with those markets have yet to recover. As outlined on the slide, we face similar trends as we have in the past several quarters.

This was compounded by the fact that Q2 is the seasonally weakest quarter for this segment. The average number of rigs serviced in the quarter was down 40% from a year ago to just 74. Average utilization of our key equipment, centrifuges for processing waste, was down to 32% from 40% a year ago.

We remain convinced that this market is driving many small competitors out of business. However, that is a small consolation for us until we see rig counts and customer spending finally moving in a positive direction. Looking at our corporate initiatives on slide 10, activities associated with our planned carve-out remain on schedule.

We are preparing financial statements under IFRS that we will have audited, and we're developing a unifying brand for the carve-out, assembling the new organization's leadership team, and coordinating all of the necessary steps. We are proceeding with all the actions necessary for the carve-out to be capable of going public by year-end.

We still expect to complete an IPO during 2016 depending on the market conditions and board approval. The next initiative I wanted to highlight is the integration of Thermo Fluids, which we acquired in early April.

We have begun the process of overlaying TFI with our existing Safety-Kleen network with a focus on maximizing our use of rail and achieving lowest cost transportation.

And while we're in the early stages of this initiative, we see a lot of opportunity, including significant potential to cross-sell our environmental services into Thermo Fluids on a penetrated base of over 20,000 customers. Slide 11 is simply a reminder of our capital allocation strategy.

We continue to repurchase shares when we see that as the most effective use of capital. We also intend to continue to invest in our business, particularly where we see attractive long-term growth opportunities, such as the new incinerator in Arkansas.

And we continue to evaluate potential acquisitions with an emphasis on complementary environmental or industrial businesses we can acquire at a reasonable valuation. Moving to our outlook starting on slide 12; we have a range of growth initiatives underway across our segments.

Within Tech Services, we expect to extend disposal momentum at our incinerators and are pursuing a strong pipeline of large volume projects in our landfill business in the second half of the year. We remain on target for the planned startup of our new incinerator in late 2016, which we continue to believe will be well-timed.

The rotary kiln, which alone weighs 131 tons, will be delivered to El Dorado this week and construction continues throughout the site. Within Industrial and Field, our near-term emphasis is on managing our resources as we wind down several emergency response events and begin ramping up for the busiest part of the turnaround season.

For Field Services, we are continuing with our plan of co-locating with existing Safety-Kleen branches, which has been a highly effective strategy for us. Within Oil Re-refining, we remain focused on increasing the efficiency of our network to reduce our transportation costs.

At the same time, we're looking to jumpstart our blended product sales by moving forward with our pilot programs to build a direct sales channel. Our intention is to create a structure where we sell our blended products directly back to the Safety-Kleen customer base. The pilot which began in Canada, is now getting underway here in the U.S.

And by the end of this year, we should have some good insights into how to best make this program work on a national scale. Turning to Safety-Kleen Environmental on slide 13. We are looking to continue the success of our branch business that it has had in the past year.

With the Thermo Fluids assets at our disposal, we will continue our efforts to drive down our total cost for waste oil, while maintaining sufficient volumes to run our plants. Optimizing their network and training their sales force for cross-selling to the TFI customers are high priorities in the coming quarters.

And for Lodging, we continue to monitor opportunities to add occupancy at our fixed lodge. And as I've mentioned earlier, we're evaluating network to move any locations as necessary.

We continue to seek opportunities related to the activities in British Columbia to deploy our mobile assets, and our strategy is to pursue non-traditional markets as we seek to weather this cyclical low in that business.

With Oil and Gas, we are continuing to take market share from smaller players, while pursuing emerging opportunities in areas such as seismic. We are targeting some sizable projects in Alaska. And at the same time, we are moving forward with cost reduction measures designed to counter the still challenging environment we're in.

So with that, let me turn it over to Jim for his financial review.

Jim?.

Thank you, Alan. And good morning, everyone. The pie chart on slide 15 shows our direct revenue in Q2 from our six reporting segments. With $170 million in emergency response revenue, our Industrial and Field Services segment accounted for 37% of revenue, approximately twice its typical contribution. Technical Services followed at 31% of Q2 revenue.

You can also see how much our energy-related businesses have been hurt by the current market conditions, as Oil and Gas Field Services accounted for only 4% of revenue and Lodging Services was 2% or a total of 6% between the two segments. In Q2 2014, those two segments accounted for 12% of our total revenue.

Turning to the income statement on slide 16, gross profit for the first quarter was $283.5 million or a gross margin of 30.3% up 100 basis points from a year ago, reflecting the revenue increase and leverage in our business. SG&A totaled $120.4 million in Q2 or 12.9% of revenues.

This is a 60 basis point improvement from the 13.5% of revenues we posted in Q2 a year ago.

For the full year, we now expect our total selling, general and administrative expense in dollars will exceed last year by a few percentage points, given an increase in incentive compensation with this year's performance, the increasing cost of labor, and the higher level of administration associated with our emergency event business.

Depreciation and amortization increased slightly to $67.8 million, reflecting our larger asset base and the addition of Thermo Fluids. For the full year, we remain on track to meet our original projection for D&A of approximately $270 million.

Income from operations, including the non-cash impairment charge for oil and gas, was down from the same period last year. But on an adjusted basis, it increased by more than $25 million to $92.8 million as a result of our revenue growth. Adjusted EBITDA increased 20% to a record $163.1 million, well ahead of the guidance we had provided in early May.

Though some of the emergency response work was underway by the time of our Q1 call in May, we did not anticipate the scale that some of these activities would reach. I should point out that our adjusted EBITDA this quarter includes $1.8 million in integration and severance costs as we continued with several of our cost reduction initiatives.

Margins climbed considerably from 15.8% to 17.4%. Our effective tax rate excluding the impairment charge came in at 41.8% compared with 39.1% in Q2 a year ago. This tax rate was largely expected given our performance in Canada, where rates are lower.

Based on where we are at the midpoint of the year, we now expect our effective tax rate for the full year, excluding the impairment charge, to be approximately 42%. Turning to slide 17, we continue to maintain a strong balance sheet.

Cash and cash equivalents at June 30, declined to $173.6 million, compared with $233.7 million at the end of Q1, which is a decline of $60 million. This decline reflects our closing of the all cash approximately $80 million acquisition of TFI and the funding of over $16 million in share repurchases during the quarter.

Based on the amount of revenue we generated in the latter part of Q2, we expect our cash balance to climb significantly in Q3, which historically has been our strongest cash generating quarter. Payables and receivables were up sharply from the end of March as a result of the emergency work we performed, much of it in the second half of Q2.

The $722 million in billed and unbilled receivables should fall significantly by the end of September. DSO for the quarter decreased by 1 day to 71 days as we remain focused on collections and improving our billing processes to reduce DSO. We continue to target DSO in the mid 60 day range.

Environmental liabilities at quarter end were $200.6 million, essentially flat with Q1 and down over $5 million from year-end as we continue to address our obligations at a number of sites and reduce our total liability over time. CapEx net of disposals for Q2 was $69.3 million, which is above the $61.1 million we spent in Q2 of last year.

However, this quarter includes $17.5 million investment in the El Dorado incineration project. If you net out that project, we are down appreciably from a year ago as we are focused on maximizing the returns we receive on internal capital.

For 2015, we are continuing to target CapEx of $200 million excluding the construction of the incinerator, which we still believe will likely add approximately $50 million in 2015. Our target has been to sell $25 million to $50 million of non-essential assets, which will reduce our CapEx net of disposals.

But a portion of this will extend into next year, given the timing of some of the related projects as well as the recent refocusing of our asset management team to servicing the events part of our business. Year-to-date, we have had asset sales of nearly $3 million, but we expect this rate will accelerate in the coming quarters.

Cash flow from operations in Q2 was $109 million, compared with $110.3 million a year ago. For the full year, we continue to expect cash flow from operations to exceed $400 million. Moving to guidance on slide 18.

For the third quarter, we anticipate another strong level of performance as we expect to generate adjusted EBITDA in the $165 million to $170 million range. For the full year, we are maintaining our previously announced guidance range of $530 million to $570 million.

In terms of our anticipated 2015 segment performance, we continue to expect both Technical Services and SK Environmental to expand their adjusted EBITDA in the mid single-digit range excluding the TFI acquisition.

Because of the contribution of emergency work in Industrial and Field Services and the increases in several of its other businesses, we expect that segment to deliver adjusted EBITDA growth close to 50%. We now expect adjusted EBITDA in our SK Oil segment to be flat with 2014, assuming another modest base oil price decline in the near-term.

In our Lodging segment, we continue to project adjusted EBITDA to decline greater than 50% from 2014, based on our first half results and the slowing oil sands environment. Similarly, we anticipate that adjusted EBITDA in our Oil and Gas Field Services segment will also decline over 50% based on the current state of the energy markets.

So with that, LaTanya, could you please open up the call for questions?.

Thank you. We will now conduct a question-and-answer session. One moment please while we poll for our first question. Our first question comes from Tyler Brown with Raymond James. Please proceed with your question..

Hey, nice quarter, guys..

Thank you..

Hey. Jim, kind of the logical question I guess here is on the EBITDA.

Just how much was associated with the $170 million of response work? I mean it looks like the margins expanded nice in Industrial and Field, I'm assuming that came in kind of at least at a 20% to 25% incremental margin?.

Tyler, probably not that high, I would say more to the high teens, when you consider the fact that clearly, this performance had an effect on our incentive compensation and also the administration. So, I would push it more to the high teens.

Within Industrial and Field Services, it's probably in around that 20% area, but if you look at our corporation as a whole, I would say high teens. Yeah..

Okay, perfect.

And then, as you think about Q3, can you guys give us some specific guidance as to how much are you expecting similar or more or less than the $170 million?.

We're involved in projects right now, and we expect at a revenue standpoint to exceed $100 million. I feel pretty confident that an EBITDA level, perhaps in the $15 million range, could be higher than that, could be $20 million, but we're obviously in the middle of the quarter or only a third of the way through.

So we're, as you know, with emergency response work, it is sporadic and it's hard to forecast when things will be through..

Okay. Then just real quick. So if I look at the math, so you kind of have, it's hard to say, but let's just say $50 million, $60 million of EBITDA from the ER work this year, that's kind of in that 550 basis points midpoint.

I mean is it – did your core kind of EBITDA is running more in the 500 basis points excluding the ER?.

No. No. I wouldn't say that at all. I mean, clearly maybe the way to look at it is this way. If you look at our businesses outside of the businesses that we're carving out, so if you take Oil and Gas and Lodging and what has happened in those segments, and put those aside.

And you just look at steady – the steady, what I'll call core businesses, excluding the events that we're working on, the emergency response events, what we're seeing is probably an 8% plus growth in EBITDA year-over-year when you look at the full year.

So clearly, that would take you north of what you are suggesting, but you'd need to then add in Oil and Gas and Lodging to get above there. But clearly, I think if you recall, when I was giving a report at the first quarter, I was thinking we would be at the bottom end of our range, and now clearly we're moving up higher in that range..

Okay, cool. I'll jump back in the queue. Thanks..

Thank you. Our next question comes from Michael Hoffman with Stifel. Please proceed with your question..

Hey, Jim, Alan and Jim thanks for taking my questions..

Hi..

And nice to see the operating leverage of the business still exists when volume comes through. On the guidance, you didn't talk anything about free cash flow, you'd given a $150 million number at the beginning of the year based on where you are still reaffirming the capital spending in the second half trends tends to be better than the first half.

I'm assuming we could talk about a range now of $150 million to something on the free cash?.

Yeah. I would agree, Michael..

And what's the something?.

I would put you in between the $150 million to $200 million range. I suspect it will be somewhere in the middle there..

Okay. And then following your logic, and I get that. So last year, if I took all of the, what I'll call the recurring businesses ex the carve-out business, you did $581 million and you had a $161 million of corporate overhead.

If you take the $581 million and says that grows 8%, what am I using for corporate overhead this year?.

I would put that in the $145 million to say $150 million range..

Okay. So the first half $26.5 million goes to $45.5 million between the 2Qs and that kind of averages $36 million, which then if you annualize that's $144 million. Is that the way to think about it? You said your corporate overhead was a little bit lumpy in the first half..

That's right. And – but also to say that, clearly, all the emergency response work, being that we are very centrally run, our billing and all that. There is some impact on corporate costs and that's why I'm saying $145 million to $150 million..

Okay. So that – to that point just to follow that thread through, you would come in the year thinking it would be lower because of cost initiatives improving operating leverage on ex-emergency response, that's still true. That – there is....

Absolutely..

And....

Absolutely, yeah. And that's why I highlighted that we had severance and integration costs along even in this quarter, we had a couple of million of that going on. So that all continues. Yes..

All right. Just to follow that thread, and I knew – I realize I exceeded my question limit, but you said something about SG&A in the margin number. I have to admit I'm confused.

What are you looking for, the percent of revenue for SG&A?.

Yeah. I think it comes out to somewhere around $13.5 million, but actually I was more precise in my comments, I meant to be anyway, Michael where I was saying that I expected that our SG&A would grow in dollars by a few percent, so that could add $20 million over where we were last year, and I think we were at $440 million or so last year.

So that's kind of what I'm looking at right now.

And that increase, which I originally thought we would be flat, but with labor costs, with the increase of administration around the higher level of business that we have right now and just increasing labor costs, even net of cost savings that we're doing, will put us a little higher on a whole dollar basis..

All right. And then, Alan, on the carve-out assets, I get – I've got depressed conditions, but normally there is a seasonal pattern in the second half that's better than the first half.

Is there going to be any seasonality this year?.

It's a tough market when you look at what's happening with crude oil being where's it's at today at $45, $46. We've got the weak Canadian dollar at $0.75. There is – probably I have not seen the kind of reduction in spending that has been happening, literally overnight, with many of our customers and their contracts.

So as much as we're hopeful that we'll see an improvement in the second half of the year, where we're – certainly got a lot of headwinds against this year, Michael..

Okay. Fair enough. Thank you for taking my questions..

Thank you..

Thanks, Michael..

Our next question comes from Scott Levine with Imperial Capital. Please proceed with your question..

Hey, good morning, guys..

Hi, Scott..

Good morning..

So, I mean I wanted to ask about a couple of the other businesses here that you guys were optimistic about at the outset. Firstly, within the Industrial and Field business at the beginning of the year, you guys were expecting a very strong turnaround year; my sense was that was based on planned turnarounds, what you saw in the calendar.

Last quarter you kind of dialed down the expectation. Now it sounds like the expectation is maybe a little bit more positive on the basis of unplanned outage work..

Right..

Maybe little bit more elaboration on that, and whether the schedule for the fall turnaround season has you anymore encouraged regarding the planned portion of that business picking up in the back half of the year?.

So, I could comment that the spreads – the refinery spreads are excellent right now for a lot of the companies in that business and from everything we're seeing, they are trying to run these plants as strong, and as hard, and as long as they can.

And, I would say that we wouldn't be surprised to see more delays in planned work, which only leads to higher costs down the road for things like catalyst change-out and overall turnaround work.

So, we're positioned we think very well with a lot of key accounts, but we are seeing customers who really are relying on the margin on the refinery side to offset the share decline on the crude oil side to continue to run strong..

So, basically, I mean do you have an explicit assumption with regard to how that business should be year-over-year and/or are you thinking that the unplanned improvement you saw in the second quarter, that those trends should continue as well into the back half or not?.

Yeah. I would offer, Alan, that in the U.S. we're definitely seeing turnaround activity increase year-over-year for sure. In Canada with some of the – it's affected a little bit by the Oil Sands where they're trying to reduce spending and stretch it out as much as they can.

So there it could be flattish to slightly down, but I would say overall up in turnaround based upon what you....

Yeah. This was supposed to be a strong five-year cycle and I don't believe it's going to be the five-year cycle that we're hoping for....

That's right..

But I would tend to think that that's going to spill over into next year as well. And for the unplanned work which we can't necessarily predict, they tend to be much more expensive when they do happen for the customers..

That's right. And Scott, I was including unplanned work when I was talking about turnaround.

I mean we're working – I think with, to Alan's point about crack spreads and what's going on with the refineries, planned turnaround work has come down, but the amount of unplanned when you push it too far – we respond to a lot of outages – that is bringing that overall business up higher as I talked about a moment ago..

Right.

And with a positive bias to margins given the point you made?.

Absolutely, absolutely..

Got it. Okay. And then as a follow-up on Oil Recycling, so from what I saw a $0.10 – a modest reduction, $0.10, I think out of Motiva, a reduction in the quarter, a modest – it sounds like you're baking another modest decline here in 3Q.

But from an internal perspective, the initiatives you're pushing, et cetera, everything kind of on track there, and maybe a little bit more detail behind your expectations for base oil and whether things stabilize thereafter as far as you can tell?.

So, a couple of things. One is, in certain geographies, we are beginning to charge for oil; we know that not only because of the decline in base oil value, but also the decline in Gulf Coast number six and where the diesel market is, that our recycled fuel oil that we send to other customers is also – has declined.

So we realize that in a number of the geographies at this price in this market, we need to be charging for oil, and we are executing on that.

We believe next year that our oil and the base oil market particularly should improve because of not only the nature of change in formulations where customers, particularly in the heavy-duty engine oils side of things are moving to a different grade, a different -a focus on the use of our 240 for example.

We think we can actually start seeing a premium in the value of our products that we sell. A huge number of municipalities, federal government, states are really driving more on renewable fuels and putting up more bids with a higher percentage of recycled oil to be included in them and they're bidding.

And so, we are very optimistic about moving away from the commodity side of the base oil market and really differentiating ourselves with our recycled products that we are selling to our customers..

And to that end, I know that blended as a percent of totals kind of been knocking around low-to-mid 30%s.

I mean as next year, do you have any targets that you could share? Is next year, you guys are confident you can get closer to 40% and maybe through that on a consistent basis, anymore color there would be helpful?.

I certainly think that you're going to continue to see us improve in the blended area. I think what we have done particularly in the first six months with the intense effort we've had in this area is recognize that the margins with some of the oils that we are selling is just unacceptable.

Considering the cost of our additives and some of the locations the products was going to really substantially reduced our transportation cost and improved our margin in this business.

So I think you're going to now see, now that we've kind of right-sized that business and we've improved the margins and we are changing the contracts, I think you're going to see an improvement every quarter moving forward here..

Got it. Great. Thank you..

Thank you..

Thank you. Our next question comes Joe Box with KeyBanc Capital Markets. Please proceed with your question..

Hey. Good morning, guys..

Good morning..

I just want to dig into the Industrial and Field Services margins a little bit more. I mean, if you assume that the flow-through rate or the incremental margin is in that high-teen percent on the $170 million of revenue, if my math is right, that gives you a margin that's well above last year in the Industrial and Field Services business.

So can you just help us understand the different moving pieces there? Like how accretive was it for those unplanned turnarounds? Did you see any dilution to the margin from the organic build-out of Industrial and Field Services going into SK Environmental? Just any help on the margin profile would be good..

Well, we continue to in all of our businesses and certainly Industrial and Field Services has been successful in doing a lot around in improving margins. So all of that continues, all of that work.

When we talk about cost reductions and improving our efficiency at our sites and reducing our offices and trying to consolidate and have the two parties in this case to Field Services and Industrial working be aligned more closely together, we do certainly improve our margins.

Also that being said, with the turnaround and specialty work increase that we saw in the U.S. during the quarter, we saw a nice increase, that's planned and unplanned work. A lot of that specialty industrial work carries with it a higher margin. So we saw some nice improvements there.

And I will also say that our overall Field Services business is really doing a tremendous job in terms of increasing its business.

We came out of a really rough winter and that as soon as March and April came around, that group got very busy and they were doing a lot of work and really leveraging both from an employee productivity standpoint as well as efficiency in using our equipment.

So all those factors contributed to a nice margin increase and then certainly the events being, as I mentioned before, upwards of 20% that's reflected in that business unit, certainly helped them too..

Understood. Thanks, Jim..

Maybe just to add one other comment, we have about 650 locations, 150 plus of those are Safety-Kleen branch locations and we are really overlaying growth across Safety-Kleen, particularly with our Field Services business. We're also repositioning assets out of our Oil and Gas business to help staff and resource those new offices.

So we move 15 hydrovacs, for example, out of Western Canada into the States as a way of expanding our Field Service and Industrial Service capability. So there is a lot of shifting going on here and I think you're going to see that continually improve our margins with that leveraging of our infrastructure..

Great. Thanks.

And then, Alan, can you maybe just put more context around landfill volumes being down 29%? What I'm curious about is, are these projects that are being deferred, is this a long-term push-out, was it a weather-related issue, and maybe are you starting to see them flow as of August where we sit today?.

When you look at some of our landfills in California, North Dakota, Alberta, we saw a significant reduction in volumes from our E&P clients, as you would expect with the drilling rigs laying down and lot of activity and cash really being curtailed – any cash spending by our customers.

So that reduction we don't think will come back certainly in the next six months. But what is going to offset that is certainly the pipeline of remediation projects and other waste projects that we have in our pipeline and we believe we'll replace a good part of that volume that we've lost now because of those market conditions.

We were successful in our new permit in Sarnia. We now have received new 25-year permit, which took us over five years to renew and we're really excited about working through the community and working through the ministry there and now have a brand new 25-year permit for that site, which is the largest site in Canada..

I'll hop back in queue. Thanks..

Thanks, Joe..

Thank you. Our next question comes from Sean Hannan with Needham & Company. Please proceed with your question..

Yes.

Can you hear me?.

Yes, Sean..

Good morning, Sean..

Okay, great. Thanks so much for taking the question. Good morning. First question here. So wanted to ask a little bit about PFO. Just based on some other comments or color within the space, there's been some that have actually seen your PFO average come up by a penny or two versus in March.

So just wanted to ask if you can maybe talk about what you've seen in terms of resistance from used oil generators, how you've managed it? Are you walking away from any volumes or even does your geographic presence have you in more markets where for some reason you're not seeing it as much? So any more color on what you've seen, the actions and then the difference in terms of your presence, what you've done would be helpful.

Thanks..

Sure, Sean. So the recycled fuel market, the market where we sell oil as a recycled waste oil, hazardous waste oil is pretty much a seasonal market, as you would expect in many geographies selling to asphalt companies that are heavy construction going on in the summertime. So it's more of a seasonal business.

And within some of those geographies, we do see competitors that get aggressive to provide recycled fuel oil to those outlets and, honestly, we have tried not to go after that business.

And in some cases, we've lost some volume, because we're not going to chase that essentially low margin side of the business, which is again short term and very seasonal.

Over the last five years, we have seen a continuous decline in outlets for RFO because of the natural gas market really taking a lot of share and today natural gas pricing, many, many companies continue to look at ways of moving to natural gas.

So even though those markets pop up and that seasonal opportunity for some of these collectors, they might push PFO up a little bit during a small period of time, we're not participating. We don't think in the long term those outlets will continue to exist anyway.

And our focus continues to be to get back to where we were 10 years, 15 years ago when customers were paying for the service of having their hazardous waste managed safely and in compliance and that's where we're driving our initiatives here..

Yeah. I'm sorry, Alan, I was – if I had said RFO, that was my mistake, I meant PFO, I was trying to get a sense of the PFO average. You folks have made some comments early on the call that you continue to make incremental progress towards zero.

So that dynamic just seems a little different than some conservations I've had within the space, trying to understand in that context..

What I was trying to do is give you a correlation where some companies are paying more PFO if they're in a RFO market. And so what I was trying to do is give you some color on that. Maybe I didn't clearly articulate it.

Jim, do you want to make a comment?.

Sure. Absolutely. I think if you look at the amount of Charge-for-Oil that we're doing now, we've increased quite a bit. I don't have a precise figure, but I would say somewhere between 7 million gallons and 10 million gallons we're now charging for oil.

But as you look across the whole network that we have and you look at the geographies, we're probably at a blended rate of getting closer to zero. We're not quite at zero because there are geographic factors. There are factors where you take transportation into account, particularly in sites around our plant that have used oil.

To garner those volumes, you would perhaps pay more than you would otherwise. But our strategy is to really work with that spread as it pertains the base oil. We look at this as a spread business and where we want to make sure that we're always maintaining or trying to exceed that spread. That's the strategy..

Okay. That's helpful. And I think the combination, Alan and Jim, that's very useful. So RFO having some bit of an influence there as well as geography and your business, you're just in a better position..

Yeah..

Okay. And then in terms of blended products, can you lay out a little bit more in terms of the strategy for how you build up the scale there? I think there are, if I've sensed correctly, some creative efforts that you could take on within the market in order to drive up that portion of your sell-through product.

Can you talk about that a little bit more since that's kind of a bogey that a lot of us are tracking toward in kind of the near and medium term? Thanks..

I think for competitive reasons, Sean, we'd rather not get into that in too much detail here. I would tell you that we have a number of quality distributors that we do business with and we will continue to have a relationship with them and we will be offering our products in certain markets through our distributors.

In other markets, we believe we will go direct and we think we have some creative strategies to expand our volumes and our customer base, particularly across the Safety-Kleen customer base, the 200,000 customers that they have, as you know.

I think getting into any more of that from a detail would be something competitively I'd like to restrain from talking about here..

Understood. Thanks so much for taking my questions, folks..

Okay, Sean..

Thank you, Sean..

Thank you. Our next question comes from Al Kaschalk with Wedbush Securities. Please proceed with your question..

Good morning, guys..

Good morning, Al..

Good morning, Al..

I wanted to delve right into the visibility on the business, Alan, and the number of shifting parts and I know it certainly has some broader markets – broader factors in the market that are beyond your control.

But if you look at those businesses that have struggled, have we or have you reached a point here where you feel like we've bottomed or are we still carrying through to the back half of 2015?.

Well, I think it's hard to talk to pick a bottom, as you know, in some of these businesses, particularly where they are.

So driven by crude oil and capital spending by our customers and there is an awful lot going on in the energy markets, as you know, and it's not only impacting us on the base oil side of the business, but most importantly, on the capital spending side.

Whether you're running a refinery or you're thinking about building out a new plant or expanding your existing facilities, just a significant constraint on capital by a lot of our energy customers, upstream and midstream – downstream, everywhere. And so it's hard to pick a bottom at this point, I would say, Al.

We continue to operate under the mindset that it could get worse and we need to be prepared for that and we're really working extremely hard to make sure that we are prepared for it..

Right. I appreciate that. But in terms of customer capital spending, I guess, your comments earlier would – we should conclude that you're continuing to see a lot of uncertainty and therefore you don't expect really a movement forward.

I guess, what I'm asking, do we need – do you need to take further actions from a cost side to help the business from a return standpoint?.

Yeah. We're always doing that. I think the team has gone through two different reductions in force this year in the oil and gas area particularly. But for example, our seismic business with its reduced budget this year should be on track. It should meet its budget – close to its budget right now with the work it's doing in Alaska and some other markets.

But it is a reduced budget substantially from where we would have been maybe in 2012 for example. But I think we're repositioning assets, moving centrifuges into our Industrial business for example.

We still are investing some capital in centrifuges for the oil and gas area, because we still have a number of great customers that are drilling for natural gas. So we tend to be focused on the gas market. Particularly in Western Canada and D.C., we see great growth opportunities in that market.

And so we're very, very close to it and we just did management reviews a couple of weeks ago and I feel the team is doing a really good job of managing their costs and their capital..

And then my follow-up. I appreciate that color. On the capital side, you alluded to obviously the seismic is going to have some investment; I don't know if there's a way you can quantify that? It doesn't seem like you're taking up CapEx for this potential win.

But secondly, with the cash that's going to be coming in from the emergency response, how does that change your outlook on whether you're repurchasing more stock, get more aggressive there, get more aggressive on better growth opportunities from acquisitions, maybe just a little more detail around the thought process here?.

acquisitions, internal capital spending, and share repurchases.

Does that help, Al?.

Yeah. It does. But why wouldn't – if your customers' CapEx spending is dropping, why wouldn't your CapEx spending come in? And maybe we can't see it because just it's a broader number.

But it's tough with the reporting and things to see, where you're either allocating additional or where you're reducing capital allocation given the end market conditions?.

Al, we – just to point out – we have reduced capital spending substantially.

We were at a $280 million level and we as a company looking at the return on all of our growth projects, we decided we are going to bring our CapEx, other than the incinerator – we've carved that out because that's a new big project that we're spending $50 million on this year, that we want to hold the limit at $200 million this year.

So really the two numbers to compare is really $280 million going down to $200 million. That took a lot of work to bring that down. So we have reduced spending. But this investment for the future and one of our crown jewels in the company is critical and we've kind of put that aside and did not hamper that.

We're continuing with that incineration expansion, which we need desperately to do because we're over, as you know, in the 90% to 95% utilization range and it gets tough moving waste around in the network at that level..

Yeah. I appreciate that. Thanks..

Our maintenance CapEx is at $150 million, as you know. So there is a floor also $140 million to $150 million is maintenance CapEx, so that's going to be there. So really it's the growth projects above that that we've severely limited.

Does that help?.

Yeah. Very good. Thank you and good luck to you..

All right. Thanks, Al..

Thanks. Our next question comes from Adam Baumgarten with Macquarie. Please proceed with your question..

Hey, guys. Thanks for taking my question. I just wanted to touch on Tech Services.

Can you walk us through the impact to the unplanned outages on margins in 2Q? I guess just what I'm trying to get at is, you're starting the first half down about 4% adjusted EBITDA growth, guiding to mid single-digits, just sort of the confidence there and how much of the cost in 2Q are going away going forward?.

I think the points that Alan was talking about on the landfill side, I mean we're not counting on energy related waste coming back into the landfill. So that reduction in landfill – that piece of the reduction in landfill will stay. However, we have a good pipeline of waste projects that will offset some of that, but probably not all of it.

So we're – our outlook for landfill is still quite good. The outages do cause us to incur several million dollars of loss operating leverage. If you're not running your plant for eight days, and that happens to be in each case, the two largest incineration sites that we have were down in that timeframe, is quite costly. We're beyond that.

We're up and running and everything is fine. One of them was due to a power outage there locally that caused some issues in the plant that extended it out for a while. So I think we're beyond that.

Other than that I think the Tech Service business, if you look at the landscape of some projects out there and clearly the EPA has been active with some of the super fund areas that we hope to be bidding on into the future. So our outlook for Tech Services is quite good actually..

Okay. Great.

And then, can you just remind us how much of Tech Services revenue is related to that E&P or Oil and Gas piece that's been weak?.

Adam, I don't have that handy in front of me right now, but I would say probably a range of perhaps maybe $15 million to $20 million in revenue somewhere around there I would say is probably the impact. Now that's more on an annualized basis. But I would say $20 million roughly. That's a very rough figure though..

Okay. And then, just lastly, just a quick one.

How many gallons of RFO did you sell in the quarter?.

The sale of RFO, I think I have that. I thought I had that handy, I don't have that right in front of me, maybe as we continue with the call, if I'm able to view that during the call, I will report it out..

Great. Thanks a lot..

Thank you, Adam..

Our next question comes from Michael Hoffman with Stifel. Please proceed with your question..

Well, so on that vein, you didn't have much RFO sales in the first quarter and SKEs margins were $18.3 million, you had very good margins in the second quarter, and you did have RFO sales and they were lower margins.

So, I'm curious of what the net of like-to-like comparison – that's got to put you in the upper $20 million on a like-to-like basis sequentially..

Yeah, the RFO that was in last year, and I'm trying to recall the numbers and this should help Adam as well. I think last year we had about $11 million of RFO revenues, I believe that was revenues and that was completely offset by the revenues from TFI. So, TFI replaced that.

So beyond that, I think the increase – RFO was like, beyond TFI was $1 million or $2 million – there was $1 million or $2 million in revenues from RFO beyond TFI. So, I would say in that $13 million range in revenues..

And I'm right that in 1Q you had hardly any...?.

What's that?.

In 1Q 2015 you had hardly any because you....

Right. That's right..

The PFO strategy pushed enough oil away that you used up all the oil you were collecting, didn't have much left to sell for RFO?.

That's exactly right..

Right..

So in Q2 we had the TFI business of what they were running, and then we had like I said a $1 million or $2 million from legacy SK..

Right. And RFO is coming in at low double-digit margins, maybe even single-digit..

It is lower margin, absolutely..

Right, right. So my point is, is the $18.3 million out of 1Q 2015 compared to $20 million almost $25 million in 2Q, it's even better when you look at the parts washer, antifreeze on all of that stuff ex the RFO because of what you're doing.

The operating leverage you've improved in that business is even better than it looks $18.3 million to $25 million, because of.....

You are absolutely correct....

Okay..

...Michael, you had a nice mix, you had – that team has done an excellent job in terms of managing the correct prices in the marketplace for increasing the volume as you said in parts washers, in containerized waste, even vac services. So the mix of all that they're working on has certainly improved, in addition to the operating leverage..

Okay.

And then just to follow-up on the used oil outlook comment of – you've been now flat year-over-year, which is roughly $51 million before overhead last year...?.

Yeah..

To do that, sequentially you have to be better, which puts you at a run rate exiting the year at greater than $51 million?.

That's right. That's right..

Because, you got the big.....

Because we had the (1:06:24) loss in the first quarter..

Right.

You got the big inventory correction in the first quarter, right?.

Exactly, exactly..

Are we still looking at something that's – something in the approaching $70 million run rate?.

I would say it's around that area, getting close to that, yeah..

Okay. That's what I need to know. Thanks..

Excellent Thank you, Michael..

Thank you. At this time, I would like to turn the call back over to Mr. Alan McKim for closing comments..

Okay. Thanks, again for joining us today. We appreciate your questions and your comments, hope to see many of you at some of the events in the coming months that we participate with you on and enjoy the rest of your summer. Thank you..

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation..