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Greetings, and welcome to Clean Harbors Fourth Quarter 2017 Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Michael McDonald, General Counsel for Clean Harbors. Thank you, Mr. McDonald, you may begin.
Thank you, Rob, and good morning everyone. On today's call with me are Chairman, President and Chief Executive Officer, Alan S. McKim; EVP and Chief Financial Officer, Mike Battles; and our SVP of Investor Relations, Jim Buckley.
Slides for today's call are posted on our website and we invite you to follow along. Matters we are discussing today that are not historical facts are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Participants are cautioned not to place undue reliance on these statements, which reflect management's opinions only as of today, February 28, 2018. Information on potential factors and risks that could affect our actual results of operations is included in our SEC filings. The company undertakes no obligation to revise or publicly release the results of any revision to the statements made in this morning's call, other than through the filings that will be made concerning this reporting period.
In addition, today's discussion will include references to non-GAAP measures. Clean Harbors believes that such information provides an additional measurement and consistent historical comparison of its performance. A reconciliation of the non-GAAP measures to the most directly comparable GAAP measures is available in today's news release, on our website, and in the appendix of today's presentation.
And now, I'd like to turn the call over to our CEO, Alan McKim. Alan?
Thanks, Michael. Good morning, everyone. Thank you for joining us. Starting here on slide 3, we're happy to report today a strong conclusion to 2017 with Q4 results that were in line with our expectations. We successfully executed our strategy and benefited from improving economy, which resulted in revenue growth in all four of our reporting segments. From an adjusted EBITDA perspective, Safety-Kleen was the main driver in the quarter, as the team effectively managed the spread while capitalizing on higher base oil and lubricant pricing. Tech Services also achieved profitable growth in Q4, as we again drove considerable volumes of waste into our disposal network.
Before turning to more detail on the segments, let me share some thoughts on our annual results as we returned to full year profitable growth in 2017 and completed several strategic initiatives. We opened a new hazardous waste incinerator in El Dorado, Arkansas, the first such facility built in the U.S. in the past 20 years. Despite incurring several unplanned outages related to the startup of the plant, we remain excited about its long-term prospects. In addition, we continue the roll out of Safety-Kleen's closed loop offering and recently surpassed another milestone selling and delivering lubricants direct to more than 15,000 unique Safety-Kleen customers. We also opened Safety-Kleen's Customer Care Center which will improve our efficiencies across many functions within that business.
Turning to Technical Services on slide 4, we drove strong volumes into our incinerators and our landfills, resulting in a 9% increase in revenue. If you exclude our Transformer Services business, which we sold in mid-2017 from the 2016 results, this segment achieved 13% organic growth. Incineration utilization was seasonally strong at 92% in the quarter. That number is particularly significant in light of the unplanned shutdown of El Dorado in October. It really speaks to the great job that our team has done in capturing waste volumes.
Landfill tonnage was up 18% in the quarter, helping to drive an increase in profitability. The segment's adjusted EBITDA margin was slightly lower based on the mix of waste in the network and some of the additional cost associated with the repairs of the new incinerator at El Do.
Looking at Industrial and Field Services on slide 5, segment revenue rose 11% in the quarter, largely due to Field Services, including hurricane-related emergency response work in the Gulf and in Puerto Rico. However, our own Puerto Rico operations have continued to be impacted by the lingering effects of Hurricane Maria, and many customers have not resumed operations.
Adjusted EBITDA and margins declined from a year ago based on business mix, customer pricing pressures and some one-time costs. We also were challenged in the quarter with certain labor costs, subcontractor expenses and management of third-party spend, including equipment rentals. These are areas that we are focused on improving in 2018, including an emphasis on higher margin work. With the market bottoming out, we believe there's an opportunity for better pricing and for the whole industry to get back on a path to profitable growth.
Moving to slide 6, Safety-Kleen grew revenues by 5%, largely due to higher base oil and lubricant pricing, as well as incremental growth in our core branch offerings. For example, our parts washer services for the quarter increased to 243,000 from 241,000 a year ago. Adjusted EBITDA in the segment increased 23% from a year ago, due to increases in base oil and blended pricing, our spread management in the re-refining business and cost reductions associated particularly with the national Customer Care Center.
In terms of the sales mix for Safety-Kleen, direct lube oil sales accounted for about 4% of our total volumes sold in Q4, which is essentially flat on a sequential basis. Blended sales accounted for 23% of our total in the quarter versus 27% a year ago. In our first year since introducing the closed loop offering, we sold 5.3 million gallons of lube direct to customers, demonstrating to the market that this is a compelling offering. And we continue to see a strong pipeline of opportunities and interest amongst our customers.
For 2018, we're targeting at least doubling our total gallons of direct lubricant sales. In Q4, we launched sales blitzes in our bulk offering in three metropolitan markets, including Los Angeles, and we have high expectations for the California marketplace which has been very receptive to the recycled aspects of our offering.
Turning to Oil, Gas and Lodging Services on slide 7, improved market conditions helped drive an 11% increase in segment revenue and a $4 million year-over-year improvement in adjusted EBITDA. The average number of rigs serviced increased to 92 from 90 a year ago and included larger average engagements. While these businesses remain a relatively small contributor to our performance, this was the third consecutive quarter that we improved the top and the bottom line in this segment.
Moving to slide 8, we acquired Veolia's U.S. industrial cleaning business for $120 million in cash. This business generated about $210 million in revenue in 2017 through 1,300 employees across 60 different locations, and they have an extensive fleet of vehicles and equipment. This acquisition essentially doubles the size of our U.S. industrial business and creates scale that we believe will enable us to enhance our service offering and drive profitable growth.
The geographic fit is strong and as you can see on the slide, Veolia's footprint is concentrated around the Midwest, a market where Clean Harbors has had limited industrial presence. And they also are strong in the Gulf, where there is a large customer concentration given all of the refining and chemical activity. Equally important, this deal strengthens our vertical integration, providing the opportunity to drive additional waste volumes into our disposal network. We're excited to welcome members of the Veolia team into Clean Harbors and move forward with our comprehensive integration plans.
Turning to slide 9 and our corporate initiatives, in 2018, our strategy is to make a concerted effort to reinvest in our workforce. We estimate between higher average wages, greater bonus compensation, the reinstatement of the 401(k) match program, increases in healthcare benefits and driver retention programs that we will invest well over $20 million more in 2018 than we did last year.
In addition to our long-term annual savings from the reductions in the U.S. corporate tax rate, we have a broad array of cost savings initiatives underway to help offset some of these increases. As a service company, our team of talented employees form the backbone of our organization, and these investments are critical for us to succeed over the long term, particularly given the current tight labor market and availability of drivers.
Profitable growth is our top priority for 2018. In our incineration network, we plan to improve our mix and drive pricing gains. For the closed loop, our target is to more than double the volumes achieved in 2017. We have already begun the integration process for Veolia industrial and plan to capture some cost savings, but more importantly, we see revenue synergies and more stable pricing over the long term. And lastly, we intend to execute our capital allocation strategy that is outlined on slide 10.
Our board and management team remain closely aligned on deploying our capital to maximize value and return for our shareholders. We'll look to invest capital to drive growth, including in Veolia. We'll continue to evaluate acquisitions that will support or accelerate our growth. At the same time, we'll also seek opportunities to divest smaller non-core assets or businesses. We expanded our buyback program to $600 million in late 2017, which provides us considerable flexibility in that regard. Our current strategy is to target repurchasing 1 million shares this year. In 2018, we also will assess our debt structure as prepayment penalties expire later this year on both our 2020 and 2021 senior notes.
Before turning it over to Mike, let me close with our current outlook. We began 2018 with positive momentum across our key businesses and excited about our prospects for the year. We're focusing on enhancing our margins through better pricing, improving our revenue mix, increasing efficiencies, and capitalizing on the growth initiatives. The underlying dynamics of our business remain very positive and we're seeing favorable trends in hazardous waste volume as industrial production increases. We're seeing more large project opportunities in our pipeline, a growing interest in our Performance Plus brand and a stabilization within the energy marketplace. Overall, we anticipate a strong adjusted EBITDA and adjusted free cash flow performance in 2018.
So with that, let me turn it over to Mike Battles.
Thank you, Alan, and good morning everyone. Turning to slide 12 and our income statement, we capped off a year of strong topline growth with a revenue increase of $55 million in Q4, driven by contributions from all four segments, led by Tech Services, which benefited from strong volumes. For the full year, we grew our revenue by approximately $190 million or 7%.
Stronger year-over-year pricing, especially in our re-refinery business, generated 130 basis point improvement in gross margin for the quarter. On a full year basis, gross margin was up 20 basis points, as pricing improvements more than offset the lower margin mix of volumes and facility costs in our disposal network.
With El Do now online and utilization above 90% for the past two quarters, shifting toward higher margin waste volumes is the goal we are focused on achieving this year. SG&A expenses on a percentage basis were up 150 basis points, primarily based on higher incentive compensation. Full year SG&A was up 20 basis points from 2016, as lower integration and severance costs largely offset incentive comp. For 2018, we expect SG&A as a percentage of revenue to be essentially flat with 2017.
Depreciation and amortization was flat with the fourth quarter of 2016, and up slightly on a full year basis, as the addition of El Dorado and recent acquisitions offset the benefits of divestures and lower CapEx. For full year 2018, we expect depreciation and amortization in the range of $290 million to $300 million, which includes an estimate for the Veolia assets. Income from operations increased 27% for the quarter, reflecting the higher level of revenue and gross margins in 2017. Adjusted EBITDA increased 6% for the quarter and full year.
Looking at the bottom line, GAAP EPS came in at $1.48 per share for the quarter and $1.76 for the full year. These results were impacted by recent tax law changes, including the revaluation of our deferred tax liabilities under the new corporate tax rate of 21%. Adjusted net loss in Q4 was $0.06 per share. Adjusted EPS for 2017 was $0.20 versus $0.02 in 2016.
Turning to the balance sheet on slide 13, we ended the year with cash and short-term marketable securities of $357.6 million, up over $50 million from 2016. The Veolia transaction will likely cause our cash balance to dip in Q1, but we still have plenty of dry powder to execute our capital allocation strategy. DSO came in at 72 days, which is up from the prior quarter, but lower than the prior year-end for the first time in four years. Our team has done a good job in reducing that number even as clients continue to push for longer payment terms, especially on large projects. We remain focused on lowering DSO in 2018.
Turning to our cash flow highlights on slide 14, Q4 CapEx net of disposals was $37.5 million, which led to a full year total of $159.9 million, which is at the low end of our forecasted range of $160 million to $170 million. The team was prudent with our capital spend while maintaining a focus on strategic investments. For 2018, we are targeting CapEx net of disposals of $170 million to $190 million, which includes $12.5 million more than 2017 for landfill cell expansion and additional CapEx for Veolia.
For the full year, we more than doubled our adjusted free cash flow to $140.2 million from $61.1 million in 2016. For 2018, we anticipate generating adjusted free cash flow in the range of $125 million to $155 million. This is based on net cash flow from operating activities in the range of $295 million to $345 million. During Q4, we've repurchased $24.5 million of stock. For the full year, we've repurchased $49 million or approximately 907,000 shares. As Alan mentioned, we are currently targeting repurchases at a level consistent with 2017, but that is subject to a variety of factors that could move that number up or down.
Moving to guidance on slide 15, based on our 2017 results, current market conditions and the Veolia transaction, we expect to generate 2018 adjusted EBITDA in the range of $440 million to $480 million. At the midpoint, that represents an increase of 8% from 2017. Our goal is to return Clean Harbors to being a company that generates positive predictive results year-after-year.
Looking at our 2018 guidance from a quarterly perspective, we expect our percentage of growth to be slightly weighted towards the back end of the year due to the ramp of the Veolia business and our closed loop offering. In addition, we expect Q1 adjusted EBITDA to be flat to slightly up year-over-year, as we are incurring higher 401(k) costs in Q1, and there were additional costs with some unplanned down days for our payers at our El Do plant in 2018. Total impact for both items is about $7 million.
Here is how our 2018 guidance translates into a segment perspective. We expect adjusted EBITDA for Tech Services segment to increase by a mid single digit percentage in 2018. This growth will be driven by a combination of pricing, mix and margin enhancements.
The Industrial and Field Services segment is projected to see a 30% or greater increase in adjusted EBITDA compared with 2017. The addition of Veolia will account for a majority of that increase, but our legacy business should also contribute higher EBITDA based on a combination of pricing, organic growth and cost reductions.
For 2018, Safety-Kleen is expected to generate adjusted EBITDA growth in the high-single digits. Driving this increase are higher base and blended pricing, the closed loop, and organic growth in our core SK branch network.
For Oil, Gas and Lodging Services, adjusted EBITDA is expected to more than double in 2018, given the small base of profitability in 2017. Higher rig counts are driving growth in our Surface Rental business and our Lodging business is seeing a small pickup. But Seismic and other businesses are still lagging the energy recovery.
We expect the negative adjusted EBITDA in our corporate segment to increase in the low teens in 2018, with costs from acquisitions and higher compensation and benefits, including the 401(k) outweighing our ongoing cost saving programs and lower severance costs. Overall, we anticipate a year of profitable growth in 2018 based on the favorable macroeconomic environment and initiatives Alan discussed and the addition of the Veolia business.
With that, Rob, please open up the call for questions.
Thank you. Our first question comes from the line of Brian Lee with Goldman Sachs. Please proceed with your questions.
Hi, guys. This is Hank Elder on for Brian, and thanks for taking the questions.
Good morning.
Good morning. So on the Veolia acquisition, can you give us an idea on the timeframe for when that kind of run rate EBITDA will be achieved?
Sure.
Yeah. The idea we said publicly, it's $15 million to $20 million, and we feel that that's going to take time. Some of that is consolidating sites, getting the team kind of up and running, getting it on our systems and on our network, that's going to happen kind of later this year and into next year. Frankly, we bought the company last Thursday, Friday, so we're just kind of continuing to assess it. I think it's going to take some time to kind of get it into our systems and processes. But I'm hopeful by the time we get to Q4, we're going to hit that run rate. There are some synergies we need to do, that's more, I'd say, consolidation and so forth. But I'm confident that as we get into Q4 and into 2019, we'll have that run rate good and stabilized.
Okay. Thanks. That's helpful. And then, do you guys – from a cost versus revenue synergy perspective, where do you I guess see more upside in that acquisition?
Yeah, I think probably on the revenue side, I would say that one of the benefits that we see with the Veolia business is they had a lot of nested sites, so a lot of sites where they have people at customer sites every day with planned work, which represented 70%, 80% of their revenue. So a nice steady revenue stream where we could go in and cross-sell and add a lot more services to those customers that they are on site with versus our Industrial business is much more of a event-driven business, turnaround business. So we really see some nice opportunities to expand our relationship with their customer base.
Great. Thank you, guys.
Yeah.
Our next question comes from the line of Noah Kaye with Oppenheimer. Please proceed with your questions.
Good morning, everyone. Thanks for taking the questions. You don't I know guide to topline growth, but just so we can understand how to think about the margin trajectory here. I mean, broadly are you thinking about kind of a mid single digit growth rate for the topline or should be higher than that for 2018?
So, Noah, thanks for the question. This is Mike. So, as I said earlier, we had a kind of good year from a growth perspective or from a revenue, and we grew 7%, some of that's acquisition, but a lot of it's kind of base business wins. And so our goal, as I said in my remarks, were to kind of have more profitable growth and drive margin versus volume. And so, so we are going to be more selective. I do think that's a low single – low-to-mid single growth rate, because of the macroeconomic factors that are out there. I think it's difficult to kind of pinpoint that, because it's based on oil prices as well. So it's hard to give that out. But certainly it's going to be – it is not going to grow at that level, because I think we had some good tailwinds and base oil pricing increasing, but certainly the idea here is more profitable growth.
Thanks, Mike. And then on the free cash flow conversion, just trying to understand, are there – you talk to DSOs and working capital efforts. I think we'd like to understand just how we kind of come to a sort of flattish free cash flow profile at the midpoint off of the 8% EBITDA growth there? Are there some puts and takes to think about this year? Would have thought you would get a benefit as you said from tax reform and maybe some continued improvement in working capital.
Sure, Noah. So, that's a very good question. So, I'll start, and feel free, Alan, if you want to jump in. So, we said that we ended the year with about $160 million in CapEx, net CapEx, and we said we're going to be in the midpoint kind of a $180 million, right? And so that's – some of that's cell expansion, some of that's lease buyouts of Veolia assets, and so that's another $20 million of CapEx which would be a bad guy to our free cash flow. If you take the midpoint of our guidance of $160 million, that's $35 million more, so obviously that would translate into $35 million more cash flow, so that's a good thing.
But then also we have as kind of a downward pressure is bonus payments this year, which we really didn't have last year. And so, so we're going to have about a $20 million payment here in March through our organization. And so that's going to put some pressure on free cash flows for the year. We also had -as a good guy, we will have lower interest payments in 2018, so that's about a $5 million good guy. And we also are hopeful that we had better working capital as we look at 2018 which would be a positive number. So, look, we get the fact that flat is not a great answer, but we feel like that is a reasonable and balanced answer based on kind of where we are given the fact we do need to make some investments in some cell expansion. We are going to pay some bonuses this year and we're hopeful we'll get some better working capital in 2018.
Good. That's helpful. And then maybe one more from me, just how to think about the cash tax rate? Because I think if I do my math right, which hopefully we do, kind of the GAAP tax rate implies still about a 48% effective, if that's correct, but how to think about the cash tax rate?
Yeah. So, no, that's an interesting point, glad you brought it up is that in 2017, from a federal tax standpoint, we didn't pay a lot of cash taxes. We paid $3 million or $4 million, because we had the new incinerator coming online, which we got – under the old tax law, we still got bonus depreciation in the 50% range. And so, we didn't pay a lot of taxes in 2017. We won't pay a lot of federal income taxes in 2018. I'm not sure that's going to be a help or – a good guy or a bad guy, so to speak, as we look at the 2018 cash flows. Over a longer horizon, obviously with the federal income tax rate going from 35% to 21% and our U.S. pre-tax income of $100-million-plus, that's going to be a $15 million winner, it's probably not a winner in 2018.
Okay, perfect. Thanks so much.
Okay.
Our next question comes from the line of Larry Solow with CJS Securities. Please proceed with your questions.
Hi. This is Craig Bibb in for Larry. You've touched on it at the end of the presentation and a little bit in the free cash flow discussion. But just maybe to summarize, it looks like the guidance for EBITDA which includes Veolia for the full year is maybe 0% to 10% organic growth. And you have an easy compare with – I think met with hurricanes this year, so just a summary of the key good guys and bad guys that are going to limit EBITDA growth.
Sure, Craig. So, kind of without getting too specific, at the end of the day, we're going to get some benefit from the Veolia business, right? We're going to get benefit from the closed loop, from base oil spreads, and from El Do kind of online now and certainly some of the shakedown is in the rearview mirror. But as an offset to that, we are making investments in some people. As Alan mentioned in prepared remarks, we are making investments in a 401(k) match, in some driver incentives, and we have some costs in there for Veolia. And so, there is some investment we're making in 2018, which does kind of dampen the midpoint of our guidance.
And also, Craig, I want to mention that our goal is to drive positive predictive results in 2018. So, we are trying to be kind of reasonable and balanced as we go into this first 2018 guidance. And so, we're hopeful that we'll kind of meet and beat kind of all four quarters and be fine. And so, should we have had – we're obviously gaining some benefit in 2018 from no hurricanes forecasted at the moment, so that's a good thing. But at the end the day, we do need to recognize we need to make some investments in people and we are trying to be more balanced in our view of guidance as we go into 2018.
Okay. And then at the refinery business, you're planning to double that or you'd like to double that next year. California is a huge market and the appeal there is pretty obvious. What else gets you to the ability to double the size of that business?
I think it's just – as we've opened up more distribution centers for bulk lube oil offering, we're looking to get to about 12 million gallons across the network. We have added quite a number of salespeople that are specialists to just focus on this line of business. So, I think between the packaged and blending capability and distribution we have as well as the bulk facilities that we now have opened up, we certainly have the infrastructure and the wherewithal to deliver that, and the customer base quite frankly.
Okay. And then last one, if you could just give us an update on the acquisition of Lonestar and how much will that contribute this year?
At this point, Lonestar is essentially sort of integrated into our business. We now have over 200 daylighting assets. As we continue to roll out that offering now to a lot of our customers, particularly to cross sell a lot of our existing customers, we expect to grow that business. We haven't broken it out or given any guidance necessarily on it, but it is certainly in its early stages of implementation across our network here.
Okay, great. Thank you very much.
Yeah.
Our next question comes from the line of Bobby Burleson with Canaccord. Please proceed with your questions.
Hey guys, this is John DeCoursey (30:37) on for Bobby. Can I just follow up on that Lonestar question? Thanks for touching on the growth. But just in terms of profitability, would an approximately 15% EBITDA margin for that business still be reasonable as you grow, or is that something that is kind of a ramp-up and won't be achieved until much more integration is continued?
Yeah, John, thanks for the question. When we think about it, again, it's kind of integrated. As Alan says, it's tough to kind of break it out per se. We do think that it probably gives us $3 million to $5 million of incremental EBITDA as I'm looking at kind of my view of 2018, but really it is – whether that's growth in the industrial base business through use of those Hydro Vacs or incremental Lonestar business, that's impossible to really determine at this time. But if you're kind of asking the question, I think that's probably a $3 million to $5 million kind of a good guy in 2018.
Okay. Great. And then second on hydro excavators, can you kind of just touch on what the competitive advantage for Clean Harbors is versus kind of some of your single-service provider peers out there, like a Badger, et cetera?
Sure. Our focus is really on the haz waste side, so we're particularly interested in using that technology to go after sites and opportunities where hazardous waste is being – we moved and permitted, trucks need to be utilized, and disposal facilities need to be used for either incineration or landfill. So, we really look to differentiate ourselves in that market to really go after more of that kind of business. Most of our competitors that are in that space are non-haz daylighting companies and therefore tend to not have to worry about the tailings from their excavation work.
So, I would say that – we're also trying to integrate the fact that we have 16,000 or so rolloff containers and a large fleet of rolloff vehicles so that we can integrate that in with our fleet and our transportation organization. So that's been really our differentiation in the market.
Okay, great. And then just one last question out of me, you touched on Puerto Rico still being a drag in some businesses, with some businesses still being offline. Can you kind of touch upon the, kind of your expectation, even if it's just qualitatively, in terms of how much longer the hurricane drag is going to persist?
I think it's going to continue to persist. I mean, that was – we had several offices in Puerto Rico. We've been there over 20 years, $15 million to $20 million of revenues that we regularly achieved in that market. So it's really been impacted quite significantly. We're doing cleanup work and somewhat and limited, because it's really getting power up and kind of getting the people back in a safe situation I think has been really the priority down there for our customers and the government. And I think it's another 6 to 12 months before we see any kind of normalization there to be honest with you.
Great. Thank you very much, guys.
Yeah.
Sure, John.
Thank you. Our next question is from the line of David Manthey with Robert W. Baird. Please proceed with your questions.
Yeah. Hi, guys. Good morning. What are your assumptions for revenue and EBITDA contribution in the 2018 guidance for the acquired Veolia business? I know you said it was $200-million-ish in revenues and $15 million to $20 million EBITDA in the first full year. But could you just talk about what you're assuming in 2018?
Sure, Dave, this is Mike. I'll take a shot at that. So we think it's about $175 million. That's an estimate based on some modeling we've done, and $8 million to $10 million of EBITDA for Veolia in 2018. So, again, that's based on timing, that's based on some integration work we had to do, but I think that's a reasonable starting point.
And I think our turnaround business is going to start off really strong here. As we were preparing the integration work, we were getting a lot of demand for labor and a lot of business coming in here, so we really think that's going to help our Industrial business quite a bit this year, and we've got obviously people and equipment to help fill those needs that they have. So we're pretty excited about teaming together now with these two firms.
Okay. When you look at that full year run rate of $15 million to $20 million in EBITDA, how much of that is coming from synergies versus just existing base business profitability?
David, I don't think a ton of it's coming from kind of synergies. We do have some revenue synergies we want to achieve and we do have some costs. As Alan said in his prepared remarks, they're big in the Midwest. We don't have a huge presence in the Midwest. We don't anticipate consolidating a lot of offices in Midwest. We feel like there's opportunity there to do cross-selling. And so we think that there's some there. But really honestly, we haven't put a ton of synergies into the model trying to get to these answers, some, mostly in the back half of the year.
Yeah.
Okay. Thank you for that. And with a bit of a rebound here in the Oil, Gas and Lodging business, I guess you cited three quarters of improvement, wouldn't now be a good time to take a harder look at divesting sort of non-core businesses maybe within that segment that don't fit with the core Clean Harbors?
Yeah. We have been looking at different parts of our business and selling off certain of the non-core businesses as we've shown with our – the Transformer business, for example, that we sold and the Catalyst business we sold. So, we certainly continue to look at whether it's specific assets or entire businesses. That's something we certainly look at, but quite frankly, that business is certainly in the early stages of a recovery, we would say. Even though crude oil is trading at $60, the discounting Canadian crude has really continued to hamper the Western Canada market. We do see light at the end of the tunnel with pipelines being permitted now and under construction. So, we think that discount will probably begin to shrink and more investments will get made, and we've got some great people and some great assets there. We think that market will come back and we'll continue to look at that business.
Okay. Thank you.
Yeah.
Our next question is from the line of Hamzah Mazari with Macquarie. Please proceed with your questions.
Hi. This is Kayvan Rahbar filling in for Hamzah. You mentioned it on your slide, on slide 10, but can you walk us a little more through the acquisition pipeline, what it looks like and which areas or segments you want to be more aggressive?
Yeah. Certainly, we continue to look at opportunities particularly in our Technical Services business where we see opportunities to drive more waste into our network of disposal locations, and so that's one particular area. I think the other thing which has really been – we've really been excited about is the success of Safety-Kleen. We've now owned the business for five years. We're sort of in the fifth inning there in our overall thinking and how profitable that business can be. We see bolt-on acquisitions to potentially help achieve a much greater scale in that business. And I think that's a huge bright spot for the company that we've had, and so because of that we certainly would look at making investments in that part of our business as well. The beauty of that is it drives lot of waste into our plants, it drives a lot of field services opportunities for us. And certainly, we're going to continue to leverage the lines of business that Safety-Kleen does so well across the core Clean Harbors' customer base. So, pretty exciting and acquisitions might fit that business pretty well right now.
All right. Thanks for that. And then a quick follow-up, can you talk a little more about your Energy business, some of the options for that going forward in terms of – just some of the strategy behind it?
Yeah. I mean, we've been certainly constraining capital on that business. That's been a business that we've really tried to adjust the cost structure. We've consolidated a lot of locations in that. Pricing in that business has been very, very difficult and utilization has also been significantly lower than it would have been four, five years ago. So, we continue to right-size that business to meet the current market, and our belief is, is that we've now generated a positive EBITDA with this business and we think we can continuously improve on that business. And quite frankly, we'll continue to look at what's the right way to support that business from both a capital as well as strategy standpoints as we see the markets recover.
All right. Thank you.
Yeah. Thanks.
Our next question is from the line of Sean Hannan with Needham & Company. Please proceed with your questions.
Yeah. Thanks for taking my question here. And sorry, I'm going to come back to some of the EBITDA guidance and some of the comments that have been made here this morning. I'm just trying to understand this a little bit better. So folks, so you're calling out that we have over, above and beyond, there's some reinvestments going back into our business here. It sounds like, Alan, that we're attributing all of that to the recent tax change. I just want to make sure I understand that correctly, and I'm sorry if I had missed the number, was there a rough magnitude of what it's effectively costing to the EBITDA dollars? What can we attribute here?
Hey, Sean, this is Mike. I'll answer this. So, in Alan's prepared remarks, he mentioned a $20 million number, which was really our reinvestment in people. That's 401(k) match; that's healthcare costs going up. We're shouldering a bigger burden of healthcare costs this year versus prior year. We're putting driver incentive programs in place. That's a bit of a cost. And then we have some small incremental salary adjustments. And so all of those kind of add together to be a $20 million investment, again, in our people knowing that it's been hard to get drivers, hard to get people and so like our peers we need to make those types of decisions.
And I think during the downturn over the last several years, I mean, we really constrained wage increases. We took away our 401(k) match. I mean, there were a lot of things that the team had to do to weather the fact that crude oil went from $100-plus a barrel to under $30 for a period of time. So, we recognize that the workforces are our key asset here and we need to go back and reinstate some of these things that we took away, and that's going to cost us a little bit of money, Sean.
Okay. And if I understand the commentary, particularly as we look through from a segment standpoint, the corporate adjustments, it looks like the vast majority of that would, or the investments would all go within there, much lesser impact in terms of within the segments. Am I not looking at this correctly? Because it sounded like that directional adjustment at the corporate line would really kind of make up for most of that increase.
Sean, this is Mike. You're right with that. There are a fair amount of cost savings programs in place across our businesses to help offset inflation in those businesses. And so there is a list of 30 items or 40 items that we've worked consistently. Some are cost savings, some are revenue initiatives, kind of drive that and that should neutralize any inflation that's happening within the segments themselves. When I think of this driver incentive program, that's in corporate today, and 401(k), that's all corporate, some healthcare cost increases, again that's in corporate. So to answer your question, yes, directionally that incremental spend primarily that we talk of that Alan mentioned in his prepared remarks, runs through the corporate line. And in my comment, I said it's up kind of mid teens, and it tells you that.
Yeah. Okay. And so then that leads me to a question then I have around Tech Services. So as I think about this business, if we're thinking about then only mid single digit EBITDA growth, we have some price increases that are going into place. We have some increased volume at El Do. It almost sounds like that's implying we're going to have kind of a little bit of a flattish scenario for, once we remove El Do or once we think about other aspects of volume. I just want to try and connect the dots a little bit better to understand why we weren't seeing a little bit of a stronger performance within that Tech Services business for 2018 here?
Yeah, Sean, that's a good observation. So two things I'd say. First of all, we did have some unplanned shutdowns here in January that kind of puts a little pressure on Q1. But more importantly, I think that we are trying to have positive predictive results as we go into 2018. And so we are assuming that not every day is sunny and nice. And so we are trying to be more reasonable in our guidance and that's part of it.
Okay. All right. Thanks very much for addressing the questions, folks.
Okay, Sean.
Thanks, Sean.
Our next question comes from the line of Michael Hoffman with Stifel. Please proceed with your questions.
Hi. Alan, Mike, Jim. And I'm apologizing in advance. I've been in business meetings and missed all your prepared remarks. So, I'm going to ask some questions based on what I've seen in the numbers.
Okay.
And I apologize if you've answered them already. But can you take all of those pieces of data that you gave through your presentation and take the $425 million and create a waterfall of the puts and takes to get to $460 million?
Yeah. Absolutely. So if you take the breakout of the different segments and you look at kind of where we landed in 2017, I mentioned that the Tech Services would be up in a mid single digit growth from 2017. And so we think that's due to kind of growth in the base business. Many of our challenges in El Do are in the rearview mirror. And so we think that grows kind of mid single digits due to kind of growth in the base business and more profitable growth in that business.
Industrial and Field really is the impact, is up 30%-plus, Michael. And that's driven really primarily by the Veolia acquisition which we said $8 million to $10 million in 2018, plus increases in the base business which implies some growth in the Daylighting business as well.
When I think of Safety-Kleen, so Safety-Kleen, as you well know, has been on a terrific tear, and some of that's acquisitions, some of that's base oil price increases, but really going from kind of $165 million back in 2014 to $215 million today is really just a great story. We think that grows another 10%, another low-double digits in 2018. And that's due to progress in the closed loop, base oil pricing spread and continued – kind of branch business continue to do well, some of those are kind of revenue increases in that business.
In Oil, Gas and Lodging, we said double, but it's off a real small number, right? So that's really, again, we see some positive trajectory there in surface rentals, but some areas are still struggling with seismic, especially areas like seismic are going to continue to struggle for a little bit here in 2018 as the discount from crude oil prices to Canadian oil is still pretty large.
Kind of offsetting all that goodness is in corporate where, as Alan said in his remarks, we are making some investments in people, whether it'd be the 401(k) match, whether putting some driver incentives in place, kind of higher healthcare costs which we are absorbing, some wages and incremental bonuses in 2018, offset by some severance, gets you to a mid-teen number in growth in corporate. And so, that kind of walks it down and we are trying to have positive predictive results here in 2018. So we try to be reasonable in these growth rates, but I think that – I think that kind of – I feel pretty good about this number going into 2018 given kind of the good exit velocity we have in 2017.
As Alan mentioned in his remarks, if you take out the Transformer transaction that we did in 2017, revenue growth for the Tech Services business was up 13% year-over-year. So again, I feel good about our ability to kind of drive higher margin waste streams into our network and drive incremental profitability and improve our margins.
Okay. So, if I think about what those numbers are, that's sort of $25 million upside from Tech Services, $12 million to $15 million from Industrial and Field. If I'm looking at double digits on Safety-Kleen, that's...
That was Oil and Gas.
Yeah.
Double-digit was Oil and Gas.
Oh, Oil and Gas. But that's only $2 million or $3 million. If I'm low 10% – I think you said low-double digits. So 10% on Safety-Kleen, that's another sort of $25 million, well over the $35 million that's the – so I'm trying to figure out the offset, that's $50 million...
Yeah. I may have misspoke or you may have misheard, but I said mid single for Tech. So, we ended the year at $276.6 million of EBITDA, so.
Okay.
It's single, not 25%. Right?
Got it. Got it. Yeah. All right. So that's $10 million, $10 million, $11 million, okay, there is some of it. Okay. So, it's $10 million, $11 million there, it's $12 million, $15 million in IS&S, sort of in the $20 million range in Safety-Kleen, $2 million or $3 million in Oil and Gas, and there's an offset of $25 million to $30 million from quirk.
Yeah, that's directional. Yeah.
Okay. Okay. That helps. And then what was the answer why I'm not getting a free cash flow bump too?
So, when you think about it, and this was a question that was asked earlier, but I'm happy to answer it again. We are going from $160 million. So $35 million, the midpoint of our guidance is $460 million, so that's a $35 million more in EBITDA. And then if you take out incremental CapEx of about $20 million and a bonus payment of about $20 million, that's a negative $5 million, and we're going to get about $5 million of less interest payments in 2018 than we did in 2017. The question that was also asked – so part of that CapEx increase is some cell expansion, Michael, so that's about $12.5 million of that and some Veolia spend to buyout some leases. And so that's really driving that incremental CapEx in 2018.
One question again that was asked earlier that I'll just get in front of it is where is the benefit of the tax law change. And frankly and you may know this because we mentioned it before, we didn't pay a lot of tax – federal income taxes in 2017. We had the El Do incinerator coming online and that even under the old tax law had kind of bonus depreciation of 50%. And so that really cut down the amount of taxes we paid in 2017. And frankly with the change in the tax law with bonus depreciation going to 100%, we don't anticipate paying a lot of federal income taxes in 2018 either. So it's not necessarily a good guy or a bad guy.
Over long term though, we do see obviously 35% going to 21% with a $101 million, $102 million of U.S. taxable income, that's going to be a $15 million to $20 million good guy over the long term, but over the short term pier from 2017 to 2018 just because we did a decent job managing our federal income taxes, is not a big good guy here in 2018.
Okay. And I get the timing of cell development – if you had a volume swing that's really driving cell development, that does – you don't repeat that. It resets back to a more normalized rate, so the true underlying performance is $150 million to $153 million, and that's up 8% and that's what that matches your midpoint of your up 8% on EBITDA.
Yeah.
Yeah, that makes sense.
Am I talking myself into something or is that true?
No, no, you're right, that does make some sense.
Okay. So, Alan and Mike, when we last met, you talked about how the budgeting process was being revisited instead of driving it from go to operations and tell me what you think you can do and then tell sales to fill it, you're going to sales and saying what's the market bear.
Yeah.
How has that walked its way through the way you're thinking about this guidance, talk to us about what's different that if the plants had set the guidance versus what the sales folks are telling us.
Yeah. Certainly, we've looked at it both from a sales-driven process and an operations P&L-driven process and really tried to correlate those two together. It's been an intense effort for us here. We've been spending an enormous amount of time really trying to get both sales and operations align more closely, particularly to help us not only come up with guidance like we're talking about here, but really as our forecasting and our budgeting and establishing our incentive compensation both for sales and ops people. And I would say that it's the best we've had. We can do better. There's still room for opportunity there prove that alignment. But I think that reconciliation process that we have been doing I think is going to pay off in a big way for us.
And would you say that the plants have figured out that they need to reset cost to match what sales thinks is really practical? And where do you think you are in that – that's a cultural change, so where are we in that?
As you know, a lot of our costs are very fixed cost – a lot of our plants are very fixed cost in nature. It's not like you throttle back an incinerator or even a re-refinery. You do have some more movement on the landfill side and particularly on the project side. But I think more to do with the service side of our business and trying to make sure that we have our equipment lined out, we have our capital investments to support the growth that we're trying to do, that our pricing strategy and our margins that are going to be supporting, some of those investments are aligned.
So trying to drive more – let's face it, we're trying to get the business to a 20% EBITDA business. We are totally disappointed with the level of profitability that we operate this business at. The risk that we take, the permits that we have to abide by, the regulatory environment that we operate in are significant. And so we need to get the entire organization aligned on margin improvement. And that really has been the mantra as we've gone through this exercise over the last year here, and we will continue to go through that until we see the margins improve in this business.
Okay. That's terrific. Thank you very much for taking the questions.
Thank you, Michael.
The next question is from the line of Jeff Silber with BMO Capital Markets. Please go ahead with your questions.
Hey, guys. Good morning. It's Henry Chien calling for Jeff.
Hey, Henry.
I just wanted to shift back to the Technical Services side. It sounds like growth was – ex the Transformer business was pretty solid and you showed some numbers in the landfill volumes. I was wondering if you could provide some color on overall volumes to the incinerator business and how you're thinking about that for the next year and especially in the context of some of the complements you mentioned of expanding to higher margin waste and if you could just give us an idea where you might see some of the incremental demand coming from? Thanks.
So, I certainly think we're seeing some nice growth just from – the economy is doing good, we're seeing a lot of drum growth, we're seeing bulk growth in our business. As we were challenged with our El Dorado incinerator during the startup, so some of the bulk that we were bringing into that plant was lower margin, sort of less difficult material to handle that – we were using as we were bringing that plant online. But as we've talked about in the past, that plant was built to handle some very difficult and high-price waste streams that we're now just starting to introduce back into the market.
And so we anticipate particularly in light of some of the chemical industry that's been consolidating, our customers have been consolidating, we've seen some nice opportunities of customers looking to outsource. And many of those types of streams quite frankly fit nicely into the capabilities of both our Deer Park and El Dorado plant. So, I think we're going to see not necessarily just volume growth, but really some nice mix growth improvement here in our business. But the drums in general – our drum business in general has been very, very good in the past year. We anticipate that velocity to continue as we go through 2018.
Got it. Okay. And that's great to hear. And I know in the past that you've mentioned that plant turnarounds have been I mean important driver of volumes. Do you have a view on how that is looking for this upcoming year?
I think 2018 is going to be a stronger year for turnaround than certainly 2017 and 2016. So, I think we're going to see some nice volumes coming from the turnaround season. Yeah.
Got it. Okay. Great. Thanks a lot.
Thank you.
Thanks, Henry.
Next question comes from the line of Tyler Brown with Raymond James. Please proceed with your questions.
Hey, good morning, guys.
Good morning.
Hi, Tyler.
Hey. So in totality, how would you characterize the unusual shakedown cost at El Do in 2017? I presume that those won't reoccur or is that not the right way to look at it?
I think whenever you're bringing on a complex unit like that, that needs to meet the MACT II standards, we have a complicated air pollution control system, you're going to have sort of the disruption quite frankly that we see. We actually handled more volume through that plant than we had budgeted.
Okay.
So, it's not like – and so we're pretty pleased with that. But we still incurred quite a bit of disruption with the backend of that plant and we took the plant down in October. We had some further issues with it in the first quarter. We really feel like we've finally got the right technology there to get that plant up to that 70,000 ton. I would give our team an A for what they've did though to bring that plant online quite frankly, so kudos to them.
Okay. That helps, because – okay. So, it's not as much a year to year benefit – I wasn't – I was thinking about a bunch of cost that don't reoccur, but I don't think that is necessarily the case or the right way to look at it. But, Alan, at this point, is El Do running up to your expectations, is it running smoothly and was the unplanned downtime at El Do in Q1, I think Mike you mentioned, or is it somewhere else?
No. It's El Do and we're not where we want to be. The team continues to work through some of the mix challenges and, like I said, some of the mechanical side of it. But I think right now we're forecasting 2018 to be a very good year at El Do. We saw day-after-day, and in some cases week-after-week record volumes with all three of those incinerators running at that plant. So, I think the team has really done a good job. But we're not 100% by any stretch, and I would anticipate as you would – any plant of that size and complexity, it's going to take a little bit of time, and we've always said that.
Okay. Okay. Maybe switching...
Tyler, one other point I want to add is that, and for Q1 is that I hate saying weather, because weather happens everywhere, but we did have some unusually cold conditions in Texas and there was ice in our Deer Park facility that shut us down for like a day or so. And so that is – and a day, it means a lot for us, especially at Deer Park. And so that's another – I think we want to blame El Do, but it really is the network and we did have some – again weather is kind of a poor answer, but it really did happen, and it really is an important – it was an important time for us and it really did put us out for a day or two.
Okay. Okay. That's helpful. And then maybe switching gears a little bit. So, Alan, you hinted at it, there's a lot of talk about rising transportation costs.
Yes.
I'm just curious, how much do you spend on third-party transportation, how much inflation are you expecting there, particularly given some of the rail service issues?
We spend over $100 million in third-party and another $75 million in rail. And so we certainly want to spend more on rail, because we can move a lot more efficiently there as well. But I think customers recognize that costs are increasing not only through our fuel surcharge, but wages and availability of drivers has been a big issue. The implementation of the electronic logs has also caused a further shortage of drivers, and it is a real problem for I think all the industry right now. Part of our price increase strategy is certainly to go back and address the fact that those costs are increasing.
Right. Do you have any idea how many drivers you do have?
We have over 4,000 CDL drivers right now.
Wow. Okay.
And we're looking to hire a couple hundred more. So it's a important part of the service we offer our customers through terrific organization of drivers and equipment operators.
Right. Okay, that's very helpful. And then lastly, so Mike, I want to come back to free cash flow yet again, instead of maybe looking at a year-to-year, I want to look at it top-to-bottom. So how do we bridge EBITDA down to free cash? So if you start at $460 million at the midpoint, and then I take out maybe $85 million for cash interest, it sounds like maybe, I don't know, $10 million for cash taxes less the $180 million in net CapEx. I'm getting more a number like $185 million of free cash versus call it the guide at $140 million. Are you assuming some working capital in there, or is there something else in there that I should think about when I bridge it top to bottom?
Yeah. So, Tyler, that's a good question. And I think the one thing you're missing is, we spend about $13 million to $15 million in environmental spend every year.
Okay. Yeah. Okay.
Kind of keep our current obligations set.
Right. Okay. Okay. Yeah. That helps me bridge some of that. Okay, cool. Thank you, guys.
Our next question comes from the line of Sean Hannan with Needham & Company. Please proceed with your question.
Yeah, hi. Thanks for the follow-up, folks, and I'm sorry if I'm being a pain here, not intending to. Wanted to follow up around some commentary for Industrial and Field Services. So, if I think about the EBITDA guide for this year, I mean the dollar increase, I mean, I think we can pretty much attribute all to Veolia. So, I'm just trying to kind of close the gap when I hear the comments, say from you Alan, in expecting a much better year in terms of turnarounds. And I think there's certainly been some data out there to suggest that it should indeed be a better turnaround year. But otherwise, it doesn't seem to empirically make sense to me if we're looking at an otherwise flat performance for the segment when we pull that acquisition out. Thanks.
We really want to offer guidance to the Street here that we can beat. We recognize that being more predictable is really important here and we have opportunities to improve our performance in Industrial and Field. We know that. But I think we are conservative there. There are a number of initiatives that we're focused on to improve the margin in that business. Our customers have beat us up because of the crisis that was in the oil industry. Both our competitors and ourselves I think are now going back to our customers and looking for relief from all the discounting that's been done, and we see opportunities to improve in that business because of that.
Okay. Because when I step back now, what it sounds like through the course of this call, as well as in addressing some of my questions here, we've got some pretty meaningful segments where Tech Services, Industrial and Field and so forth where, and you guys have admitted it, that there has been a fair amount of conservatism. You guys are trying to be very thoughtful to not be set up for perhaps a fail versus the guide. So it seems almost per se that there's a decent amount of upside to the model here in 2018 that would be reasonable or realistic. You don't want to necessarily have everybody putting numbers above that guidance range, but is it fair to walk away with the interpretation that that type of an opportunity is actually very realistic this year?
Sean, good observation. And I guess I would say that for an industrial company, and we've had our challenges in 2017, but we're going to, at the midpoint of our guidance, we're growing EBITDA at 8%. That's pretty good on top of 6% last year. And so we can say that this is conservative. I don't think so, I think it's reasonable. I think it's balanced. I mean, we are trying to assume that bad things can happen and they have happened in 2017 and 2016. Bad things did happen, and we weren't ready for that, and we didn't have a model that could handle that. And so we're trying to build a model that can handle a bad weather, a bad incident, a problem at a facility. We're trying to bake that into the baseline number. I don't think that it's conservative, I think it's reasonable. And I think that – I'm hopeful that – look, I want you to be right, Sean. I'd love it for you to be right. Let's do that and try to increase more predictable results.
All right. Fair enough. Thanks for addressing all these questions, folks.
Okay.
Our next question is from the line of Daniel Moyes (01:08:51) with Wells Fargo. Please proceed with your question.
Hi, gentlemen. Thanks for letting me squeeze a question in here. I just had one on El Do. The comment that you just made in response to a question about the issues in the first quarter, and then maybe the follow-up, it was just related to weather. My understanding was that that was primarily related I guess to a cleaning or sprayer attachment. And so, was just sort of wondering if you could comment. I mean, any lingering design issues we need to be worried about, and anything that could cause El Do to operate below its I guess design for the foreseeable future? Or is that kind of all behind us? Thanks.
Yeah. Thanks. Again, I think from the folks on the ground that have been working through the issues with the spray dryer and the nozzles that you're referencing, I think people feel like with our effort, with our team, we've been able to put in place a solution to the way that that piece of equipment is operating. There may be over the next 6, 12, or 18 months a redesign or maybe a relook at the performance of that plant in consultation with the supplier, the manufacturer, that we're currently discussing with. But it should not prohibit us from at least running the plant at the budgeted amounts that we had anticipated for 2018.
And, Daniel, when I mentioned weather, that was at another facility, at our Deer Park facility in Q1.
Yeah.
Again, it's kind of very cold conditions created some ice and created the shutdown for a day or two.
Yeah.
Okay. So then, as it relates to a potential redesign, I mean is there costs maybe in the guide related to that or any puts and takes there that you might be willing to disclose or help us out with? And that's all I had. Thank you so much.
Yeah. Sure. And it would be certainly a wild guess for us, but it would be certainly something that we would look to the designer and the company that designed it for us to reimburse or to pay for that work that would need to get done if in fact we do need to go in a different direction than the way that it's been designed. We're not anticipating to have to do that, but I think that's a worst case scenario quite frankly. So hopefully that answers your question. Okay.
Yeah. I appreciate it.
Okay.
Thank you. Our final question today is from the line of Michael Hoffman with Stifel. Please proceed with your questions.
Yeah, thank you for the follow-up. In the 2017 free cash flows, you have a benefit of tax gain on the asset sale. Is there anything, or is our midpoint of 2018 cash flow from ops less capital spending or is there anything else assumed in that flat year-over-year?
No, Michael, no other assumptions assumed in the 2018 number.
And then, Alan, you are the largest provider of services related to refining RMO work. And you think that refining turnarounds are going to be up. I'm trying to reconcile that with the question that backed Veolia out and said IS&S is flat. How is that playing out, that turnaround world today, because most of it's supposedly scheduled in the first half of the year?
Yeah. I think it's going to be very strong. I think it's going to be a strong turnaround season. And there is a – because of that there is a shortage out there of labor and operators and certainly we're trying to address that as our competitors are as well.
Okay.
But I think there's been a built up of demand as evidence of customers just not wanting to spend money while they were going through the downturn. And we have seen some event-driven turnaround work, but we expect to see even more of that this year as well.
Okay. All right. Thanks.
Okay.
Thank you. I will now turn the floor back to management for final remarks.
Okay, Rob. Thanks so much and thanks, everyone, for joining us today. We look forward to seeing many of you at Investor-related events certainly in the coming months here. So, we appreciate you having us today.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.