Clean Harbors - Q1 2017
May 3, 2017
Transcript
Operator (participant)
Greetings, and welcome to the Clean Harbors, Inc. first quarter 2017 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. It is now my pleasure to introduce your host, Mr. Michael McDonald, General Counsel for Clean Harbors. Thank you, Mr. McDonald, you may begin.
Michael McDonald (General Counsel)
Thank you, Michelle, and good morning, everyone. On today's call with me are Chairman, President, and Chief Executive Officer, Alan S. McKim, EVP and Chief Financial Officer, Mike Battles, and our SVP of Investor Relations, Jim Buckley. Slides for today's calls are posted on our website, and we invite you to follow along. 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 today, May 3rd, 2017. Information on potential factors and risks that could affect our actual results of operations is included in our SEC filings.
The company undertakes no obligation to revise or publicly release the results of any revision to the statements made in this morning's call, other than through 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 the non-GAAP measures to the most directly comparable GAAP measures is available in today's news release, on our website, and in the appendix of today's presentation. Now, I'd like to turn the call over to our CEO, Alan McKim. Alan?
Alan McKim (Chairman, President, and CEO)
Thanks, Michael, and good morning, everyone. Turning to slide 3, we delivered a strong first quarter performance as revenues grew 8% and adjusted EBITDA increased 19%. Our ability to grow profits at more than double the rate of revenues demonstrates the operating leverage in our business model. Q1 results were driven by higher waste volumes, cost reductions, and improved pricing, particularly in our lube oil business. Reviewing our segment performance in the quarter, Technical Services revenues increased as a result of our new El Dorado incinerator and growth initiatives. Industrial and Field Services revenue and margins were up slightly due to field services improving from a year ago. Safety-Kleen again performed exceptionally well. Oil, Gas, and Lodging Services was down as expected, but the rate of decline was slowed as the energy markets are beginning to recover, particularly in the United States.
So now let's review the segments in more detail, beginning with Tech Services on slide 4. With El Dorado coming online in the first quarter, Tech Services revenue was up 7% from a year ago. A portion of that increase came from retail customers, who are driving additional volumes. Lower segment profit and margins were largely expected in Q1, given the startup of Eldo and costs associated with growth initiatives such as our healthcare, as well as a decrease in landfill volumes. On the other hand, incineration utilization remained strong. Utilization, including the new incinerator, was 79%. Excluding the additional capacity, it was 90%, compared with 87% in Q1 a year ago. Turning to slide 5, we experienced double-digit revenue growth in field services, largely due to new branches, which have been co-located in existing Safety-Kleen and tech service sites.
That growth was essentially offset by lower revenue in Industrial Services, resulting from the sale of the catalyst service business in Q3 of last year and ongoing softness in Western Canada. No major emergency response events occurred in Q1. Field services did see a nice pickup in base work. Personnel utilization in the quarter was 78%, which is up from a year ago. Moving to slide 6, Safety-Kleen picked up right where it left off in 2016. Revenues were up 19% on the strength of both organic growth and acquisitions, supplemented by higher year-over-year base oil and blended pricing. Profitability was up 31% and margins increased 180 basis points, fueled by the revenue increase, higher pricing, and continued good spread management.
Our charge for oil rate was up $0.05 from a year ago, but dropped $0.02 from Q4 as we began to see the effect of some higher crude pricing on the collection side of our business. For the quarter, we collected 2 million gal more, 2 million more gal of waste oil than a year ago, aided by some recent acquisitions. Parts washer services at 251,000 were flat with a year ago. Our blended products percentage in the quarter was 31% of our total volume, which is a significant increase from the 27% level we reported in Q4. This is down slightly from a year ago quarter, but keep in mind that during 2016, we added 3 re-refineries to our network. Those re-refineries are contributing more base oil production, creating a larger denominator.
This makes the sequential comparison in Q4 much more relevant. While direct sales to our Safety-Kleen branches are starting to contribute, they account for only 3% of our total volumes in the quarter. Our direct sales efforts should continue to ramp up, certainly in the years ahead. And we also anticipate continually to closely partner with some of our key distributors of our blended products in several existing markets. So turning to slide 7, revenue in our Oil, Gas, and Lodging Services was down 17%, which was expected. Increases in our surface rental group and our fixed lodges were more than offset by a decrease in exploration work and declines in our mobile camps and manufacturing. Average rig serviced, while still less than optimal, doubled from a year ago on the improved energy market. Average utilization of key equipment also nearly doubled in the quarter.
Outside room utilization at our fixed lodges rose to 35% from 23% a year ago and was flat with Q4. Despite aggressive cost reduction efforts within these businesses, adjusted EBITDA remained slightly negative in Q1, but we continue to believe we can turn that around during the remainder of 2017, given market trends and our own internal initiatives. Turning to slide 8, I'll update you briefly on several corporate initiatives, most of which I've covered in detail on our February call. As evidenced by Safety-Kleen results here in Q1, the series of bolt-on acquisitions that we completed in 2016 are contributing well. We are still in the process of optimizing several of those assets and expect to more fully realize their capabilities and benefits over the course of this year. Our cost reduction programs remain on plan.
Executive team members are driving each of the key programs so that we hit our targets for the year. Top line growth remains one of our highest priorities in 2017, and we are off to a good start in Q1. Looking at some of the key drivers this year, the El Dorado facility is up and running nicely. We continue to go through the equipment shakedown process that you would expect at any new plant, but we expect to steadily increase the rate of hazardous waste processed through the site in the coming quarters. While the sales cycle can be quite lengthy, we're engaged in discussions with a number of captive incinerator owners about how we can more effectively and efficiently process their waste. We also expect to benefit from some of the M&A activity in the chemical space, which should drive volumes from existing captive locations.
In terms of our OilPlus program, we continued to expand our bulk product offering in more metropolitan markets in Q1, including launches in the regions around St. Louis, Dallas, and Fresno, California. Sales of packaged lubricants out of all 190+ Safety-Kleen branches continues to grow. We're improving our sales and marketing effectiveness as we get a better sense of customer demand in individual markets for our drums, totes, and cases of quart bottles. Based on customer response, we remain confident this will be a highly successful initiative for Safety-Kleen in the years ahead. Lastly, I wanted to mention that we expect to continue with the divestiture of select businesses, as we did with Catalyst Services last year. While we don't anticipate selling anything sizable this year, we're continuing to evaluate opportunities to sell non-core businesses, which is consistent with our strategy.
Turning to our capital allocation strategy on slide 9. As we outlined on our Q4 call, we added a fourth element to our mix in 2017. Given our current debt profile and expected free cash flow in the years ahead, repaying our debt is likely to become an element we will carefully weigh against internal investments in our business, acquisitions, and share repurchases. Moving briefly to our outlook on slide 10, our focus in 2017 across each of our segments will be profitable growth. Within Tech Services, our near-term priority will be ramping up waste streams into our new incinerator and across our entire incineration network. We're also focused on regaining momentum in our landfill business by pursuing large volume projects, which we should start seeing some more given the trends in the marketplace.
In Industrial and Field Services, we hope to carry forward the momentum that we generated in field services in Q1 to its seasonally strong quarters now. Within industrial, we're readying our resources to meet customer needs during the spring turnaround season, and we're also continuing to expand our efforts in the daylighting marketplace. For Safety-Kleen, our focus is centered on the rollout of the OilPlus Closed Loop program into more regions. At the same time, we intend to aggressively manage our spread, particularly as higher energy prices have put some pressure on our charge-for-oil program. Within our branch network, recent acquisitions have created an expanded customer base for our products and services, and we're working to leverage these relationships and to continue to grow our overall parts washer business.
Within Oil, Gas, and Lodging Services, we're maintaining our focus on cost as we await a sustained recovery in the energy markets, particularly in Western Canada. Within our fixed lodges, we've seen occupancy rates begin to rise recently as part of the spring turnaround season, and we're intensifying our sales efforts up north, including the pursuit of more manufacturing opportunities. So overall, signs suggest an improving picture, but no material significant improvements yet in that segment. So in conclusion, our first quarter performance marked a good start to the year.... After several challenging years, we're seeing a number of reasons for optimism in 2017. We have seen a noticeable uptick in customer activity and sales opportunities early this year.
With crude oil prices having stabilized in recent months, customers in multiple industries have been more confident in their spending decisions, and the energy market itself has improved with an increase in rig counts and overall activity. US industrial production is expected to rise this year. Our Safety-Kleen segment, both at the branches and within our refining, refinery business, continues to perform well. Our technical service segment should return to profitable growth this year with the help of El Dorado. With our company-wide focus on margin expansion and growth in 2017, and the efforts we're making on cost reduction to support our goals, we remain on track to hit our guidance for the year. So with that, let me turn it over to our Chief Financial Officer, Mike Battles. Mike?
Mike Battles (EVP and CFO)
Thank you, Alan, and good morning, everyone. Turning to our income statement on slide 12, revenue increased by 8% in Q1 as a result of growth in Safety-Kleen and Tech Services. Gross profit for the quarter was $192.4 million, or 27.9% of revenue. Gross margin improved 90 basis points from the year-ago quarter, driven by the revenue increase and our cost control initiatives. SG&A expenses were up year-over-year, primarily reflecting the impact of the acquisitions we made in 2016, higher overall revenue and greater incentive compensation. On a percentage basis, SG&A costs declined by 10 basis points to 16.3%.
For full year 2017, we now expect SG&A expenses to increase slightly on an absolute dollar basis, as higher revenue and short-term incentive compensation are largely offset by lower severance and cost action. Depreciation and amortization increased $3.5 million in Q1 due to the acquisitions and the El Dorado incinerator. For 2017, we continue to expect depreciation and amortization to be flat with 2016, in the range of $280 million-$290 million, despite the addition of $5 million related to the new incinerator, as well as the full year effects of the 2016 acquisitions. Income from operations in the quarter was $5.4 million, compared with a loss of $4.1 million in Q1 of 2016, reflecting higher year-over-year revenue.
First quarter adjusted EBITDA was $80.1 million, up 19% from a year ago, driven by the combination of higher revenue and cost reductions. On a GAAP basis, the net loss for the quarter was $0.37 per share. Adjusting for the effects of not recognizing income tax benefits associated with pretax losses generated by some of our Western Canadian subsidiaries, we recorded an adjusted net loss of $10.9 million, or $0.19 per share. Turning to the balance sheet on slide 13, despite the fact Q1 is our seasonally weakest cash generator, we ended the period with $297.4 million of cash and cash equivalents, driven by good cash flows in the quarter. DSO came in at 57 days, down sharply from 74 days at year-end. The 7-day drop reflects several factors.
In addition to revenue strengthening as the quarter progressed, the team made meaningful progress on collection, particularly with some large and aged receivables. As you know, this metric has been challenging to improve given customers' preference to stretch terms. We are improving cycle times, and we anticipate keeping DSO in the high sixties in the quarters ahead. Q1 CapEx, net of disposal, was $41.4 million, which included $7.9 million related to the final phases of construction of the El Dorado incinerator. This compares with net CapEx of $74.5 million a year ago, which included $21 million related to El Dorado. Excluding the new incinerator from both periods, we reduced our Q1 net CapEx by nearly 40% while continuing to make strategic investments in the business.
For the full year, we are continuing to target CapEx, net of asset disposals, of $160 million-$170 million. Q1 was a strong quarter from a cash flow perspective. Cash flow from operations was $57.1 million, up significantly from a year ago. Adjusted free cash flow for the quarter was a positive $15.7 million, versus a negative $35.2 million in Q1 of 2016. For 2017, we continue to expect adjusted free cash flow in the range of $140 million-$180 million, excluding any divestitures. During Q1, we repurchased $6.8 million of stock and have more than $93 million remaining on our authorized buyback plan.
Moving to guidance on slide 14, we are reiterating our full year 2017 adjusted EBITDA guidance of $435 million-$475 million, which at the midpoint represents 14% growth. With a 19% increase in Q1, we're right where we expected to be. For modeling purposes, here's how our annual guidance translates into a segment perspective. We continue to expect Tech Services adjusted EBITDA to be up low single digits in 2017 from 2016 due to the addition of the El Dorado incinerator, as well as modest GDP growth and U.S. industrial production. We expect Industrial and Field Services to be flat to slightly positive compared with 2016, with expected profitability improvements in the U.S., largely offset by prolonged weakness in Western Canada.
Despite positive signs within the overall energy market, we do not expect growth in the oil sand region anytime soon. We now expect Safety-Kleen to generate double-digit adjusted EBITDA growth in the mid to high teens. This growth and profitability will be driven by the acquisitions we made in 2016, better pricing, our closed loop offering, and continued contributions from our SK Brands network. For Oil, Gas, and Lodging Services, we anticipate a return to positive adjusted EBITDA in 2017. There continue to be encouraging signs. Rig count has begun to rise in the U.S., and to a lesser degree, in Canada. Our lodging business has begun to pick up recently with turnaround activity and some manufacturing opportunities. However, our overall expectations for the year remain fairly muted.
Our corporate segment Adjusted EBITDA loss is expected to be slightly higher in 2017, with costs from acquisitions and higher incentive compensation balancing out our expected cost savings and lower integration and severance costs. Overall, our 2017 expectations remain on track. As Alan highlighted, there are multiple reasons for us to be optimistic. We're executing well on our strategic growth initiatives. Our cost structure continues to be tightly controlled. We are seeing momentum across multiple businesses on the sales front. While Western Canada remains challenged, the macroeconomic outlook in many of our key markets is trending in our favor. And with that, Michelle, please open the call up for questions.
Operator (participant)
Thank you. We will now be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. 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. Our first question comes from Joe Box with KeyBank Capital Markets. Please proceed with your question.
Joe Box (Senior Equity Research Analyst)
Hey, good morning, guys.
Alan McKim (Chairman, President, and CEO)
Good morning.
Mike Battles (EVP and CFO)
Hey, Joe.
Joe Box (Senior Equity Research Analyst)
So, Alan, you called out a noticeable uptick in customer activity and sales opportunities. What I'm curious about is, how are you guys able to differentiate some of those opportunities between just normal seasonality and an actual cyclical pickup in activity? Is there anything anecdotal that you guys could share with us to maybe give us a little bit of confidence that, you know, we are starting to see some of that cyclical, you know, tailwind flow through to the business?
Alan McKim (Chairman, President, and CEO)
Well, one thing, Joe, that we did last year, we moved everybody from our old CRM system to Salesforce, and I think now having everybody on one platform, both Safety-Kleen and the, and the legacy business, we're getting a lot more consistent visibility into the pipeline, looking at it by line of business across the businesses. And I think the confidence, I think, that we see in the activity is derived a lot from the data that we're now able to extrapolate from that CRM.
Mike Battles (EVP and CFO)
Yeah, Joe, this is Mike, too. You know, with Salesforce, you can see, you know, kind of the pipeline and kind of closed orders, and you can get a much better picture. If you look at kind of waste projects and remediation, they both look like, you know, those are the large projects that kind of drive, you know, kind of incremental growth, and we see some of those coming onl`ine here in Q2. So there are real, real signs there that's not just kind of base work versus kind of the waste project and remediation work, which has long since been stagnant to down, as you know, and so we're just seeing some of those signs of life there.
Alan McKim (Chairman, President, and CEO)
I think the only other point I'd make, too, is that we made a large investment in sales. A number of cost reductions that were in our plan for last year and this year did not include a reduction in our sales.
Mike Battles (EVP and CFO)
Actually, incremental sales.
Alan McKim (Chairman, President, and CEO)
And we increased quite a bit of folks in our sales organization, over 900 people now. So I think coupled with better management, better data, better trends now that we can see, I think we feel more confident with the business that we have in front of us.
Joe Box (Senior Equity Research Analyst)
Got it. And then maybe changing gears, you know, there's a lot of moving pieces in the Safety-Kleen margin profile. Can you maybe just help us understand what some of those components were? You know, how should we think about what the base oil pricing increase drove versus, say, volume growth in that business versus the, you know, new closed loop initiative, which I'm gonna assume was probably a net drag to margins just to start?
Alan McKim (Chairman, President, and CEO)
Yeah, I'll touch on the base oil first. I mean, as you know, we saw some price improvement announced by the majors, and that was sort of late in the quarter, and there's a lag. So you'll start seeing more of that benefit come through in the second and third quarter, certainly is our expectation. And we also had a lot more base oil to sell because of the additional three plants that we took on last year, and a very strong demand. There's really been somewhat of a shortage and even in some cases, an allocation. So good, strong demand.
We've actually had to hold back some orders in the quarter due to some unexpected shutdown in a couple of our plants that we actually had to move a May shutdown up into March. So, a little bit of delay in some of our volumes there that will pick up. We'll make up that benefit in the second and third quarter. Mike, did you wanna chime in on the blended?
Mike Battles (EVP and CFO)
Yeah. Yeah, Joe. So if you think about the three things you mentioned, pricing, volume, closed loop. So closed loop, let's start to your point, it's nominal, right? Because again, it's starting up, you know, it's up a bunch, kind of month-over-month. It's great trajectory, but then as you well know, it's pretty small numbers. So that's not a big adder or subtractor in the quarter. You know, the volume's up because of the acquisitions, and again, as Alan said, there's a shorter supply, so certainly volumes, we feel really good about volumes. And pricing is also, you know, year-over-year, a good guy. Obviously, this time last year was kind of oil was under duress. Oil price was under duress, and we were kind of feeling it dramatically, so that's up.
But not so much up versus what we kind of gave guidance out back in February. So as Alan said, there's a lag there, and so it's a spread business. We talk all about that, and there's a lag associated with that. We'll see that lag probably in Q2, as the pricing comes into the network. So I would say if you tried to, if you tried to rank them, you know, pricing and volume equal, closed loop, very small.
Joe Box (Senior Equity Research Analyst)
Got it. Thank you, guys.
Mike Battles (EVP and CFO)
Yep.
Operator (participant)
Thank you. Our next question comes from Hamza Mazari with Macquarie. Please proceed with your question.
Kayvon Rahbar (Equity Research)
Hi, this is Kayvon Rahbar filling in for Hamza Mazari. Could you give us a sense of what oil prices you guys need to see to see a sustainable improvement in the energy business? You know, given most of it's in Western Canada, and then just, you know, in general, could you give us an update on what you're thinking about strategically going forward with that line of business?
Alan McKim (Chairman, President, and CEO)
Well, I'll let Mike answer the strategic point, but I guess $60 has really been sort of the magic number that we've been looking at that would, you know, be probably the minimum number, I think, particularly in Western Canada.
Mike Battles (EVP and CFO)
On a sustained basis.
Alan McKim (Chairman, President, and CEO)
On a sustained basis.
Mike Battles (EVP and CFO)
Yeah. That's what I was gonna say, Kayvon. It depends on kind of how you get there, right? If there's a one-off thing that spikes oil prices, that's not gonna mean much. If it's sustained supply and demand dislocation that drives the price up and keeps it there for a while, well, then we'll see activity in the 60 to 60-
Alan McKim (Chairman, President, and CEO)
Yeah.
Mike Battles (EVP and CFO)
But we've heard anyway, the $60 range. So again, as I said in my prepared remarks, we've seen signs of life in that business, but we're not—as we're giving guidance for the year, we're kind of saying-
Alan McKim (Chairman, President, and CEO)
Yeah
Mike Battles (EVP and CFO)
... 2017's a flat year for that business.
Alan McKim (Chairman, President, and CEO)
Yeah.
Mike Battles (EVP and CFO)
Strategically, you know, we feel like selling it at the trough where it is today is not the right answer. We've said that publicly. We continue to make investments in that business smartly, where we got some new leadership involved. We made some CapEx improvement to try to turn that business around. Again, we see signs of life anecdotally, that, you know, certain subparts of our businesses are doing fine. But overall, you know, overall, we continue to struggle, you know, especially in areas like seismic and camp manufacturing-
Alan McKim (Chairman, President, and CEO)
Yeah
Mike Battles (EVP and CFO)
... where small numbers, but we, they're kind of driving up instead.
Alan McKim (Chairman, President, and CEO)
Yeah. And we're, you know, we're the market leader. We have No. 1 market share in seismic, both in the U.S. and Canada. There's just no activity and no spending, and we expect in the third and fourth quarter to start seeing capital being put into the business. I think people are predicting, you know, over the next two or three years, a real shortage, quite frankly.
Mike Battles (EVP and CFO)
That's right.
Alan McKim (Chairman, President, and CEO)
Because people are not spending the kind of money that historically would be spent for new finds. So, we again, we think that, you know, right now we're in that trough on seismic, but things should start picking up.
Mike Battles (EVP and CFO)
That's right.
Kayvon Rahbar (Equity Research)
All right. Thank you so much.
Mike Battles (EVP and CFO)
Thanks, Kayvon.
Alan McKim (Chairman, President, and CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from Michael Hoffman with Stifel. Please proceed with your question.
Michael Hoffman (Managing Director and Group Head Diversified Industrials)
Thank you very much, Alan and Michael, for taking my questions. On the SK business, if we got inside it again and asked this slightly differently, in the SK business, what was the trend in average branch revenue or as a percentage change or dollar change? And then in the used oil piece, on the volume size, what was the percent change in volume year-over-year, and then what was the percent per gallon you got in the Q different than you thought, but what's that trend going into 2Q? That's the first question. Lots of pieces.
Alan McKim (Chairman, President, and CEO)
That's the first multi-
Mike Battles (EVP and CFO)
That's a
Alan McKim (Chairman, President, and CEO)
a lot to unpack. So I'd, I'd take the volume. I mean, we, I think we mentioned we're up 2 million gal.
Mike Battles (EVP and CFO)
That's right.
Alan McKim (Chairman, President, and CEO)
Now we, as you know, we're really managing the spread of our business. So, you know, as crude oil ticks up to 55 and we saw our Gulf Coast Number 6 tick up, you know, the RFO market started to be on the little bit up under pressure. We benefit a little bit because we have excess oil that our, you know, we have oversupply for our refineries, so we benefit a little bit there. But obviously, it puts a little pressure on what we collect our oil for. And so we saw a little uptick in our CFO rate.
Mike Battles (EVP and CFO)
Yeah.
Alan McKim (Chairman, President, and CEO)
We also-
Mike Battles (EVP and CFO)
Down tick.
Alan McKim (Chairman, President, and CEO)
Yeah.
Mike Battles (EVP and CFO)
Down a bit.
Alan McKim (Chairman, President, and CEO)
Yeah, it went down.
Mike Battles (EVP and CFO)
Yeah.
Alan McKim (Chairman, President, and CEO)
The value of that-
Mike Battles (EVP and CFO)
Yep
Alan McKim (Chairman, President, and CEO)
... or the price. On the other hand, you know, I think we've been gaining share. In some markets, we're actually getting some national accounts back that walked away after we started charging for oil a year or 18 months ago. And so our expectation or our trend continues to be positive, I think, in the volumes that we're bringing in. Go ahead.
Michael Hoffman (Managing Director and Group Head Diversified Industrials)
Well, just if I could ask, either would you give us the gal last year or just help us understand the percent change? The 2 million gal is nice, but what's it against?
Alan McKim (Chairman, President, and CEO)
On the collections, Michael, the 2 million gal referencing is 50 million gal collected versus 48 last year.
Michael Hoffman (Managing Director and Group Head Diversified Industrials)
Okay.
Alan McKim (Chairman, President, and CEO)
We don't share gal produced or anything, if that's where you're going.
Yeah.
Michael Hoffman (Managing Director and Group Head Diversified Industrials)
Okay. But your yields tend to be about 75%, so I can figure that out, right? That's, your yields are still about... Okay.
Alan McKim (Chairman, President, and CEO)
... Sorry, closer to 70, Michael, probably with the new smaller plants. Yep.
Michael Hoffman (Managing Director and Group Head Diversified Industrials)
Okay. All right, I get the spread management, and I applaud this, and you do regain control. When I think about the puts and takes between the CFO, RFO, and then the change in the base oil pricing through the quarter, you know, when it's all said and done, you were $0.02 ahead of the game year-over-year, but the trend going to 2Q looks more like $0.10-$0.15?
Alan McKim (Chairman, President, and CEO)
Yeah. You'll see a much better trend in the second quarter because a lot of our contracts with our main distributors, you know, and our base oil buyers, you know, they have a lag in how those price increases flow through.
Michael Hoffman (Managing Director and Group Head Diversified Industrials)
Okay. And if I want-
Mike Battles (EVP and CFO)
Michael, as Alan said, that we did move a shutdown out of Q2 into Q1 'cause we needed to, and that was a bit of a drain, but that's gonna be a kind of a good guy in Q2, as that shutdown was-
Alan McKim (Chairman, President, and CEO)
Yeah, we'll pick that back up again.
Mike Battles (EVP and CFO)
Yeah.
Michael Hoffman (Managing Director and Group Head Diversified Industrials)
Okay. And then, all of the public companies who manage turnarounds, on the E&C side, especially E and C side, said they had a, not a very good turnaround quarter in 1Q, but felt that there was clear visibility of better turnarounds through the remainder of the year. What's your view on that?
Alan McKim (Chairman, President, and CEO)
Yeah, our second quarter will be so much stronger. We view this year better than last year, and 2018 is shaping up to be a much stronger year even than this year. So I think that's consistent with our view.
Mike Battles (EVP and CFO)
Yeah.
Michael Hoffman (Managing Director and Group Head Diversified Industrials)
Okay. And then one last thing, Mike, on the guidance for $140-$180 on the free cash flow, you are doing better than you expect than we certainly modeled on your working capital. How much of that improvement is a cushion to the $140-$180, as opposed it was built into the $140-$180?
Mike Battles (EVP and CFO)
When we gave the $140-$180, Michael, we didn't assume any kind of working capital improvement. And so the fact we're getting some DSO goodness is great. But realize, too, that as we roll out the closed loop oil and we move out oil and other products out across the network, inventory is gonna go up a bit. And it has gone up a little bit over the quarter, but as that continues to ramp up, that is gonna be a small bad guy to working capital. And so as such, I mean, overall, I think it's gonna be overall good. And to answer your question, it's probably a bit of a cushion, but you know, that's in my mind, I need DSO to improve to offset a slight uptick in inventory.
Michael Hoffman (Managing Director and Group Head Diversified Industrials)
Fair enough. Then you did 50 million gal blended in the fourth quarter. What's the gal blended in the first quarter? The closed loop.
Alan McKim (Chairman, President, and CEO)
Well, that wouldn't be the full closed loop.
Mike Battles (EVP and CFO)
That wouldn't be... So when we talk about blended, that's kinda, that's kinda all in. As Alan said in his comment, only 3% of the blended-
Alan McKim (Chairman, President, and CEO)
Yeah
Mike Battles (EVP and CFO)
... of the total volume was, you know, direct, if you will, which is the packaged product, the 55 gal drums, the quart bottle, the-
Michael Hoffman (Managing Director and Group Head Diversified Industrials)
Right. Right.
Mike Battles (EVP and CFO)
Different talk about.
Michael Hoffman (Managing Director and Group Head Diversified Industrials)
I'm just trying... I mean, you had a goal of raising that number, 10 million gal in 2017. Trying to understand where we are against the 10 million gal improvement.
Alan McKim (Chairman, President, and CEO)
I don't think that Michael, that was from the fourth quarter call. You sort of set that 10 million goal. We didn't share that number. You sort of said it's 40, shooting for 50, and
Michael Hoffman (Managing Director and Group Head Diversified Industrials)
You didn't say no.
Alan McKim (Chairman, President, and CEO)
We didn't confirm or deny.
Yes, we're-
Michael Hoffman (Managing Director and Group Head Diversified Industrials)
Another one.
Alan McKim (Chairman, President, and CEO)
I think just at a high level, we've said we really wanna shift the percentage of base oil and blended oil almost upside down, right?
Mike Battles (EVP and CFO)
That's right.
Alan McKim (Chairman, President, and CEO)
That ultimately is our goal to get out of that commodity-based oil.
Mike Battles (EVP and CFO)
And I think we're making good progress to that end.
Alan McKim (Chairman, President, and CEO)
Yeah.
Mike Battles (EVP and CFO)
But what the right number is in 2017 versus 2018, you know.
Alan McKim (Chairman, President, and CEO)
Yeah.
Mike Battles (EVP and CFO)
Early days.
Michael Hoffman (Managing Director and Group Head Diversified Industrials)
Okay. Thanks for taking my questions.
Alan McKim (Chairman, President, and CEO)
You're welcome. Thank you.
Mike Battles (EVP and CFO)
Michael, great. We'll see you next week.
Operator (participant)
Thank you. Our next question comes from Brian Lee with Goldman Sachs. Please proceed with your question.
Brian Lee (Controller and Chief Accounting Officer)
Hey, guys. Thanks for taking the questions. Not to beat a dead horse here, but it does sound like you're expecting base oil prices to increase over the next few quarters as you have a bit of a catch-up effect. Did I understand that correctly, first? And then can you quantify how much uplift you're expecting, and then through which quarter?
Mike Battles (EVP and CFO)
Sure, Brian. So, as you're right, we are expecting an uptick in base oil pricing as we kind of roll our price increases out to the network. And as we've talked about publicly many times, there's a lag. But what's gonna happen is, it is a spread business. It is gonna put pressure on CFO. You know, that is gonna drive those margins up. We've said publicly, we try to manage that spread well. I think we put in, in 2016, good systems and processes to manage that spread well, the team with new leadership and working well together. And so, you know, it's gonna be up. How much of that is tough to tell. We're not updating our guidance numbers.
This is obviously a positive factor, but you know, so it's a lot of months left, right? We got a lot of months left, and so we're not gonna try to quantify that. I think it's slightly better than, as you said in my prepared remarks, it's slightly higher than what we had said back at year-end for the SK business.
Brian Lee (Controller and Chief Accounting Officer)
Okay, great. And then maybe just as a follow-up on that, if you know, crude's been strong through the early part of the year, but it's been a bit more under pressure and range bound here, sub 50 on the WTI. So how should we think about how that impacts the different moving pieces here in terms of you know, your ability to charge for oil and the trends in base oil pricing as you move later into the year and maybe some of the catch-up effect starts to get lapped?
Mike Battles (EVP and CFO)
Brian, when we give out the guidance and talk about here, again, in reaffirming the guidance in Q1, we don't assume any base oil price changes than what we have up in front of us. We, you know, I think that's sort of tough to guess that in any sense. So if it goes up or down, it's gonna have an impact on our business. And as base oil pricing has hovered around the $50, maybe a little south of $50 the past week or two. You know, that's just we don't have great hopes for the Western Canadian business. So the fact that that, you know, the $50 range or the $47, $48 range doesn't really change that.
Brian Lee (Controller and Chief Accounting Officer)
Okay. Okay, fair enough. Last one from me, and I'll pass it on. On technical services, can you guys give us any sense... I know you broke out the utilization numbers, but how much volume you did get out of El Dorado here, out of the gate? And then, how we should be thinking about increases in volumes over the next few quarters and just overall utilization trends. Do you get to 90% across the network by year-end, out from the 79 or so you were at this quarter? Thank you.
Mike Battles (EVP and CFO)
Yeah, Brian, no problem. So, you know, you add on, you know, 70,000 tons of capacity, it takes, you know, years to kind of build that back up. We feel like that's – that will be a great investment for Clean Harbors shareholders. We are confident that we'll be able to hit the targets. We've said publicly that the El Dorado incinerator should contribute, you know, $5 million-$10 million of incremental EBITDA in 2017. Nothing has changed in that end. As Alan said in his public remarks, that it's got the normal shakedown process, and the thing went online, you know, in Q1. We're going through direct burns, getting all the permits and qualifications done. We're excited about it.
The leadership team, led by our COO, has been a couple of times down there, getting his leadership team down there to understand what can happen there. And so we're again. Can't be more pleased with the progress that thing's gonna deliver to the shareholders of Clean Harbors. So again, you know, it's gonna, but it's gonna take some time, and these are long selling cycles to increase volumes, and so we don't anticipate, you know, this is gonna be measured in years, not quarters.
Brian Lee (Controller and Chief Accounting Officer)
Okay. Appreciate the call. Thanks, guys.
Mike Battles (EVP and CFO)
All right. Thanks, Brian.
Operator (participant)
Thank you. Our next question comes from Sean Hannan with Needham and Company. Please proceed with your question.
Sean Hannan (Managing Director of Equity Research)
Yes, good morning, folks. Thanks for taking the question here. I'm gonna come back to the base lube oil for a moment. I think there are some key things that perhaps we haven't touched on yet. There have been some price increases that we've seen, some of which is a little bit of a function of some seasonality, but also we've had the benefit of a number of turnarounds that have been kind of back to back to back to back, some of which are still going on. So, do you have any worries or fears that, you know, once we get into midsummer, so past the second quarter, and we get back to a more normalized supply scenario, what are your thoughts or plans, or considerations around pricing at that point?
Because we're gonna have a different supply-demand dynamic, I think, than what we're experiencing today. You could even argue that there's a potential you can get some declines that might be a little bit earlier than normal seasonality. So just wanted to sense that out with you, as you think beyond the second quarter, getting back to more balanced dynamics.
Alan McKim (Chairman, President, and CEO)
Right. So I think, one, you know, we're gonna manage our spread no matter where crude is gonna be. Two, I don't think we have anything significant into the remainder of the year for price increases, as we spoke of earlier. As you, your points are all, you know, well taken. We agree with them. It is a possibility that as we get through the next six months, that you could see pricing pressure, if there is more supply again. But, as we look at the market and at least what's gonna happen, we believe, over the next two to three quarters, then, that's sort of why we're sticking with our guidance for the year.
Sean Hannan (Managing Director of Equity Research)
Okay.
Mike Battles (EVP and CFO)
Yeah, Sean, the only thing I would add to that is that, yep, you know, Q1, we beat by a little bit than what kind of the midpoint in the range, and, you know, it's, we have puts and takes.
Sean Hannan (Managing Director of Equity Research)
Yeah.
Mike Battles (EVP and CFO)
And so if that happens, and you make a very valid point that we're getting the benefit of a lot of shutdowns and a lot of supply issues in the marketplace, and that could solve itself in Q, you know, Q3, and then what do we do from there?
Alan McKim (Chairman, President, and CEO)
Yeah.
Mike Battles (EVP and CFO)
The answer is that, you know, that's why, that's why guidance is what it is.
Alan McKim (Chairman, President, and CEO)
And that will be impacted by crude oil pricing at that time, which I think everyone is sort of up in the air about what's gonna happen with the main meeting and where inventories are gonna go there. So we agree with you, Sean.
Sean Hannan (Managing Director of Equity Research)
Yeah, I don't want to convey anything in terms of, you know, chinks in the armor around the guidance. It seems like, at this point, you guys actually have a relatively healthy buffer to be able to manage from here and manage those unpredictable factors. So, I'm comfortable on that high level front. Just a little bit more on the CFO as that's gone down a little bit. There's been some commentary that I've heard within the space that the behavior at the street level has become a little bit more unpredictable, and that there is some slightly irrational behavior versus the course of what's been seen over, say, the last one to two years.
Want to see if we can get some commentary, from you around that since you have the most exposure.
Alan McKim (Chairman, President, and CEO)
Sure. I don't think anything different than I've seen in the last 40 years, to be honest with you. I mean, you always have people that try to take advantage of maybe a particular opportunity in a particular market. It certainly doesn't create a trend across the US or Canada. And, you know, as the market leader, we have really-
... I think, provided market leadership since acquiring Safety-Kleen in 2012. I think we're managing the spread. I think, I think customers realize that, we're providing a valuable service to them. We continue to gain share. We know that there are one-off competitors out there that are irrational from time to time, and oftentimes they go out of business sooner than later. Sometimes the Number 6 oil market will spike up, and the demand in Mexico will increase significantly, and you'll see a big rush to buy a whole bunch of oil in the street, and we're not following that business. And I think you'll continue to see us do a good job of managing our volumes.
Sean Hannan (Managing Director of Equity Research)
That's great. If I can switch over to Safety-Kleen, can we get a little, I'm sorry, looking at the rest of Safety-Kleen for the parts washing. I know I realize this is all consolidated here, but can you give us a sense of how much that side of the equation had grown within the segment?
Alan McKim (Chairman, President, and CEO)
You know, I think we said that the parts washer service is about 251,000, so pretty flat with a year ago. I would tell you that we track that, our placed machines and our customer-owned machines, and we're seeing some losses in a couple of examples, but for the most part, we're really holding our own in that space. Our oil filter recycling business is really strong. Our DIY placements are up substantially. Our vac services, we've added a lot of more vac equipment, and we are putting more vacs out there, so we have, you know, well over 100 vac units in our Safety-Kleen team now. So that business is doing extremely well.
Even, you know, our waste antifreeze and our windshield washer fluid business, all of those lines of business that kind of flow through our Safety-Kleen branch network, outside of parts washers, I think is why you're seeing that revenue growth across that business.
Sean Hannan (Managing Director of Equity Research)
Okay. Well, and so... Sorry.
Alan McKim (Chairman, President, and CEO)
Go ahead.
Sean Hannan (Managing Director of Equity Research)
No, so basically, we had seen the parts washing locations flattish, but you know, are you getting increased pricing on that? And then, you know, as you get into those ancillaries, which I think that you had talked about, then that mix, scale-wise, dollar-wise, is also improving there, if I'm interpreting your comments correctly.
Alan McKim (Chairman, President, and CEO)
Yeah, I, I think we're doing a better job of, of capturing, more, with our existing customer base and providing more services and, and cross-selling more to our existing customers. Absolutely.
Sean Hannan (Managing Director of Equity Research)
Okay. Last question here. In terms of the landfill volumes on the Tech Services side, we've obviously seen over the last few years, less and less volumes coming from the Bakken. To what degree in that decline that you saw in the quarter is that primarily driven by projects versus, the volumes that would come from, the oil fields there? Just trying to understand that a little bit better because it seems like we should be getting to a point where, we, we should have better comps, coming out of, out of the Bakken, of those depressed levels.
Alan McKim (Chairman, President, and CEO)
Yeah, I mean, they are still depressed, and the amount of, you know, solids coming off the rigs, the amount of waste going into the landfills, both in California, North Dakota, and Ryley, up in Alberta, are all depressed, and we don't anticipate them coming back. Our largest account up in Western Canada still hasn't started back up, and quite frankly, not sure if they'll ever start that plant back up again. So that was our single largest sort of base account at our Alberta landfill. So I would say that our base business is pretty good. You know, our... If you went through and looked at all, you know, 11 landfills, base is not bad.
It's just that event business, and particularly the oil and gas-related drill cuttings and those kinds of waste streams is really the ones that's impacted. I would also tell you, because of the weak turnaround season, not a lot of refinery waste came into the landfills as well, so I hope that we're gonna see some pickup on that in the next couple quarters.
Sean Hannan (Managing Director of Equity Research)
That elaboration makes a lot of sense. Thanks so much, Alan.
Alan McKim (Chairman, President, and CEO)
Thanks.
Mike Battles (EVP and CFO)
Thanks, Sean.
Operator (participant)
Thank you. Our next question comes from Larry Solow with CJS Securities. Please proceed with your question.
Larry Solow (Partner)
Great, thanks. Good morning, guys.
Alan McKim (Chairman, President, and CEO)
Good morning, Larry.
Larry Solow (Partner)
Most of my questions have been answered. Just a few follow-ups. Just, you mentioned your visibility certainly improved and your new systems have helped that. In terms of on the landfill side, several quarters of down volumes there, you spoke of several larger projects coming online. Are they already online? Are they already out for bid, or is that your expectation, or any thoughts there?
Alan McKim (Chairman, President, and CEO)
You know, I would say, you know, looking at, like, the second quarter, we see a nice uptick, but nothing, you know, it's not a hockey stick yet. We're, you know, as we look at, you know, close date, execution date, we still see things getting pushed.
Larry Solow (Partner)
Mm-hmm.
Alan McKim (Chairman, President, and CEO)
You know, even business that we're awarded, we're still seeing some lag in some of those, you know, actual execution dates. So we're looking at that, but overall, I think, you know, the pipeline is pretty good for the waste project side of our business and our remediation business.
Larry Solow (Partner)
Right.
Alan McKim (Chairman, President, and CEO)
But probably, consistent, quite frankly, with the last couple of years, though.
Larry Solow (Partner)
Got it. And on the incinerator side, do you see some more of these captives closing? Does that, you know, is that... Your confidence in that seems to be, you know, you seem to be speaking more about that again.
Alan McKim (Chairman, President, and CEO)
Yeah, I think with some of the consolidation going on, particularly with some of the majors, where they, you know, ownership changes are taking place, mergers and divestitures are happening. There's a lot of noise amongst our customers, particularly those that operate captives.
Larry Solow (Partner)
Mm-hmm.
Alan McKim (Chairman, President, and CEO)
We've seen a lot of interest in our new incinerator because of its capabilities as much as because of the captives winding down. So, we're pretty optimistic about people's interest in El Dorado and the ability to handle material that up until that plant coming online, quite frankly, we did not have the capacity for them to consider taking a captive down.
Larry Solow (Partner)
Got it. And then just switching gears on the, on the Safety-Kleen side, you, you mentioned, I think 3% of your blended sales were, were direct back, you know, through the, the closed loop. Do you have sort of a, you know, maybe not an exact target, but, you know, where you expect this in, I don't know, year-end or the next 2, 3 years? Any, you know, thoughts on that? And is that probably the best metric for us to sort of follow is in terms of your progress on that, on the closed loop?
Alan McKim (Chairman, President, and CEO)
Yeah, we had talked about, you know, coming up with some of a metric here for you that maybe you can hang your hat on.
Larry Solow (Partner)
Right.
Alan McKim (Chairman, President, and CEO)
I, I think on a gallon basis, we haven't yet kind of determined what's... Because when we look at a three to five year, you know, model, you know-
Larry Solow (Partner)
Mm-hmm
Alan McKim (Chairman, President, and CEO)
... we know we're trying to get 70% of our material as a blended oil rather than-
Larry Solow (Partner)
Right
Alan McKim (Chairman, President, and CEO)
- base oil, right? So that's sort of our long-term strategic plan. I don't know, Jim, do you want to comment on that?
Mike Battles (EVP and CFO)
Yeah. So, Larry, if you just take apart what Alan just said, and we're trying to get from, say, 33% to 70%, so we're trying to move it up 37% there.
Larry Solow (Partner)
Right.
Mike Battles (EVP and CFO)
That's primarily not gonna be from distributors, that's gonna be internally generated. So we're at 3% today, and we wanna be, you know, in that 3- to 5-year plan at that 35%-40% direct.
Larry Solow (Partner)
Yeah.
Mike Battles (EVP and CFO)
But I don't think we are prepared today to say on this call, you know, we wanna be 7% by the end of the year, or whatever the number is.
Larry Solow (Partner)
Right.
Mike Battles (EVP and CFO)
But that is the number to watch.
Larry Solow (Partner)
Yeah.
Got it. Got it. Okay, switching gears on the industrial side, you guys have, I think over the last few quarters, spoken a little bit more about, you know, your increased presence in the hydrovac and the daylighting market. Can you maybe just take a minute, sort of, you know, is that market growing today in the U.S., and how does it... You know, is it bigger still in Canada versus the U.S.? Can you kind of just give us, like, a quick market size and growth, you know, outlook?
Alan McKim (Chairman, President, and CEO)
Absolutely. You know, we're seeing a nice demand, you know, for those services in the U.S. The market is growing. People are looking at that technology and replacement of yellow iron as a safer way of dealing with a lot of work that goes on, both on the streets for utility work, as well as within the refineries and chemical plants. And so we're seeing a nice demand, and the market improving there. And, you know, Canada is well ahead in utilizing.
Larry Solow (Partner)
Right
Alan McKim (Chairman, President, and CEO)
... that technology, and I think in the U.S., we're seeing a greater adoption of that. And we're growing. You know, we're pretty pleased with the team and the growth that they're getting there.
Larry Solow (Partner)
So, it sounds like you guys are more on the U.S. side relative to the more mature Canada piece, but you're more-
Alan McKim (Chairman, President, and CEO)
Yeah. Yeah, Eastern Canada and U.S. certainly have a lot more growth opportunity. And Western Canada has adopted that technology for a long time, so more so in those markets.
Larry Solow (Partner)
Just at the ballpark, not your share, but what is sort of that total market size today in North America?
Alan McKim (Chairman, President, and CEO)
You know, I think if you look at, like, a Badger who's got over 1,000 units overall, and, and-
Larry Solow (Partner)
Right
Alan McKim (Chairman, President, and CEO)
... you've got some other players out there that probably equal that, you know, that's probably a good number to think about, 2,000 of those units that are probably-
Larry Solow (Partner)
Okay
Alan McKim (Chairman, President, and CEO)
... in the market.
Larry Solow (Partner)
Okay. Okay.
Mike Battles (EVP and CFO)
Maybe Badger times 2, if you wanna think about the total market size.
Alan McKim (Chairman, President, and CEO)
Yeah. Yeah.
Larry Solow (Partner)
Got it. So Badger's probably about half the share of that market. Okay, just last question on, I think you mentioned your net CapEx about $160-$170. In terms of disposal of assets, I think it was like $20 million last year. Is that sort of a good ballpark target to think about for 2017?
Mike Battles (EVP and CFO)
So, Larry, so, at the end of the day, we're gonna hit $160-$170 in net CapEx. And kind of how we get there, whether it's through kind of cutting back a little bit on CapEx and more asset disposals, I mean, we try to give you the parts, but frankly, it's, you know, sometimes you're talking about selling property, it takes a long time to sell. And so I don't wanna sit here and tell you it's gonna be $185 minus $20 of CapEx or asset disposals. What I am gonna tell you is that it's $160 to, you know, whatever we said, $160-$170 of net CapEx, and we'll get there. We will manage it accordingly.
Larry Solow (Partner)
Got it. So it sounds like you have a little discretion on the tail end, at least.
Mike Battles (EVP and CFO)
Yeah. At the end of the day, you know, it's, it's things-
Just the timing of payments-
Larry Solow (Partner)
Yeah
Mike Battles (EVP and CFO)
... and timing of acquisitions and timing of, CapEx spend. It's just a, just a timing thing. We manage it.
Larry Solow (Partner)
Got it. Got it. Great. Understood. Great. Thanks a lot. I appreciate it, guys. Thanks a lot.
Alan McKim (Chairman, President, and CEO)
Yeah. Okay, Larry.
Mike Battles (EVP and CFO)
Thanks, Larry.
Operator (participant)
Thank you. Our next question comes from Noah Kaye with Oppenheimer and Company. Please proceed with your question.
Noah Kaye (Senior Research Analyst)
Hey, good morning, Alan, Mike, and Jim. Thanks for taking my questions. Just so I'll just keep it quick here. First, can you update us on where you're at with the run rate on realizing some of the major cost reduction initiatives, and kind of how that run rate should trend over the next several quarters heading into 2018?
Alan McKim (Chairman, President, and CEO)
Mike, do you want to try?
Mike Battles (EVP and CFO)
Yeah. Yeah, yeah, no, no problem. The, you know, at the end of the day, when you think of kind of Q1, we did 8% in kind of reported revenue. We did you know, increase. We did 19% EBITDA increase, right?
Noah Kaye (Senior Research Analyst)
Mm-hmm.
Mike Battles (EVP and CFO)
So it gets really tricky for us to try to measure, like, did tech have the cost-saving targets we had in there? You know, 'cause at the same time, we're making investments in the sales force, we have a bunch of acquisitions, you know, the business has changed and more of that. I would say we're making very good progress. As Alan said in his prepared remarks, there's executive leadership across cost-saving initiatives. Although we're trying to invest for growth, and we made some investments in the sales force in other areas, nothing's gonna change here at Clean Harbors as far as kind of managing costs effectively. And so we continue to drive that.
Can I tell you? So I would say that given the results in Q1 and my view for the year, we're still kind of well on track to kind of get to the cost savings we talked about at year-end. Nothing has changed there. Honestly, as we're trying to manage for growth, we're making some investments. So that makes SG&A and corporate costs a little higher, but at the end of the day, nothing changes around here.
Noah Kaye (Senior Research Analyst)
Yeah, totally fair. I mean, I guess maybe just from a sort of a baseball sense of it, though, you know, kinda just thinking about, you know, the run rate versus where you ultimately wanna be, what kind of inning are we in here on those initiatives?
Alan McKim (Chairman, President, and CEO)
Pretend this is pretend there's 75-
Mike Battles (EVP and CFO)
Yeah.
Alan McKim (Chairman, President, and CEO)
Basically all in-
Noah Kaye (Senior Research Analyst)
Yeah.
Mike Battles (EVP and CFO)
Yeah.
Noah Kaye (Senior Research Analyst)
Yeah.
Mike Battles (EVP and CFO)
We're making good progress.
Alan McKim (Chairman, President, and CEO)
Well, you know, we just had our corporate executive team in last week, and I think the sense of all of the folks in the organization is that we're on track, and we actually have, you know, other initiatives that we'll be starting to, you know-
Noah Kaye (Senior Research Analyst)
Mm-hmm
Alan McKim (Chairman, President, and CEO)
... put pen to the paper for next year, for, you know, as we think about our 2018 initiatives. So this is sort of a never ending, but I think that $75 million is, is on track, and we're probably, you know, in the early innings of, of seeing that showing up in the numbers, if you wanna, if you wanna, you know, think of it that way.
Noah Kaye (Senior Research Analyst)
Yeah.
Mike Battles (EVP and CFO)
You know, just, just to clarify, the $75 million gross, you know, $30 million net, just because we're making investments. We have, you know-
Alan McKim (Chairman, President, and CEO)
That's right.
Mike Battles (EVP and CFO)
Healthcare costs go up, wages go up, things happen, things happen, inflation happens. So this is, that $30 million that I spoke of is correlates to Alan's gross ones-
Alan McKim (Chairman, President, and CEO)
That's right.
Mike Battles (EVP and CFO)
Gross ones net, and I think we're kind of well on our way.
Alan McKim (Chairman, President, and CEO)
Which is a point on the SG&A. You've seen a little uptick in SG&A-
Mike Battles (EVP and CFO)
That's right
Alan McKim (Chairman, President, and CEO)
... because you're gonna see stock-based compensation, other incentive compensation, that is gonna offset some of those cost reductions.
Mike Battles (EVP and CFO)
That's right. That's right.
Noah Kaye (Senior Research Analyst)
Yeah, and we are seeing more macro inflation as well. I mean, I just went around the corner and my burrito pricing went up, so we're seeing it, too. And then just a follow-up from me. On Tech Services, you know, the margin headwind in the quarter, really, I mean, you're basically investing here. You've got the startup at El Dorado, you know, and you're investing in the healthcare business. But when should we start to see... How do we think about from a modeling perspective, kind of incremental margin, margin improvement year-over-year, return to that in the business? Is that kind of more of a 2018 story, or, you know, is it possible that we'll get it in future quarters this year?
Mike Battles (EVP and CFO)
Yeah, no, so I'll, I'll take a shot at this one, and Alan, feel free to chime in. You know, all year long, as we, you know, get the generator kind of running and up and operational, it's gonna put pressure on the margin, and we're gonna have, you know, mix matters too, right? Whether it be, you know, some of these projects are kind of higher margins. So as the projects kick in, we're hoping to have some of that. Q1 was more base business, kind of a little lower margin. And so, so I don't think. I think as I look at the year from an EBITDA margin standpoint, I think it's gonna be, you know, flattish, you know, kind of all year long.
Noah Kaye (Senior Research Analyst)
Mm-hmm.
Mike Battles (EVP and CFO)
Higher revenue, slightly higher EBITDA on an absolute dollar basis, but, you know, the margin will remain there for 2017. And as the incinerator gets up and running and gets up, you know, kind of full capacity in 2018 and 2019, the margins will kind of creep back up from there.
Noah Kaye (Senior Research Analyst)
That's perfect, caller. Thanks so much.
Alan McKim (Chairman, President, and CEO)
Thank you. Thanks, Noah.
Operator (participant)
Once again, as a reminder, if you'd like to ask a question, please press star one on your telephone keypad. Our next question is a follow-up from Sean Hannan with Needham and Company. Please proceed with your question.
Sean Hannan (Managing Director of Equity Research)
Yeah. Hi, thanks. Just quick here, Dow and DuPont, how much business are you doing with them today? What degree is that business trending with them, particularly related to Tech Services?
Alan McKim (Chairman, President, and CEO)
Yeah, we couldn't comment, Sean, on particular customers at this point. To be honest with you, I think that would be getting kicked under the table. We can't comment on that.
Sean Hannan (Managing Director of Equity Research)
Okay, fair enough. And then, within oil and gas, you know, there's a lot of activity that's been ticking up that you've already acknowledged. And you've also, in prior calls, talked about pricing pressures. Can you elaborate on where some of those pressures perhaps stand today? To what degree are they, you know, normalizing? How do we think about pricing here forward, and, and, and how is that assumed within your EBITDA guidance for the space? That's it for me. Thanks so much.
Alan McKim (Chairman, President, and CEO)
Sure. Yeah, as we mentioned, you know, our utilization was up substantially, but, you know, discounting really has hurt that business. Just the sheer number of rigs being serviced is so low compared to, you know, two or three years ago. So all of the suppliers and the buyers are beating each other up, and we've been caught in that. So our discounting has been substantial. We are pushing back now and addressing that with our customers, realizing that for us to continue to service them and invest in the kinds of equipment they need to have reliable service, we've got to make a profit and get a return on our capital there. So, we're pushing it back, and hopefully gonna see that discount, you know, improve.
Sean Hannan (Managing Director of Equity Research)
Thanks so much.
Mike Battles (EVP and CFO)
Thanks, Sean.
Operator (participant)
Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. McKim for closing remarks.
Alan McKim (Chairman, President, and CEO)
Okay, great. Thanks, Michelle. Thanks for joining us today. We are speaking at several upcoming conferences in the next week, including events both in Boston, New York, and New Orleans, so we look forward to seeing many of you at these and other events throughout 2017. Have a great day.
Operator (participant)
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.