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

Joe G. Box - KeyBanc Capital Markets, Inc. Al Kaschalk - Wedbush Securities, Inc. David J. Manthey - Robert W. Baird & Co., Inc. (Broker) Michael E. Hoffman - Stifel, Nicolaus & Co., Inc. P. Tyler Brown - Raymond James & Associates, Inc. Scott J. Levine - Imperial Capital LLC Barbara Noverini - Morningstar Research.

Greetings. Welcome to the Clean Harbors Third 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 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, 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, November 4, 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. Thank you for joining us today. Beginning on slide three, revenue increased 5% in Q3 to $893 million. Our growth was largely driven by a continuation of emergency response work, which generated nearly $145 million, or 16% of our revenues in Q3.

This emergency response work more than offset the headwinds we faced from weakness in the energy markets, currency translation and lower base oil pricing. And it continued to demonstrate the leverage of our business model as adjusted EBITDA grew faster than revenue.

In fact, Q3 marked the highest quarterly adjusted EBITDA in our history and our margins hit 18.5%. The other key points on this slide are that Safety-Kleen Environmental recorded another excellent quarter and that the U.S. Industrials group also delivered solid growth.

Looking at the segments starting on slide four, Tech Service had a down quarter, both in terms of revenue and profitability. The core of this segment remained strong, as drum volumes continue to climb, which helped contribute to our 92% incineration utilization in the quarter, but the market environment was challenging.

Oil and gas production waste streams remained lower, hurting our landfill business, which was off 28% from a year ago. We again saw some customer deferrals on some high margin waste project business. The lower price of fuels also hurt our top line due to reduced fuel recovery charges compared with last year.

In addition, industrial customers reduced because of the slowdown really in their business. Turning to slide five, Industrial and Field Services revenue nearly doubled in Q3 based on the ER work. Within the rest of the segment, revenue would have been close to flat, as growth in our U.S.

Industrial and Specialty group, as well as our Base Field Services business, offset the decline in the Oil Sands and the currency effect. Turnaround activity in the quarter was relatively strong. At the same time, we continue to see a healthy amount of unplanned work, as refiners are still running their plants hard.

Our refinery team again took market share this quarter, as we expanded our footprint in this vertical. Profitability in the segment more than tripled, and margin was up more than 700 basis points. Emergency response, high margin industrial work and cost reduction efforts in the Oil Sands all contributed to these increases.

Moving to slide six, revenue on newly named Kleen Performance Products segment was down due to the continued decline in base oil pricing. Today, our posted Group 2 pricing stands at $2.05 a gallon versus just over $3 a gallon a year ago.

While we've been faced with significant backend price decreases, our team continues to do well on the frontend of that spread by lowering both our transportation expenses and our collection costs. We have again taken a leadership role by initiating a shift to Charge-for-Oil and for stop-fee for generators of hazardous waste oil.

The rollout, which began in September, is proceeding well. Blended sales were at 34% in Q3, flat with the year ago, and really consistent where we have been all year. Turning to slide seven, outside revenue in SK Environmental Services was up slightly, while direct revenue was down 14%, which is entirely due to the reduction in our pay-for-oil.

Profitability rose an impressive 30%, reflecting volume gains, the contribution from Thermo Fluids, and cost reductions. Parts washer services were up slightly. We collected 57 million gallons of waste oil, up from a year ago, mainly thanks to Thermo Fluids. And in Q3 we reduced our average PFO costs by about $0.02 from Q2 as we got closer to zero.

With the implementation of our Charge-for-Oil program and then unilateral stop-fees for servicing remote customers in September, we will now see a fuller quarter effect from that in Q4. Turning to slide eight, Lodging Services, which operates in a very challenged Oil Sand region.

We really saw revenue decline over 60% and registered only nominal profitability in Q3. All three elements of this segment's business are fixed lodges, our mobile camps, and manufacturing, are faced with severely limited activity due to the drop in capital spending by our customers.

With Q3 being a seasonally weaker period, the occupancy rates at our primary fixed lodges registered just 19% in the quarter. We are continuing to take steps to address this difficult environment, including cost reductions and throttling back capacity at our manufacturing plant, which we did during the summer.

We're also evaluating the potential relocating our facilities to areas of opportunity such as British Columbia. Turning to Oil and Gas Field Services on slide nine, the 29% drop in revenue was in line with our expectations and aligned with the 27% decline in the number of rigs we serviced this quarter.

Q3 was typically a seasonal weaker quarter for the segment. We did win some nice seismic projects in Alaska, but that was more than an exception, as nearly all of our energy customers have slashed their exploration budgets.

We serviced an average of 101 rigs in the quarter, as we continued to increase our market share in a very shrinking market for both our Surface Rentals and Production Services. Average utilization of our key equipment was just 38%. Looking at our corporate initiatives on slide 10.

Let me start by discussing the $100 million of cost reduction program that we announced in today's press release. As we look at our markets today, we see an environment that really has been materially changed by the drop in crude price and the subsequent elimination of capital spending by many of our customers.

For us, it's had a profound impact on our business, including lodging occupancy and overall activity in Western Canada, certain waste streams like the drill cuttings and the prices we received for the products that we sell, our recycled products such as our base oils and our recycle fuel oils.

There have been secondary effects as well, such as the strong U.S. dollar and a slowdown in certain verticals. The team has done an admiral job this year in offsetting many of these challenges and obviously, the emergency response work we did came at a very fortunate time.

But as we head into the fourth quarter and into 2016, we have to assume that $40 to $50 crude may be with us for quite some time. Therefore, we are aggressively taking action and will lower our cost structure to a level that enables us to succeed even in this challenged market.

Working with our executive team, we've set a target of $100 million in cost takeouts that will be achieved by the end of next year. Our goal is to realize a minimum of $50 million of savings in 2016 and enter 2017 with our $100 million reduction in run rate reached.

These actions will center around reduced G&A, office and real estate consolidations and many other operational gains and efficiencies and productivities. Our plan is to carefully manage down costs without harming our ability to pursue opportunities for profitable growth. Today, we have an addressable cost structure of approximately $2.8 billion.

So we're targeting a less than 4% reduction in these costs. The next initiative I want to touch on today is the launch of Kleen Performance Products. This new name will serve as the umbrella brand for all our re-refined products and byproducts. It also ties with our efforts to capture sales opportunities and generate growth in our blended business.

And at the same time making Kleen Performance Products a distinct business unit really differentiates it from Safety-Kleen. During 2015, Safety-Kleen has been working to separate out its used motor oil collection business, and we expect that process to be completed in early 2016.

Our objective in splitting that out within SK Environmental Services is to enable us to better centralize our sales, logistics and collection. In addition, it supports our planned growth and our direct blended sales under the Kleen Performance Products brand.

Turning to the planned carve-out of our energy business, many of our steps needed to transition the Oil and Gas Field Service and Lodging segment into a standalone public entity are done or nearing completion. We are on track to go public when the market conditions improve.

Looking realistically at where those businesses are today and the state of the energy sector that will probably not take place in early next year as we originally targeted. And so the timing will depend on market conditions and also remain subject to our board's approval.

In the meantime, we'll continue to manage those two segments carefully, with an emphasis on generating incremental profits and taking market share in a down cycle. Slide 11 is a reminder of our capital allocation strategy we like to share each quarter.

We view our capital and its return on a relative basis, and as Jim will highlight, we continue to repurchase shares and operate that program using a discretionary approach based on stock price, as opposed to just buying a set amount each quarter.

We continue to invest in our business with a bias towards attractive long-term growth opportunities such as the El Dorado incinerator expansion. We are also regularly evaluating potential acquisitions that we can acquire at a reasonable valuation.

Moving briefly to our outlook starting on slide 12, we have a range of initiatives to revitalize organic growth across the company. Within Tech Services, we're focused on continuing the growth trajectory of our drum volumes, as well as bulk solids in order to support our incineration network and in preparation for the new incinerator in Arkansas.

Construction of the facility is on-track and on budget and really scheduled for startup in late 2016. On the landfill side while we are still working to offset the loss of oil and gas production waste, primarily the drill cuttings, we see a nice pipeline of large volume projects that should only increase.

And within Industrial and Field, we are winding down this year's turnaround season, both our U.S. and Canadian teams have been busy so far this quarter with refinery work. Within Field Services, our collaboration with Safety-Kleen continues and our plans to cross-sell environmental services through TFI are well under way.

Within Kleen Performance Products, we want to get our stalled blending sales growing again by selling our products back to our customers.

Our direct sales channel plan is conducting a pilot program we initiated in Canada and as we gain insights from that pilot, we will formulate the best path to successfully scale up this program across all of North America. Turning to Safety-Kleen Environmental on slide 13, the focus is on extending the momentum of that business.

In light of the margin compression our base oil business is facing, our aim is to drive down our total collection cost for waste oil, while maintaining sufficient volumes to run our plants.

TFI is playing an important role in our ability to achieve that goal, optimizing our network and training the sales force for cross-selling to the TFI customers remains a high priority in the coming quarters. Within Lodging, we'll continue to aggressively pursue opportunities rather than just competing in a tight market in the Oil Sands region.

We are evaluating the network to move any locations as necessary. We continue to seek opportunities to deploy our mobile assets in British Columbia and toward that end, we're in close contact with pipeline companies and many other firms that may be active in that region.

And within the manufacturing, we're ramping our capacity back up as we have won some nice business in some nontraditional markets. Within Oil and Gas, we'll remain disciplined as we reduce our cost structure and capitalize on opportunities to take market share from smaller players, many of whom are failing due to the extended downturn.

The seismic portion of this business with its high margin potential is another area we're pursuing aggressively, including looking at nontraditional markets and geographies for that group. So with that, let me turn it over to Jim for his financial review.

Jim?.

Thank you, Alan, and good morning, everyone. The chart on slide 15 shows our Q3 direct revenue by segment. Similar to Q2, we had a significant amount of emergency response revenue that accounted for nearly half of the Industrial and Field Services part of our business.

As a result, our Industrial and Field Services segment in total accounted for one-third of our total quarterly revenue. Technical Services followed at 32% of Q3 revenue.

SK Environmental accounted for the majority of the remaining portion, as the weak energy markets and base oil pricing have shrunk the other three segments to well below their historical norms. Turning to our income statement on slide 16.

Gross profit for the third quarter was $258.7 million, or a gross margin of 29%, down about 0.7% from a year ago when we had a better mix of high margin business, including the 45%-plus margin in our Lodging business. On the expense side, SG&A totaled $93.1 million in Q3, or just 10.4% of revenues.

This is a 130 basis point improvement from the 11.7% of revenues we posted a year ago. For the full year, we expect our total SG&A dollars to be flat or slightly less than last year.

Although this year's SG&A reflects the increased costs of labor and higher level of administration associated with our emergency response business, this is offset by reduced incentive compensation expense associated with this year's overall results. Depreciation and amortization was down slightly at $69.1 million.

The decrease reflects lower amortization during the quarter in our landfill business, partly offset by higher amortization of intangible costs associated with the TFI acquisition. For the full year, we remain on track to meet our original projection for D&A of approximately $270 million.

Income from operations increased to $94 million from $80.7 million on an adjusted basis a year ago, primarily as a result of our revenue growth. Adjusted EBITDA increased 8% to a record $165.6 million, at the low end of the range we provided in early August.

Included is $2.3 million in integration and severance costs due to our ongoing cost reduction initiatives, particularly in our energy-related businesses. Margins rose 50 basis points to 18.5% this quarter. Our effective tax rate came in at 46.2%.

This unusually high tax rate was directly tied to our lower performance in Canada, where corporate rates are lower. Given where we are at the nine-month mark, we expect our effective tax rate for the full year, excluding our Q2 goodwill impairment charge, to be approximately 44% to 45%. Turning to slide 17, our balance sheet remains strong.

Cash and cash equivalents at September 30 increased slightly from the end of Q2 to $179.2 million, that's even with the repurchase of $37.6 million worth of shares during the quarter.

DSO for the quarter increased by one day to 72 days, but I would point out to several large receivables related to the ER work that should help us bring that down in the upcoming quarters. We continue to target DSO in the mid 60-day range.

We brought environmental liabilities down below the $200 million mark for the first time since we bought the Chemical Services division of Safety-Kleen back in 2002. Environmental liabilities are down more than $9 million since the start of the year as we continue to address our obligations at a number of sites and reduce our overall liability.

Q3 CapEx net of disposals was $64.8 million, which is above the $57.8 million we spent in Q3 of last year. However, this quarter includes $21 million invested in the El Dorado incinerator. If you back that out, we are considerably lower than a year ago.

For 2015, we are continuing to target CapEx of $200 million, excluding El Dorado, which we expect to add approximately $50 million to $55 million this year. Cash flow from operations was strong at $115.8 million versus $81.1 million a year ago. For the full year, we expect to achieve cash flow from operations of approximately $400 million.

Moving to guidance on slide 18, based on our year-end performance and where we see our markets today, we are revising our 2015 adjusted EBITDA guidance. We now expect adjusted EBITDA in the range of $507 million to $514 million, compared with our previous guidance of $530 million to $570 million.

In summary, a continuation of emergency response work helped us offset challenges caused primarily by the weak crude oil market. Industrial and Field Services and SK Environmental provided the bright spots for the company in Q3.

The launch of Kleen Performance Products serves to unite our re-refining business under a single brand that is focused on growth opportunities in the lubricants market. We are headed into our 2016 internal budgeting process later this month.

And as Alan said, we recognize the need to be proactive in the event that the challenges we face this year potentially become the norm in our markets for a protracted period. While we are not providing 2016 guidance at this time, our goal as we enter budgeting will be to meet or exceed this year's adjusted EBITDA results in 2016.

The $100 million cost reduction program we announced today will be underlying our entire budgeting process. And with that, Rob, could we please open up the call for questions..

Sure. Thank you. Our first question comes from the line of Joe Box with KeyBanc. Please go ahead with your questions..

Hi, good morning, guys..

Good morning..

Good morning..

So Jim, I recognize that there's no formal 2016 guidance here, but if your goal is to achieve flat to up EBITDA in 2016, recognizing that the ER business probably won't repeat and some of the businesses are likely to remain challenged.

Can you just walk us through what levers do you expect to pull to get to that flat to up, aside really from the $50 million of cost save that you expect to get next year?.

Well, certainly what we've seen this year in terms of delays in waste projects in our Technical Services business, we know from history that waste projects, the typical things that we do, like for example in – when we were at – in the time of August, I was looking across the schedule in the pipeline of projects we are working on and they numbered over 30.

And many of them, most of them, have been pushed. So clearly, that had an impact when we were talking about our guidance this year. But we know from the past that those projects must be completed. Generally, those projects are being done with various government authorities and relate to good environmental practices that we know will come back.

So I suspect that we'll see some growth there. As well as with what had happened in the Kleen Performance Products business, if you recall, this year, we had a loss in Q1 when we were initiating our zero PFO, but base oil had come down so much.

We're not expecting anything like that because we've dropped now our – that has all been flushed through inventory and now we're operating in a better spread, in a more appropriate spread based upon all that has happened. I mean base oils went down, as you know, 35% to 40% just since last year. And hence we needed to bring our PFO down.

And it's down close to zero, as Alan mentioned in his comments. So things like that have differences that come into next year, but clearly, that's all going to be part of our budget process and we really are going through all the cost savings and making sure that we're integrating those into the budget as well.

But I assure you that there are many growth levers, if you compare some of the details of this year versus – that won't be headwinds going forward. Energy, we're not counting on. As Alan pointed out, we think it could be protracted. We're not looking for any jump in crude price or having any of that.

It's how we're managing the business that gives us confidence about that. So that is our goal..

And then just a follow-up question for you on the Tech Services business, I mean, you laid out I think it was four or five headwinds that impacted the business in the quarter.

Was there any one headwind that really drove the mix, or if you could just, kind of, bucket those for us? And then I know you're talking about a lot of these projects coming back, but I'm curious, what's your conviction that this is a one-quarter slip, or what's the likelihood that it drags into 2016, because a lot of the areas that you highlighted seem like they could be with us for quite some time?.

Yeah. Okay. But maybe – you asked about Tech, and maybe I'll just do a quick rundown of the businesses. If we look at Technical Services, I had mentioned before that waste projects clearly came in a lot less from what we expected and with the active projects and the push outs that we saw among our customers.

The energy waste streams coming into the landfills have hurt us already. We're not looking at further reductions from that. And a third item that I would point out and we're seeing this in the chemical industry, where clearly with the high value of the U.S. dollar in the U.S.

and exporting among our multinational customers and multinational companies in the chemical industry clearly have been impacted by their production and hence they are producing lower waste stream. So that had some impact as well.

So, when you look at those three factors, was the main driver behind our reducing guidance coming into the Q3 and Q4 of this year. Now, last year I would point out in Q4, it was the opposite trend. Waste streams into the energy business were very strong.

You saw a sequential increase from Q3 to Q4, a substantial increase due to energy-related waste streams, and you also saw a pickup of waste projects. Waste projects were very strong.

So it was the exact opposite situation going from Q3 to Q4 last year, which originally we were anticipating based upon the schedule for this year, but that did not turn out. So when I look at Tech and I look at it in Q4 versus Q3, I see it more of a sequential normal seasonal decline.

And maybe it's about $5 million in profitability when you go from Q3 to Q4. So those are the factors that I don't think are repeatable next year. I do think waste projects will pick up. And we've already seen I think the bottom of the energy-related. And then we'll see how the overall economy goes with chemical industry.

And then just very quickly, because the nature of your question just talking about some of our key businesses, in Industrial and Field services, I would think that as we look at Q4 this year, I expect probably a 5% increase over last year; that's without any ER.

We're pretty much done with that in Q4, but clearly we're very busy with turnarounds right now. We will be winding down as we get into the holiday season clearly. But that has been very busy, so I'm expecting a 5% increase year-over-year. So good, healthy business, as Alan has been talking about in our Industrial and Field Services business.

And Kleen Performance Products, I do see as I alluded to before and Alan mentioned, a pickup going into Q4 because the two base oil price declines that we saw in Q3, clearly our CFO program has not progressed far enough to offset that. But it will in Q4. So you will see a few million dollar sequential increase there as we've gone to Q4.

And then clearly, SK Environmental with all of the cost savings, the volume of business that we're doing, the number of services we're doing with clients and some pricing changes that we've made there, that should continue to see growth.

Sequentially, it will obviously be down due to seasonality, but year-over-year, I expect 10% growth in profitability there in EBITDA. I'm talking about EBITDA, by the way, throughout here..

Okay..

And then Lodging and Oil & Gas, that being said, although there are certainly opportunities that Alan alluded to, expanding our drill camp program to get into other businesses and expanding our manufacturing to serve nontraditional markets, next year we'll see some pickups there, but we're not counting on the energy-related side.

So there are some opportunities there. But when I go from Q3 to Q4, we would say that we'll probably in each of those businesses maybe increase a $1 million or $2 million in profitability and EBITDA.

And then the last thing just to mention on corporate costs, just to look at where that is, we're expecting that corporate costs for the full year 2015 will be in the $145 million range, which as you know is down considerably from 2014 when we were $161 million. So we are proud of the reductions there.

And now that our businesses are all on one system, there are a lot of cost savings that we can do from a general and administrative standpoint that those system integrations will now allow us to do. So we believe we'll be able to decrease that even further going into next year.

Hopefully, Joe, that rundown of the businesses helps both in terms of Q4 and what are good possibilities and confident possibilities for next year..

It is, Jim. Thank you for all the color on that. I'll turn it over..

Our next question comes from the line of Al Kaschalk with Wedbush. Please go ahead with your questions..

Good morning, guys..

Morning..

Morning..

I want to focus on two areas. First, on the cost takeout, you provided some general commentary. Is this more chunky in nature? In other words, it's going to be a couple things to really accelerate this $50 million in 2016, such as maybe facilities or plants.

I'm curious, just given the reduced volume, the acquisitions done, and the optimization of facilities if you're finding that your network now maybe is too broad?.

Well, certainly as the company has acquired 40 businesses in the last 25-plus years, there are a number of assets and the network is significant. We've got over 800 locations. And we have been evaluating all of our locations, both leased and owned. Well over 400 of those are leased, costing us in excess of $35 million just in lease expense alone.

So there is a lot of areas in our network, to your point, where we could consolidate into owned property and eliminate a lot of leased locations. And that has been well underway in design. There's no silver bullet I think, Al, in far as your question about chunky or groups.

There's certainly dozens of cost buckets within our organization that are part of our cost reduction plan, and we'll be communicating those both internally and to you all as they progress.

But we recognize based on where we're at and based on where we think oil is going to be at least in the next three years, and so I think we have to look at crude oil and base oil being where it's at for three years. So if we plan that, then anything of an improvement will certainly be a benefit to all of us.

But we have to kind of reestablish the realities because things have been moving in the energy spaces, as you know, very, very quickly and it's been very difficult for everybody involved to keep up with the decline that's taking place here.

So we're working hard across the organization to recognize those changes need to take place, including the infrastructure that we operate from, as I mentioned, as well as a lot of other buckets of costs that need to be addressed. So we'll communicate that to you as quickly as we can..

No, I agree on the new reality, that's for sure.

On the more constructive side of things, I was wondering if you could be a little more provide to the extent you can, given the strategic nature of it is, but one of the things we continue to look at is the blended sales program, the pilot program that you're underway and the Kleen Performance Products..

Yes..

Can you maybe talk broadly about it, like where adoption is, where you're pushing harder, where you're getting success and how we can look at that?.

I think, this year has seen a lot of movement in regard to blended products. We certainly have had to shift a lot of our blended products away from where it was actually being sold to at the time, because we recognized from a pricing and profitability standpoint it just wasn't making a lot of sense.

We've had to go back and look at a lot of our contracts and a lot of our channels, as we've talked about I think, Al, in the past. So we took a couple of steps back to go a step forward. So even though we're flat, I think we're focused on the right areas for that business today.

The opportunity to have customers who are generating hazardous waste oil to buy back our re-refined products, one of 70 different products that the company manufactures across a number of different brands, we believe is a successful strategy moving forward for our re-refined business.

The selling our products as a commodity, particularly as a base oil, is something that we're not interested in continuing in the long-term.

And so I would say that we've seen a lot of interest, particularly as you start introducing charges for customers in the field to collect their oil and offering them an alternative to also buy that same kind of product back is a very welcome strategy I believe by a lot of the customers.

So we have 70,000 customers, and we feel we can get good traction with them in buying back our blended products. And we'll continue to update you on our success with that..

Thank you and good luck..

Yes. Thanks..

Thank you..

Our next question comes from the line of Dave Manthey with Robert W. Baird. Please go ahead with your question..

Hi, good morning. Thank you. First off, on the $100 million in cost cuts, Jim, in your monologue you had mentioned oil and gas costs that had already been reduced and clearly in response to the environment. And then you also mentioned the corporate overhead costs being lower.

I'm just wondering, are any of the benefits that you're seeing currently in the third quarter and then maybe some in the fourth quarter a headstart on this $100 million already, or is this totally separate from where we are in the third quarter?.

No, Dave, this is completely separate from where we're at and where we'll be for the rest of this year. This is a program that goes beyond what we've been working on. And as Alan gave some of the highlights, I did mention in the general and administrative area and in our non-billable head count, if you will, that we'll see some reductions there.

We will see office consolidations. We'll see reduced fees, whether they be contractor fees, whether they be professional consulting, along those lines, systems, consulting included, reduced travel-related expenses and the like. So it's a completely new program..

Okay. And as it relates to the cost reduction efforts, by our math I think you've announced – you've just announced cost reduction plans of about $375 million since you acquired Safety-Kleen back in 2012.

And this round, in terms of lower G&A and facilities and that sort of thing, it sounds like these are longer-term and maybe bigger moves rather than just cutting around the edges.

Number one, are you reaching the end of the line on what you can cut? And then second, I'm hoping you can outline what are operational efficiencies? Those don't really sound like a cost cut, but can you describe what those are?.

Yes, I'll take a stab at it. So I would tell you that as we look at where we've been since we first started working with Safety-Kleen back at the beginning of 2012, base oil in itself is down well over $2, in fact, about $2.30 a gallon. And that equates to about $270 million of essentially EBITDA loss for the business.

And so when we look at that $350 million number that you talked about, we're talking about reductions in PFO costs, which is part of our operating costs. We've taken out a lot of overhead. Our non-billable staff is about 4,000 right now. That was close to 4,700, and that included several acquisitions that were made during that same period of time.

So we're about 1,000 less non-billable staff in the company. The team really has worked extremely hard to reduce cost in the headwinds that we have felt since the acquisition of Safety-Kleen, which is coming up on three years.

And so, as Jim mentioned, getting everybody on the same platform, we've eliminated huge amounts of IT costs and systems cost and those, unfortunately, are not showing up in our EBITDA numbers, per se.

But I would hate to see what the business would look like if we didn't take all the actions that we've taken in light of the decline that we've seen across our business with the impacts of oil..

Okay.

And that number you mentioned, that EBITDA impact is a gross number based on the decline in base oil, it doesn't include your reduction in PFO?.

That's right. That's right. So to offset that, we've had to reduce PFO costs to offset that. But when you start thinking about where is that cost reduction number, I don't know all the numbers that are part of your $350 million number that you mentioned, but all I can tell you is that reducing our PFO was probably $200 million of that at this point.

So we've had to change the market and that has taken a tremendous amount of effort to move from charging customers well over – or paying customers well over $1 a gallon when base oil was at $4.35 a gallon, to be able to sit across from a customer and start charging now for that same oil, because base oil is only worth $2.05 a gallon.

And so that's part of that cost reduction, Dave..

Okay.

So a part of the $100 million is charged for oil in 2016 as opposed to pay for oil in 2016?.

No, I don't think so. When we look at – our PFO cost is essentially at zero right now. The $100 million that we're talking about is not PFO-related. So that's unrelated. We'll certainly be reducing outside transportation by expanding our rail. We just added 500 more railcars.

So we have a lot of opportunity to internalize a lot more movement of our oil and eliminate a lot of over-the-road transportation, which saves us a lot of money. We've just converted about 400 railcars to jumbo railcars, which has increased our capacity considerably.

So there's a lot of things that are coming in this quarter which will start showing up next year. But those are the kinds of things. This is not a PFO number that we're talking about here..

Okay. All right. Thank you very much..

Thank you, Dave..

Our next question is from the line of Michael Hoffman with Stifel. Please go ahead with your questions..

adjusted EBITDA margins would get to 20% and free cash flow would be at $300 million.

Can we talk about how you view that today given your commentary that we should assume that we're lower for longer commodity pressures on the overall business model?.

I'll start. This is Jim and if Alan wants to add anything. Clearly, when we were doing the Analyst Day was before the precipitous decline in the energy markets. So I think we're at a new level now.

And depending upon what economist you talk to, there's several views out there that think there is a cycle here and that maybe in a couple of years you'll see more stability and perhaps an increase. But in any event, there's a new norm. And when we were holding that, the energy markets were a lot more different. We were a lot different.

We were at the front end of a lot of the opportunity in the U.S. with what was going on in energy.

So I think setting that aside, but recognizing with Safety-Kleen as Alan talked about, all of the integration that's been done and the strategic moves that we've made in terms of Kleen Performance Products and kind of centralizing that whole oil collection and direct sales channels and all that has an impact that we are confident that we could get closer to that goal.

But without energy markets – within that timeframe that we talked about, without energy markets becoming more stable, I think across all of our businesses, it's affecting everyone. It's affecting industry overall. I think it's going to be tough to be at a $300 million cash flow in the next couple of years. But I do believe we're going to come close.

I mean, our free cash flow is about half that this year, and we think it will be about $150 million or so.

So I think that we're in a good situation from free cash flow despite all that has happened, I mean despite the huge numbers that Alan just talked about, that was nearly $300 million impact on our EBITDA from some of the energy things that have gone on. So I think the resiliency of our business to be able to withstand that is good.

And I think even today we're at half of what that goal said we would be. So we haven't given up yet..

Certainly.

And I think if you look back, Michael, at where we were during those meetings and look at the hundreds of billions of dollars of spending cuts that have been announced by the top 100 customers of ours, I mean, shutting down production, shutting plants down, ceasing investment, demanding price declines to address what is going on in their business.

And so this has been I think unprecedented..

Yes..

I think people go back to the 1982 or 1973 timeframe. This is really unprecedented times that is spilling over across our business.

And I think the team has done an incredible job to deliver $500 million plus of EBITDA this year, last year, and continuing to drive kind of the initiatives to be a profitable business here in light of the huge headwinds that this company has faced and our customers are facing..

Granted. If you do $150 million in free cash this year, and I'd like to tease that out a little bit, that was the sort of original guidance. I mean, at the end of the day, all things being equal, follow the cash when everything else is burning down around you.

If you're $150 million this year and you achieve the cost saves you're talking about next year, there's clearly growth in that, then I take El Dorado out because it's done....

Yes..

...I mean, that's the path. But you're standing by the $150 million because that means you'll do $30 million in free cash in the fourth quarter. You're $120 million year to date..

Yes, I think if you look at some of the collections that we're doing in AR related to the ER work and the reduced CapEx as we've talked about, I think yes, that's doable..

Okay..

But you do bring to light the opportunities going forward. I mean, you definitely do. Because you're right, we won't have the spending. After next year we will not have that roughly $50 million to $60 million spend that we'll have this year and next year on El Dorado.

So our CapEx will be down substantially, which will affect – that's a boost of $50 million to $60 million. So that's a very good point, that the year after next you should see a nice boost in free cash flow. So maybe we're not so far off our goal. It just might take another year or two..

I mean, at the end of the day, stocks discount future free cash flows and Clean Harbors was a good cash generator from sort of 2000 to 2010 and it was kind of an ugly cash generator from 2010 to about last year, and then you started correcting that.

What I'm trying to understand is can this be that quality cash generator was when the stock was a great stock to own from 2000 to 2010?.

Absolutely..

And what I'm hearing....

Absolutely. I think the company knows how to manage its cost and we've committed to really focusing on ROIC and improving our returns and really taking a much closer look at all of our capital investments, which is something that drove that CapEx down considerably this year from a year ago.

And we'll continue to manage that tightly going forward, especially in light of what we've seen in the energy space..

So Alan, you have a rare perspective on a lot of what goes in your end markets being at this for 35 years.

Do you think we're in an industrial economy recession or just a resetting to a longer term low growth rate?.

I think the industrial is certainly in a recession from everything -- we would have thought with natural gas at $2 or $2.20 with all the things that we had seen over the last two years or three years of investment going into building new chemical plants, and we would have seen a lot more out of the industrials than we're seeing in, whether it's the strong dollar or the weak global economy that's hurting the industrials.

But clearly, on the waste side we have seen that. But I don't think there are many businesses out there that we service that haven't had some impact on energy..

Okay..

So they have curtailed their spending. I mean, they have held back on capital. They are doing their attempt (52:45) shrink their spending. And so all of that has had an impact I think across the board.

And whether you're talking about refining or chemical or oil and gas or some of the other big manufacturing companies out there, clearly I think that's what we're seeing..

Okay. And then one last one for me, one of the things that the company's had a challenge, and you mentioned it, is this base oil was over $4 and it's now at $2. Can you frame in this last nine months that some of the things that are different about how you've been running it that show how you've managed that trend.

So I'm not asking you absolute numbers because it's a competitive issue, but what's the trend year-to-date on the base oil versus your cost-of-goods sold of oil delivered to the plant, that landed cost, so we understand how well you are in fact driving the control over that spread?.

I think we have the data today, the economic models and the data and we've built the tools, so that in every location we're in, let's say 190 locations, we know what our cost is to deliver to one of our three refineries and 50 different terminals. So I think we have a better handle than ever before that Safety-Kleen has.

And they are a 50-year-old company. We have better handle on, not only what our costs are, but what are the competitive outlets in a particular market as it relates to RFO.

The one thing that we continually see is with price of natural gas being where it's at and where we think it's going to continue, the outlets for recycled fuel oil continue to shrink. The need and the demand to have hazardous waste oil refined and recycled to be reused will continue to grow.

The specifications on what oil has to be to be used as a marine diesel oil or another kind of VGO continues to tighten. So we're in the right place and we just got to deal through the issues we're dealing through right now..

Okay, I get that. But can you share – I mean, on a year-over-year basis, is your fully landed cost to your plants down.

I'm making a number up, $60 and the base oil price is down $70 and you're going to fix that by CFO move? And that spread – I'm trying to understand that?.

I would tell you and two years ago, we would have had as an expense, well over $200 million for oil. Today, that would be under $20 million. And then you have to look at the transportation cost of moving product, the processing and the handling cost.

All the other costs, it's sort of a complicated question, Michael, but I would just tell you that the deliberate cost, we have had to work our tails off here to address every single aspect of it from charging customers to reducing our cost of transport and doing everything in between, including running these plants much more efficiently to be able to deal with the decline that we've seen here..

One last thread on that.

Don't you have going into 2016 a whole bunch of national account contracts expire, which gives you another point of leverage on that $200 million to $20 million number?.

I'd be guessing to answer that one. I don't know specifically. We've got hundreds and hundreds of accounts and national accounts, I'd be guessing, Michael.

But I think you got the message that I've visited a lot of accounts and talked to them personally about the challenges and showed them the graphs and explained to them where we are, the only difficulty I think people have is that it was 10 years ago when the majority of customers were being charged for oil.

And so they forgot that this is a business, that historically you would charge because you're performing a service, but when the value of the oil got up to $135 or $140 a barrel, it really changed the market and the industry did not move fast enough back to charge for oil, and I believe we are providing that leadership and communication back to our customer to make that happen like it was 10 years ago..

Fair enough. Thank you..

Thank you, Michael..

Our next question is from the line of Tyler Brown with Raymond James. Please proceed with your questions..

Hey, good morning, guys..

Good morning..

Good morning, Tyler..

Hey. Jim, I want to come back to SG&A. So it looks like it was the lowest nominal level kind of in years at $93 million this quarter.

I think you noted incentive comp, was there a reversal in the quarter?.

The reduction year-over-year was something like $5 million or somewhere around that on incentive comp..

Okay, perfect.

And then I just want to be clear on the $100 million of reduction in expense, these are all operating expenses, it's not capital reductions?.

That's right. No, these are savings that hit the P&L..

Okay, perfect..

And they are in tandem with that, there are asset sales and things like that that will spin out as a result of this. So obviously when you're consolidating locations, there will be opportunities to gain capital, but that's not – the $100 million is P&L, what we're talking about..

Okay. I do want to come back to CapEx for a second. So you guys are talking about $200 million in CapEx, ex El Dorado.

But I'm curious like how much of that $200 million is specifically designated in oil and gas and lodging?.

Oh, small..

Yeah, maintenance is how much – of the $200 million, Jim, what is the maintenance number that we keep (58:58)?.

For the overall company, it's $140 million to $150 million of maintenance just to keep things going..

Yeah..

Right..

And the growth CapEx, there's virtually -- there's almost nothing for the businesses in the carve-out right now..

Yeah, we're repositioning a lot of oil and gas-related assets into the business, moving center fuses into our industrial business. We really are not spending capital in the oil and gas, but we are maintaining those assets and making sure that these are not losing their value..

Okay. And I totally appreciate that. So when we look to next year, I mean, we've got fixed lodge utilization at 19%. You've got oil and gas equipment utilization at 38%.

I mean, why wouldn't we see CapEx that – excluding El Dorado come down next year?.

I think we originally set out a goal to be able to have our CapEx to be at the $200 million and below $200 million over the next few years. We're achieving that now. So we've done a lot of cutting already, Tyler. Now, there will be more.

As part of this budget process, clearly an underpinning to a budget process is also what is the capital plans by business. So I wouldn't commit at this point to say that we would have a decline.

But I think you have a point, that if we cut that out and we don't intend to put growth CapEx into energy with the way things are right now, perhaps we could see a reduction, ex-El Dorado. But right now I just can't commit to a number, but I think you raise a good point..

Okay..

But I think we're trying to get to a number south of $200 million..

Absolutely..

On a net basis. So we've realized that by consolidating locations, and in some cases owned properties even, that on a net basis we can generate quite a bit of cash by executing on our plan here..

That's a great point, Alan, because I was talking gross. But it's clearly to the point we talked about before of asset sales, that's right..

That will net it down..

Okay. Perfect.

And then, Jim, just thanks for the detail on the realized cost saves in 2016, but should we assume that that is going to be more back half weighted or are these actions going to be taken fairly swiftly? And then are you going to see any major severance outflows in terms of next year's cash flow?.

There will be some, yes. The way I would characterize it is we're looking at a run rate of $50 million. So we're anticipating that it is something that will flow through the year, so that we would be at the run rate of $100 million by the end of the year. So right now that's our best estimate, that $50 million will be captured next year..

Okay. So you can get to the run rate, a $100 million run rate by the end of the year..

Oh, absolutely..

Okay..

By the end of 2016, yes..

Okay. Perfect. Thanks, guys..

Yeah. Excellent. Thank you, Tyler..

Our next question is from the line of Scott Levine with Imperial Capital. Please go ahead with your question..

Hey, good morning, guys..

Good morning..

Good morning, Scott..

I want to focus – I want to come back to Technical Services. So, it seems like that was certainly below expectations. You referenced on the one hand lower volume tied to energy and industrial and on the other hand, waste project delays, which seem like they are not cyclical in nature, but more timing. You referenced I think government projects.

And otherwise -and also a 28% decline year-over-year in landfill tonnage.

How much of the downside versus what you guys were expecting or what you're seeing would you consider to be cyclical versus delays? And could you elaborate on the delays and conviction level that those delays, that that delayed volume effectively comes back at some point in the future?.

I'll start that and if Alan wants to add anything. But one of the things that we've seen in waste projects is there is some cyclicality to it. Clearly, as I mentioned, there's government involvement and all that. But if there is an area that you could hold up on, it is some of these projects. It's not like – there is latitude.

It's not a month-to-month or quarter-to-quarter, it's more half year to a year where you could delay. If you're in a low cyclical period, if you want to stretch some of those projects, you can. The key that I was trying to bring up is that you eventually have to get to it. Like I'll give you one example at just a high level color here.

When we had the recession in 2009, we suffered just like everyone else that Tech Services came down with the lower industrial production that was going on. And we also saw some waste projects being drawn out. In 2010, the year after, if you look at Technical Services, they went up like 20% to 25% because there's a backlog from that.

Now, I'm not saying that now is anything like 2009. But there is a softness in industrial given – in the multinational area due to the high U.S. dollar and some of the factors that we mentioned before, that there is a softness that we are seeing some stretching.

So there is a little – I just wanted to correct that one point, because there is some cyclicality here that we are talking about..

Got it..

Does that help, Scott? Did I completely answer your question, or no?.

Yeah, I guess the follow-on thought would be what portion – I don't know if this is answerable with a point projection or estimate, but what portion of call it the downside and what you're seeing in Tech Services do you think is delayed that likely comes back in 2016 versus is more cyclical in nature, not delayed and is frankly gone for good?.

I would say probably about – I would say anywhere from a half to two-thirds. From a very high level just given waste projects – and certainly any pickup in the economy would help with this and industrial softness that we're seeing out there right now.

But even with wastes, oil and gas waste and drill cuttings and all that, just staying flat, just not moving anymore, I would say probably two-thirds (01:05:39)..

I don't think we should miss the point though about our Tech Services is extremely strong. With our drum business, our utilization of our incineration facilities, the volumes of waste that Safety-Kleen continues to generate from their small quantity generator customer base, those 200,000 customers has been growing....

And they are domestic..

And that's all here in North America. So I would say that we're looking at remnants of some of the slowdown that we saw, some of it got to do with the strike that we saw in both the refinery side as well as the longshoremen strike that impacted a number of our customers this year.

So we see a little bit of that remnants, but when you look at some of our verticals, our healthcare, some of our other industries that we service, those are doing pretty well and we expect that and retail to do very well next year.

So although we're talking about somewhat a reduction, particularly related to the 11 landfills we have, the rest of that business, our CleanPack business, our drum business, is very strong right now..

Got it, great. Call is running a little bit long. I'll leave it there and turn it over. Thanks..

Thanks, Scott..

Thank you. Our final question is from the line of Barbara Noverini with Morningstar. Please proceed with your questions..

Hey, good morning, everybody..

Good morning..

Throughout this earnings cycle a number of companies offering industrials field services commented on the heightened competition for work.

Can you comment a bit on project pricing dynamics and whether you agree that competition has intensified in any particular type of field or industrial cleanup work that you offer through your Field Services segment?.

I would say that not so much on our Field Services or Industrial segment as it would be in our oil and gas side, our field business in the oil and gas side of the business, where irrational pricing has taken place. A number of people in that space – let's face it. I think the drill count has gone from 2,500, maybe down to 500 or 600.

I mean, it's just an amazing decline. And as you can imagine, all of the service companies that were out performing everything from fluids hauling to frac tank rentals, everything that's going around the rig, those assets are sitting.

And so we've seen irrational pricing and it's one of the reasons why our equipment is sitting and why our utilization is low. And that includes lodging, by the way. We've kind of chosen that we're not going to wear out all our equipment for nothing and give it away.

And realizing that we're going to have competition that's going to put themselves out of business. And we're going to be, I think well-positioned when that cycle happens. And that's been our strategy particularly in the Oil and Gas Field Services.

But as it relates to the Field Services and Industrial, I don't think we would say that that kind of pricing pressure has been the same..

Got it.

And then even on those, you know like you've had a great quarter for emergency services work in that segment this past quarter and also over the past year and pricing for those types of projects has remained relatively stable as you expected throughout the year?.

Yeah, I would say you know, this – some of the emergencies, one of the emergencies we did here was bigger than our large Gulf event we did back five years ago, and so it was a great event.

But I think more importantly we partnered with a lot of other companies around the network and we continue to work with firms as other emergencies happen and partner with them if they are the lead on those types of events. So we don't look at our emergency response as sort of a one-time. It is part of our business.

We handle anywhere between 25 and more emergencies every single day. It's the nature of what we do, but when these large events happen, we are typically the company that gets called or we're participating in some way. And I haven't seen any price decline in that area at all..

Got it. Okay. Thanks very much..

Thanks..

Thank you. At this time, I'll turn the floor back to management for closing comments..

Okay, great. Thanks for joining us. We appreciate your time and your questions certainly. I know Jim Rutledge and Jim Buckley will be presenting at the Baird Conference next week. Hopefully, we'll be seeing many of you there, as well as some of the other events. So thanks again for participating today..

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