Clean Harbors - Q1 2016
May 4, 2016
Transcript
Operator (participant)
Greetings, and welcome to the Clean Harbors first quarter 2016 conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. I would now like to turn the conference over to your host, Michael McDonald, General Counsel for Clean Harbors. Thank you. You may begin.
Michael L. McDonald (General Counsel)
Thank you, Robin. 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 and President, Jim Rutledge, EVP and Chief Financial Officer, Mike Battles, and our SVP of Investor Relations, Jim Buckley. The slides for today's call are posted on the investor relations section of our website. We invite you to follow along as we go through the presentation. 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, May 4th, 2016.
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 obligations 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, 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 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. Now, I'd like to turn the call over to our CEO, Alan McKim. Alan?
Alan S. McKim (Chairman and CEO)
Thanks, Michael, and good morning, everyone. Thank you for joining us. Before I begin with the first quarter review, I do wanna mention that the thoughts of all of us here at Clean Harbors are with our employees, our customers, and really everyone in the greater Fort McMurray area, that a raging wildfire continues to ravage that area. This disaster only adds to the ongoing economic devastation this region has faced, and you'll hear more about this as we review our results. More than 80,000 residents have been ordered to leave the city, which is the largest evacuation in Alberta's history. Fortunately, as of this morning, our local employees and their families are all accounted for.
Sadly, some have lost their homes to the fires, and we are doing everything we can to assist our employees and our customers to help them through this crisis, which hopefully will come to an end soon. Beginning on slide three, Q1 Adjusted EBITDA was in line with the expectations that we provided on our Q4 call. SK Environmental delivered another quarter of strong, profitable growth, and Clean Performance Products began to generate some momentum, particularly late in the quarter. Elsewhere across the business, however, our results reflected the impact of a persistently weak energy sector on industrial demand and customer spending. Against this backdrop, we moved ahead aggressively with a cost reduction program that included reducing our workforce by more than 900 employees and contractors and initiating dozens of other expense reduction initiatives.
We also completed the reorganization of our sales team, continued hiring key people within this new sales structure, which we believe will generate revenues as the year progresses. Turning to the segment review, beginning with tech services on slide 4, revenue and profitability declined because of the same headwinds that affected the segment's performance throughout much of 2015, including fewer drill cuttings coming into our landfills, lower U.S. industrial production, customer deferrals of large-scale projects, lower value of our recycled products, such as our copper, solvents, catalysts, and certainly unfavorable foreign exchange year-over-year. Incineration utilization was strong at 88%. It was down slightly from a year ago due to the fact that we had 12 more scheduled maintenance days this year. With less energy-related waste streams and projects, landfill volumes were off by 33%.
Q1 is a seasonally weakest quarter for Tech Services, and we've already seen activity pick up in the early part of Q2. Turning to slide five, market conditions made Q1 a challenging quarter for Industrial and Field Services. As crude oil prices dipped below $30 a barrel, we saw a massive reduction in spending in Canada, especially, and that spilled over into our industrial and field businesses. Opportunities were limited, and we saw extensive pricing pressures from the majors, pushing margins to historically low levels in the quarter. Profit in the segment was down 79%, with Q1 utilization of personnel at just 76%, and we have taken a number of cost reduction actions in this segment. These measures include eliminating industrial headcount in Western Canada, as well as cascading more equipment from that region.
We expect to see better results moving forward, as Q2 is the start of our seasonally stronger turnaround period for our industrial business, and our field service group should see a similar ramp-up in activity. Moving to slide 6. Clean Performance Products revenue, both outside and direct, was lower as a result of the continued decline in base oil pricing. Posted Group II pricing fell by $0.25 early in Q1, squeezing near-term profitability. Fortunately, base oil pricing recovered somewhat in late April due to the steady rise in crude since February, and our posted price now stands at $1.85 per gallon. The Safety-Kleen team has done an outstanding job managing the spread that greatly influences the segment's performance. Reducing collection and transportation cost is critical to offset the lower base oil pricing.
The stop fee policy we introduced in December, along with the subsequent targeted charge for oil initiatives, are protecting our spread in CPP and has us on a path to steadily improve our lower margins. Blended sales were at 32% in the quarter, consistent with Q4 and Q1 a year ago. We believe our efforts around our closed loop direct sales model will meaningfully drive that number higher in the years ahead, and I'll provide some detail about that later in my comments. Turning to slide 7. Revenue in SK Environmental Services increased on both an outside and direct basis. A combination of 2015 acquisitions and organic growth drove the increase in the segment. Profitability rose an impressive 30%, reflecting the higher revenue, improved pricing, and the benefits of cost reductions.
Parts washer services were up for the seventh consecutive quarter, with 251,000 services in Q1. We're on track to achieve our goal of over 1 million services in 2016. In a mature market, the Safety-Kleen branches have done a fantastic job in growing this business. In Q1, we collected 48 million gallons of waste oil, reflecting the addition of TFI. Driven by our stop fee policy, we reduced collection costs by 17 cents per gallon from Q4. Our collection costs are down 27 cents a gallon from Q1, 2015. Turning to slide eight. Lodging Services saw our revenue decrease 54% from a year ago, and profitability declined 85%. Western Canada continues to feel the effects of the current energy market.
Occupancy rates of outside rooms at our primary fixed lodges averaged just 23% in Q1, half of what it was a year ago and down slightly from Q4. Our mobile camps business remains severely limited due to the lack of drilling activity. Average drill count in Alberta in Q1 was only 105, with a peak of just 165 versus a typical Q1 peak of 400-500 drilling rigs. Our manufacturing facility was active in Q1, working on the modular build contract that I highlighted on our Q4 call. As I mentioned on that call, we're continuing to take costs out of our Lodging, including wage rollbacks and assessing whether to close or relocate some of our less profitable lodges. Turning to Oil and Gas Field Services on slide 9. The 40% drop in revenue was expected in the current market.
Average rig count in the U.S. and Canada was more than 1,700 in Q1 a year ago, compared with barely 700 in Q1 of this year, a 59% drop. As a result, the average number of rigs serviced in Q1 declined to 53, while average utilization of our key equipment was just 20%. Cost reductions will continue to be the key story in this business until the energy markets stabilize and ultimately rebound, with higher crude pricing in the future. In the meantime, we're implementing every possible action, including wage rollbacks and closing locations. Turning to our corporate initiatives on slide ten. In Q1, we continued to execute on the $100 million cost reduction program launched in December.
We fully expect to achieve a net effect of at least $50 million in cost takeouts in 2016, but our intention clearly is to do better than that. We expect to enter 2017 with our $100 million in reduction run rate achieved. The largest action we're taking from the list you see on the slide is headcount reduction, and that is largely complete at this point with the 900 positions we've eliminated that I mentioned. As I highlighted on our Q4 call, we continued preparations related to our carve-out and are exploring multiple strategic alternatives in addition to our planned IPO. Since our last call, we completed a highly successful capital raise of $250 million in senior notes by leveraging the strength of our balance sheet.
We intend to use the proceeds from that offering for acquisitions, particularly those related to our environmental business, and to fill gaps or strengthen elements in our closed-loop direct sales model in our renewable lubricants business. Turning to slide 11, let me briefly share with you the components of that closed loop model. It starts and ends with our waste oil customers. After gathering their used motor oil and running it through our terminals, we deliver it to our re-refinery locations, where it's converted into premium base oil. That base oil is then blended into high-quality lubricants and packaged for the various end markets. It is then stored in distribution locations before ultimately being delivered back to those same waste oil customers.
We are evaluating a number of potential acquisitions related to this sales model, ranging from as small as $20 million to as much as $75 million, and these acquisition candidates will provide internal capabilities where we are limited today, such as blending and packaging, or will enhance our presence in a particular region. In fact, we recently closed on a small transaction that will provide us blending packaging capabilities at a total of three locations, both in Eastern Canada and the Gulf region. These three facilities, along with our purchase of our Nevada re-refinery, will play an important role as we build out our national footprint for our closed-loop model. This discussion is a perfect segue into slide 12 and our capital allocation strategy. We continue to invest in our business with a bias towards meaningful long-term growth opportunities, such as the El Dorado incinerator.
We look at acquisitions on the same relative long-term return basis and seek businesses that we can purchase at attractive valuations, and share repurchases remain a fundamental component of our overall capital strategy. Moving to our outlook on slide 13, we have a range of growth initiatives underway. Within Tech Services, our incineration expansion in El Dorado remains on schedule. Construction is proceeding well, with testing plans coming together and the startup still projected for late this year. Overall, Tech is looking to regain momentum in areas such as bulk volume, as well as in landfills, which have struggled in the current environment. And we continue to see a pipeline of diverse projects, though timing remains uncertain as customers, particularly energy and industrial companies, have been reluctant to spend. We're seeing a good seasonal pickup in the Industrial and Field Services business in the early parts of Q2.
We're working with customers to ensure their 2016 turnaround needs are met, either here in the spring or in the larger fall season. Field Services has also begun to rebound from a seasonally weak Q1. The collaboration between Field Services and Safety-Kleen branches and secondary markets should deliver some incremental benefit to that business. With Clean Performance Products, we've begun work on ramping up the Nevada facility and expect to come online on a staged basis in the coming months. Our Canadian pilot program of the closed-loop strategy for our renewable products is ongoing, and it remains successful. Our intention is to expand that into the U.S. in at least one state, possibly a second, by the end of the second quarter, with more to follow in Q3, and we expect to roll out a national launch of our renewable products in Q4.
With Safety-Kleen Environmental, our strategy is to extend our track record of profitable growth, particularly in parts washer and containerized waste. On the collection side, the focus remains on implementing our stop fee program as we drive down our total collection cost. Slide 14 summarizes the outlook for our Lodging and Oil and Gas segments. 2016 will largely remain a cost reduction story as energy markets remain mostly in decline. We will remain disciplined, seeking ways to lower costs and apply our underutilized assets, including in nontraditional markets or geographic regions. So with that, let me turn it over to our Chief Financial Officer, Mike Battles. Mike?
Michael L. Battles (EVP and CFO)
Thank you, Alan, and good morning, everyone. Let me begin by providing a quick snapshot of direct revenue by segment on slide 16. Technical Services was our largest contributor of at 40% of revenue in Q1, which is in line with Q1 a year ago. SK Environmental followed at 25%, a sizable increase from 20% in the same period of 2015. Industrial and Field Services was down 1 percentage point to 18% of direct revenue from Q1 of 2015. Clean Performance Products, Oil and Gas Field Services, and Lodging accounted for just 17% combined, compared with 23% a year ago, when crude prices were considerably higher. Turning to our income statement on slide 17, revenue declined by 13% in Q1, based on a mix of factors Alan outlined.
Gross profit for the quarter declined to $171.8 million, which translates to a gross margin of 27%. This 160 basis point improvement from Q1 of 2015 directly reflects our cost reduction efforts, which affected our cost of revenue more than SG&A. SG&A expenses declined slightly in terms of dollars to $104.5 million in Q1, equating to 16.4% of revenues. From a margin perspective, this was up from Q1 in 2015 due to higher severance costs this quarter, incentive compensation, and investments we have made in our sales organization that we outlined in our February call. We added 60 incremental positions in the sales organization as we more closely aligned sales and operations.
Our new sales structure includes a regionally based incentive program that rewards and encourages cross-selling. These items essentially offset the SG&A costs we eliminated as part of our $100 million cost reduction program. For the full year 2016, we still anticipate SG&A expenses to be approximately flat with 2015 in terms of absolute dollars. We expect the same formula to play out, with cost savings balanced off by sales-related investments and incentive comp. Depreciation and amortization in the first quarter increased by $500,000 to $68.9 million, primarily as a result of acquisitions we completed in 2015, partially offset by lower amortization. For the full year, we still expect depreciation and amortization of approximately $265 million-$275 million.
Loss from operations in Q1 was $4.1 million, primarily reflecting the drop in revenue and less favorable business mix. Q1 2016 Adjusted EBITDA was $67.3 million, slightly better than our expectations for a decrease of 15% or more. This figure includes $9.4 million in integration and severance costs, primarily due to the significant headcount reduction that Alan highlighted. This compares with integration and severance costs of $2.2 million in Q1 of 2015. We believe that excluding these discrete expenses provide a more accurate picture of our core business operating results. Our effective tax rate for Q1 was unusually low at 10.9% due to a $7.9 million or 14 cents per share non-cash impact from not recognizing tax benefits on certain current Canadian operating losses.
For the remainder of the year, we expect the combination of continued losses in Canada and the limitations on recognizing these NOLs in the near term will result in tax rates greater than 50% in each of the final three quarters. Therefore, we now expect our effective tax rate for the full year to be in the range of 55%-56%. The low tax rate in Q1 resulted in our net loss on a GAAP basis, increasing to $20.9 million or $0.36 per share. But on an adjusted basis, when you apply that non-cash tax benefit, the company reported an adjusted net loss of $13 million or $0.22 per share. This compares with a $0.12 per share loss a year ago. Turning to slide 18, our balance sheet remains healthy.
Cash and cash equivalents at the quarter end increased significantly from year-end to $355.3 million. This was the result of the $250 million senior notes offering we completed in mid-March. DSO for the quarter remains at 72 days. While our DSO has remained higher than we'd like in the past year, we still see a path to DSO in the mid- to high-50 range 60-day range. We recently have focused on some initiatives around collection that should benefit us in 2016. Our environmental liabilities in Q1 were $189.5 million, up slightly from year-end as a result of foreign exchange, primarily as a result of foreign exchange. Q1 CapEx, net of disposals, was $74.5 million, which is well above the total spend in Q1 last year.
However, this quarter included $21 million of CapEx related to the construction of the El Dorado incinerator, while Q1 of 2015 had less than $16 million of incinerator-related spend. Excluding that spend from both periods, our CapEx increased by approximately 16% from a year ago. However, that increase was essentially timing related as we are continuing to bring down our capital plans for the year. Cash flow from operations was $39.3 million, approximately half of last year's total, due to the 13% decrease in revenue. For the full year of 2016, we continue to expect to achieve cash flow from operations of $350 million-$400 million, and free cash flow in the range of $150 million-$200 million.
In addition to achieving our 2016 Adjusted EBITDA guidance, three key elements that affect our ability to hit our cash flow targets in 2016 are working capital improvements, asset sales, and our CapEx spend. As I mentioned, we have a number of programs underway to lower our DSO by several days to benefit our working capital. Although the timing of achieving that is hard to predict, as that number can be stubborn to move when customers are in a challenged environment. We also are evaluating a number of underutilized assets to potentially sell, as well as some real estate as part of our network optimization program. However, the sales cycle, particularly on pieces of property, can take longer than expected.
As a result, we have elected to reset our target for total CapEx, net of disposals, to just $200 million, including El Dorado. Previously, we have said $200 million was our target excluding Eldo, which we still expect to cost about $50 million this year. This $50 million reduction in 2016 CapEx will help us to reach our free cash flow goal in the event that DSO is slow to come down or our asset sales take longer than expected. Buyback activity was nominal in Q1, as we repurchased $5 million worth of stock. We still have approximately $117 million remaining under our existing plan and expect to continue to execute that program throughout the year. Moving to guidance on slide 19.
Based on our Q1 performance and our current market outlook, we are reiterating our 2016 guidance of adjusted EBITDA of $430 million-$490 million. I should point out that this guidance is after the effect of the $9.4 million in severance and integration costs in Q1, as well as any incremental expenses we incur the remainder of the year based on our cost reduction initiatives. Looking at the full year 2016 adjusted EBITDA guidance from a segment perspective, we continue to expect Tech Services to generate low single-digit growth in 2016.
For SK Environmental, given the strong start of the year and the current outlook, we now expect that business to achieve high single-digit growth for 2016 that's above what I shared with you in February. Within an Industrial and Field Services segment, we still expect a substantial decline in year-over-year adjusted EBITDA due to the unfavorable comparison with 2015 due to the Emergency Response contribution. Excluding ER from both years, we now anticipate that segment will be down 15%-20% in 2016, given the poor start in Q1 and the current market environment among energy and industrial customers as it relates to project spending, particularly in Canada. For Clean Performance Products, we are increasing our expectation based on our ability to manage the spread and the recent price increase in base oil.
We now expect profitability in 2016 to increase by as much as 70%. At the same time, we are reducing our expectations for Lodging, for our Lodging and Oil and Gas segments. I mentioned in our February call that we anticipated we could grow their adjusted EBITDA on a combined basis from the low total we had in 2015. The combined adjusted EBITDA of those two segments is likely to be closer to flat or even slightly down, as rig counts have continued to decline and pricing pressures continue unabated in the entire energy space. While we have elected to discontinue providing specific quarterly guidance, we obviously want our shareholders to appreciate the seasonality of our business.
Given current market conditions and the record emergency response revenue and profitability we experienced in Q2 of 2015, we expect that our Adjusted EBITDA in the current quarter will be down as much as 30% from Q2 a year ago. That said, we obviously expect a substantial sequential increase from Q1 as we move into our seasonally stronger operating periods across our environmental and industrial lines of business. With that, operator, please open up the call to questions.
Operator (participant)
Thank you. At this time, we'll be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is coming from the line of Scott Levine with Imperial Capital. Please proceed with your questions.
Scott Levine (SVP and Equity Research Analyst)
Hey, good morning, guys.
Michael L. Battles (EVP and CFO)
Morning.
Alan S. McKim (Chairman and CEO)
Morning, Scott.
Scott Levine (SVP and Equity Research Analyst)
So, a little bit more color maybe on the energy, sensitivity specifically. Could you, on the Technical Services, could you give us a sense of what portion of your total landfill volumes are associated with energy on the one hand, maybe industrial on the other hand, or combined, just so we can get a little bit more of a sense of how big a factor that is? And I'm also curious, with regard to your energy business, businesses in general, whether you saw improvement late in the quarter as commodity prices started to pick up, and whether you're any more confident with oil prices sitting where they are, that things should get better from here?
Alan S. McKim (Chairman and CEO)
Sure. I'll start. Certainly the landfill business, you know, we have landfills in Alberta, North Dakota, California, all severely impacted. One of our major customers in Alberta had a catastrophic event, shut down that plant and one of our largest accounts, and we're not sure when that facility will come back online. So that happened, you know, early in the quarter. I would say that we have not seen an improvement. We certainly have seen a continuous reduction in spending by our energy customers, and we do not anticipate any increase in spending by them.
Many of them start looking at their their budgets September, October timeframe, and we'll start getting some visibility into 2017, but we are not anticipating a big ramp-up in those kind of volumes. However, on the other hand, we still have a large pipeline of projects in our traditional Superfund remediation business that we're targeting, and we have won some good contracts out there. So, you know, we're gaining what we think is a good share of business for our landfill business.
Michael L. Battles (EVP and CFO)
Scott, the only thing I can add to that is that, you know, obviously, oil prices going up, commodity prices going up recently is helpful, right? It's helpful. How that affects certain businesses is, depends on the business, whether it be Western Canada or industrial, you know, as Alan said, you know, I don't see that, I don't see that having a large impact in 2016. As it relates to, you know, Clean Performance Products and oil prices going up, including base oil, obviously, that's, that's helpful.
Alan S. McKim (Chairman and CEO)
We're definitely trying to structure the business around this new norm, realizing that oil is going to be in this range, at least based on our best guess, and we need to have our cost structure and our business operating at this price level and not expecting any significant improvements.
Scott Levine (SVP and Equity Research Analyst)
Got it. All right, so it sounds like, you know, your guidance affirmation and the targets you laid out don't assume any improvement there.
Alan S. McKim (Chairman and CEO)
Right.
Scott Levine (SVP and Equity Research Analyst)
Okay, and then this is my follow-up on this closed loop initiative, which you provided some more detail on. You know, you discussed some acquisition opportunities. Are there organic initiatives you guys are spending on there as well? Maybe a little bit more color on at least the organic side and then the other types of expenditures you know you're expecting for this year at a minimum, and it sounds like you're very encouraged by what you're seeing there. Does that factor into the upside in 2016, or is it really just the increase in base oil prices that drive the improvement that you guys are expecting in CPP relative to your last earnings call?
Alan S. McKim (Chairman and CEO)
Yeah, I think when we see the base oil pricing improving, that certainly is helping us. But as we continue to execute, and to answer your question, it's predominantly organic. I would say that the beauty is the leverage, the infrastructure and the customer base that we have. And the small niche acquisitions that we touched on in our script here was more pertaining to making sure that we have, you know, the capabilities to deliver and have a good supply chain for many of the customers that we have now contracted with. So I would say the majority of what you're gonna see in growth is that gonna be organically driven.
Michael L. Battles (EVP and CFO)
Yes, yes, Scott, I would say that, you know, the, just to pile on here is that, you know, most of it's already there. You know, we're certainly making organic investments as part of our CapEx spend to make sure we have the distribution network on the ERP system, make sure that we can get the oil to the customer in a reasonable way and keep track of that properly. And so, you know, we are talking about acquisitions to fill in the gaps, as Alan said in his prepared remarks, but certainly that's a fraction of the total closed loop initiative, if you will.
Scott Levine (SVP and Equity Research Analyst)
Mm-hmm. Right. So that was initially factored in your guidance, and then the increase in profitability is a function of spreads and pricing, maybe said another way. Is that fair?
Michael L. Battles (EVP and CFO)
Certainly, as it relates to CPP, yes.
Scott Levine (SVP and Equity Research Analyst)
Okay.
Michael L. Battles (EVP and CFO)
And before-
Scott Levine (SVP and Equity Research Analyst)
Great, thanks. I'll, I'll turn it over. Thank you.
Operator (participant)
Our next question is from the line of Michael Hoffman with Stifel. Please go ahead with your question.
Michael E. Hoffman (Managing Director)
Thank you.
Alan S. McKim (Chairman and CEO)
Thanks, Michael.
Michael E. Hoffman (Managing Director)
Thank you for taking-- hi, Mike, Jim, Jim. On the landfill side, if we could dig a little deeper. I get that you've got an energy and market exposure and big volume compression. As I strip that away, or you strip it away, is there a low-level organic growth across general manufacturing and refining and chemical and what have you, ex energy?
Michael L. Battles (EVP and CFO)
Clearly, I mean, the decrease that we've seen in that part of the business is almost exclusively related to energy in kind of Western Canada, and that decline, and we certainly have a strong base business in the, let's say, more of legacy Clean Harbors type of vertical.
Michael E. Hoffman (Managing Director)
Customer. Okay.
Michael L. Battles (EVP and CFO)
Yeah.
Michael E. Hoffman (Managing Director)
So that's consistent with other messages we've heard from the two other big landfill players in the business then.
Michael L. Battles (EVP and CFO)
Mm-hmm.
Michael E. Hoffman (Managing Director)
Okay. And then on the used oil side, Alan, can you share with us what's the penetration of the stop fee versus, you know, the customer... I'm assuming you rolled it out, and 100% were getting it, but how many of them actually kept it?
Alan S. McKim (Chairman and CEO)
Yeah.
Michael E. Hoffman (Managing Director)
Where are you in sort of successfully getting 100% having to take the bill?
Alan S. McKim (Chairman and CEO)
Yeah, I think, you know, at this point, we have rolled it out across all of our customers, including our national accounts. National accounts certainly lag because of the relationship and the contracts that we have with them. But absolutely, we have, and I will tell you that I think our customers certainly are understanding. They see what we're going through and what the industry is going through. And you know, we are trying to provide that leadership for the industry to allow this business to you know, maintain its spread, and operate at a fair margin for fair, even during these really difficult times that we're dealing with on a base oil standpoint. Just wanna touch on two other points, Michael.
One of the other reasons why capital is coming down is just the sheer capital spending that's gonna be required in our landfill business has now been deferred, because we're just not bringing that much volume in. And so another reason for that $200 million, including El Dorado, is a reduction in spending across for our landfilling and closing. On the tech services side, however, our drum business is extremely strong, and not only from the Safety-Kleen Environmental organization, but just in general, we've got a lot of good volume coming into that, the tech services side of our business.
Michael E. Hoffman (Managing Director)
Okay, that's very helpful as well. Thank you. And then, do I interpret the $0.17 reduction in logistics and collection costs that you noted in your presentation, Alan, if I link that to the... You exited 2015 at about $0.10 in 4Q, so you're at about $0.27 is the charge for oil. Is that the way to think about that?
Alan S. McKim (Chairman and CEO)
Yeah, it's probably a, you know, directionally, yes.
Michael E. Hoffman (Managing Director)
Okay. And I, the presumption is the combination of stop fee plus that you're continuing to work that CFO number up consistently. That's. You're continuing to raise that number or charge the customer more?
Michael L. Battles (EVP and CFO)
Yeah, Michael, I mean, the charge fees we put in place really are, were done kind of even after, in the recent ones, even after the prices were starting to increase. This just gets us. We took $0.25 off the top here in Q1, so this is the recent price increases that we've experienced are just, you know, getting us back to square one. There will be no changes in the short term on stop fees.
Michael E. Hoffman (Managing Director)
Okay. And then, back in the original guidance, beginning of the year, you thought about this business being able to track towards $15 million a quarter as you got control over the stop fee and the charge for oil. What, what's your view about that at this point?
Michael L. Battles (EVP and CFO)
Yeah, no, it's certainly up. I mean, certainly that's part of the story. As we've talked about guidance specifically by segment, we see that, you know, kind of, you know, north of 15, clearly. You know, kind of depends on what happens to oil prices and so forth, but we see that in our current forecast of being kind of well north of that.
Michael E. Hoffman (Managing Director)
Okay. And then in typical margin trend, 1Q to 2Q in IFS, the Industrial and Field Services, the second quarter should be, except emergency response, kind of low double digits. Should—is, given what you're seeing in activity, is that a reasonable expectation?
Michael L. Battles (EVP and CFO)
Yes.
Michael E. Hoffman (Managing Director)
Okay. And then, that, that's it for me. Thank you for taking the questions.
Michael L. Battles (EVP and CFO)
Thank you, Michael.
Operator (participant)
Our next question is from the line of Luke Junk with Robert W. Baird. Please go ahead with your questions.
Luke L. Junk (Senior Research Analyst)
Yeah, good morning, guys. Question for you, Michael, on the full year EBITDA guidance. If you can just help us bridge from the first half EBITDA with the, you know, first quarter now reported and the second quarter guidance that you gave us. I use the midpoint of full year guidance. We're coming up with maybe a little over 40% of earnings in the first half of the year, and that would imply about just under 60% in the second half.
Historically, that second half number looks more like 53%-55% of full year EBITDA by our math, if we exclude years with either major emergency response activity or M&A. Can you just help us understand how maybe cost savings layer in from here, how your base oil assumptions work into guidance, seasonal factors, or anything else really to help us understand the bigger step up that's expected this year? Thanks.
Michael L. Battles (EVP and CFO)
Yeah, no problem. So, appreciate the question and certainly not surprised by it. You know, we are a seasonal business, you know, and the and the back half of the year is better than the first half of the year. Certainly, Q3 is our strongest quarter, within Q2, and then and then one and four are kind of following. But at the end of the day, the difference and kind of the bridge that we're getting to when we do our analysis is really on the cost saving and the kind of the rollout of the cost saving programs and kind of how it affects the organization.
When you do the math on the back half of the year, you get to kind of a higher, kind of a, you know, kind of EBITDA contribution, if you will, than what you have historically. That's really just the timing of the actions that we took and the rollout of some of the. It's not just headcount, even though that's the biggest one. There's a bunch of others out there that, you know, that, they're all, as I just said in my comments in February, you know, 50 different project groups, you know, kind of chasing even smaller dollars that all kind of come in place in the back half of the year.
Luke L. Junk (Senior Research Analyst)
Then just a quick follow-up. Did I hear you correct in your prepared remarks, Michael, that you said the full year guidance excludes severance and integration expense, including, I think you said, $9.4 million in the first quarter, and then anything subsequent to that through the rest of the year. Is that right?
Michael L. Battles (EVP and CFO)
It includes. It doesn't exclude.
Luke L. Junk (Senior Research Analyst)
It does include it. Okay. Sorry, I misheard that. Thanks for clarifying. That's all I had.
Michael L. Battles (EVP and CFO)
$9.94 million in Q1, and there's probably a small amount in Q2, as we've seen so far, but, nothing, nothing, nothing big so far.
Luke L. Junk (Senior Research Analyst)
Okay, great. Thank you so much.
Operator (participant)
Our next question is from the line of Al Kaschalk with Wedbush Securities. Please go ahead with your questions.
Al Kaschalk (SVP)
Good morning, guys.
Michael L. Battles (EVP and CFO)
Morning, Al.
Alan S. McKim (Chairman and CEO)
Good morning.
Al Kaschalk (SVP)
Just wanted to follow on, on the pilot program. And Alan, I guess we've been talking a few quarters about this, and you've laid out for the balance of 2016, I guess, a national rollout program. But when does the pilot program become a, you know, a regular service or a non-pilot designated type program? And then, to what extent should we think about the economics around this program in terms of its renewable capabilities?
Alan S. McKim (Chairman and CEO)
Sure. No, it's a good question. Certainly, the pilot that we kicked off in the middle of last year certainly is continuing. We have learned a tremendous amount in our relationship with our customers, particularly in Ontario and Quebec. And so to your point, it's really no longer a pilot. It's sustainable. We are building volumes and doing a good job, you know, with that business there, which gave us, you know, confidence in our ability to now execute in the U.S. and expand. We have essentially a five-year model that will allow us to move substantially away from being a base oil seller to a direct lube oil customer service organization here.
We feel very confident that this model is gonna be received well by the majority of our waste oil customers out there, which are over 90,000. We certainly have over 250,000 customers in total, but over 90,000 customers we service today. And so we see a great customer base there to provide this renewable product to. So, we're really excited about it. We think you're gonna start seeing those volumes improve. And, you know, I think the five-year plan that we have in place will really, you know, show great return on invested capital in this business.
Michael L. Battles (EVP and CFO)
Yeah, Al, the only thing-
Al Kaschalk (SVP)
So if I-
Michael L. Battles (EVP and CFO)
Al, the only thing I could add to that was just to say that, you know, you know, it we call it a pilot, but it still continues, right? I mean, the work we've done in Ontario just continues on, and we're expanding it into New York. And Alan and the team are being sensitive to the fact that you don't wanna do this unless you're ready to go, and you gotta have the systems, the processes, the people, the distribution network, all need to be in line. Because once you start, you know, first impressions matter. And once you start, you're gonna you wanna make sure you're rolling it out smartly.
And so Alan and the team have worked kind of day and night to make sure that this program, when it rolls out, and it will roll out as the year rolls on, you know, will be successful. And we'll be able to kind of, you know, gain traction, you know, through through, you know, good customer service.
Al Kaschalk (SVP)
Right. So in reference to the details you provided on slide 11, the acquisitions you made, I guess what I think investors would be focused on here is what additional investment do you have to make, or are you completed? You alluded to most of it being completed, but what's the linchpin here to push this over the edge, to drive it or to make incremental steps on that five-year plan?
Alan S. McKim (Chairman and CEO)
We're executing as we speak, and, you know, the capital that we have invested in this business allows us to do what we wanna do in the short term. And as we get further into, you know, our, our plan here, there may be some other smaller, acquisitions or, or investments that we might need to make inside our facilities. But again, we have 450 physical locations in our network, and we're going to leverage those and deliver product to our customers around those, those 450 locations. So we're excited about it, and to Mike's point, we're ready to go.
Michael L. Battles (EVP and CFO)
Yeah, and you'll see as the year-
Al Kaschalk (SVP)
Go ahead.
Michael L. Battles (EVP and CFO)
And you'll see as the year rolls out, kind of, it's a jurisdictional rollout, and so we're just trying to find areas where we feel like there's the we have the network kind of ready to go. And so it's a jurisdictional thing where it started in, you know, Eastern Canada, and it's upstate New York, and we're going to move across the US as the year rolls on.
Al Kaschalk (SVP)
Okay. And then just a final follow-up to that. You talked a little bit about working capital and CapEx. I guess, did I hear correctly that 2016 now, you're—you've lowered that to $200 million, that includes $50 million on Eldo? And if so, is that also a function... I know you made the landfill commentary, which I certainly can understand based on volume, CapEx would go up. But what about the maintenance CapEx? With all of the restructuring, for lack of a better word, and the lower activity, has maintenance CapEx come down?
Alan S. McKim (Chairman and CEO)
Yes. Yep, clearly, it's come down. You know, certainly as the volumes in Western Canada have been severely impacted, and our utilization has come down, we're certainly reducing the amount of capital that we're spending, and the investment into our Oil and Gas and Lodging business is essentially nil. And so you're seeing us really watching capital every you know every dollar, and making sure that we're making the right investments in this kind of an environment.
Michael L. Battles (EVP and CFO)
Yeah, as the business has gone down, particularly in Western Canada, you know, that and what the environment in Western Canada just beats the heck out of the equipment. And so as that business has gone down, the need for the, you know, the kind of CapEx to kind of maintain the equipment is just not there. And so we made a decision with careful review of our capital budget to kind of take it down because we feel like there's just, you know, when the EBITDA is in this range, we don't need it. And so we looked at it very smartly, whether that be the landfills, as Alan mentioned, or in new trucks or new equipment, especially in Western Canada. That's how we're driving this number.
Al Kaschalk (SVP)
Are you willing to put a number around that? I mean, I think historically, it's been around a 150 shadow number. Is that something you're willing today to talk about?
Alan S. McKim (Chairman and CEO)
Well, I think we've said that, you know, once we get through the $120 million or so investment in El Dorado, that we clearly wanted to have, you know, a $200 million CapEx number, but we also thought we could reduce that even further.
Michael L. Battles (EVP and CFO)
That's right.
Alan S. McKim (Chairman and CEO)
On a net basis. So we, you know, we have been consolidating locations, and we have been cascading a lot of assets coming out of the Oil and Gas area to reduce, you know, some of the capital needs of other parts of the business. So, you know, that's sort of in line. Al, we continue to really focus on that free cash flow number, and, you know, capital, you know, is really going to, you know, prove out on an ROIC basis.
Al Kaschalk (SVP)
Great.
Alan S. McKim (Chairman and CEO)
Good luck, guys.
Al Kaschalk (SVP)
Thank you.
Alan S. McKim (Chairman and CEO)
Thanks.
Michael L. Battles (EVP and CFO)
Thanks, Al.
Operator (participant)
Our next question is from the line of Tyler Brown with Raymond James. Please go ahead with your questions.
Tyler Brown (Managing Director)
Hey, good morning, guys.
Alan S. McKim (Chairman and CEO)
Morning.
Tyler Brown (Managing Director)
Hey, Alan, just a couple of questions on the incinerator side. So first off, can you give us an update on how pricing is trending there? Is cement kiln competition a gaining factor? And second, you guys talked about back at the Analyst Day, some 60 units in operation from captives.
Alan S. McKim (Chairman and CEO)
Yes.
Tyler Brown (Managing Director)
Can you give an update there on where that number is today?
Alan S. McKim (Chairman and CEO)
Nothing significantly changed on the captives, although we continue to have conversations with a number of our customers who are looking at the additional capacity that we're going to have available for them as a way of reducing what they're burning on their own site. So, we, you know, we think that this is going to be real positive for a number of customers that are burning waste at low utilization levels. You know, pricing has relatively been flat in many of the waste streams, particularly the bulk waste streams that have been more impacted in this market. Our drum business is strong, as I mentioned earlier, and I think our pricing in that side of the business is good.
So I think we still have a backlog of waste. And with the new capabilities that the new incinerator has, both handling the most difficult types of waste streams, we're actually signing contracts now with customers who really need that capacity. So I think, you know, all in all, we feel pretty good that we've got a good volume teed up, and we've got a great plant built, substantially complete at this point, and really, we'll be starting up over the summertime here all of the components. And you know, we're feeling very good about that new plant.
Tyler Brown (Managing Director)
Any comments on the cement kilns? Have they been particularly competitive? Just curious.
Alan S. McKim (Chairman and CEO)
Nothing different than, you know, the last 10-plus years. As you know, cement kilns went, you know, from about 27 at one time, maybe even north of that, to, you know, 15 or less today. We have not seen any significant change in the competitiveness in that area.
Tyler Brown (Managing Director)
Okay, perfect. And then, how should we think about, you know, CFO as base oils rise? So do you feel that the market is in a place that could see those CFO prices remain fairly steady, even if Group II lube prices pick up? Or will CFO naturally move up closer to PFO as oil prices rise?
Alan S. McKim (Chairman and CEO)
Well, again, you got to look at where base oil is today. At $1.85, it's almost $3 a gallon less than it was three years ago. And so we have a long way to go for base oil to increase before the value of waste oil starts becoming back to a PFO, you know, where we're paying for that oil. The spread has been severely, you know, limiting, and even with this modest price increase that we just saw come through, the $0.25, we're certainly appreciative and thankful, but it's, you know, this business has been under a margin squeeze since we acquired it. I'm hoping, as we all are, that we're gonna do a better job as base oil improves in managing that spread, and not, you know, not go out and stop paying for oil until things improve substantially.
Tyler Brown (Managing Director)
Right. Okay. Okay, and what is the expectation for gallons collected this year?
Michael L. Battles (EVP and CFO)
$200 million.
Alan S. McKim (Chairman and CEO)
Yeah, roughly 200.
Tyler Brown (Managing Director)
Two hundred.
Michael L. Battles (EVP and CFO)
We were in line in Q1, as Alan, in his prepared remarks, $47 million.
Alan S. McKim (Chairman and CEO)
Yeah.
Michael L. Battles (EVP and CFO)
That's a good sign.
Alan S. McKim (Chairman and CEO)
Yeah.
Tyler Brown (Managing Director)
Okay. And then, Mike, I read this morning that there have been 59 bankruptcies in the oil and gas sector to date. So can you talk a little bit about the exposure on the receivable side? What are you expecting on a doubtful account accrual this year?
Michael L. Battles (EVP and CFO)
Sure, Tyler, you know, given my background, obviously very sensitive to accounts receivable and maintaining an accurate balance as we kind of work through these things. Clearly, the bankruptcies and the difficulties with our customers in Western Canada have affected us a little bit, and so we have a process we've been monitoring.
I don't expect it to be a huge kind of bad debt expense, kind of a charge coming through the rest of the year, but we do, you know, we are kind of focused on that through kind of detailed receivable reviews on a weekly basis with the team to ensure that, you know, as customers either trying to obtain more credit or try to pay the balances that are owed, that we have a kind of a proper, you know, properly valued on our financial statements.
Tyler Brown (Managing Director)
Okay, just one last one here. Just on the contributions for El Dorado next year. I mean, at this point, Alan, you mentioned you've invested $120, maybe $150 million in capital on that incinerator. I assume you're trying to deploy that capital at maybe 7x EBITDA or somewhere around there. If that's the case, will that be a benefit? Will it, that full EBITDA contribution benefit 2017, or is that way too aggressive and that this is more of a ramp over the course of a couple of, or maybe even a few years?
Alan S. McKim (Chairman and CEO)
Yeah, there'd be a ramp, you know, over two or three years. There'll be no more than $120 million investment into that plant.
Michael L. Battles (EVP and CFO)
Yeah, Tyler, $20 million to the high end.
Alan S. McKim (Chairman and CEO)
That's the high end.
Michael L. Battles (EVP and CFO)
Just so you know where we're at.
Tyler Brown (Managing Director)
Okay. Okay, perfect. Thanks, guys.
Alan S. McKim (Chairman and CEO)
Okay.
Operator (participant)
Our next question is from the line of Sean Hannan with Needham & Company. Please go ahead with your questions.
Sean Hannan (Managing Director and Equity Research Analyst)
Yeah, thanks, and good morning, folks. First question here. Just want to see. I'm not sure if I'd heard this a little bit earlier, but, across all of your business segments, what's the dollar of revenue exposure that you have right now in that Fort McMurray geography?
Alan S. McKim (Chairman and CEO)
Well, in regard to the fire that's happening right now, Sean, is that what your question is about, a risk for us?
Sean Hannan (Managing Director and Equity Research Analyst)
Well, the spirit comes from that, for sure. I think, and to your point, Alan, and we have seen this as well, I mean, the whole region is evacuated. So just trying to understand the percentage of exposure we have there.
Michael L. Battles (EVP and CFO)
Yeah. Well, it kind of goes both ways, right? Because we have lodges there that may get filled up because of this. And so it's very difficult for us, Sean, to try to speculate as to what the impact is gonna be on this, on this, on this catastrophe, nor would we even want to try to do that at this time.
Alan S. McKim (Chairman and CEO)
Yeah.
Sean Hannan (Managing Director and Equity Research Analyst)
Sure. I understand that, and I'm not looking for forecasts. I'm really looking for what is our exposure today.
Alan S. McKim (Chairman and CEO)
I guess it's probably $20 million a month, I would think, roughly, between our industrial, our Lodging, our Oil and Gas field servicing business, is probably the Western Canada number, I'm thinking. We were, you know, prior to the Canadian dollar decline, we're roughly $1 billion in Canada, but that is obviously substantially less than that. But that's across all the provinces of Canada. Jim, does that sound-
Sean Hannan (Managing Director and Equity Research Analyst)
Yeah, I think, I think you're in the ball. It might be a little bit more if you add the Lodging on, but, you know-
Alan S. McKim (Chairman and CEO)
Yeah
Sean Hannan (Managing Director and Equity Research Analyst)
The oil sands and the industrial is probably about a $70 million-$75 million business annually-
Alan S. McKim (Chairman and CEO)
Yes
Sean Hannan (Managing Director and Equity Research Analyst)
in the oil sands on the industrial side, and then you have Lodging on top of that, that you can see, you know, that's maybe another 10-15 a quarter, typically. So that's about the investment. But to Mike's point there, who knows, forecasting-wise, what this will mean.
Alan S. McKim (Chairman and CEO)
Yeah.
Sean Hannan (Managing Director and Equity Research Analyst)
Certainly, I think a lot of the customers in the area are gonna need support, and we're certainly there to give it to them.
Alan S. McKim (Chairman and CEO)
Right.
Sean Hannan (Managing Director and Equity Research Analyst)
Sure. Okay, that's helpful. Thank you. And then when I think about the Oil and Gas profitability is obviously this, you know, remains on your, on your, on your books today. As I drill down into the revenues that came through, say, for this first quarter, and then I consider that there are a lot of incremental costs that you guys are, are taking out, is there an ability for, say, at just an example, at that revenue level for us to get to break even or profitability based on actions you've got roadmap today? Or, you know, how do we think about, you know, kind of continued actions and, and the results for stemming the bleeding within that business?
Michael L. Battles (EVP and CFO)
Yeah, Sean, so, you know, we're doing kind of everything we can, right? And including kind of wage rollbacks and closing kind of unprofitable sites and looking at kind of, let's say, you know, no dollar being, you know, not examined. And so, you know, we're hopeful to try to get to, you know, kind of flat or kind of no growth or no EBITDA at the end of the year. But, you know, it's gonna be tough given the fact that there are some costs up there that do provide some revenue that we don't wanna close at this juncture. Trying to grab some market share and hopeful that the economy recovers.
Sean Hannan (Managing Director and Equity Research Analyst)
Okay. And then last question here, and I apologize that it seems a lot of these questions are coming from a negative spirit. It's just more in terms of pushing on where some of the soft points might be. Blended product, now I get the strategy, I get what you're looking to do, I get that these efforts take time, but I still struggle with seeing where the percentage has gone. Why is this actually trending down still as a percentage of your clean product revenues? It's difficult to get a sense of why even early stage momentum is taking so long. So we've heard about bringing this up as a percentage for well over a year. So any feedback would be helpful.
Alan S. McKim (Chairman and CEO)
That's great. You know, and, and as you know, historically, Safety-Kleen sold, oil, mainly to kind of wholesale distributors. And, and, as, as you've seen, I think we've done a very good job in Safety-Kleen, both on the environmental side and CPP, to deal with the, you know, the close to $3 a gallon decline. And, and one of, one of the things that we had to do is certainly get away from the contracts of selling some of the products that we were manufacturing to wholesale distributors and, and, and reducing that blended volume.
So what you're not seeing is a breakout of what we're actually delivering direct. And, I, I think you, you, you will start seeing that improvement, Sean, and I think we might have touched on it a year ago. But, you know, we're really focusing on the margins in that business and making sure that we're not making product and kind of giving it away in this kind of a challenging market. And that's why the volumes are down.
Sean Hannan (Managing Director and Equity Research Analyst)
Okay. Thanks very much. Tough environment. Nice work with the progress you folks are making on taking a lot of these costs out. Thanks very much.
Alan S. McKim (Chairman and CEO)
Thanks.
Michael L. Battles (EVP and CFO)
Great.
Operator (participant)
Our next question is from the line of Barbara Noverini with Morningstar. Please go ahead with your question.
Barb Noverini (Equity Analyst)
Hey, good morning, everybody.
Alan S. McKim (Chairman and CEO)
Good morning.
Barb Noverini (Equity Analyst)
Can you talk a little bit about the results of your sales team reorganization? Just give us a little bit more color on how this team is better equipped now to capture some of the organic growth opportunities that you mentioned earlier.
Alan S. McKim (Chairman and CEO)
Sure. You know, we have about 950 folks in our sales and marketing organization, and that's across our entire portfolio. One of the things we changed is we aligned our tech, our field, and our industrial sales organization to our operating organizations. And we also layered in a new sales regional structure, 23 market areas. And as we mentioned on the call here, we hired a number of new senior levels executives to manage those 23 market areas for us.
So we're really challenging them to help within those areas grow revenues as well as cross-sell across our different service organizations in these different geographic areas. And so all those folks are in place. We, you know, we spent close to six months last year in the design and all the change and implementation, and so I think the team is in place and doing extremely well. We're seeing some really nice results here.
Barb Noverini (Equity Analyst)
Are you incentivizing the team to maybe go after some of the end markets that are less challenged? You know, obviously, we know the story in the energy sector is very tough, and that's to be expected. But, you know, maybe you can talk about some of the end markets that you see some opportunity and whether your sales team is indeed going after those opportunities.
Alan S. McKim (Chairman and CEO)
Yeah, I mean, you know, as you know, our waste disposal network is really second to none. The more volume that we bring through our plants, the more leverage, you know, we have in our business. And so those are certainly the key verticals that we're focusing on is to drive that incremental disposal volume into our landfills and incinerators and water treatment plants and recycling facilities. And that is absolutely where their focus is right now. However, the company continues to look at rolling out and expand lines of business with its existing customer base.
For example, our hydrovac and daylighting business, you know, we have 140 of those out there, and we're growing that business. Those are assets that were in the Oil and Gas space that we're now moving into our industrial side of our business and expanding that. So, you know, we're really trying to drive not only the disposal, but we're driving equipment utilization and personnel utilization as well.
Barb Noverini (Equity Analyst)
Okay. Thank you.
Alan S. McKim (Chairman and CEO)
Yeah.
Operator (participant)
Thank you. As a reminder, to ask a question today, you may press star one from your telephone keypad. The next question is from Michael Hoffman with Stifel. Please go ahead with your question.
Speaker 11
Thank you for taking the follow-up. Just two housekeeping questions, Mike. I wanted to make sure I understood your tax comment. It's 55% per each quarter, or it's 55 for the year? I just based on 10%.
Michael L. Battles (EVP and CFO)
55% for the year. 55%-56% for the year.
Speaker 11
For the year. Okay. And then what is your expectation for cash taxes paid in 2016? That should still be meaningfully less than book taxes.
Michael L. Battles (EVP and CFO)
Absolutely, and we were working under the assumption of $40 million-$50 million of cash taxes this year.
Speaker 11
Okay. Then the SG&A comment, flat year-over-year in absolute dollars, but given the guidance has severance in it, I'm assuming the G&A has the severance, so ex severance, you would actually be down in dollars.
Michael L. Battles (EVP and CFO)
Yeah, some of the severance is in cost of revenue. We do break that out, so if people were let go in the direct headcount, if you will, those dollars would be in there. It's a mishmash of a bunch of different things, Michael, which includes, you know, incentive compensation changes and other types of adjustments. And the selling, obviously, the selling organization, the investment we made there is all in SG&A.
Speaker 11
Okay, and then there was a question earlier about the, you know, typical mix of earnings, 40, 60, kind of first half, second half. But if you had the benefit of, on a run rate basis, of those cost saves in the first half, your, your reality is this mix is more normal looking. And so it's the benefit of the cost saves that are shifting the mix on it this year, but in 2017, it goes back to that more normal proportion because you've got a full run rate of it.
Michael L. Battles (EVP and CFO)
Absolutely.
Speaker 11
Yeah.
Michael L. Battles (EVP and CFO)
Absolutely.
Speaker 11
Okay.
Michael L. Battles (EVP and CFO)
And also, I wasn't sure if the numbers he was quoting included you know, the emergency response work we've done and the impact of that, because there was a big number in Q3 that might have screwed up some of the first half, second half numbers.
Speaker 11
Yeah, I mean, historically, you're kind of 45, 55, 45-50 in the beginning and 50, 55 in the second half. But, so this year it's going to be heavier because of the way the cost saves are falling out. It's just... That's an important point, is that you're the cost saves matter and that you're getting them.
Michael L. Battles (EVP and CFO)
Yes, absolutely.
Speaker 11
Okay.
Michael L. Battles (EVP and CFO)
Clearly, as we look at Q1, as you know, Michael, we meet weekly on this, on this topic, you know, we're getting them.
Speaker 11
Okay. Thanks.
Michael L. Battles (EVP and CFO)
Good.
Operator (participant)
Thank you. The next question is coming from the line of Scott Levine with Imperial Capital. Please go ahead with your questions.
Scott Levine (SVP and Equity Research Analyst)
Hey, thanks for taking my follow-up. Did you comment, or could you give us the impact of FX translation on your business? And I think it was, like, 21% of your revenue last year. Is there an earning sensitivity, roughly speaking, you can give with respect to the fluctuation in the C dollar relative to the USD?
Michael L. Battles (EVP and CFO)
Yeah, it, we don't really give that number out specifically. It, you know, kind of year-over-year, interestingly enough, it was, it's still a, it's still a bit of a headwind as you look at Q1 versus Q1. You know, $0.80 was the average rate in Q1 of 2015, and, and $0.72 was the average rate in, in 2016. And so it was a bit of a headwind as we kind of, as we look out. That. We think that fixes itself as the Canadian dollar last year kind of went from 80 down to, into, you know, the, the low 70s, even to 69. And so, you know, that, that fixes itself as the year rolls on. But in Q1, it's, it's still a bit of a headwind.
Scott Levine (SVP and Equity Research Analyst)
But does your guidance presume a certain level in the C dollar, relative to 20? Or just does it assume a certain level? I'm just trying to get a sense of whether it could be a needle mover if we still see further appreciation in the Canadian dollar.
Alan S. McKim (Chairman and CEO)
Yeah, absolutely. This is Jim, and just to comment on what Mike said, just to add the point, that if you look at the first quarter, it was about a $12 million headwind in revenues and probably a $1 million or so in EBITDA. But as you suggest, as we move later through this year, certainly we'll start seeing some benefit there, and we were not very aggressive in our guidance in looking at that.
Michael L. Battles (EVP and CFO)
We kind of currently use, as we've mentioned before, we use kind of current period, you know, FX rates as we give out guidance, and so we update that as the year rolls on.
Alan S. McKim (Chairman and CEO)
Right.
Scott Levine (SVP and Equity Research Analyst)
Understood. Thank you.
Alan S. McKim (Chairman and CEO)
Okay.
Operator (participant)
Thank you. At this time, I will turn the floor back to Mr. Alan McKim for closing remarks.
Alan S. McKim (Chairman and CEO)
Thanks for joining us today. The team is presenting at a number of upcoming conferences starting next week with Stern Agee’s Business Services Conference and Oppenheimer’s Industrial Conference. We hope to catch up with many of you in person soon, and look forward to updating you as the year progresses. Have a great day.
Operator (participant)
Thank you. This concludes today's teleconference. Thank you for your participation, and you may now disconnect your lines at this time.