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Clean Harbors (NYSE:CLH)

Q3 2012 Earnings Conference Call

November 7, 2012, 9:00 am ET


David Musselman – General Counsel

Alan S. McKim – Chairman, CEO

Jim Rutledge – Vice Chairman, COO

Rob Gagnon - CFO


Rodney Clayton – JPMorgan

Al Kaschalk – Wedbush Securities

Larry Solow – CJS Securities

Rich Wesolowski – Sidoti & Company

(Stephen Raygard) – Stephens Incorporated

Jamie Sullivan – RBC Capital Markets

Brian Butler – Wunderlich Securities


Greetings and welcome to the Clean Harbors Incorporation third quarter 2012 conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the normal presentation. (Operator Instsructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Musselman, General Counsel for Clean Harbors Incorporated. Thank you, sir. You may begin.

David Musselman

Thank you, (Dan), 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 and Chief Operating Officer, Jim Rutledge; and Chief Financial Officer, Rob Gagnon.

The 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 7, 2012.

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, which will be made concerning this reporting period.

In addition, I would like to remind you that today's discussion will include references to non-GAAP measures. Clean Harbors believes that such information provides an additional measurement and consistent historical comparison of its performance.

A reconciliation of the non-GAAP measures to the most directly comparable GAAP measures is available in today's news release, which can be found on our website,

And now I'd like to turn the call over to our COO, Jim Rutledge. Jim?

Jim Rutledge

Thanks, David, and good morning, everyone. Let me start with an agenda for today's call. I'll make some brief remarks about Q3 and then provide a more detailed discussion about how our individual segments performed and an overview of our verticals.

Rob will walk through our financials in more detail and then Alan will do a quick recap on our recently announced acquisition of Safety-Kleen and provide our outlook before we open it up to Q&A.

Starting with our results, our Q3 performance reflected the diversity of our business model. We had a number of areas of strength including our landfills and incinerators on the environmental side and our oil sands and lodging business on the industrial side.

At the same time, the seasonal slowdown in oil and gas field services that we discussed on our Q2 call continued. And unlike last year, we had no emergency response revenue in field services.

Rob is going to talk more about our results in more detail but I did want to highlight our EBITDA performance this quarter. We topped $100 million for only the third time in our history this quarter.

Equally important, we delivered a high EBITDA margin for the quarter of 18.7%. The third quarter is typically the strongest period for our environmental business, so business mix was certainly a factor in our high margin performance.

The other primary reason was execution. In addition to our ongoing cost reduction initiatives, our team has done an excellent job at capturing efficiencies and economies of scale from our acquisitions. We've been able to achieve productivity gains across our enterprise due to the investments we've made in technology and processes.

At the same time, we have been successful in carefully implementing market specific price increases. In total, those efforts resulted in our strong EBITDA results in Q3.

Drilling down on our segment performance, technical services was a strong performer for us in Q3. Utilization at our incinerators was a robust 91.3% in Q3. This is up 130 basis points from Q3 2011 when we recorded utilization of 89%.

As a reminder, it is at these high levels when utilization is in that high 80s to low 90s range that we are able to maximize our profitability by managing our waste streams, increasing our efficiencies through product mix and gaining opportunities for spot pricing.

Our very high level of utilization this past quarter was primarily the result of our US locations, which averaged 92%. Our Canadian operation, which currently consists of (inaudible) incinerator was strong at 88.2% utilization.

Our landfill business had a tremendous quarter setting a new record for volumes by a wide margin. In fact, we achieved the 78% increase in volumes from Q3 of last year and we were up more than 50% from Q2. This strong performance was driven by several large scale projects as well as Bakken-related work, which we saw manifested at our Sawyer landfill in North Dakota.

Volumes at Sawyer were more than double what we recorded in Q3 of last year. Overall, our landfill team continues to do an excellent at capturing considerable waste streams from a variety of projects.

Within our field services segment, we saw a steady stream of routine maintenance and project-related work. When you exclude the $42 million in revenue related to the Yellow Stone River oil spill in 2011, this segment was flat year-over-year.

I should point out that Q3 was our fourth consecutive quarter in which we had not recorded a major emergency response event. I know that a number of you have been inquiring about what hurricane Sandy might mean to us in terms of emergency response work.

But let me start by saying our thoughts and prayers are will all of the people affected by hurricane Sandy. Based on our history, we know firsthand about the type of devastation that can be caused by a weather event of this magnitude. We are proud of the efforts of our team in responding to those affected by the storm.

As we noted in today's news release, we currently have about 500 Clean Harbors related personnel on the ground at a number of sites. We have done some initial work for a variety of customers, including some of our utility clients and terminal operators.

While the storm happened more than a week ago, the true scope and scale of our involvement is something we cannot precisely quantify at this time. In many cases, we are still in the early stages of the cleanup process as the flood waters have finally receded in some areas, the power is just now coming back at a number of sites and access in some affected areas is only just now becoming possible.

Turning back to our segments, our industrial services segment had another great quarter. This segment grew 15% from a year ago, which reflects a mix of organic growth and acquisitions.

It also delivered significantly improved margins and was a key element in our strong EBITDA performance. The driving force behind this segment was activity in the oil sands region and our lodging business, particularly our fix lodging locations.

We also saw a high level of cross selling activity at our refinery customers and steady demand for many of our implant services. Our lodging business continues to be a real source of strength for us.

As the cold winter weather approaches, we are headed into our strongest operating periods in the Northwest US and Western Canada. Our bookings in this business are continuing at a high level and we expect lodging to extend its momentum into the quarters ahead.

Within our oil and gas field services segment, we are involved in a broad range of projects from seismic and surveying work to drilling and completion services to ongoing production and maintenance.

As we outlined on our Q2 call, we began repositioning some of our solids control assets and rental equipment as a result of the shift earlier this year by many energy producers away from some dry gas wells toward liquid rich gas and oil plays.

At this time, our repositioning is nearly complete and we expect to be fully utilized by the end of the year.

Our revenue in Q3 was also negatively affected by the unfavorable rain and weather conditions in Western Canada. As we head into the winter months, we're looking forward to the seasonally strong quarters for this segment.

Turning to our key vertical markets, here's a snap shot of how those shaped up in Q3. Just as in Q2, chemicals remains our largest vertical in the quarter, accounting for 15% of total revenue and up 18% from a year ago.

We experienced solid growth in our base business supported by comprehensive cross selling to our chemical customers. In addition, the low price of both natural gas and raw materials were favorable to overall US production in this vertical, which led to increased incineration waste volumes.

Oil and gas production was our second largest vertical, also at 15% of revenue but down from a year ago. While overall drilling activity is down, we have been successful at winning a number of new accounts driven by our legacy transport and downhaul maintenance services.

Refineries and upgraders were our third largest vertical at 13%. This vertical grew about 25% from a year ago and the majority of that can be traced to a cross selling program we implemented that generated approximately $11 million in revenue.

Oil and gas exploration accounted for 9% of revenue. We recorded incremental growth in this vertical versus a year ago. General manufacturing had a strong quarter due to some nice project wins. This vertical accounted for 9% of revenue and was up nearly 30% from a year ago.

Some of the other significant contributors in Q3 included brokers at 5%, utilities at 4% and government and pharmaceuticals each at 3%.

One of the smaller verticals I want to highlight is our healthcare services vertical. While it still represents only 1% of our revenue, it is growing for us and we are seeing some traction with new accounts, particularly hospitals setting up pharmaceutical waste programs there. We expect this vertical to deliver double digit organic growth going forward.

I hope that detail on the segments and verticals gives you some better insights into our Q3 performance. And with that, let me turn it over to Rob for the financial review and guidance. Rob?

Rob Gagnon

Thank you, Jim, and good morning, everyone. We reported Q3 revenue of $533.8 million versus $556.1 million in the same period a year ago. As Jim pointed out, Q3 last year include approximately $42 million in emergency response revenue related to the Yellow Stone River oil spill.

Excluding that event for a more normalized comparison, revenues were up nearly $20 million year-over-year driven by solid performances in our technical services and industrial services segments.

Also pleased to note that in the financial section of today's news release, we included the segment revenue and EBITDA information that is in our 10-Q each quarter.

Gross profit for the quarter was $160.9 million or a gross margin of 30.1% compared with a gross profit of $169.5 million or a gross margin of 30.5% in the same period last year.

The decrease in gross margin is primarily due to the mix of business in the quarter and the lower revenue year-over-year.

Turning to expenses, SG&A was $60.3 million or 11.3% of revenue compared with $65.7 million or 11.8% in Q3 a year ago. Our SG&A percentage this quarter is well below our target range of 12.5% to 13% of revenues. Clearly our ongoing cost reduction initiatives combined with the efficiencies and economies of scale we are gaining from our 2011 acquisitions are proving to be effective. Our SG&A results also reflected lower incentive compensation.

On the past several calls, Jim has outlined a number of those cost reduction programs that we are targeting in areas such as outside transportation, procurement and recruitment costs.

The company has made some great progress with these initiatives. We've also completed the remaining synergies from the peak acquisition. Again, these savings were designed to offset the increases we are experiencing in labor, commodity and healthcare costs. And to date, we've been able to successful mitigate most of those increases.

Depreciation and amortization increased 19.4% year-over-year to $41.3 million primarily reflecting our acquisitions of the past 12 months, many of which brought a significant amount of equipment in higher landfill volumes.

Given that we are currently at $116.8 million at the nine-month mark, we now expect our 2012 depreciation and amortization to be in the $155 million to $160 million range. That figure obviously excludes anything related to Safety-Kleen or any additional acquisitions we may complete.

Income from operations was $56.7 million or 10.6% of revenues compared with $66.8 million or 12% of revenues in Q3 2011. This decrease reflects the higher level of depreciation and amortization that I just mentioned and slightly lower revenue and SG&A expense this quarter.

As Jim mentioned, we delivered strong Q3 EBITDA results generating $100.5 million or a margin 18.8%. This compares with $103.8 million or a margin of 18.7% we recorded in Q3 of last year.

Our effective tax rate for the quarter was essentially flat with the year-ago period coming in at 33.8% compared with 33.7% in Q3 of last year. For the full year 2012, we are currently estimating our effective tax rate to be 36% which is slightly lower than our previous estimates.

Q3 net income was $12.4 million or $0.23 per diluted share compared with $37.1 million or $0.70 per share last year. The third quarter of this year included a $26.4 million pre-tax charge related to our senior debt refinancing completed this quarter.

When you exclude that charge from the calculation, our adjusted net income for Q3 was $28.8 million or $0.54 per diluted share. The decline in earnings year-over-year is primarily related to the increase in depreciation this quarter and the higher revenue a year ago.

We continue to maintain a clean and healthy balance sheet. We are well capitalized following our successful bond offering. Cash and marketable securities as of September 30th were $534.7 million up from $306.5 million at the end of Q2. Obviously a large portion of that capital will be put to use as part of the Safety-Kleen transaction.

Total accounts receivable increased to $433.8 million at quarter end from $427.6 million at the end of Q2. In Q3, our DSO remain the same as Q2 at 75 days. Our targeted DSO level remains at 70 days or less but given our acquisition activity in the past year, it will still take a few more quarters to get to that level.

We continue to work closely with our acquired companies to improve collections and make billing enhancements.

We are also still working through the existing contract cycles we inherited through those acquisitions. CapEx for Q3 was approximately $47.4 million, down slightly from the $55 million we spent in Q2.

Given where we are at, the nine-month mark, we anticipate hitting our 2012 target of $108 million and we may, in fact, be closer to the $190 million level. As a reminder, of that total, approximately $70 million consists of maintenance capital. The remainder is targeted toward high-return internal investments.

Moving now to our guidance, based on current market conditions and our year-to-date performance, we are revising our 2012 annual revenue and EBITDA guidance. We now expect 2012 revenues in the range of $2.15 billion to $2.16 billion revised from $2.2 billion to $2.25 billion.

We now expect 2012 EBITDA in the range of $375 million to $380 million revised from $400 million to $410 million. I should point out that this guidance does not include the revenues from our emergency response efforts associate with hurricane Sandy. It is still too early to know the duration of the cleanup activities presently being performed by more than 500 Clean Harbors personnel at various sites.

Based upon our preliminary estimates, I should stress that we are still in our annual budgeting process. We currently expect 2013 revenues in the range of $2.3 billion to $2.35 billion. We anticipate our EBITDA margin to be approximately 18.5% at this level of growth in 2013, which translates into an EBITDA range of $425 million to $435 million.

This guidance is exclusive of Safety-Kleen or any other potential future transaction. We will complete our budgeting process for 2013 in the coming months. Therefore, in conjunction with the announcement of our Q4 and year-end results in February 2013, we plan to update this preliminary guidance.

With that, let me turn the call over to Alan for some final remarks before we open up for Q&A.

Alan S McKim

Thanks, Rob, and good morning, everyone. I wanted to make some brief remarks about our pending Safety-Kleen acquisition. It's been nine days since we announced the transaction and the feedback we have received on all sides has been extremely positive. That includes customers, partners, employees and shareholders. They are excited about the value we can drive in combining our two organizations.

I don't plan to spend time this morning going over the specifics of the Safety-Kleen business as I did in last week's call. I would like to reiterate some of the points we've made about the prospects for the combined company and why we are eager to move forward with this deal.

Safety-Kleen has the number one market position and significant scale in three markets: small quantity waste generators, parts cleaning and used oil collection and re-refining.

We view the small quantity generator market as a major source (and full) growth for us both in terms of new customer exposure and additional waste streams. Clean Habors' approach has been to provide a one-stop shop for customers. That's why we're vertically integrated in our environmental business from collections to transportation to recycling and disposal.

We're always looking for opportunities to add services that broaden our portfolio. This acquisition does just that. It deepens our waste treatment capabilities to include re-refining waste oil and expanded some recycling capabilities.

Our environmental business operates at its peak efficiency and generates its highest margins when we're able to consistently deliver high volumes into our disposal treatment network.

Safety-Kleen handles a substantial amount of waste volumes that we will be directing into our facilities. There is a growing demand for recycled products, including re-refined oil. And this deal enables us to capitalize on this trend in a very meaningful way.

The addition of Safety-Kleen with its closed loop recycling approach greatly enhances Clean Harbors' commitment to sustainability and that's an area that is only going to get stronger in the years ahead.

And after integrating our organizations, we believe that there will be meaningful cross selling opportunities for our combined sales force, particularly given the limited overlap between our services and key markets today.

And those are just some of the reasons why we're excited. We believe it's a great cultural fit as well. We're confident that we can unlock the potential of the combined organization and we look forward to completing the acquisition prior to year-end.

Looking ahead, we remain encouraged about our overall prospects as we enter the final quarter of 2012. During the year, we extended our track record of strong growth and momentum across many of the markets we serve.

While we experienced some temporary disruption this year, such as the shift from dry gas to liquids play, the underlying industry and outsourcing trends remain favorable to us.

Within our environmental business, we continue to have an active pipeline of projects and ongoing engagements and we see numerous opportunities for growth and expansion. Within our energy and industrial business, we're heading into our strongest operating periods during the cold winter months, particularly in Western Canada and the more remote locations.

We're looking forward to completing the Safety-Kleen acquisition. Our focus in the near-term will be gaining the necessary approvals, planning our integration and lining up the ideal financing structure for the deal. We believe the merger of our two organizations should extend our growth momentum in 2013 and beyond and this deal should increase our cash flow going forward and ultimately enhance shareholder value.

So with that, (Dan), could we please open the call up for questions?

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Rodney Clayton – JPMorgan.

Rodney Clayton – JPMorgan

All right, so first I wanted to just try to dig in a little bit to your assumptions behind the 2013 guidance. Could you tell us maybe what you're expecting for drilling activity particularly in Canada this year? Secondly, I guess the margin profile in the oil gas field services segment we know with the equipment redeployment there that there may have been some impact to pricing. So any color you can give us there would be helpful.

And then third, s we think about you having $20 million in your preliminary guidance for '12 for your emergency response, what do you have baked in for '13?

Jim Rutledge

First of all, we were – in our guidance for 2013 we were very conservative in the oil and gas field services segment and, in fact, the growth rate year-over-year is somewhere on a couple of 3%.

Clearly, with – to the second part of your question about the relocation and the repositioning of assets, our team proved that they can sell very well into that market, that it would have otherwise been growth were we not repositioning from what happened on the gas side.

And it's interesting that gas prices are also coming up a little bit, too. So we have our eye on that as well.

But I think the key thing in that area with the repositioning of those packages is what you see in our cross selling on the disposal side. We talked about the landfill increase that we had in our Sawyer landfill where we've more than doubled the volume there and certainly that's coming from this vertical.

And prior to our being a player in this industry, we weren't getting any of that disposal. So we also have tried to fact that a little bit into the technical services side of our business.

Also, I would say also on the relocation of those packages, we're also diversifying our customer base. It used to be in that business in the drilling and completion side that the peak energy services company had pretty much a handful of customers. We've now expanded that from just a handful. I think we're around 20 customers now. So I think we're successful there.

Regarding the field services event activity, Rob, I think we were – where are we in the budget on that?

Rob Gagnon

So basically I think you probably know we budgeted about $20 million into our 2012 targets and so at this point for 2013, we have a pretty modest number in there, in sort of the $10 million to $20 million range. And that compares to – I think if you looked at our historical averages, we've been above that. We've been close to the $30 million range.

Rodney Clayton - JPMorgan

So just to play it back to you, 2% to 3% growth. Was that for drilling activity or was that for the segment in general?

Jim Rutledge

That was for the segment overall. That's our conservative estimate. And clearly with the growth that we're – the repositioning that we're doing, we've proven that we can do that growth and certainly the cross selling will help. But we decided to keep it conservative, although certainly we – there might be upside to that.

Rodney Clayton - JPMorgan

$10 million to $20 million of event work for '13. Is that right?

Rob Gagnon

Yes, that's right.

Rodney Clayton - JPMorgan

Then so secondly, with respect to your involvement with hurricane Sandy cleanup, certainly appreciate the fact that it's a little early to try to quantify the impact there. But can you remind us how a number of I guess 500 personnel compares to some of your – what you have mobilized for some of your past notable events, whether it be – BP was obviously very large event, but maybe some of your past hurricane event or maybe some of your smaller spills like Yellow Stone?

Jim Rutledge

Yes, significantly larger staff than Yellow Stone and when we look at the gulf spill that happened a couple years ago we were at a peak at 3500 personnel there. Similar in size to Rita and Katrina, I think, in size right now, that 500 to 600 person range. The question will be is the amount of equipment and the duration at this point is certainly up in the air.

Rodney Clayton - JPMorgan

And then finally for me, your guidance for 2013, it looks like it implies about 100 basis points of margin expansion in 2013. Can you tell us which segments are contributing most of that margin expansion? Are there any overhead rationalization initiatives behind that or just a little bit more color on the drivers behind the margin expansion?

Jim Rutledge

On the tech services side, we're with some efficiencies there and some of the additional disposal that we're getting resulting from all the verticals that we're operating in, we're expecting an improved margin there next year.

Also, in our industrial services area, with the activity going on in Western Canada, we're expecting market improvement there as well. And then certainly in the oil and gas side, with the repositioning that we had in the middle quarters of this year when the margin was so low, you won't see margins at that lower level in next year.

So it's actually the three areas that are all contributing a bit to that overall margin increase.


Your next question comes from the line of Al Kaschalk – Wedbush Securities.

Al Kaschalk – Wedbush Securities

On the technical services side, I just want to drill down a little bit on that. Maybe you can talk on the business trends. The (Atlanta) volumes were up significantly and I think that's some of the shale but also some large scale projects. So talk a little maybe about the duration of those projects. Are they multi-quarter? Should we continue to see this favorable trend which is certainly very good on the margin profile?

Jim Rutledge

Yes, we've done extremely well this year on our waste projects and remediation business. So we've been, as you know, been really successful in driving a strong pipeline in that area and I continue to believe that the organization has some great opportunities out in front of them and working those through the pipeline.

So that project business is lumpy, so it's hard sometimes to know exactly which period it's going to fall in but I would say the general trend now has been real positive in that business over the last several years, particularly in Western Canada, our Western Canada landfill which has gone through a large expansion and our Sawyers North Dakota landfill, which also has gone through an expansion.

We are now able to take on more volumes and those markets are very strong for us. But our other landfills are also doing well and I'd like to think that we're going to continue to see good volumes there.

Al Kaschalk – Wedbush Securities

So in essence, the industrial services side, given the presence in the oil sands in Western Canada are driving some of this volume towards these key positioned assets.

Jim Rutledge

Yes, exactly, and we have expanded certainly more on the industrial side in Western Canada but the oil and gas market there, which isn't really driven by the oil drilling activities but more to do with the service work in the oil and gas fields. We're doing a lot of production related support services, so we see a lot of waste coming out of that.

A lot of the (Sag B) facilities generate quite a bit of waste volumes that are ongoing waste streams. So we think our strategy of focusing on the oil and gas area is not just great for the rental side of our business, which is relatively small, but really great for our environmental business because every drilling activity, every well provides a need from an environmental standpoint and that's really the business we're in is to provide those environmental services to those oil and gas customers.

They're becoming more and more sensitive to environmental regulations, more concerns about waste disposal and missions and it's really what's driving our focus on that area.

Al Kaschalk – Wedbush Securities

I'm going to stay the course and a follow-up would be just a little bit of the walkthrough on guidance and the event business in general given the size of the organization now. It looks like if you want to just parcel the math out, about a $20 million adjustment on EBITDA for fiscal '12 relative to where you started the year.

A lot of that, I think, chunks as the event business, right, and then also the other headwind is the repositioning in oil and gas. But are you seeing structurally any other changes in the business that would warrant some of this very, very near-term cautionary?

And then with that, does it makes sense going forward to just exclude any of the event business in guidance given it is now less than clearly 1% in corporate revenue?

Jim Rutledge

Yes, I think it's safe to say that in the past due to our size the event business was very important to us and, as you mentioned, it's smaller and smaller. And as we combine with Safety-Kleen it'll even be much smaller.

But it is one of those businesses that the company has a real strong brand and it's one that we have historically reported on. So we'll have to take a look at that on whether we're going to break that out further, I guess, moving forward, guys.

But I think you're right. I think when you look at the miss this year and, quite frankly, we're not through the year. So the fourth quarter could be, on the event side, could be very good for us and we might make up on that shortfall but we're not – we won't know until the quarter's over.

But you're absolutely right, a good percentage of that miss is on the event side and the repositioning and some of the slowdown in the oil and gas side. But the team in general, when you look across the 40 lines of business that we're in, has done extremely well this year.

Really the team has done a great job and I think it's reflective in some great numbers that we have. We'll have a great year this year.


Your next question comes from the line of Larry Solow – CJS Securities.

Larry Solow – CJS Securities

Can you talk a little more about your pricing? I know you set up a team of executives just for pricing initiatives and how much price increases are implied in your 8% sales growth guidance for next year, if you can parcel that out a bit.

Jim Rutledge

Sure, what we – at this early stage of the budgeting, what we're seeing is that the pricing will be similar to this year and this year we're roughly in that 2% range and that includes a little offset that we had done this year in being aggressive with some of that repositioning of assets which was more of a strategic decision that we made there.

So maybe there's some upside to that but right now we're being somewhat conservative and just having it be comparable to this year.

Larry Solow – CJS Securities

And clearly SG&A was – I think it's the surprise number this quarter, the low number. You mentioned there was some lower incentive comp expense. If I look at just your guidance in Q4, it does imply that your margins do come down a couple hundred bips, I guess. I imagine there is some seasonality in part of your business but hopefully that'll be offset.

So if you could just discuss maybe SG&A, was that a little bit artificially low and did you rob Peter to pay Paul for Q3 or Q4 a little bit there?

Jim Rutledge

Clearly with the revision that we made in the guidance and our plans, clearly those plans, there's incentive compensation when we're able to exceed our targets, et cetera, being lower. We certainly reduce the accrual for incentive compensation. Rob, I don't know if you can add anything about SG&A going forward.

Rob Gagnon

I was just going to add I think you're thinking about that the right way. Look, I think part of it was just timing and expenses in the quarter. But as you think about Q4, I certainly wouldn't expect a repeat again. So in terms of modeling how you think about Q4, I would expect it would be a bit higher.

Larry Solow – CJS Securities

Can you quantify what the reverse accrual was?

Jim Rutledge

It wasn't a reverse. It just was not a booking of any (inaudible) credit where we started to look at where the year was going to be. We still got significant incentive compensation being paid out to employees both on the sales side and the operating side. But it's just because we have now taken down our forecast for the whole year, the booking in the third quarter just didn't happen as much as it normally would have on the operating side.

So I don't think it's a stealing from Peter to pay Paul at all, Larry.

Larry Solow – CJS Securities

Just on your CapEx, if you can just give us some update on some of your larger growth projects and independent of Safety-Kleen I know has their own growth initiatives plan. Do you expect – it seems like you've got a lot of projects out there and a lot of good (spending), so is it fair to say that this level will be sustained in '13?

Rob Gagnon

So I think some of the larger additions that we've had in capital this year have to do with tractor trailers and specialty equipment. We've added a number of vehicles and those amounted to about $50 million or so.

On the specialty equipment side, that's probably closer to $30 million. We've also added a number of containers, roll offs of various sizes closer to maybe $10 million mark. And that's really to support a lot of the cross selling that's going on between the industrial services business on the environmental side.

In terms of expansion projects, we're just in the early stages of the incinerator expansion project, which will really go on for a few years. And as we think about next year, we also have our Ruth Lake facility that we'll be constructing the first half of next year.

So that's probably in the $25 million to $35 million range, the Ruth Lake project, but that's a snapshot of Clean Harbors.

In terms of Safety-Kleen, I think it's probably a little bit early for us to comment on capital guidance going forward. But I know if you were to take a look at their S1 you could get some pretty good details on how they've performed in the past around capital.


Your next question comes from the line of Rich Wesolowski – Sidoti & Company.

Rich Wesolowski – Sidoti & Company

I was hoping to ask a previous question in a more pointed way. The $27 million difference in your 2012 EBITDA guidance at the midpoints, is that all from field oil and gas, taking out the emergency response, or are there any other than three segments below your budget?

Alan S McKim

Well, again, we report four segments, right, and but we also have 40 – over 40 lines of business. And so when we think about some of the lines of business that are softer for us this year, it may include like our transformer services business, which is a lot of the work that we do for the utility industry. That business is behind plan this year, not a huge part of our business but it's one of the businesses.

And so as you go through some of those – and we won't go through all 40 – but some of the rental businesses we've been talking about, the solids control packages or what we call the rental businesses, is soft this year based on the repositioning.

But I wouldn't say of the $27 million – if I use your number there – I would say at least half of that or maybe close to half of that is more related to our event and project business I would think at this point. Would you, Jim?

Jim Rutledge

Yes, I would say so or maybe it's two-thirds the oil and gas slowdown and a third the event, somewhere around there, almost roughly half.

Alan S McKim

Yes, almost.

Rich Wesolowski – Sidoti & Company

There has been a lot of discussion about the CapEx being trimmed at some of the (inaudible) producers in Western Canada. I understand your implant services would not really be affected there but I’m wondering whether that prompts you to look harder at the plant additions and lodging area and just perhaps your overall view on the multiyear growth outlook in Western Canada.

Jim Rutledge

We continue to see $15 billion to $20 billion a year being invested in there and I think every year you're going to hear some cutting back on their capital spending campaigns and then others readjusting their portfolio and maybe investing even more.

And so when you look at it from our perspective over the next three to five years, it's in that $15 billion to $20 billion spending level that we anticipate as they continue to look at building out their infrastructure to generate that 4 million and 5 million barrels of oil a day where today they're almost at that 2 million barrels.

And so that investment that continues to be made is really our focus in the oil sands and with our lodges and we continue to see high demand, high level utilization. We're making more investment, as Rob mentioned, in Ruth Lake and in some of the other markets up there.

But I think hearing the feedback, like you're probably hearing, in regards to some of these capital projects I think is going to be ongoing and we're going to continue to hear that kind of information year-in and year-out. But that's our long-term trend.

Rich Wesolowski – Sidoti & Company

So Clean Harbors doesn't need that $15 billion to $20 billion to continue to go up, up in every year in order to grow your industrial service.

Jim Rutledge

Certainly capital investments to make and to expand their capacity, whether it's a phased approach on a mine or one of these upgraders, but we've got well north of 700 people there. We're adding people. We're short staffed and so we're looking at further expanding our training and recruiting efforts to keep up with the growth opportunities there. So we don't see that gyration in capital spending by one company or another necessarily having a direct impact on our business up there.


Your next question comes from the line of (Stephen Raygard) – Stephens Incorporated

(Stephen Raygard) – Stephens Incorporated

Can you just remind us what the revenue and associated margin impact from Katrina and Rita were on you guys and what was the duration of that work?

Jim Rutledge

Yes, Katrina, Rita was roughly about $37 million and that spanned about four months and that's why – we don't know that the Sandy hurricane yet is going to go in anything like that duration because clearly with Katrina, Rita, with the retention wall that broke and a lot of that area being below sea level, it was a much longer drawn out project and we don't see this one going that long but it is a little early to tell.

(Stephen Raygard) – Stephens Incorporated

Just one other question I had on the growth margin being down 40 basis points year-over-year – I know you called out some unfavorable mix in the quarter. Was that just due to pricing on the oil and gas side or what would you maybe …

Alan S McKim

I think it had more to do with the event, the Yellow Stone event. Wouldn't you think?

Jim Rutledge

Absolutely. That was part of it and then also if you look at the, even within tech services, for example, our landfill improvement – and if you look at price per pound, that tends to be lower than the incineration, for example, so you do get a little bit of a mix effect that way as well.


Your next question comes from the line of Jamie Sullivan – RBC Capital Markets.

Jamie Sullivan – RBC Capital Markets

Just a follow-up on the 2013 outlook, maybe directionally how you're thinking about the growth in tech services and industrial services as you look into next year and maybe some of the things that you're considering, whether it's discussions with customers or actual book business that kind of helped form that view into next year.

Jim Rutledge

Clearly we remain very excited with what is going on in the environmental side of the business. The growth rate there, we were a little conservative there, too, and that was in the mid to upper single digits, I think 6% or so.

And clearly what we're seeing in the landfill side, we see, as Alan was just talking about, we see a lot of that continuing and also with the trends that we see in the incinerating materials and our cross selling that we're doing to be able to ensure that at least that growth rate takes place.

On the industrial side, we're very excited there. That's probably in the 11%, 10%, 11% range that we've assumed that this point year-over-year and clearly some of the expansions that have been going on up there in Western Canada that Alan alluded to, that $25 billion that was invested last year, we see growth coming out of that in our oil sands activity and in our lodging activity up there and the cross selling.

I keep adding that because that certainly is something that boosts these growth rates as we cross sell between the environmental and industrial sides of our business.

The only other thing I would point out there on seasonality, clearly what we saw last year or this year, 2012, and then even if you look back to 2011, you will see that seasonality shift up there.

It used to be that it was just the environmental business that was seasonal and we saw typically a weak Q1 followed by a stronger Q2 and Q3. And I just wanted to alert folks that with the oil and gas Western Canadian side, it is not unusual and you should expect that going from Q1, which is the strongest quarter up there, to Q2, over the last couple of years in our businesses, if we owned all of the acquired businesses throughout those two years, the reductions are in the $60 million to $70 million range from Q1 to Q2

Whereas in the environmental side, what we saw over the last couple years, is an increase going from Q1 to Q2 of roughly $30 million, so I just wanted to get that out there because there was seemingly – although we were doing acquisitions at the same time, there was seemingly some surprises around the seasonality that we have but I wanted to point that out.

Jamie Sullivan – RBC Capital Markets

And then maybe one quick one on what we're looking at for 4Q. On the revenue side, the obviously oil and gas field is being impacted on the comparisons there. Is there growth in the other businesses that you're looking at year-over-year or you being conservative there and not assuming much into year end?

Jim Rutledge

No, we're being conservative going into year-end, particularly since last year the oil and gas part of the business I think with the Marcellus expansion that was taking place at that time that went into Q1 I think caused Q4 to be a bit stronger last year. So we're being conservative actually in our outlook for Q4 here.

But as Alan pointed out, there could be some upsides there and then certainly the emergency response would add to that.


Your next question comes from the line of Brian Butler – Wunderlich Securities.

Brian Butler – Wunderlich Securities

Just to revisit the 2012 just to tame it down, so half of that change is kind of the event business and then the other half coming from the oil and gas, is that really the repositioning or how does that demand look going into the fourth quarter?

Rob Gagnon

It was pretty much the repositioning because gas went so low in price, so the positive about that is that we were able to reposition those assets into the oil side and liquid rate side of gas which would otherwise have been growth.

So that's why we are continuing to believe that it would be more an upward trend going into next year as opposed to a downward trend.

Brian Butler – Wunderlich Securities

So thinking about the seasonality of that oil and gas fourth quarter, is it still expected to be, that seasonality to be strong enough that you see an improvement from third quarter to fourth quarter or is the repositioning really still impacting that you end up more flattish when you think of how that trends in the fourth quarter and then

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