Clean Harbors - Q3 2013
November 6, 2013
Transcript
Operator (participant)
Greetings, and welcome to the Clean Harbors Inc. Third Quarter 2013 Conference Call. At this time, all participants are in 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, Assistant General Counsel for Clean Harbors Inc. Thank you, Mr. McDonald. You may begin.
Michael McDonald (Assistant General Counsel)
Thank you, Kevin, 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 and Corporate Communications, Jim Buckley. Matters we are discussing today that are not historical facts are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Participants are cautioned not to place undue reliance on these statements, which reflect management's opinions only as of this date, November 6, 2013. 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 for 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. And now I'd like to turn the call over to our CEO, Alan McKim. Alan?
Alan McKim (Chairman and CEO)
Thanks, Michael. Good morning, everyone. Our third quarter results reflect strong revenue growth across a number of our segments as we exceeded $900 million in quarterly revenue for the first time in our history. From a margin perspective, we continued on an upward trajectory from the first and second quarters for both operating and adjusted EBITDA margins. However, our adjusted EBITDA fell a little short of what we were expecting, primarily due to the delay of our new Ruth Lake camp and lower than expected EBITDA contributions from the oil sands region. Synergies from Safety-Kleen are on plan, resulting in improved SG&A margin performance this quarter, and Jim Rutledge will touch on this in more detail in his remarks.
Looking at our performance from a segment perspective, I should first make note that we've integrated Safety-Kleen onto our WIN platform for the majority of business, and Safety-Kleen has now adopted our intersegment policies. So the result of this is a small shifting of margins between segments. This is all within Safety-Kleen, Environmental, Technical Services, and the re-refining segments. Let me start with the Technical Services performance. Revenue grew 20% from Q3 a year ago, as we continue to benefit from the addition of Safety-Kleen, delivering another quarter of high utilization and volumes into our disposal network. Utilization at our incinerators was 93.5% in Q3, our highest level in more than five years. By region, our Canadian operation was again, essentially running at maximum utilization as it did in Q2, while our U.S. locations come in just shy of 92%.
In what is this segment's seasonally strongest quarter, tonnage at our landfills grew 40% from Q2, and 7% year over year. The addition of Safety-Kleen's volumes, in conjunction with several large projects, drove the performance of Technical Services this quarter. From a margin perspective, Technical Services increased its margins to 25.8% in Q3, up 130 basis points from Q2. Some of this sequential increase was at the expense of our Safety-Kleen Environmental business, as we integrated Safety-Kleen onto our WIN platform, as I just mentioned. If you look at Safety-Kleen, the total third-party revenues in our press release, it increased 4% in Q3 from Q2. Our oil re-refining and recycling segment led the way in that increase, rebounding from a slow Q2.
Segment revenue increased from Q2 as a result of higher total volume of base oil and blended oil sales, improved base oil pricing, and a slightly higher volume of byproduct sales. Consistent with Q2, our level of blended sales remained in that 37%-38% range, and we're continuing to target improvements that improving that mix between the base and blended, particularly as it relates to our fully blended EcoPower motor oil, which should boost this segment's EBITDA contribution. Our Adjusted EBITDA margin in this segment in Q3 was 21.8%, and that is a 500 basis points improvement from Q2. That was mainly driven by improved pricing, higher base oil and blended volumes.
As we've discussed in prior calls, we're also focusing on enhancing margins in the re-refining segment by reducing the prices we pay for waste oil collected from thousands of Safety-Kleen accounts, thereby reducing our input cost. Our Pay-for-Oil costs was essentially flat in Q3 from Q2. The progress we made in lowering our pricing was somewhat offset by the rise in price of Gulf Coast No. 2 oil during much of the quarter, which ultimately increased our Pay-for-Oil costs from an index, from our index customers. Our efforts with our major national accounts to reindex those accounts to base oil pricing continued in the quarter, but that remains a longer-term process.
As we highlighted at our Investor Day in September, we also have successfully been seeking new and less expensive sources of waste oil, particularly in Western Canada, where legacy Clean Harbors has a strong presence and key customer base. Our goal remains to enhance the margins in this segment over the next several quarters, even without any improvement in the price of Group II base oil. Safety-Kleen Environmental Services performed in line with our expectations this quarter, as we continue to see steady activity across the more than 150 Safety-Kleen branches. Demand for our containerized waste services, parts washers, Vac services, and allied products was consistent with prior quarters. In addition, our waste oil collection volumes were up slightly in the quarter, increasing approximately 1% or so from Q2 levels.
Within this segment, we continue to focus on re-energizing our parts washer business, and we're in the process of rolling out new internal sales campaign designed to recapturing market share in this business. The margin declined from about 17% in Q2 to just over 12% in Q3, again, reflecting the integration of Safety-Kleen on our Win platform that I just mentioned, as well as some higher healthcare costs and less favorable product mix than Q2. Turning to Industrial and Field Services, overall, this segment had a disappointing quarter. Despite revenues being up thirteen percent and adjusted EBITDA increasing 11% from a year ago, we expected better results as the oil sands region underperformed. As a result of uncertainty surrounding a threatened work stoppage by a recently certified labor union, a significant customer chose to rebid existing contract work.
We successfully resolved the labor negotiations without a work stoppage, but a competitor was successful in winning this rebid work. While we have since won back a small portion of these services, the loss of this contract is a setback for this segment, particularly in the near term. As I mentioned, our lodging business was impacted by the delay in completing the construction of the Ruth Lake camp, mainly due to flooding and the weather issues. Today, that lodge is up and running. It's being utilized by more than 100 of our internal staffs and a small number of customers. With the construction delay, we missed signing several large contracts for winter drilling and planned work in the oil sands.
The facility is a showcase location for us, and we have high expectations in signing multi-year contracts, but we are behind this year based on our construction delay. Another factor in the performance of this segment in Q3 was our turnaround group. They had a good quarter overall, but activity could have been even higher, except that U.S. refineries have been operating at 92% capacity in the quarter, and that really limited some of our opportunities. Our field services group also contributed nicely to the quarter with a diverse mix of projects, and it continues to benefit from the cross-selling opportunities to the Safety-Kleen customers. I should note that we did not participate in any major emergency response events in Q3. Lastly, turning to Oil and Gas Field Services. This segment had a strong quarter as revenue grew 27% year-over-year, while Adjusted EBITDA increased 48%.
These results demonstrate the type of leverage we have in this business due to the underutilized equipment. Growth drivers behind oil and gas this quarter were major seismic work that T1 in Western Canada, continued expansion in the U.S., and some flood and oil spill cleanup work. Rig counts in the Alberta region rebounded from a slow start in the quarter to finish above last year's levels, and industry experts are still predicting an increase of 5% or so in this year's winter drilling season in Canada. On the U.S. side, we continue to build our presence in several plays, and particularly, we are growing our market share for surface rentals in the Rockies. Before turning to our outlook, here's a quick update on our Safety-Kleen integration.
As noted in today's release, with $25 million in synergies recorded in Q3, we remain on track to hit our target of $70 million-$75 million in 2013 cost synergies, which will translate into $100 million in savings next year. We have successfully integrated Safety-Kleen's waste disposal and vehicle maintenance into our network. We've also reduced Safety-Kleen's reliance on outside transportation while making important gains in areas like procurement. Lastly, we've realized considerable savings by migrating their systems onto our industry-leading WIN platform, a process that's just being completed. As we move into 2014 and have the benefit of managing Safety-Kleen's assets and resources through WIN, we're confident that we'll realize additional savings through efficiency gains, better utilization of Safety-Kleen's people, vehicles, and facilities. With that, let me turn to our outlook. We're anticipating a solid finish to 2013 as we build momentum into 2014.
Jim will be providing our preliminary guidance for next year in his remarks, but looking ahead for each of our segments, we expect Technical Services to continue to deliver high utilization and consistent volumes into our disposal network. The addition of Safety-Kleen has significantly impacted that segment in a very positive way. Industrial and Field Services has a solid pipeline of prospects, particularly on the turnaround side, where a number of projects were pushed into 2014. The recent opening of Ruth Lake is exciting for the company. I recently visited the lodge with several executives, and we're wowed with the finished product. Given its prime location and accommodations, we expect this first-class facility to be in high demand in the years ahead. Oil and gas field services are coming off a strong Q3 and heading into Canadian winter drilling season.
We see significant expansion opportunities in the US and continue to target new plays in areas such as Texas and Oklahoma. Within oil re-refining and recycling, we're quickly moving ahead, integrating Evergreen Oil in California into our re-refining network. We see that acquisition as an ideal complement to our existing re-refining business. Recent increases in our base oil and blended products position us for profitable growth in 2014. And finally, we continue to maintain a positive outlook for our Safety-Kleen Environmental Service segment, particularly now that it's on our WIN platform. We intend to reinvigorate profitable growth in that business through better price management, cross-selling, and added asset utilization. So with that, let me turn it over to Jim for the financial review. Jim?
Jim Rutledge (Vice Chairman, President and CFO)
Thank you, Alan, and good morning, everyone. Revenue for the third quarter increased 70% to $907.5 million, from the $533.8 million we reported in Q3 a year ago. As Alan mentioned, our revenue performance was strong across several of our segments, with oil and gas delivering a particularly good quarter for us. To provide some additional perspective on Q3, here's a snapshot of of how our key verticals performed. Overall, the percentages were similar to what we saw in Q2. General manufacturing was again, our largest vertical in the quarter, accounting for 18% of total revenue.
We saw a stable core customer base, particularly in areas such as parts cleaning and Vac services, with some softness on the project side, as customers were cautious with their spending and pushed some project work into 2014. Refineries and oil sands customers accounted for 13% of our Q3 revenue. This vertical could have been even stronger if, as Alan mentioned, U.S. refineries were not running at such a high capacity in the quarter. Organic growth in this vertical was supported by strong cross-selling activity. Safety-Kleen is slowly building a presence in Western Canada due to our strong footprint there, so we should see additional opportunities for growth. The automotive vertical accounted for 10% of Q3 revenue.
As I mentioned last quarter, this vertical was not a meaningful contributor to Clean Harbors in the past, but Safety-Kleen provides a basket of services, including used oil collection, containerized waste collection, and vacuum services. The chemical vertical also represented 10% of Q3 revenue, with continued solid base business driven by the low cost of natural gas, particularly in petrochemicals. Remedial and industrial projects were a little light again this quarter, which was offset by strong incineration volumes and cross-selling. Oil and gas production accounted for 9% of revenue and achieved double-digit year-over-year growth. This was driven by the overall growth in our oil and gas field services segment, particularly our U.S. surface rentals business.
Other notable Q3 contributors, each at about 3% of revenues, included utilities, brokers, government, as well as terminals and pipelines, which grew more than 25% from the same quarter a year ago on the strength of several large projects in California and Alaska. Returning to the income statement, gross profit for the quarter was $260.4 million, or a gross margin of 28.7%, compared with a gross profit of $160.9 million, or a gross margin of 30.1% in the same period last year. This margin decline was expected due to the impact of Safety-Kleen. On a sequential basis, our gross margin percentage was essentially flat with the 28.6% we reported in Q2.
Turning to expenses, we have a great story in SG&A this quarter, as we totaled $114.5 million, or 12.6% of revenues. This compares with $122.6 million, or 14.2% of revenues, in Q2 of this year. The 150 basis point sequential reduction in SG&A percentage is not only due to the higher revenue, but more importantly, the ongoing effect of cost synergies with Safety-Kleen, a large part of which fall in this area. Excluding integration and severance costs of about $2.7 million recorded in SG&A in Q3, our SG&A percentage would have been closer to 12.3%. Even with those costs included, we achieved our target SG&A range of 12.5%-13% of revenues in the quarter.
As we move into Q4 and additional synergies take hold, we expect this percentage to continue to decline incrementally in the quarters ahead. For the full year 2014, we are projecting our SG&A percentage to be in the mid-12% range. In Q3, depreciation and amortization increased 68% year-over-year to $69.4 million. Again, this is driven by the addition of Safety-Kleen and other acquisitions completed during the year. Through the first nine months of this year, we are currently at D&A of $196.9 million, so we remain on target for our full year expectation of D&A in the range of $255 million-$265 million, although we will likely be at the high end of that range.
Income from operations for Q3 was $73.6 million, or 8.1% of revenues, compared with $53.2 million, or 6.2% of Q2 revenues. This sequential improvement in operating margin reflects the significant improvement we've made in our SG&A percentage and the overall impact of the cost synergies with Safety-Kleen taking hold. Our Q3 adjusted EBITDA was $146 million, or a margin of 16.1%. This is up 45% from Q3 a year ago. I should point out that our adjusted EBITDA this quarter includes the effect of the $2.7 million integration and severance costs. Turning to our taxes, our effective tax rate for the quarter came in slightly better than our expectations at 34.7%.
This compares with 33.8% in Q3 of last year and 35.1% in Q2 of this year. Year to date, we have an effective tax rate of 34.5%, and now expect our effective tax rate for the year to be approximately 35%. Third quarter net income was $35.4 million, or $0.58 per diluted share, compared with $12.4 million or an EPS of $0.23 per share a year ago. Our Q3 2013 net income includes the pre-tax, $2.7 million in integration and severance costs. Net income in last year's Q3 included a $26.4 million pre-tax charge related to the refinancing of our senior debt at that time. We continue to maintain a strong and healthy balance sheet.
Cash and marketable securities as of September 30 were $260.4 million. This is only down slightly from the $273.8 million we reported at the end of Q2, despite the fact that we acquired Evergreen Oil for approximately $60 million in cash during the quarter. Total accounts receivable were $645.2 million at quarter end, and our days sales outstanding increased to 66 days, compared with 62 days in Q2, partly due to the increased revenues in the quarter and the addition of Evergreen receivables at the very end of the quarter. We are continuing to focus on collections and improving our billing processes going forward, so we are maintaining our target DSO level of 60 days or less.
Environmental liabilities at the end of Q3 were $219.6 million, up slightly from the $218.3 million at the end of Q2. CapEx for Q3 was $66.2 million, which is slightly less than the $69.2 million we spent in Q2. At about $210 million through nine months, we remain on pace for full year CapEx in the neighborhood of $280 million, which includes maintenance CapEx of approximately $130 million and growth CapEx of about $150 million. Our cash flow from operations in the quarter was strong at $142.5 million, up significantly from the $98 million we reported in Q2, and $39.6 million in Q1.
Moving to guidance, we are reiterating our 2013 revenue guidance and lowering our Adjusted EBITDA guidance based on Q3 and our outlook for the remainder of the year. We continue to expect 2013 revenues in the range of $3.5 billion-$3.55 billion. We now expect Adjusted EBITDA in the range of $523 million-$528 million, down from our previous guidance of $535 million-$545 million. As we announced in this morning's press release, we are providing our preliminary 2014 guidance today. For 2014, we currently expect revenues in the range of $3.7 billion-$3.8 billion and Adjusted EBITDA in the range of $610 million-$640 million. And with that, Kevin, could you please open up the call for questions?
Operator (participant)
Certainly, sir. At this time, we'll be conducting a question and answer session. In the interest of time, we ask that you please limit yourself to one question and one follow-up. 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 those star keys. Once again, if you'd like to ask a question today, please press star one on your telephone keypad. Our first question today is coming from Sean Hannan from Needham & Company. Please proceed with your question.
Sean Hannan (Senior Equity Research Analyst)
Yes, good morning, and thanks for taking my question.
Jim Rutledge (Vice Chairman, President and CFO)
Morning.
Alan McKim (Chairman and CEO)
Good morning.
Sean Hannan (Senior Equity Research Analyst)
So a question around the guidance. You know, as we move from September and into December here, it seems like the implied range with where we are now, and I realize you're reiterating for the year, but, you know, as we back into what's implied here for December, we could see revenues pull back a little bit in the fourth quarter. So, just wanted to see if we could get a little bit more of an explanation around that, particularly as we have, you know, Ruth Lake now, I think they came on the first last Friday, you know, and some other, I think, seasonal factors that should be in favor. So just a little bit more clarity around that would be helpful.
Jim Rutledge (Vice Chairman, President and CFO)
Yeah, I can start that, Sean. It's Jim. Certainly what we've done, in looking at the guidance for the rest of the year, considering the delays that we experienced in Ruth Lake, we're certainly having very good meetings with customers and high interest level with companies taking blocks of rooms there on in contracts. But we're being a little conservative about how much we'll achieve of that during the fourth quarter. So you're right, that we're expecting, you know, to be more at the level of Q3 with revenues in that segment. Certainly, we'll see oil and gas come up a bit, as we get more into the winter drilling season in Canada.
But slightly offsetting that is in technical services in the environmental side of the business, that gets seasonally a little weaker as you get into Q4.
Sean Hannan (Senior Equity Research Analyst)
Okay. That's helpful. You know, and then as you look to 2014, that preliminary guidance, how do you expect the growth there to be weighed? I think it's about 6% growth at the midpoint ex any deal. So your comps should arguably be easier in the first half, particularly with what we saw in the oil and gas kind of headaches, you know, in this 2013 year. You should have some price increases. You're gonna have Ruth Lake. So should we see a better than 6% in that first half with kind of that backlog of turnarounds that you're looking at and all other factors, and then a little bit more tempered in the back half of the year? What's the thought process behind this? Thanks.
Jim Rutledge (Vice Chairman, President and CFO)
Yeah, I can start on that, Sean. I think if you look at our total revenue guidance, the $3.7 billion-$3.8 billion, the way I would divide that up between the first half and second half is probably somewhere a little bit more than half of it, say 51%, is in the second half of the year, I would say. And you know, the 49% in the first half, with each of the quarters being maybe, you know, 24.5 in that range.
And the reason why I say that is that the environmental side of the business, in both Safety-Kleen and in tech service, you do have the first quarter, which tends to be the weakest quarter in that segment. Clearly, in those segments, but then that's offset to some degree by oil and gas, which, with the winter drilling program, and the winter is very strong in the first quarter, but it's not enough to offset that. So I still put a little bit more of the weight in the back half of the year. Certainly from a margin perspective, looking at our overall margin for the year, I expect that when we're in Q1, probably to be in that high 15% range, given that the environmental business is seasonally slow in the first quarter.
I think to be in that high- to 15% range is, it feels right. I think, as you get into Q2 and, and the environmental parts of our business start picking up in the spring and Q2 gets stronger, we're gonna be near 17%, I expect in Q2. And then when you get into Q3, which is probably the strongest of the year, you're gonna see us in the 17.5%-18% range, and then probably 17% range in Q4. So that's the way we're kind of looking at it, recognizing... I, I wanted to give some of that color because there are some offsets, seasonality in our business, but hopefully, that gives you some color around the cadence of, of, of our business through the year.
Sean Hannan (Senior Equity Research Analyst)
Okay, that's great. Just when you back out the integration and the severance, it seems like your earnings number would have otherwise been about $0.61. Just wanna validate that, and I'll hop back in the queue.
Jim Rutledge (Vice Chairman, President and CFO)
Yeah, that's right.
Sean Hannan (Senior Equity Research Analyst)
Okay, great. Thanks so much.
Jim Rutledge (Vice Chairman, President and CFO)
Thank you, Sean.
Operator (participant)
Thank you. Our next question today is coming from Hamzah Mazari from Credit Suisse. Please proceed with your question.
Hamzah Mazari (Managing Director and Senior Equity Research Analyst)
Good morning. Thank you,
Jim Rutledge (Vice Chairman, President and CFO)
Good morning.
Hamzah Mazari (Managing Director and Senior Equity Research Analyst)
Good morning. The first question is just on the industrial and field services segment. You know, if we adjust for some of the acquisitions you've done and anything in there Safety-Kleen related, I don't think there's much in there, but it seems like the underlying organic growth in that segment has slowed pretty significantly. I realize you mentioned there's some projects that are being pushed back into 2014, but maybe give us a sense of, you know, what's going on in that segment. Is this all activity related? Is there an execution issue? I realize that, you know, some of your BCT capacity has gone to building out Ruth Lake, but just give us a sense of what's going on in that segment.
Alan McKim (Chairman and CEO)
Yeah, I would say, Hamzah, that it's true that we built the camp ourselves. That was a facility that took up all of our capacity and manufacturing, so that revenue was lost, and we are now back building commercial facilities, and we'll see revenues for the next, you know, 6 months-12 months as we build out more camps. I think you're right that our growth slowed, and that had to do with both some of the weather-related issues that impacted our business, particularly in the oil sands, but the lost contract that I mentioned as well had a negative impact.
On the other hand, our specialty business, you know, the business that does the catalyst work and a lot of our turnaround work, you know, continues to do extremely well. But we, we could have done even a lot better. As we mentioned, a lot of the refineries are running real strong, and our, our turnaround work has been delayed. So I would expect next year that you'll see our industrial and field business really pick up again like it was growing in that double digit level.
Hamzah Mazari (Managing Director and Senior Equity Research Analyst)
Great. That's helpful. And then, just a follow-up question on the Safety-Kleen business. It's a two-part question. You know, on the re-refining side, could you give us your updated view on incremental capacity coming online in that marketplace and your ability to keep margins within that re-refining business? And then, on the parts cleaning side, washing side, you mentioned loss of market share. You know, could you maybe talk about who you're losing market share to, why you're losing, and how you're gonna get it back? Thank you.
Alan McKim (Chairman and CEO)
Sure. I'll just touch on the parts washers for a second. You know, I think over the past 10 years, we've mentioned that, you know, Safety-Kleen was going through its difficulties, that they did lose market share in the parts washer business. And there's been, you know, regional competitors out there that have taken advantage of that. And so we really wanna go back after our lost accounts. And you know, we currently have about 200,000 parts washing machines out there, and that was over 300,000, I believe, in the late 1990s, when Safety-Kleen was running, you know, in its peak. So you know, it's not necessarily a big growing market, but there's clearly opportunities for us to go back.
Safety-Kleen really has done a tremendous job of improving its service, its quality. And now with our recycling facilities tied together with the Safety-Kleen branch business, we think we can really add a lot more value to those customers, not just on parts washers, but particularly on the containerized waste side of the business. On the incremental capacity, you know, we feel very confident in our position. We've got three re-refineries. Our Breslau facility expanded by 10 million gallons, and that plant just coming out of a turnaround is running extremely well. The acquisition of our West Coast refinery, the Evergreen facility, we have just turned around both of those units there as we took on that acquisition in September.
And we believe, you know, from a capacity and processing quality standpoint, that our products are second to none in the marketplace. We do know that Chevron and Pascagoula is coming online with their plant. We believe that most of that product is gonna go export. We also believe that that is more of a risk to the Group I players out there, that our Group II product is very well, you know, in a very high demand product in the marketplace. And we believe we're gonna continue to be, you know, a great source of that product for our customers.
Hamzah Mazari (Managing Director and Senior Equity Research Analyst)
Great. Thanks a lot.
Alan McKim (Chairman and CEO)
Okay.
Operator (participant)
Thank you. Our next question today is coming from Larry Solow from CJS Securities. Please proceed with your question.
Larry Solow (Managing Director and Senior Research Analyst)
Hi, good morning.
Alan McKim (Chairman and CEO)
Good morning.
Larry Solow (Managing Director and Senior Research Analyst)
I was wondering, just a couple follow-ups on the lost contract on the oil sands customer. Is there potential. You mentioned you took back a little business. Is there a potential to, you know, to take some of that business back or these long-term type contracts? And just a follow-up, and how is the, you know, the oil sands in general, outside of this, you know, sounds like a pretty fairly sizable loss, but how's the region holding up?
Alan McKim (Chairman and CEO)
Yeah, unfortunately, that loss kinda offset a lot of the gains, and the, you know, the team has been working extremely hard and done a great job of servicing not only that customer, but other companies. And, we are growing. As you know, the market is growing, Larry. There's new contracts that are being led, and, we're winning those new accounts. So you know, we expect our utilization of our people and equipment to continue to grow. This was probably more of a short-term issue for us. The oil sands, in general, is a very expensive place to do business.
Larry Solow (Managing Director and Senior Research Analyst)
Mm-hmm.
Alan McKim (Chairman and CEO)
All of our customers, as well as ourselves, are doing everything we can to manage our cost, and very aggressive in how we do that. So we had a short-term issue here that we had to get through, but you know, our long-term perspective there is we're gonna continue to grow, and we've made a big investment in that area.
Larry Solow (Managing Director and Senior Research Analyst)
Okay. And then just switching gears, just on the SK Environmental and the uploading onto the WIN platform, and you mentioned some impact in margin and I guess also some shifting into technical services. Could you just give a little more color on that? Did you expect sort of that impact? And I guess, obviously, over the long run, it's should be a lot more positive gains than this negative. But was there sort of an additional negative temporary hit this quarter as you went onto the platform?
Alan McKim (Chairman and CEO)
Yeah, I can start that off, Larry. I think if you look at going on to our WIN platform, having the Safety-Kleen waste stream processes, how they get flow through the network, conform to the WIN way that we do it, the WIN platform. And two examples, just to give a little color on that. For example, one of the things that Safety-Kleen had done was they gave credit for transportation revenues as part of waste streams going through the network to the distribution centers.
Which is in the SK Environmental side. The way the WIN system works is that the transportation revenue is credited to the first manifested location, which is typically the recycling center, which is in the technical services side of the business. That's the facility. And the reason why that's better is that it enables us, from a logistical standpoint, to see the transportation going through, along with the waste stream, and hence enables us to optimize logistics. So it is a difference, but it does hurt the margin on the SK side and improves the margin and revenues on the technical services side. Another quick example is the way when we take solvents in, spent solvents, waste solvents to be recycled.
Typically, the way the accounting system within Safety-Kleen would handle that would be a charge and a credit within operating expenses between the two segments. We handle that as intercompany revenues, so you'll see intercompany revenues go up during the quarter, and what that's associated with is bringing up those revenues up to the revenue side rather than just handling it as a plus and minus within operating expenses. Again, these are all associated with the wind platform. I think that the SK margin on direct revenues during the quarter of being at that 12% range is probably a little low.
I think they're more at about a 14% range because they were impacted by higher healthcare costs, and to some degree, it was a catch-up because we switched, they switched over to our healthcare provider, and there was some catch-up of some of the claims coming through in the quarter. And also, the product mix was not as favorable as it was in Q2. So, I'm kind of thinking that they're probably in about the 14% range currently.
Larry Solow (Managing Director and Senior Research Analyst)
Okay. And if I could just squeeze one last one. Just on the oil and gas, it sounds like, obviously, the U.S. improving, capacity utilization. It seems like I think you sort of bottomed in the middle of last year. Can you just sort of give us some color on, you know, where you are today versus where you were, maybe some kind of figures? And it sounds like there's still a lot more room to grow there. Thanks.
Jim Rutledge (Vice Chairman, President and CFO)
You know, absolutely. In the oil and gas, I think that the margins that you'll see in that business will be in the upper teens and approaching 20% and exceeding 20% in the winter drilling season. I think that that's key there. But we're still probably in the teens, I would say mid-teens in the off-season, particularly Q2. That'll go down into the low teens that you'll see there. So that'll generally be the cadence there, but-
Alan McKim (Chairman and CEO)
Utilization, you know, we still have a ton of opportunity from a utilization standpoint, and we've been repositioning more units to the U.S., and we'll expect to continue to grow that business in the U.S.
Larry Solow (Managing Director and Senior Research Analyst)
Great. Thanks.
Jim Rutledge (Vice Chairman, President and CFO)
Okay.
Alan McKim (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. Our next question today is coming from Michael Hoffman from Wunderlich Securities. Please proceed with your question.
Michael Hoffman (Managing Director and Director of Research)
Good morning, and thank you for taking my question.
Jim Rutledge (Vice Chairman, President and CFO)
Good morning, Michael.
Michael Hoffman (Managing Director and Director of Research)
Hi, hi, Jim, Alan, Jim. On Safety-Kleen Environmental, can you bridge for us what QQ could have been on a comparative basis if the WIN system had been fully integrated then, so we understand what this displacement looked like?
Jim Rutledge (Vice Chairman, President and CFO)
Yeah, that would-
Michael Hoffman (Managing Director and Director of Research)
Ideally, both at a revenue and a margin side, but it's just such a big difference that bridging that would help.
Jim Rutledge (Vice Chairman, President and CFO)
Yeah, I would say that the on the revenue side, the direct revenues in Q2 would have been very similar to what you're seeing as direct revenues in Q3. I do think that the margin, though, would have been a little higher at 14% because Q2 was hit with some of those items, as I mentioned before.
Michael Hoffman (Managing Director and Director of Research)
Okay, and then just to clarify, all of that shifted into technical services. That's where it went?
Jim Rutledge (Vice Chairman, President and CFO)
For the most part, most of it in the recycle centers that are part of the facilities there, although there's some benefit in the oil re-refining side as well.
Michael Hoffman (Managing Director and Director of Research)
Okay. And then second question, in your guidance, thank you for giving that perspective. At your conference in September, you suggested that there would be a substantial free cash flow improvement, but didn't really quantify it then. Can you come up with a little bit of quantification this time? I mean, you're running kind of in a call it low $100 million range for this year. Is it possible that number doubles in 2014?
Jim Rutledge (Vice Chairman, President and CFO)
Yeah, I think obviously, with the cash flow from operations that we talked about in the comments up front, we've seen a nice improvement there. And I would estimate that the free cash flow during the quarter was above $50 million for just this quarter. And our year to date rate at almost $100. So we'll probably get a little over $100 this year. But next year, I do believe that you'll see the cash flow, free cash flow exceed probably a $160 million level. And our CapEx, we're expecting to be lower.
What I'm estimating there with CapEx is about $200 million of our base CapEx, but there might be as much as $40 million on the new incinerator that will span 2014 and 2015. So that's implicit in my numbers, about $240 million, but it could be lower than that. Our target for regular CapEx is $200 million. So I would say we should exceed 160 and perhaps better, you know, better than that.
Michael Hoffman (Managing Director and Director of Research)
Okay, so just so I understand that correctly, ex-El Dorado, you are talking about nearly doubling free cash flow next year, and El Dorado pulls that back?
Alan McKim (Chairman and CEO)
That's right.
Michael Hoffman (Managing Director and Director of Research)
Okay, thank you.
Alan McKim (Chairman and CEO)
All right, thank you.
Operator (participant)
Thank you. Our next question coming today is coming from Al Kaschalk from Wedbush Securities. Please proceed with your question.
Al Kaschalk (SVP)
Good morning.
Alan McKim (Chairman and CEO)
Morning, Al.
Michael Hoffman (Managing Director and Director of Research)
Good morning, Al.
Al Kaschalk (SVP)
Is it possible to talk further about or quantify the contract lost on the industrial and field services area?
Alan McKim (Chairman and CEO)
Just in dollars, you know, we're probably talking $20 million.
Al Kaschalk (SVP)
Okay.
Alan McKim (Chairman and CEO)
Revenues.
Al Kaschalk (SVP)
Yeah, and in terms of the ability, is your understanding that that contract is a multiyear contract? I know you talked about getting some of that revenue back, but is that something that, from a practicality standpoint, is gonna be a challenge to recover?
Alan McKim (Chairman and CEO)
No, no. I mean, we could be next month, you know, we could be back in there. It could be, you know, 60 days, it could be 6 months. But it's not anything that there is nothing that prohibits us from. And this was a multi-year customer, nothing that prohibits us from getting back and getting that customer's business back. And we are back in there. We are doing still a considerable multi-million dollar account still for us, but it did hurt us here.
Al Kaschalk (SVP)
Right. And then, it's good to see Ruth Lake open, but did I interpret your comments, Alan, correctly, that the ability to get 100% utilization or occupancy rates in the near term will be a challenge given the delays, or is there sufficient work that maybe you're working on optimizing the rates next year, given the seasonality? Let me just clarify.
Alan McKim (Chairman and CEO)
Yeah. You know, as you can imagine, building a facility in such a remote area and dealing with the multitude of agencies to get occupancy, that -- and I encourage people to visit that facility, because it's just a first-class facility. It's -- we've been told by people who are in that business that it's the nicest facility in that region, you know, in Alberta. So, but to get occupancy and to go through all the approval processes and particularly to deal with all the weather that we're dealt with, particularly, you know, through June and then July, and then the impacts to construction. You know, it was week to week, you know, hoping to get all of our occupancy permits and get this up and running.
And so we couldn't commit and guarantee any capacity to customers who truly are interested in the site. And so I think because of that, you know, we really didn't leave anybody short. And so we feel very confident. You know, this is a 600-room camp. We're gonna occupy about 100 to 125 rooms of that for our own needs, because we have a major maintenance facility and our Fort Mac logistics operation right there. We feel very confident that we can fill the rooms up. It's just sort of a timing issue for us because of the delay.
Al Kaschalk (SVP)
And then, I don't know, maybe we can pick one of these to answer, but two-part question, and I guess it's more on the margin side for the segments. But SK Environmental and the oil re-refinery moving around. Are you comfortable where that business is performing in terms of the margin perspective? I know the pricing has some variation in impacting that, but from what you get and how you operate, should this be more of a mid-teens EBITDA-type business, or should we see something in the low twenties over time? And then secondly, the same parts of that would be on oil and gas field services, which had a pretty strong performance in the quarter.
Alan McKim (Chairman and CEO)
So I think it's important to mention that, you know, when you move, you know, Safety-Kleen onto the Clean Harbors platform and get off of SAP and get off of WINX and get off these different systems, and you really streamline the processes and adopt our 404 work, our Sarbanes-Oxley kind of processes and controls, we got to be consistent in how we run the business, how we go through our audit process and what have you. And so with that comes some changes. And so I think it's, you know, to absorb a $1.3 billion business within that first year and implement all those changes, we had to do it, and it takes a little bit of time for us to get it done.
That being said, we've also had to address the issues of pricing, particularly in the oil side of the business. We are, we are obviously disappointed with the level of profitability that we've been running at when you look at the overall Safety-Kleen business. However, very encouraged by the amount of cost that we've been able to take out by putting them on our systems and by implementing those initiatives and those programs. And so we feel very good, even in light of where the pricing is for oil, that we've got a very good business here and one that we can really build on.
Al Kaschalk (SVP)
Great. No, it's good to hear the fundamentals, SK integration is still strong. So thank you. I'll hop back in queue.
Alan McKim (Chairman and CEO)
Okay. Thank you, Al.
Operator (participant)
Thank you. Our next question today is coming from Adam Thalhimer from BB&T Capital Markets. Please proceed with your question.
Adam Thalhimer (Director of Research and Partner)
Hi, good morning, guys.
Alan McKim (Chairman and CEO)
Morning, Adam.
Adam Thalhimer (Director of Research and Partner)
The increase in seismic activity within the oil and gas segment, how do I read that? Because that—I always thought that was a smaller piece of your business. I'm surprised that it could have this kind of an impact. I mean, is that a positive for future drilling activity? Is it a sustainable improvement? Any color there would be helpful.
Alan McKim (Chairman and CEO)
Yeah. I mean, this business is sort of, you know, three years out, right? I mean, the work that we do in this area is really supporting future activities that may be happening from a pure exploration. The work is, as you know, with our seismic exploration, is all about doing more studies and supporting more investigation on where to drill in the future. And it, it's a leading indicator, and quite honestly, that business has been slow. It has been slow for a couple of years.
The team has done a very good job of winning its fair share of the limited amount of work. But if you look back 5 years ago, that business was much bigger before even we acquired it. So I would say that we're still another year away before that business really turning on, and we expect it to benefit when that does turn on.
Adam Thalhimer (Director of Research and Partner)
Great. And then, there's been a lot of questions asked about the Safety-Kleen Environmental Services margin, and I just wanted to ask one more. Where do you think—so you kinda say you feel like on a normalized basis, you're maybe at 14% now. Where do you think that goes in 2014?
Jim Rutledge (Vice Chairman, President and CFO)
I think you'll see an improvement there into the mid to higher teens. And the way we kinda look at that business once now that we're on our platform and optimizing and looking for additional cost savings, or maybe the way I think about it, is margin expansion, that we should be able to bring that up to where our Clean Harbors margins are in the environmental business. So I think you'll see maybe a couple of hundred basis points or so improvement into next year.
Adam Thalhimer (Director of Research and Partner)
Great. Thank you.
Jim Rutledge (Vice Chairman, President and CFO)
Thank you, Adam.
Operator (participant)
Thank you. Our next question is coming from James Sullivan, from RBC Capital Markets. Please proceed with your question.
James Sullivan (Senior Analyst of Equity Research)
Hi, thanks.
Jim Rutledge (Vice Chairman, President and CFO)
Hi. Hi, good morning, Jamie.
James Sullivan (Senior Analyst of Equity Research)
Morning. So with the EBITDA guidance for this year, it looks like you took out about $12 million-$17 million in that range. Can you maybe bucket those in the adjustment between the lost contracts, Ruth Lake turnaround, sort of the major contributors to it, and maybe size it for us?
Jim Rutledge (Vice Chairman, President and CFO)
I'd say probably a third of it relates to Ruth Lake, and maybe two thirds to, you know, the issue with the contract and that labor issues that Alan referred to before.
James Sullivan (Senior Analyst of Equity Research)
Okay, that's helpful. And then I know you don't give segment guidance, but as you look at 2014, maybe you can just talk directionally about, kind of the level of variance you're putting around each segment, given some of the differences in predictability and seasonality across them. Just some color there will be helpful.
Jim Rutledge (Vice Chairman, President and CFO)
Yeah, I think if you look at the technical services business, we're looking at mid to upper single digits there in growth for the year in revenues. If you look at the Safety-Kleen Environmental business, looking at about that same growth rate, you know, mid single digits. If you look at the oil re-refining side of the business, probably more mid-teens. And what's driving that just, obviously, is the addition of Evergreen Oil that we brought in, our third re-refinery that we brought in during this quarter, so you'll see an increase into next year. We were conservative in the industrial and field services business, and also in probably the mid to upper single digits as far as growth rate. And we were conservative in oil and gas.
There, we were thinking at least now on a preliminary basis, that that would be flat to slightly up next year.
James Sullivan (Senior Analyst of Equity Research)
That's really helpful. And then, it's just Evergreen. What is there kind of a run rate contribution on the existing business we should expect from them?
Jim Rutledge (Vice Chairman, President and CFO)
Probably be in about the, close to $70 million. I don't have it all right in front of me, but in that range of revenues, roughly about $70 million.
James Sullivan (Senior Analyst of Equity Research)
Great. Thanks very much.
Jim Rutledge (Vice Chairman, President and CFO)
Thank you, Jamie.
Operator (participant)
Thank you. Our next question today is coming from Scott Levine from Imperial Capital. Please proceed with your question.
Scott Levine (SVP and Equity Research Analyst)
Hi, good morning, guys.
Jim Rutledge (Vice Chairman, President and CFO)
Morning, Scott.
Scott Levine (SVP and Equity Research Analyst)
Hope you might be able to provide some additional color on the amount of your business that's tied to the turnaround activity. And it sounds like, you know, the high efficiency and run rate on units is maybe driving some weakness in that activity this year, but some comments on the outlook for next year, whether there's any reason to expect improvement, and maybe order of magnitude.
Jim Rutledge (Vice Chairman, President and CFO)
You know, in just talking with both our chemical and our refinery vertical leaders, you know, our sense is we continue to win business, you know, grow that side of the business, have contracts lined up. So I think that we're well positioned across the U.S. and Canada, you know, of the 150 or so refineries, you know, we're doing business essentially with every one of them in some shape or form. And we believe on the turnaround side, that we're gonna continue to grow that business with our specialty services group. So I think we feel very good that, you know, if the business is there, we're gonna win our fair share of that.
Scott Levine (SVP and Equity Research Analyst)
Got it. And, as a follow-up, maybe, you know, you've been clear about where the upside to your initial cost synergy target has, has been and what it is for Safety-Kleen, but maybe, you know, a little bit more elaboration on the revenue synergy potential. You talked about parts washing today, but-
Jim Rutledge (Vice Chairman, President and CFO)
Mm-hmm.
Scott Levine (SVP and Equity Research Analyst)
Qualitative comment, if you will, you know, if you don't want to provide specific targets, but your thoughts on what the revenue synergy potential is today versus what your initial expectations were?
Alan McKim (Chairman and CEO)
You know, I think that the cross-selling opportunities is certainly in the early stages with Safety-Kleen, and the customer base that they have, and particularly to do with our field services business. We're pretty pleased with the amount of activity and the calls that we're getting. On the cost side, you know, we're really challenging the team to reduce our costs another $50 million or so next year. You know, we have other costs, obviously, that increase regarding wages and health care. And so every year, we've had a number of initiatives to take costs out of our business, and historically, that's been in the $20 million-$25 million range.
With our scale now and with the opportunity that we see, you know, we really believe that there's a lot more costs that we can take out of our combined operations. And we've been, you know, obviously, in the early stages of going through the budgeting process and looking at where each of these areas are gonna come from. But I think the team feels very confident that that there's a lot of cost here that we can keep taking out of this business.
Michael Hoffman (Managing Director and Director of Research)
Great. Thank you.
Alan McKim (Chairman and CEO)
Thank you, Scott.
Operator (participant)
Thank you. Our next question today is coming from Sean Hannan from Needham & Company. Please proceed with your question.
Sean Hannan (Senior Equity Research Analyst)
Yes, thanks for taking a follow-up here. Just to follow up on some of the comments that you've provided around lodging and as we have this late entry in 2013, is there any risk or is there any thought you can provide around as you look to fill those rooms, would there perhaps be discounts or impacts to pricing or EBITDA in order to get those rooms filled for the busy season? What's the thought process there as we enter into this seasonal period for the business?
Alan McKim (Chairman and CEO)
I don't think there's any need for us to do that. I think the facility will sell itself. You know, we're having tours daily. We've got major customers visiting. We have over 350 customers that have historically used our lodging facilities, and we believe that, you know, it's really just getting those customers. Now that the site is finished, open, ready for occupancy, serving food, managing, you know, the needs of our own workforce up there, you know, it's just a matter of time at this point, not a matter of price.
Sean Hannan (Senior Equity Research Analyst)
That's great feedback, Alan. And then in terms of the oil and gas viewpoints for 2014, looking at that to be flat, we had some comments from you folks from the Analyst Day, where, you know, there's a little bit more of a growth expectation in the longer term for that business. There's certainly a redeployment of assets. I think that you had referenced that a little bit earlier, such as some of the centrifuges into, you know, Texas and, you know, some of the other shales here in the States. Can you provide a little bit more color behind, you know, that flattish outlook? You know, what drives that? Is it really conservatism based on the volatility we've seen in the business? Is there something fundamentally that perhaps has changed a little bit?
Any color would be helpful. Thanks.
Alan McKim (Chairman and CEO)
Sure. I mean, I think first, we're being conservative, and I think second is that, you know, we have done a great job of growing our solids control business in the U.S., and the team there is excited about the opportunity to keep growing it, again, in some of these new areas. The Canada business has really been soft, you know, particularly to do with the weather. And so that has improved. We had a real wet season, and that there were a lot of rigs that were down, and so that has improved. But we have a long way to go to put that equipment to work, in, particularly in Canada.
Our seismic business, you know, has had a nice run here, but we're a little conservative for next year. We haven't got that contract in our hands, so to speak, so there certainly is upside. But I would tell you that, you know, we, we've said that, you know, looking out over the next three to five years, we wanna get this business to $5 billion and beyond. And you can see the leverage as the company continues to grow its top line. You see it recently in oil and gas, but you really see it even looking at the last two or three quarters and looking at the margin improvement and how those, you know, costs have taken coming out of the business and that revenue really has flown through.
So I still am very optimistic about, you know, where we're taking the business and, you know, achieving that longer term goal. But we are trying to be more conservative and beat our estimates next year.
Sean Hannan (Senior Equity Research Analyst)
That's very helpful. Then lastly, from an emergency response standpoint, are any numbers baked into that 2014 outlook?
Alan McKim (Chairman and CEO)
No, we did not include emergency response in 2014.
Sean Hannan (Senior Equity Research Analyst)
Okay. From an annual guidance kind of entering a year, that's kind of a change now in your process. You're just fully removing that, and whatever we get is upside.
Alan McKim (Chairman and CEO)
That's correct, because we would typically put events, you know, some estimate for the events in there at $15 million-$20 million. We've done that in the past, but we decided to have that just be kind of like upside, as you just alluded to.
Sean Hannan (Senior Equity Research Analyst)
Okay, great. Thanks so much for the perspective.
Alan McKim (Chairman and CEO)
All right. Thank you, Sean.
Operator (participant)
Thank you. Our next question today is coming from Michael Hoffman from Wunderlich Securities. Please proceed with your question.
Michael Hoffman (Managing Director and Director of Research)
I, like Sean, appreciate the second crack here. Alan, is it logistically possible to sell out Ruth Lake in the fourth quarter, or on a practical basis, it'll roll into 2014?
Jim Rutledge (Vice Chairman, President and CFO)
That's it, Jim, what? No, I was just gonna say, I think mostly we should be there in Q4.
Alan McKim (Chairman and CEO)
Yeah. You know, it's just a little bit hard because you have the holidays coming up, you know, and people-- You know, you could sell out, but, but from a occupancy standpoint, you know, between the, the holidays, it's, it's, it's a little bit softer. But, you know, certainly going into the beginning of the year, we could be full.
Michael Hoffman (Managing Director and Director of Research)
Okay. But I just wanted to understand the perspective. And then on oil and gas, you mentioned in the press release, alluded to in your comments, there was some flood work. So if I took a flood work out, what, what's that look like? That, 'cause that also limits the-
Alan McKim (Chairman and CEO)
Yeah.
Michael Hoffman (Managing Director and Director of Research)
-growth rate.
Alan McKim (Chairman and CEO)
It's not a lot. I mean, we just referenced it, the fact that our production services team was working on some event work as it related to the, you know, the great floods that happened in Alberta and helped out, you know, some of, you know, helped out a lot up there, actually, with the communities. We set up a camp in High River and, you know. So we've -- we were impacted negatively and positively, but it's not material on that, Michael.
Michael Hoffman (Managing Director and Director of Research)
All right. Fair enough. Then I remember having a conversation with Laura about the capacity utilization, and we talked about sort of two ways to do this. One was just get units in place, and the other was upsell the asset intensity. And can you frame for us how you're thinking about that as you look into 2014, but also, where are we in sort of the progress of that?
Alan McKim (Chairman and CEO)
Yeah. You know, Laura, Laura has been with us, you know, six months or so, and I think that, you know, she continues to work with the team to implement those strategies and to, you know, improve our intensity of asset utilization, as she says, and I feel confident we'll continue to see that progress, and we're in the early innings.
Michael Hoffman (Managing Director and Director of Research)
Okay. Thank you very much.
Alan McKim (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. Our next question today is coming from Dan Craig from Coe Capital Management. Please proceed with your question.
Dan Craig (Director of Research)
Hey, guys, two quick questions. First, on both on Safety-Kleen, I guess. What's the assumption for the incremental synergies that you think you could potentially get in the $610 million-$640 million EBITDA guidance for next year?
Jim Rutledge (Vice Chairman, President and CFO)
The incremental synergies, are they that $25 million-$30 million next year? Because then we'll be at the full run rate next year, so that's-
Dan Craig (Director of Research)
Yeah.
Jim Rutledge (Vice Chairman, President and CFO)
-where we go from the 70, 75, up to the 100. Yeah.
Dan Craig (Director of Research)
Okay. But there is, I, I thought you mentioned earlier in the call that there was potentially some additional synergies beyond that.
Jim Rutledge (Vice Chairman, President and CFO)
Yeah. Yes, absolutely. In terms of margin expansion, and so we do expect to see the margin in Safety-Kleen increase next year as a result of a lot of those efficiencies on the WIN system. But I haven't put a strict dollar amount on that at this point.
Dan Craig (Director of Research)
Okay.
Jim Rutledge (Vice Chairman, President and CFO)
But we should see... I think I mentioned earlier that we should see, you know, perhaps a couple of hundred basis point increase in from that 14% range that we saw in that I estimated for Q3 in Safety-Kleen Environmental. We hope to do better than that.
Dan Craig (Director of Research)
Okay. Okay.
Jim Rutledge (Vice Chairman, President and CFO)
Yeah.
Dan Craig (Director of Research)
And you're assuming that extra couple hundred basis points in the 610-640 EBITDA guidance for 2014, or?
Jim Rutledge (Vice Chairman, President and CFO)
For 2014, yes.
Dan Craig (Director of Research)
Yep. Okay. And then what's the base oil price assumption that you guys used?
Jim Rutledge (Vice Chairman, President and CFO)
Yeah, we did, we did not adjust it. We, we kept it, under current, where things are at now, with, with price increases that already occurred, as you're probably aware of, over the last month or two. Just assuming those stay flat for, for next year is what we assumed.
Dan Craig (Director of Research)
Okay. Thanks.
Jim Rutledge (Vice Chairman, President and CFO)
Thank you, Dan.
Operator (participant)
Thank you. Our next question today is coming from Larry Solow from CJS Securities. Please proceed with your question.
Larry Solow (Managing Director and Senior Research Analyst)
Thanks for those. Just quickly on pricing assumptions for next year, do you have anything you can share with us?
Alan McKim (Chairman and CEO)
You know, we on particularly on incineration, with the level of utilization that we're operating at, we continue to look at rationalizing that capacity and improving our mix and improving our pricing in that area. Our landfill business, you know, as we've said in the past, continues to be competitive on the large projects, but we've been able to improve pricing on our local, you know, local business. I think in general, we feel that Safety-Kleen has an opportunity to improve its pricing. By having them, you know, on our platform, we think our team can work together now to implement better pricing, you know, for their various lines of business. So I would say overall, those are not baked into these numbers, but those are some of our early thinking.
Larry Solow (Managing Director and Senior Research Analyst)
Gotcha. So there's not really much increase in price or negative, one way or the other, baked into, into the preliminary guidance that-
Alan McKim (Chairman and CEO)
Right.
Larry Solow (Managing Director and Senior Research Analyst)
Great. Then just two housekeeping questions. Do you expect any more severance in Q4? And tax rate, is 35% a good number to use going forward?
Jim Rutledge (Vice Chairman, President and CFO)
Yeah, I think thirty, thirty. Actually, for 2014, I think the, just opening up my. For 2014, I would use that thirty—we're thinking 35.5%-36.5%. So on average, 36% for next year-
Larry Solow (Managing Director and Senior Research Analyst)
Okay.
Jim Rutledge (Vice Chairman, President and CFO)
Given the mix of U.S. and Canadian business, so it's up, up slightly there.
Larry Solow (Managing Director and Senior Research Analyst)
Yeah.
Jim Rutledge (Vice Chairman, President and CFO)
But for the fourth quarter in that 35% range seems right.
Alan McKim (Chairman and CEO)
There shouldn't be any substantial, you know, severance costs at all in the fourth quarter.
Larry Solow (Managing Director and Senior Research Analyst)
Great. Great, so it's pretty much done. Great. Thanks a lot, guys.
Alan McKim (Chairman and CEO)
Thank you, Larry.
Operator (participant)
Thank you. We have reached the end of our question and answer session. I'd like to turn the floor back over to management for any further or closing comment.
Alan McKim (Chairman and CEO)
Well, thanks again to everyone for joining us today. We look forward to updating you on our progress as we close out 2013 and head into the new year. Have a safe day. Thank you.
Operator (participant)
Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.