Clean Harbors - Q2 2015

Transcript

Operator (participant)

Greetings and welcome to the Clean Harbors Incorporated second quarter 2015 conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael McDonald, General Counsel for Clean Harbors Incorporated. Thank you, Mr. McDonald. You may begin.

Michael McDonald (General Counsel)

Thank you, LaTonya, and good morning, everyone. Thank you for joining us today. On the call with me are Chairman and Chief Executive Officer Alan S. McKim, Vice Chairman, President, and Chief Financial Officer Jim Rutledge, and our SVP of Investor Relations, Jim Buckley. We've posted our slides for today's call to the Investor Relations section of our website. I invite you to open the file and follow the presentation along with us. Matters we are discussing today that are not historical facts are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Participants are cautioned not to place undue reliance on these statements, which reflect management's opinions only as of this date, August 5th, 2015. Information on the potential factors and risks that could affect the company's actual results of operations is included in our filings with the SEC.

The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's press release or this morning's call, other than through SEC filings that will be made concerning this reporting period. In addition, I'd like to remind you that today's discussion will include references to non-GAAP measures. Clean Harbors believes that such information provides an additional measurement and consistent historical comparison of its performance. A reconciliation of the non-GAAP measures to the most directly comparable GAAP measures is available in today's news release, which can be found on our website, cleanharbors.com, as well as in the appendix of today's presentation. Now, I'd like to turn the call over to our CEO, Alan McKim. Alan?

Alan McKim (Founder, Executive Chairman and CTO)

Thanks. Excuse me. Thanks, Michael, and good morning, everyone. I'm happy to be sharing our good results with you today. Beginning on slide 3, we reported Q2 revenue of $936.2 million, up 9% year-over-year. This growth was driven by our response to a number of emergency events in the quarter. It has been nine quarters since our last major event with Hurricane Sandy, but we had a bundle of activity here in Q2. Let me start by thanking our team for their accomplishments this quarter. We pulled resources, including people, equipment, and vehicles from across the company to safely and seamlessly handle events that occurred in the Midwest, on the West Coast, in the Northwest, and the Northeast. These unplanned events accounted for approximately 18% of our revenue in the quarter.

It was quite an achievement that once again showed the power of Clean Harbors to effectively respond to multiple large-scale events. I'm sure many of you will have questions about what we did and how much revenue was related to specific incidents. However, due to the sensitivity and ongoing nature of some of this work, as well as the customers involved, we'll not be breaking out revenue by category as we have done in the past. While Avian Flu was the largest single contributor in the quarter, in aggregate, these events totaled $170 million in revenue for the company, which more than offset the headwinds we faced from weakness in the energy markets, currency translation, and lower base oil pricing. Demonstrating the leverage in our business model, our Adjusted EBITDA grew at more than twice our rate of revenue growth, increasing 20% from a year ago.

While the segments will be covered in the upcoming slides, I did want to highlight two other strong performers this quarter, whose contributions may have been overshadowed by all the emergency work. Safety-Kleen Environmental recorded another excellent quarter. Profitability and margins increased sharply, supported by the recent addition of the Thermo Fluids acquisition, which is already performing well in the early stages of integration. Also, our Safety-Kleen Oil business rebounded nicely from Q1 as we started to experience the benefits of our lower used oil collection and transportation cost initiatives. Looking at the segments in more detail, beginning on slide four with Tech Services, revenue, adjusted EBITDA, and margins were down from Q4, excuse me, down from 2014, which was disappointing. Those declines were caused by a combination of issues, including several waste project delays, lower energy-related waste volumes, and unplanned outages at two of our largest incinerators.

These factors more than offset gains we registered in drum volumes and in bulk solids. In terms of the outages, there was a total of 8 unplanned days at our second largest plant. We also suffered a power outage in May at our largest plant, which caused some damage to the facility and resulted in seven days of unplanned repairs and upgrades. As a result of all these unplanned days, our incineration utilization for the quarter was 91%. Landfill volumes were down 29% from a year ago, primarily due to lower energy waste volumes, as well as the project delays I mentioned. We're confident that our landfill business will be back on track in the second half of the year as delayed projects come online, along with a strong pipeline of upcoming opportunities. Turning to slide 5, Industrial and Field Services revenue nearly doubled in Q2 based on the contribution.

Without the $170 million of large events and emergency response work, we would have been close to flat from a year ago. This is impressive when you consider the substantial amount of resources that were dedicated to these initiatives during the quarter. Growth in our U.S. industrial and specialty groups, as well as our base field service business, essentially offset the decline in the Canadian oil sands work and the Canadian currency effect. Turnaround activity picked up in the quarter, particularly in the U.S. While the industry continues to recover from the refinery strike that occurred in Q1 and some planned turnarounds have been pushed, we are seeing a significant amount of unplanned work.

In fact, between outages and crisis work, our turnaround group participated in more unplanned work than planned work in Q2 as refiners continue to run their plants hard and try to delay spending as long as possible. The unplanned work tends to be at a higher margin for us because it comes at a higher price and frequently involves a larger scope of work. Our team also done a great job of taking market share in some of our key business lines, particularly some of our high-margin areas. Profitability and margins in industrial and field services were up substantially based on our work, as well as the revenue mix in the industrial side. Utilization for our billable personnel was flat at 87% compared to a year ago.

Moving to slide 6, our revenue in Oil Refining and Recycling was down from a year ago, as expected, with a sharp decline in base oil pricing. Today, our posted Group II pricing stands at $2.35 a gallon versus $3.45 a gallon a year ago. Our team continues to execute well on the zero pay-for-oil and charge-for-oil initiative we have announced in December. Despite the greater than a dollar drop in base oil pricing, we still generated increased profitability in Q2, and margins were up significantly from a year ago. Our results were also in sharp contrast with Q1 when we were still flushing higher pay-for-oil inventory through our plants. Our blended sales in the quarter were below our expectations as we continue to rely heavily on our distributor network and government sales. We were flat with Q1 at 33%, but down from a year ago.

Turning to slide 7, direct revenue in Safety-Kleen Environmental Services was down 14%. But similar to Q1, this decline was entirely due to the lower intercompany costs resulting from the reduced pay for oil. Outside revenue in the segment, as shown at the top of the slide, was up slightly as the addition of Thermo Fluids and gains in base business offset a drop in recycled fuel oil sales. Profitability was up an impressive 32%, reflecting an improved business mix, pricing gains, the TFI contribution, and the cost reductions we've implemented in the past year. Parts washers services were up about 10% from a year ago as we continue to grow our revenues in that business. With the addition of Thermo Fluids, our collection volumes grew from a year ago. We brought in 59 million gallons in Q2, of which TFI accounted for just over 11 million gallons.

Bringing in such high levels of collection gives us a buffer above what we need for our three refineries to run full, which enables us to be more efficient with our sourcing and routing. It also allows us to maintain our commitment to further lowering our average price for oil. In Q2, we reduced our average PFO cost by $0.03 from Q1. And while we don't share a specific number for competitive reasons, I can say that we're edging closer to zero, but we're not quite there yet. We are now moving forward with charging for oil in some markets and charging stop fees for servicing remote customers. Turning to slide eight, as you can see from the charts, Lodging Services clearly continue to underperform, with revenue dropping nearly 50% and profitability down even greater than that.

The challenging conditions in the oil sands only worsened in the quarter as turnaround activity in that region was light and projects were severely limited. This segment was hit by declining occupancy or a fixed lodge, combined with a falloff in drill camp activity. In addition, our camp manufacturing business had limited sales. With our primary fixed lodging registering an average occupancy rate of just 31% in the quarter, we're taking steps to weather this downturn until more work returns to the region and rates begin to normalize. One of the advantages of our facilities is that they are modular, and we can be moved far more easily than many of our peers' lodges. We'll continue to take additional steps to eliminate expenses and seek opportunities in British Columbia and outside our traditional markets to generate revenue and possibly relocate our assets.

Turning to Oil and Gas Field Services on slide 9, the 32% drop in revenue from the prior year was largely anticipated as energy markets and the customer spending associated with those markets have yet to recover. As outlined on the slide, we face similar trends as we have in the past several quarters. This was compounded by the fact that Q2 is the seasonally weakest quarter for this segment. The average number of rigs serviced in the quarter was down 40% from a year ago to just 74. Average utilization of our key equipment, centrifuges for processing waste, was down to 32% from 40% a year ago. We remain convinced that this market is driving many small competitors out of business. However, that is a small consolation for us until we see rig counts and customer spending finally moving in a positive direction.

Looking at our corporate initiatives on slide 10, activities associated with our planned carve-out remain on schedule. We are preparing financial statements under IFRS that we will have audited, and we're developing a unifying brand for the carve-out, assembling the new organization's leadership team, and coordinating all the necessary steps. We are proceeding with all the actions necessary for the carve-out to be capable of going public by year-end, and we still expect to complete an IPO during 2016, depending on the market conditions and board approval. The next initiative I want to highlight is the integration of Thermo Fluids, which we acquired in early April. We have begun the process of overlaying TFI with our existing Safety-Kleen network, with a focus on maximizing our use of rail and achieving lowest-cost transportation.

While we're in the early stages of this initiative, we see a lot of opportunity, including significant potential to cross-sell our environmental services into Thermo Fluids on a penetrated base of over 20,000 customers. Slide 11 is simply a reminder of our capital allocation strategy. We continue to repurchase shares when we see that as the most effective use of capital. We also intend to continue to invest in our business, particularly where we see attractive long-term growth opportunities, such as the new incinerator in Arkansas. We continue to evaluate potential acquisitions with an emphasis on complementary environmental or industrial businesses we can acquire at a reasonable valuation. Moving to our outlook starting on slide 12, we have a range of growth initiatives underway across our segments.

Within tech services, we expect to extend disposal momentum at our incinerators, and are pursuing a strong pipeline of large volume projects in our landfill business in the second half of the year. We remain on target for the planned startup of our new incinerator in late 2016, which we continue to believe will be well-timed. The rotary kiln, which alone weighs 131 tons, will be delivered to El Dorado this week, and construction continues throughout the site. Within industrial and field, our near-term emphasis is on managing our resources as we wind down several emergency response events and begin ramping up for the busiest part of the turnaround season. For field services, we are continuing with our plan of co-locating with existing Safety-Kleen branches, which has been a highly effective strategy for us.

Within oil refining, we remain focused on increasing the efficiency of our network to reduce our transportation costs. At the same time, we're looking to jump-start our blended product sales by moving forward with our pilot programs to build a direct sales channel. Our intention is to create a structure where we sell our blended products directly back to the Safety-Kleen customer base. The pilot, which began in Canada, is now getting underway here in the U.S., and by the end of this year, we should have some good insights into how to best make this program work on a national scale. Turning to Safety-Kleen Environmental on slide 13, we are looking to continue the success of our branch business that has had in the past year.

With the Thermo Fluids assets at our disposal, we will continue our efforts to drive down our total cost for waste oil while maintaining sufficient volumes to run our plants, optimizing their network and training their sales force for cross-selling to the TFI customers, are high priorities in the coming quarters. For lodging, we continue to monitor opportunities to add occupancy at our fixed lodge. As I mentioned earlier, we're evaluating the network to move any locations as necessary. We continue to seek opportunities related to the activities in British Columbia to deploy our mobile assets, and our strategy is to pursue non-traditional markets as we seek to weather the cyclical low in that business. With oil and gas, we are continuing to take market share from small players while pursuing emergency opportunities in areas such as seismic.

We're targeting some sizable projects in Alaska, and at the same time, we're moving forward with cost reduction measures designed to counter the still challenging environment we're in. So with that, let me turn it over to Jim for his financial review. Jim.

Jim Rutledge (Vice Chairman, President, and CFO)

Thank you, Alan, and good morning, everyone. The pie chart on slide 15 shows our direct revenue in Q2 from our six reporting segments. With $170 million in emergency response revenue, our industrial and field services segment accounted for 37% of revenue, approximately twice its typical contribution. Technical Services followed at 31% of Q2 revenue. You can also see how much our energy-related businesses have been hurt by the current market conditions, as oil and gas field services accounted for only 4% of revenue, and lodging services was 2%, or a total of 6% between the two segments.

In Q2 2014, those two segments accounted for 12% of our total revenue. Turning to the income statement on slide 16, gross profit for the first quarter was $283.5 million, or a gross margin of 30.3%, up 100 basis points from a year ago, reflecting the revenue increase and leverage in our business. SG&A totaled $120.4 million in Q2, or 12.9% of revenues. This is a 60 basis point improvement from the 13.5% of revenues we posted in Q2 a year ago. For the full year, we now expect our total selling general and administrative expense in dollars will exceed last year by a few percentage points, given an increase in incentive compensation with this year's performance, the increasing cost of labor, and the higher level of administration associated with our emergency event business.

Depreciation and amortization increased slightly to $67.8 million, reflecting our larger asset base and the addition of Thermo Fluids. For the full year, we remain on track to meet our original projection for D&A of approximately $270 million. Income from operations, including the non-cash impairment charge for oil and gas, was down from the same period last year, but on an adjusted basis, it increased by more than $25 million to $92.8 million as a result of our revenue growth. Adjusted EBITDA increased 20% to a record $163.1 million, well ahead of the guidance we had provided in early May. Though some of the emergency response work was underway by the time of our Q1 call in May, we did not anticipate the scale that some of these activities would reach. I should point out that our adjusted EBITDA this quarter includes $1.8 million in integration and severance costs.

As we continued with several of our cost reduction initiatives, margins climbed considerably from 15.8%-17.4%. Our effective tax rate, excluding the impairment charge, came in at 41.8%, compared with 39.1% in Q2 a year ago. This tax rate was largely expected given our performance in Canada, where rates are lower. Based on where we are at the midpoint of the year, we now expect our effective tax rate for the full year, excluding the impairment charge, to be approximately 42%. Turning to slide 17, we continue to maintain a strong balance sheet. Cash and cash equivalents at June 30th declined to $173.6 million, compared with $233.7 million at the end of Q1, which is a decline of $60 million. This decline reflects our closing of the all-cash, approximately $80 million acquisition of TFI and the funding of over $16 million in share repurchases during the quarter.

Based on the amount of revenue we generated in the latter part of Q2, we expect our cash balance to climb significantly in Q3, which historically has been our strongest cash-generating quarter. Payables and receivables were up sharply from the end of March as a result of the emergency work we performed, much of it in the second half of Q2. The $722 million in billed and unbilled receivables should fall significantly by the end of September. DSO for the quarter decreased by one day to 71 days as we remain focused on collections and improving our billing processes to reduce DSO. We continue to target DSO in the mid-60-day range. Environmental liabilities at quarter-end were $200.6 million, essentially flat with Q1, and down over $5 million from year-end as we continue to address our obligations at a number of sites and reduce our total liability over time.

CapEx, net of disposals for Q2, was $69.3 million, which is above the $61.1 million we spent in Q2 of last year. However, this quarter includes $17.5 million investment in the El Dorado incineration project. If you net out that project, we are down appreciably from a year ago as we are focused on maximizing the returns we receive on internal capital. For 2015, we are continuing to target CapEx of $200 million, excluding the construction of the incinerator, which we still believe will likely add approximately $50 million in 2015. Our target has been to sell $25 million-$50 million of non-essential assets, which will reduce our CapEx net of disposals. But a portion of this will extend into next year, given the timing of some of the related projects, as well as the recent refocusing of our asset management team to servicing the event part of our business.

Year to date, we have had asset sales of nearly $3 million, but we expect this rate will accelerate in the coming quarters. Cash flow from operations in Q2 was $109 million, compared with $110.3 million a year ago. For the full year, we continue to expect cash flow from operations to exceed $400 million. Moving to guidance on slide 18, for the third quarter, we anticipate another strong level of performance as we expect to generate Adjusted EBITDA in the $165 million-$170 million range. For the full year, we are maintaining our previously announced guidance range of $530 million-$570 million. In terms of our anticipated 2015 segment performance, we continue to expect both Technical Services and SK Environmental to expand their Adjusted EBITDA in the mid-single-digit range, excluding the TFI acquisition.

Because of the contribution of emergency work in industrial and field services and the increases in several of its other businesses, we expect that segment to deliver Adjusted EBITDA growth close to 50%. We now expect Adjusted EBITDA in our SK Oil segment to be flat with 2014, assuming another modest base oil price decline in the near term. In our lodging segment, we continue to project Adjusted EBITDA to decline greater than 50% from 2014, based on our first-half results and the slowing oil sands environment. Similarly, we anticipate that Adjusted EBITDA in our oil and gas field services segment will also decline over 50% based on the current state of the energy markets. So with that, LaTonya, could you please open up the call for questions?

Operator (participant)

Thank you. We will now conduct a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. We will limit each caller to one question, then one follow-up question. You may press star two if you would 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 key. One moment, please, while we pull for our first question. Our first question comes from Tyler Brown with Raymond James. Please proceed with your question.

Tyler Brown (Associate VP)

Hey, nice quarter, guys.

Alan McKim (Founder, Executive Chairman and CTO)

Oh, thank you.

Tyler Brown (Associate VP)

Hey, Jim, kind of the logical question, I guess, here is on the EBITDA. Just how much was associated with the $170 million of response work? I mean, it looks like the margins expanded nice in industrial and field. I'm assuming that came in kind of at least at a 20%-25% incremental margin.

Jim Rutledge (Vice Chairman, President, and CFO)

Tyler, probably not that high. I would say more of the high teens when you consider the fact that clearly this performance had an effect on our incentive compensation and also the administration. So I would push you more to the high teens. Within industrial and field services, it's probably around that 20% area, but if you look at our corporation as a whole, I would say high teens.

Tyler Brown (Associate VP)

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

Jim Rutledge (Vice Chairman, President, and CFO)

We're involved in projects right now, and we expect, at a revenue standpoint, to exceed $100 million. I feel pretty confident that an EBITDA level, perhaps in the $15 million range, could be higher than that, could be $20 million, but we're obviously in the middle of the quarter or only a third of the way through. So as you know, with emergency response work, it is sporadic, and it's hard to forecast when things will be through.

Tyler Brown (Associate VP)

Okay, just real quick. So if I look at the math, so you kind of have, it's hard to say, but let's just say $50 million-$60 million of EBITDA from the work this year, that's kind of in that $550 million midpoint. I mean, is it that your core kind of EBITDA is running more in the $500 million, excluding the

Jim Rutledge (Vice Chairman, President, and CFO)

No, no, I wouldn't say that at all. I mean, clearly, maybe the way to look at it is this way. If you look at our businesses outside of the businesses that we're carving out, so if you take oil and gas and lodging and what has happened in those segments and put those aside, and you just look at the steady, what I'll call core businesses, excluding the event, the events that we're working on, the emergency response events, what we're seeing is probably an 8%+ growth in EBITDA year-over-year when you look at the full year. So clearly, that would take you north of what you're suggesting, but you need to then add in oil and gas and lodging to get above there.

But clearly, I think if you recall, when I was giving a report at the first quarter, I was thinking we would be at the bottom end of our range, and now clearly we're moving up higher in that range.

Tyler Brown (Associate VP)

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

Operator (participant)

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

Michael Hoffman (Analyst)

Hey, Jim, Alan, and Jim, thanks for taking my questions. Nice to see the operating leverage of the business still exists when volume comes through. On the guidance, you didn't talk anything about free cash flow. You had given a $150 number at the beginning of the year. Based on where you're still reaffirming the capital spending and the second-half trends tends to be better than the first half, I'm assuming we could talk about a range now of $150 to something on the free cash.

Jim Rutledge (Vice Chairman, President, and CFO)

I would agree, Michael.

Michael Hoffman (Analyst)

What's the something?

Jim Rutledge (Vice Chairman, President, and CFO)

I would put you in between the $150 million-$200 million range. I suspect it'll be somewhere in the middle there.

Michael Hoffman (Analyst)

Okay. And then following your logic, and I get that. So last year, if I took all of the what I'll call the recurring businesses ex the carve-out business, you did $581, and you had $161 million of corporate overhead. If you take the $581 and say that grows 8%, what am I using for corporate overhead this year?

Jim Rutledge (Vice Chairman, President, and CFO)

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

Michael Hoffman (Analyst)

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

Jim Rutledge (Vice Chairman, President, and CFO)

That's right. But also to say that clearly all the emergency response work, being that we're very centrally run or billing and all that, there is some impact on corporate costs, and that's why I'm saying $145 million-$150 million.

Michael Hoffman (Analyst)

Okay. To that point, just to follow that thread through, you would come in the year thinking it would be lower because of cost initiatives improving operating leverage on the ex-emergency response.

Jim Rutledge (Vice Chairman, President, and CFO)

That's still true.

Alan McKim (Founder, Executive Chairman and CTO)

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

Michael Hoffman (Analyst)

All right. Just to follow that thread, I realize I exceeded my question, but you said something about SG&A and the margin number. I have to admit I'm confused. What are you looking for, the percentage of revenue for SG&A?

Alan McKim (Founder, Executive Chairman and CTO)

Yeah. I think it comes out to somewhere around 13.5, but actually I was more precise in my comments. I meant to be anyway, Michael, where I was saying that I expected that our SG&A would grow in dollars by a few percent, so that could add $20 million over where we were last year, and I think we were at $440 or so last year. So that's kind of what I'm looking at right now. And that increase, which I originally thought we would be flat, but with labor costs, with the increased administration around the higher level of business that we have right now, and just increasing labor costs, even net of cost savings that we're doing, will put us a little higher on a whole dollar basis.

Michael Hoffman (Analyst)

All right. And then Alan, on the carve-out assets, I get I've got depressed conditions, but normally there's a seasonal pattern in the second half that's better than the first half. Is there going to be any seasonality this year?

Alan McKim (Founder, Executive Chairman and CTO)

It's a tough market when you look at what's happening with crude oil being where it's at today at $45-$46. We've got the weak Canadian dollar at $0.75. Probably I have not seen the kind of reduction in spending that has been happening literally overnight with many of our customers and their contracts. So as much as we're hopeful that we'll see an improvement in the second half of the year, we're certainly got a lot of headwinds against us here, Michael.

Michael Hoffman (Analyst)

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

Jim Rutledge (Vice Chairman, President, and CFO)

Thank you.

Alan McKim (Founder, Executive Chairman and CTO)

Thanks, Michael.

Operator (participant)

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

Scott Levine (Analyst)

Hey, good morning, guys.

Jim Rutledge (Vice Chairman, President, and CFO)

Good morning.

Scott Levine (Analyst)

So, I mean, I wanted to ask about a couple of the other businesses here that you guys were optimistic about at the outset. Firstly, within the industrial and field business, at the beginning of the year, you guys were expecting a very strong turnaround year. My sense was that was based on planned turnarounds and what you saw on the calendar. Last quarter, you kind of dialed down the expectation. Now it sounds like the expectation is maybe a little bit more positive on the basis of unplanned outage work. Maybe a little bit more elaboration on that and whether the schedule for the fall turnaround season has you any more encouraged regarding the planned portion of that business picking up in the back half of the year?

Alan McKim (Founder, Executive Chairman and CTO)

So I could comment that the refinery spreads are excellent right now for a lot of the companies in that business. And from everything we're seeing, they're trying to run these plants as strong and as hard and as long as they can. And I would say that we wouldn't be surprised to see more delays in planned work, which only leads to higher costs down the road for things like catalyst changeout and overall turnaround work. So we're positioned, we think, very well with a lot of key accounts, but we are seeing customers who really are relying on the margin on the refinery side to offset the sheer decline on the crude oil side to continue to run strong.

Scott Levine (Analyst)

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

Jim Rutledge (Vice Chairman, President, and CFO)

Yeah. I would offer, Alan, that in the U.S., we're definitely seeing turnaround activity increase year-over-year, for sure. In Canada, with some of the it's affected a little bit by the oil sands where they're trying to reduce spending and stretch it out as much as they can. So there, it could be flattish to slightly down. But I would say overall up in turnaround. Based on what you

Alan McKim (Founder, Executive Chairman and CTO)

Yeah. This was supposed to be a strong five-year cycle, and I don't believe it's going to be the five-year cycle that we're hoping for. But I would tend to think that that's going to spill over into next year as well. And for the unplanned work, which we can't necessarily predict, they tend to be much more expensive when they do happen for the customers.

Jim Rutledge (Vice Chairman, President, and CFO)

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

Scott Levine (Analyst)

Right. And with the positive bias to margins, given the point you made.

Jim Rutledge (Vice Chairman, President, and CFO)

Absolutely. Absolutely.

Scott Levine (Analyst)

Got it. Okay. And then as a follow-up on oil recycling, so from what I saw, a modest reduction, $0.10, I think, out of Motiva reduction in the quarter. It sounds like you're baking another modest decline here in Q3. But from an internal perspective, the initiatives you're pushing, etc., everything kind of on track there? And maybe a little bit more detail behind your expectations for base oil and whether things stabilize thereafter as far as you can tell.

Alan McKim (Founder, Executive Chairman and CTO)

So a couple of things. One is, in certain geographies, we are beginning to charge for oil. We know that not only because of the decline in base oil value, but also the decline in Gulf Coast Number 6 and where the diesel market is, that our recycled fuel oil that we send to other customers also has declined. So we realize that in a number of geographies, at this price in this market, we need to be charging for oil, and we're executing on that. We believe next year that our oil and the base oil market particularly should improve because of not only the nature of change in formulations where customers, particularly in the heavy-duty engine oil side of things, are moving to a different grade, a different focus on the use of our 240, for example.

We think we can actually start seeing a premium in the value of our products that we sell. A huge number of municipalities, federal government, states are really driving more on renewable fuels and putting out more bids with a higher percentage of recycled oil to be included in them, and they're bidding. And so we're very optimistic about moving away from the commodity side of the base oil market and really differentiating ourselves with our recycled products that we're selling to our customers.

Scott Levine (Analyst)

To that end, I know that blended as a percent of total has kind of been knocking around low-to-mid-30s. I mean, is next year do you have any targets that you could share? Is next year you guys confident you can get closer to 40% and maybe through that on a consistent basis, any more color there available?

Alan McKim (Founder, Executive Chairman and CTO)

I certainly think that you're going to continue to see us improve in the blended area. I think what we have done, particularly in the first six months with the intense effort we've had in this area, is recognize that the margins with some of the oils that we were selling was just unacceptable, considering the cost of our additives and the locations of some of the locations the products was going to really substantially reduced our transportation costs and improved our margin in this business. So I think you're going to now see, now that we've kind of right-sized that business and we've improved the margins and we're changing the contracts, I think you're going to see an improvement every quarter moving forward here.

Scott Levine (Analyst)

Got it. Great. Thank you.

Operator (participant)

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

Joe Box (Analyst)

Hey, good morning, guys.

Jim Rutledge (Vice Chairman, President, and CFO)

Good morning.

Joe Box (Analyst)

I just want to dig into the industrial and field services margins a little bit more. I mean, if you assume that the flow-through rate or the incremental margin is in that high teen % on the $170 million of revenue, if my math is right, that gives you a margin that's well above last year in the industrial and field services business. So can you just help us understand the different moving pieces there? Like how accretive was it for those unplanned turnarounds? Did you see any dilution to the margin from the organic buildout of industrial and field services going into SK Environmental? Just any help on the margin profile would be good.

Jim Rutledge (Vice Chairman, President, and CFO)

Well, we continue to, in all of our businesses, and certainly industrial and field services has been successful in doing a lot around improving margins. So all of that continues, all of that work. When we talk about cost reductions and improving our efficiency at our sites and reducing our offices and trying to consolidate and have the two parties, in this case, the field services and industrial, working be aligned more closely together, we do certainly improve our margins. Also, that being said, with the turnaround and specialty work increase that we saw in the U.S. during the quarter, we saw a nice increase that's planned and unplanned work. A lot of that specialty industrial work carries with it a higher margin. So we saw some nice improvements there.

And I will also say that our overall field services business is really doing a tremendous job in terms of increasing its business. We came out of a really rough winter, and as soon as March and April came around, that group got very busy, and they were doing a lot of work and really leveraging both from an employee productivity standpoint as well as efficiency in using our equipment. So all those factors contributed to a nice margin increase. And then certainly the events being, as I mentioned before, upwards of 20% that's reflected in that business unit certainly helped them too.

Joe Box (Analyst)

Understood. Thanks, Jim.

Alan McKim (Founder, Executive Chairman and CTO)

Let me just add one other comment that we have about 650 locations. 150+ of those are Safety-Kleen branch locations, and we are really overlaying growth across Safety-Kleen, particularly with our field services business. We're also repositioning assets out of our oil and gas business to help staff and resource those new offices. So we moved 15 Hydrovac, for example, out of Western Canada into the states as a way of expanding our field service and industrial service capabilities. So there's a lot of shifting going on here, and I think you're going to see that continually improve our margins with that leveraging of our infrastructure.

Joe Box (Analyst)

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

Alan McKim (Founder, Executive Chairman and CTO)

When you look at some of our landfills in California, North Dakota, Alberta, we saw a significant reduction in volumes from our E&P clients, as you would expect, with the drilling rigs laying down and a lot of activity and cash really being curtailed, any cash spending by our customers. So that reduction, we don't think will come back certainly in the next six months. But what is going to offset that is certainly the pipeline of remediation projects and other waste projects that we have in our pipeline, and we believe we'll replace a good part of that volume that we've lost now because of those market conditions. We were successful in our new permit in Sarnia. We now have received a new 25-year permit, which took us over five years to renew.

We're really excited about working through the community and working through the ministry there and now have a brand new 25-year permit for that site, which is the largest site in Canada.

Joe Box (Analyst)

I'll hop back in queue. Thanks.

Operator (participant)

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

Sean Hannan (Equity Research Analyst)

You guys can hear me?

Alan McKim (Founder, Executive Chairman and CTO)

Yes, Sean.

Jim Rutledge (Vice Chairman, President, and CFO)

Yes, Sean.

Sean Hannan (Equity Research Analyst)

Okay. Great. Thanks so much for taking the question. Good morning. First question here. So wanted to ask a little bit about PFO. Just based on some other comments or color within the space, there have been some that have actually seen their PFO average come up by a penny or two versus March. So just wanted to ask if you can maybe talk about what you've seen in terms of resistance from used oil generators, how you've managed it. Are you walking away from any volumes, or even does your geographic presence have you in more markets where for some reason you're not seeing it as much? So any more color on what you've seen, the actions, and then the difference in terms of your presence, what you've done would be helpful. Thanks.

Alan McKim (Founder, Executive Chairman and CTO)

Sure, Sean. So the recycled fuel oil market, the market where we sell oil as a recycled waste oil, hazardous waste oil, is pretty much a seasonal market, as you would expect in many geographies, selling to asphalt companies that are heavy construction going on in the summertime. So it's more of a seasonal business. And within some of those geographies, we do see competitors that get aggressive to provide recycled fuel oil to those outlets. And honestly, we have tried not to go after that business. And in some cases, we've lost some volume because we're not going to chase that essentially low-margin side of the business, which is, again, short-term and very seasonal. Over the last five years, we have seen a continuous decline in outlets for RFO because of the natural gas market really taking a lot of share.

Today, at natural gas pricing, many, many companies continue to look at ways of moving to natural gas. Even though those markets pop up and that seasonal opportunity for some of these collectors, they might push PFO up a little bit during this small period of time, we're not participating. We don't think in the long term those outlets will continue to exist anyway. Our focus continues to be to get back to where we were 10, 15 years ago when customers were paying for the service of having their hazardous waste managed safely and in compliance. That's where we're driving our initiatives here.

Jim Rutledge (Vice Chairman, President, and CFO)

Yeah. I'm sorry, Alan. If I had said RFO, that was my mistake. I meant PFO. I was trying to get a sense of the PFO average. You folks had made some comments earlier in the call that you continue to make incremental progress towards zero. So that dynamic just seemed a little different than some conversations I've had within the space. Trying to understand in that context.

Alan McKim (Founder, Executive Chairman and CTO)

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

Jim Rutledge (Vice Chairman, President, and CFO)

Sure. Absolutely. I think if you look at the amount of charge for oil that we're doing now, we've increased quite a bit. I don't have a precise figure, but I would say somewhere between 7 million gallons-10 million gallons we're now charging for oil. But as you look across the whole network that we have and you look at the geographies, we're probably at a blended rate of getting closer to zero. We're not quite at zero because there are geographic factors. There are factors where you take transportation into account, particularly in sites around our plant that have used oil. To garner those volumes, you would perhaps pay more than you would otherwise. But our strategy is to really work with that spread as it pertains to base oil.

We look at this as a spread business, and we want to make sure that we're always maintaining or trying to exceed that spread. That's the strategy. Okay. That's helpful. I think the combination, Alan and Jim, that's very useful. So RFO having some bit of an influence there as well as geography and your business, you're just in a better position.

Alan McKim (Founder, Executive Chairman and CTO)

Yeah.

Sean Hannan (Equity Research Analyst)

Yeah. Okay. And then in terms of blended products, can you lay out a little bit more in terms of the strategy for how you build up the scale there? I think there are, if I've sensed correctly, some creative efforts that you could take on within the market in order to drive up that portion of your sell-through product. Can you talk about that a little bit more since that's kind of a bogey that a lot of us are tracking toward in kind of the near and medium term? Thanks.

Alan McKim (Founder, Executive Chairman and CTO)

I think for a competitive reason, Sean, we'd rather not get into that in too much detail here. I would tell you that we have a number of quality distributors that we do business with, and we will continue to have a relationship with them, and we will be offering our products in certain markets to our distributors. In other markets, we believe we will go direct, and we think we have some creative strategies to expand our volumes and our customer base, particularly across the Safety-Kleen customer base, the 200,000 customers that they have, as you know. I think getting into any more of that from a detail would be something competitively I'd like to restrain from talking about here.

Sean Hannan (Equity Research Analyst)

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

Alan McKim (Founder, Executive Chairman and CTO)

Okay. Thank you, Sean.

Operator (participant)

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

Al Kaschalk (Equity Research Analyst)

Good morning, guys.

Jim Rutledge (Vice Chairman, President, and CFO)

Morning, Al.

Alan McKim (Founder, Executive Chairman and CTO)

Morning, Al.

Al Kaschalk (Equity Research Analyst)

I wanted to delve right into the visibility on the business, Alan, and the number of shifting parts. I know it certainly has some broader markets, broader factors in the market that are beyond your control. If you look at those businesses that have struggled, have we or have you reached a point here where you feel like we've bottomed, or are we still carrying through to the back half of 2015?

Alan McKim (Founder, Executive Chairman and CTO)

Well, I think it's hard to pick a bottom, as you know, in some of these businesses, particularly where they are so driven by crude oil and capital spending by our customers. And there's an awful lot going on in the energy markets, as you know, and it's not only impacting us on the base oil side of the business, but most importantly on the capital spending side, whether you're running a refinery or you're thinking about building out a new plant or expanding your existing facilities, just a significant constraint on capital by a lot of our energy customers upstream and midstream, downstream, everywhere. And so it's hard to pick a bottom at this point, I would say, Al.

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

Al Kaschalk (Equity Research Analyst)

Right. I appreciate that. But in terms of customer capital spending, I guess your comments earlier would we should conclude that you're continuing to see a lot of uncertainty, and therefore you don't expect really a movement forward. I guess what I'm asking at, do you need to take further actions from a cost side to help the business from a return standpoint?

Alan McKim (Founder, Executive Chairman and CTO)

Yeah. We're always doing that. I think the team has gone through two different reductions in force this year in the oil and gas area, particularly. But for example, our seismic business, with its reduced budget this year, should be on track. It should meet its budget, close to its budget right now with the work it's doing in Alaska and some other markets. But it is a reduced budget substantially from where we would have been maybe in 2012, for example. But I think we're repositioning assets, moving centrifuges into our industrial business, for example. We still are investing some capital in centrifuges for the oil and gas area because we still have a number of great customers that are drilling for natural gas. So we tend to be focused on the gas market, particularly in Western Canada and BC. We see great growth opportunities in that market.

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

Al Kaschalk (Equity Research Analyst)

Then my follow-up, appreciate that, color. On the capital side, you alluded to, obviously, the seismic is going to have some investment. I don't know if there's a way you can quantify that. It doesn't seem like you're taking up CapEx for this potential win. But secondly, with the cash that's going to be coming in from the emergency response, how does that change your outlook on whether you're repurchasing more stock, get more aggressive there, get more aggressive on better growth opportunities from acquisitions? Maybe just a little more detail around the thought process here.

Jim Rutledge (Vice Chairman, President, and CFO)

Al, this is Jim. I'll jump in, and then if Alan wants to add anything. But if you look at our overall capital allocation, clearly share repurchases is part of that decision process and allocating capital. And when we look at our capital expenditures, we have some very good projects going on in addition to the El Dorado incinerator, but we have some nice landfill expansions that we're doing in the hazardous waste side. We're doing some upgrades at a few of our facilities. One example is our Newark facility that we got last year in terms of increasing throughput. We're increasing some of our blended capability for growth to allude to what Alan was talking about before. We continue to invest in our technology.

We've dedicated nearly $10 million to technology and running all of our systems and how we work within the SK Environmental, for example, all the work that we're doing with the drivers and how we're managing PFO on a highest margin routing basis. So there's a lot that we're investing. And at the same time, I will say that we continue to look at acquisitions. So that's the third leg of our capital allocation program. So we want to build cash to some degree and be able to jump on some of these acquisition opportunities that we see, particularly in the environmental and industrial areas. So that's how we're looking at it. We're looking at where can we get our best return among those three areas: acquisitions, internal capital spending, and share repurchases.

Alan McKim (Founder, Executive Chairman and CTO)

Does that help, Al?

Al Kaschalk (Equity Research Analyst)

Yeah. It does. If your customer's CapEx spending is dropping, why wouldn't your CapEx spending come in? Maybe we can't see it because it's a broader number, but it's tough with the reporting and things to see where you're either allocating additional or where you're reducing capital allocation given the end market conditions.

Jim Rutledge (Vice Chairman, President, and CFO)

Al, just to point out, we have reduced capital spending substantially. We were at a $280 million level, and we, as a company looking at the return on all of our growth projects, we decided we are going to bring our CapEx, other than the incinerator, we've carved that out because that's a new big project that we're spending $50 million on this year, that we want to hold the limit at $200 million this year. So really, the two numbers to compare is really $280 million going down to $200. That took a lot of work to bring that down. So we have reduced spending. But this investment for the future in one of our crown jewels in the company is critical, and we've kind of put that aside and did not hamper that.

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

Al Kaschalk (Equity Research Analyst)

Yeah. I appreciate that. Thank you.

Jim Rutledge (Vice Chairman, President, and CFO)

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

Al Kaschalk (Equity Research Analyst)

Yeah. Very good. Thank you, and good luck here.

Jim Rutledge (Vice Chairman, President, and CFO)

All right. Thanks, Al.

Operator (participant)

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

Adam Baumgarten (Analyst)

Hey, guys. Thanks for taking my question. Just wanted to touch on tech services. Can you walk us through the impact of the unplanned outages on margins in 2Q? I guess just what I'm trying to get at is you're starting the first half down about 4%, Adjusted EBITDA growth, and guiding to mid-single digits. Just sort of the confidence there and how much of the costs in 2Q are going away going forward.

Jim Rutledge (Vice Chairman, President, and CFO)

I think to the points that Alan was talking about on the landfill side, I mean, we're not counting on energy-related waste coming back into the landfill. So that reduction in landfill, that piece of the reduction in landfill will stay. However, we have a good pipeline of waste projects that will offset some of that, but probably not all of it. So our outlook for landfill is still quite good. The outages do cause us to incur dollars several million of lost operating leverage. If you're not running your plant for eight days, and that happens to be, in each case, the two largest incineration sites that we have were down in that time frame, it's quite costly. We're beyond that. We're up and running, and everything is fine.

One of them was due to a power outage there locally that caused some issues in the plant that extended it out for a while. So I think we're beyond that. Other than that, I think the tech service business, if you look at the landscape of some projects out there, and clearly the EPA has been active with some of the Superfund areas that we hope to be bidding on into the future. So our outlook for tech services is quite good, actually.

Adam Baumgarten (Analyst)

Okay. Great. And then can you just remind us how much of tech services revenue is related to that E&P or oil and gas piece that's been weak?

Jim Rutledge (Vice Chairman, President, and CFO)

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

Adam Baumgarten (Analyst)

Okay. And then just lastly, just a quick one. How many gallons of RFO did you sell in the quarter?

Jim Rutledge (Vice Chairman, President, and CFO)

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

Adam Baumgarten (Analyst)

Great. Thanks a lot.

Jim Rutledge (Vice Chairman, President, and CFO)

Thank you, Adam.

Operator (participant)

Once again, to ask a question, that's star one at this time. Our next question comes from Michael Hoffman with Stifel. Please proceed with your question.

Michael Hoffman (Analyst)

Well, so on that vein, you didn't have much RFO sales in the first quarter in SKES, and margins were 18.3%. You had very good margins in the second quarter, and you did have RFO sales, and they're lower margins. So I'm curious of what the net of like-to-like comparison that's got to put you in the upper 20s on a like-to-like basis sequentially.

Jim Rutledge (Vice Chairman, President, and CFO)

Yeah. The RFO that was in last year, and I'm trying to recall the numbers, and this should help Adam as well. I think last year we had about $11 million of RFO revenues. I believe that was revenues. And that was completely offset by the revenues from TFI. So TFI replaced that. So beyond that, I think the increase RFO was beyond TFI was $1 million or $2 million. It was $1 million or $2 million in revenues from RFO beyond TFI. So I would say in that $13 million range in revenues.

Michael Hoffman (Analyst)

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

Jim Rutledge (Vice Chairman, President, and CFO)

What's that?

Michael Hoffman (Analyst)

In 1Q 2015, you had hardly any because you-

Jim Rutledge (Vice Chairman, President, and CFO)

That's right. That's right.

Michael Hoffman (Analyst)

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

Jim Rutledge (Vice Chairman, President, and CFO)

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

Alan McKim (Founder, Executive Chairman and CTO)

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

Jim Rutledge (Vice Chairman, President, and CFO)

It is lower margin. Absolutely.

Michael Hoffman (Analyst)

Right. Right. So my point is, the 18.3 out of 1Q15 compared to almost 25 in 2Q, it's even better when you look at the parts washer, antifreeze, on all of that stuff, ex the RFO, because of what you're doing. The operating leverage you've improved in that business is even better than it looks 18.3-25 because the.

Alan McKim (Founder, Executive Chairman and CTO)

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

Michael McDonald (General Counsel)

Okay. And then just to follow up on the used oil outlook comment of you'll be now flat year-over-year, which is roughly $51 million before overhead last year. To do that sequentially, you have to be better, which puts you at a run rate exiting the year at greater than $51 million.

Jim Rutledge (Vice Chairman, President, and CFO)

That's right. That's right.

Michael Hoffman (Analyst)

Right. Because you got the big.

Jim Rutledge (Vice Chairman, President, and CFO)

Because we had a loss in the first quarter.

Michael Hoffman (Analyst)

Right. You got the big inventory correction in the first quarter. Right. So.

Jim Rutledge (Vice Chairman, President, and CFO)

Exactly. Exactly.

Michael Hoffman (Analyst)

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

Jim Rutledge (Vice Chairman, President, and CFO)

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

Michael Hoffman (Analyst)

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

Jim Rutledge (Vice Chairman, President, and CFO)

Excellent. Thank you, Michael.

Operator (participant)

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

Alan McKim (Founder, Executive Chairman and CTO)

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

Operator (participant)

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