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Edited Transcript of Bakercorp International Inc earnings conference call or presentation 2-May-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Bakercorp International Inc Earnings Call

PLANO May 4, 2017 (Thomson StreetEvents) -- Edited Transcript of Bakercorp International Inc earnings conference call or presentation Tuesday, May 2, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kris Ashman

* Raymond A. Aronoff

BakerCorp International, Inc. - CFO and COO

* Robert M. Craycraft

BakerCorp International, Inc. - CEO, President and Director

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Conference Call Participants

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* Aaron Wong

* Sean-M Wondrack

Deutsche Bank AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning. My name is Donna, and I will be your conference operator today. At this time, I would like to welcome everyone to the BakerCorp International Inc. Conference Call for the quarter ended January 31, 2017. Participating on the call today are Bob Craycraft, BakerCorp's President and CEO; Raymond Aronoff, Chief Operating Officer and Chief Financial Officer; and Kris Ashman, Assistant General Counsel. Kris will begin the call, followed by Mr. Craycraft who will discuss the company's operating results and Mr. Aronoff who will discuss the company's financial performance. (Operator Instructions) This call is being recorded and will be available for 7 days on BakerCorp's website under the Investor tab.

I will now turn the call over to Kris, Assistant General Counsel for BakerCorp.

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Kris Ashman, [2]

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Thank you. On behalf of the company, I'd like to welcome you to BakerCorp International's earnings call for the fourth quarter ended January 31, 2017. I'm going to discuss certain limitations to any forward-looking statements regarding future events, projections or performance that we may make during the prepared remarks or the question-and-answer session that follows. Certain statements contained in this presentation that are not historical facts, including any statements as to future market conditions, results of operations and financial projections are forward-looking statements under the Federal Private Securities Litigation Reform Act of 1995, and therefore, are prospective. These forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from the future results expressed or implied by such forward-looking statements. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. In addition, estimates of future operating results are based on the company's current business, which is subject to change. Particular risks facing BakerCorp include, among others, changes in the general health of the economy, trends in oil and natural gas prices, legal and regulatory risks, management changes, competition and variable input costs. These risks and others are described in our annual report on Form 10-K filed with the SEC, and our forward-looking statements are subject to those risks. Statements in this presentation are only as of the time made, and we do not intend to update any statements made in this presentation, except if and as required by regulatory authorities.

This presentation includes non-GAAP financial measures. Please refer to our annual report on Form 10-K filed with the SEC on April 26, 2017, for a reconciliation of the non-GAAP measures referenced on this call to our GAAP measures. You'll find a link to the company's SEC filings, including our Form 10-K on the company's website under the Investor tab.

And now I'd like to turn the call over to Bob Craycraft, our President and CEO.

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Robert M. Craycraft, BakerCorp International, Inc. - CEO, President and Director [3]

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Thanks, Kris. And good morning, everyone. Thanks for joining our year-end call here. And, hey, we're happy to close our FY 2017. It's been a very challenging year on many fronts, but we feel like we weathered the storm as well as anyone. Any time you start off the year with energy prices lowering into $26 a barrel in our business is going to present significant headwinds. Over half our revenue decline was in the upstream oil and gas market for the year, which was also true for Q4 as well. And it also created tremendous amount of pressure on our midstream and downstream businesses.

While we had many challenges during the year, we also did thing -- we also did several things extremely well that we're extremely proud of the team. The first, our growth in Europe was 18% year-over-year. We had one of -- we had our largest turnaround we've ever done over there. And we rolled out pumps and filtration to roughly about 1/3 of our branch network. It was just an outstanding performance by the team as they continued to build on our platform that we've established in Europe.

We managed our costs during the year. We were down -- our costs were down almost 12.7%. So the team took the actions that were needed during the year to help maintain our profitability and to help offset some of the reductions we're seeing in several of the markets. Our initiatives, as we get into the implementation phase, are creating efficiencies in our operations. We're seeing those start to come through, as we started moving more and more of our branches over to Rock certification. We -- and we anticipate having a big movement in Q2 and Q3 of this year to get more and more of those branches completed, but those principles are being applied not only to the branches that we're Rock certifying but also the other branches, and we're applying these principles across our network.

We had several key wins from our strategic account platform. We also re-signed and renewed some accounts during the year. So we're excited about our ability to package our value proposition and to get more and more traction as we start doing more and more business across the network. And we ended the year with more than $40 million of cash on the balance sheet. And so we maintained the discipline while we still invested in the business. But we also want to make sure we maintain that cash cushion, and it was a great job by the team to help balance during the year to make sure that we ended in a very strong position. That ultimately gives us the optionality as we start moving into a recovery phase around how we can invest that cash.

In Q4, clearly, the cost accrued stabilized. We're seeing the market take a very measured approach to the recovery. We still anniversary some oil and gas headwinds even through the Q4 -- through Q4, and we'll see that trend even into Q1. And so the overall market is taking this kind of measured approach, as I said. And that trend will continue to see through the first half of next year.

And I think what you really have to kind of understand is, as I talk to people a lot in the business, they're saying, "Oh, $50 crude, things are great." And we're seeing rig counts come up in the Permian. And they doubled in the Permian really over the last 12 months. People started to think, hey, this is -- we're getting back to kind of a normal rhythm in the business and to normal levels. But if you really step back and look at the cycle that we've been in, and -- what's been interesting is if you go back to July of 2014, we've had 2 50% drops from July of 2014 to really the back half of calendar 2016. And so if you think about that first cycle, right, crude was around $110 in July of 2014. It fell to $48 in January of '15. And then, typically in the normal cycle, you would've seen the bottom. And we did see a plateau from February of '15 to July of '15 around $60.

Crude average around $60. And I think most people -- and, again, I've been in the business for over 25 years, most people anticipated as we got into that July, August time frame of '15 that we would start to see recovery. And typically, what you'd see through a cycle is, 50% recovery from that $60 mark, which would put us maybe into the $80s or in $90. But what happened in July of '15 is what I call kind of the head fake cycle. We didn't go up, we went down. And so from July of '15, where crude was trading around $60, to January of '16, we went to $26. And so as you think about the impact that, that had on the business, and we really have seen that through the course of this year as everybody reacted to that second 50% drop, right, versus recovery, that's where a lot of pressure came to bear. And obviously we've talked about that throughout the year. But as we kind of cycled through the year, we really got to another plateau, right, in kind of the -- I'll call it the October of 2016 through where we're at today, crude has been averaging in the low $50s. And so the question is, are we at a plateau? Or we at the bottom, right? And so as we -- and we haven't really even got back up to the bottom where we were in 2015. But what's going to happen now, right? And there is a lot of pressure, and there's a lot of uncertainty. So you think about that cycle and you think about how that affects our customers, how we approach the business. And that's why I say to everybody who's really having this very measured approach, because while there are clearly positive trends in the business, and we see a lot of positive activity, I think people are really wanting to see, are we at the bottom? And are we going to start -- continue to see that upward movement in crude oil pricing? And so, hey, there's been some activity increasing and again just depending on which play you going into, the oil and gas markets are clearly better. But as you think about the -- that second drop of 50%, really everybody went through that cost-lowering mode. And that put pressure throughout the value chain around lowering our cost structure. And, clearly, as we get into recovery, hopefully -- and really, primarily, we see that in rates, that we start to see some of that rate pressure that we've experienced through this double down, if you will, the double down piece of the cycle, we'll start seeing some recovery as those things start happening. And that's probably not going to happen until late in the back half of this year or early next year before you really start seeing any kind of significant rate, kind of, increase.

So again, I think we have a good perspective on the market. I think we're taking the same measured approach. We're making sure our assets are in good shape. We're in the right position as we see recovery happening, that we're there to make sure we're going to be able to fulfill the demand as it happens. And then, we're going to be smart on the way back up. We're not trying to chase the first tank back out. We're trying to make sure we are getting value for our equipment. And that -- we have a long runway as we do move forward. So again, Q4 was just a reflection of our entire FY '17. Very challenged, but, again, I think that we've fundamentally been doing the right things to put us in a position that if we are at a true bottom versus a plateau -- and, quite frankly, no matter which way the energy markets go from here, we feel like we're in good shape to move forward.

So with that, I'll turn the call over to Raymond. And he can discuss the financial results in more detail and provide some additional color on some of the operational improvements.

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Raymond A. Aronoff, BakerCorp International, Inc. - CFO and COO [4]

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Thank you, Bob, and thanks, everyone, for joining the call. For the fourth quarter, revenue was $58.9 million, which was $8.8 million or 13% below the same quarter in the prior year. For the fiscal year ended January 31, 2017, revenue was $255.4 million, which was $47.7 million or 15.7% below the same period in the prior year. Currency effects negatively impacted results by $1 million. The negative currency effects was driven by dollar increasing against the euro as well as the British pound.

Looking at the markets that impacted the fiscal year decline. Upstream oil and gas revenue contributed 52% or $25 million of the year-over-year decline. The remaining declines were driven primarily by significantly reduced spending on capital projects and shorter turnarounds in the downstream market, as Bob mentioned, as well as the low crude prices resulted in much lower midstream pipeline work. Lastly, our construction revenue was slightly down during the year. But while construction was down during -- for us during FY '17, we continued to be encouraged by improvements in specific branch locations where we've begun to better support the construction market where we are taking on larger, more complex projects.

Overall, we are seeing an uptick in the number of jobs won in the construction environmental markets. And that trend should continue.

As for our segments, in North America, fourth quarter revenue was $50.9 million, which was down 16.3% compared to the same period of the prior year. In North America, utilization increased -- decreased, sorry, to 42.7% from 50.1% and rate decreased 5.1% from $30.17 to $28.64. The decline in utilization was driven by continued pressure in upstream and downstream markets, as we've already discussed. The decline in rate is partially due to mix as a result of lower utilization in specific assets classes.

Speaking to where rates have truly declined is primarily in our core pump fleet. While we saw some modest declines across other product lines, the primary impact was in pump rates from noncore customers that didn't repeat business.

On a more positive note, in our core customers, the decline in rates is due primarily to mix and not as a result of our falling prices for the equipment. For the fiscal year ended January 31, 2017, North America revenue was $219.5 million, or 19.5% below the same period in the prior year. Impact from the oil and gas market contributed to 46% of the overall year-over-year decrease. For the full year, maintenance revenue in North America was down $19.4 million or 14.5%, which includes revenue from customers we reserved a $1.2 million of bad debt for in the prior year. This includes industrial service providers and midstream companies that were themselves down in FY '17. While we were encouraged by improvements in revenue for some end markets quarter-over-quarter and year-over-year, we have not seen any significant indication that oil price will create substantial tailwinds.

In our European segment, revenue for the fourth quarter increased USD 1.1 million or 15.9% to $7.9 million. The decline of the British pound and strengthening of the dollar negatively impacted revenue results by approximately $400,000 as compared to the prior year.

For the fiscal year ended January 31, 2017, European revenue was USD 36 million or 18% above the same period of the prior year. In Europe, fiscal year '17 utilization increased 200 basis points to 44.8% compared to the same period in the prior year, while rental rates decreased 4.3%. European rates have trended down this year, partially due to currency in the U.K. But even though we have seen some fluctuations over the past 12 to 24 months, consolidated rates are still above FY '14 levels. Our European team continued to focus on selling complete solutions to our customers helping to drive year-over-year growth in key end markets.

We couldn't be more proud of the work they're doing and continue to show strong results. For the fourth quarter of FY '17, total company adjusted EBITDA was $13.1 million, which was below prior year by $3.3 million or 20.2%. For the fiscal year ended January 31, 2017, adjusted EBITDA was $68.9 million, which was below prior year by $20.6 million or 23%.

For the full year, adjusted EBITDA margin was 27% as compared to 29.5% in the prior year. Operating expenses included an adjusted EBITDA decreased $5.5 million or 10.4% to $46.2 million for the fourth quarter as compared to the same period of the prior year. For the fiscal year ended January 31, 2017, our operating expenses were down $27.1 million or 12.7% related to reductions in almost all major expense line items. This decrease was the direct result of the continued effort and diligence of our corporate and field teams working through cost savings and efficiency initiatives.

For the full year FY '17, employee-related expenses including overtime, temp labor and fringe benefit decreased $13.2 million compared to prior year. The impact of position eliminations earlier in the year in North America were the biggest driver of the lower expenses. North American headcount reductions were 11% year-over-year. Other initiatives to lower overtime and temp labor also contributed to the results.

Rental expenses were down $9.7 million for the full year, driven primarily by lower revenue as well as lower fuel costs. Other operating expenses were down $1.8 million year-over-year, driven by cost-saving initiatives related to managing T&E expenses as well as decreasing in bad debt, primarily driven by a specific reserve due to a customer bankruptcy in the prior year.

Facility expenses improved $800,000 compared to prior year, primarily due to continued cost-savings initiatives. While the performance of the business was slightly below our expectations for FY '17, we are encouraged that during this historic market downturn, we were able to make so many key improvements, mitigate losses by reducing our expenses, won some strategic accounts and overall put the company in a position to win as the market returns. Doing all of this during a historic downturn has been a feat, and our team deserves a lot of credit for making this happen. While they have not all shown up as improvements in the income statement, we can clearly identify areas where we are truly gaining momentum in the business. A major contributor to that has been our asset management and Rent, Ready or Rock project. All but one branch that has been Rock certified are seeing the commercial growth we expected. Those branches are operating both better and more efficiently than ever before, better servicing to our existing customers and increasing our ability to attract larger, more complex projects. Of the $27 million in expense reductions outlined, we can attribute about $6 million to $7 million of those to key initiatives. This is a huge achievement because you have reduced price -- we have reduced our cost while at the same time increasing service and product quality. As Bob said, and I'll second, we're very proud of the teams and believe that our current cost structure and operating model is properly aligned to support future growth as the market returns.

Coming out of FY '17 and into FY '18, while we're not getting a boost -- significant boost from the energy markets, we are encouraged with what we're starting to see into the -- in the first part of the fiscal year. We are seeing several midstream jobs kickoff, we are seeing full turnarounds and tank cleanings being planned, and construction projects continue to move forward. Drilling activity is anticipated to be steady in the shale plays we participate and overall business sense that continues to move in a positive direction. I believe that we are at the inflection point, where we begin to get back on our trajectory of growth, albeit modest.

Q1 will have a negative comparable based on lower upstream oil and gas work in the shale plays we participate as well as the anniversary of the largest turnaround in Europe's history. As it relates to our confidence around the full year, we are seeing steady positive increases in current activity, in both midstream and downstream. We are also seeing healthy planning for additional projects that look to start in the back half of this year and into early next year.

As well, we see some of our key takeaway accounts from this past fall begin to ramp up throughout the year. Europe should continue to see growth, and our construction market activity should be steady and increase in areas where we have made concerted efforts to increase our presence in that end market.

Our CapEx spending plan is in the $25 million to $30 million range for this fiscal -- this coming fiscal year, but would accelerate as we see the business climate improving. Cash will remain above the $40 million range, unless we determine that there is a better use of our cash, as Bob mentioned. And that could come in the form of accelerated growth through capital or in a modest acquisition. Finally, we will continue to spend time as the year progresses looking at options for our capital structure. Our recent amendment provided us some times -- some time to give us -- to leverage our improving business performance.

Cash balance as of January 31, 2017 was $44.6 million as compared to $44.8 million for the same period of the prior year. Capital expenditures for the year were $34.5 million, and our ability to maintain a cash position of $44.6 million in a year of declining EBITDA speaks to strength of the business. We did not draw on the revolver at any time during the year. And as usual, we have no intention to do so in the future. This year, BakerCorp turns 75. And we really see 2 key milestones here: the first is, putting in our rearview mirror the most dramatic decline in upstream activity this country have ever -- has ever seen that clearly had a ripple effect all through the energy value chain; second, we're not only celebrating the rich history of our company, but also celebrating the tremendous work done by our current teams to put ourselves in position of growth for the next 75.

With that, I'll turn over the call for questions. And then Bob will provide us with closing remarks. Operator, you can open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is coming from Aaron Wong of KKR.

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Aaron Wong, [2]

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Just a quick question regarding the competitive landscape. I'm interested in hearing whether you're seeing any pricing pressure, specifically in the refinery end market?

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Robert M. Craycraft, BakerCorp International, Inc. - CEO, President and Director [3]

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As we've taken a look at rates in a couple of different ways, we saw most of the pressure happening from Q1 last year kind of through Q3 of FY '17. And since Q3 of FY '17, actually half of our U.S. regions have started to see a slight uptick in the tanks piece, we do see continued -- we do see some pressure in the pumps area in that space. But there's really a -- I think the key piece is on the pumps -- there's a couple of different factors. One is, length of jobs, and FY '17 were short in duration. And so the pump rates get based on a daily, weekly, monthly kind of cycle. And so as you move out the cycle, the -- actually day rate comes down, right? Because we're running for a month. And so what we're starting to see now is obviously cycle lengths are getting a little better in that area. And so you get a little -- because they get to the monthly level, you get a little lower day rate. And then also, we've a couple of new competitors that have made acquisitions of pump companies. And they're learning this pump business, and they're learning the difference of utilization length, the cost of repair and maintenance. And so while we saw some aggressive behavior early from them, I think we're starting to see them kind of flatten out and start moving back up. So I think, the good news for us is in our core customers. We're not seeing much of a rate change, but obviously on those kind of fringe customers, the noncore customers, we are seeing kind of a competitive -- you see a more competitive landscape out there. So I would describe kind of that downstream market as stable to, again depending on market, either flat or starting to slightly improve.

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Aaron Wong, [4]

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Got it. That's helpful. And then I was wondering if you could elaborate a bit more on some of the strategic wins and whether you could quantify that?

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Robert M. Craycraft, BakerCorp International, Inc. - CEO, President and Director [5]

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It's always difficult to quantify those, because it depends on what cycle that customer is in when we inherit the business, did they just come off a turnaround year or they going into a turnaround year. Typically, what we see on average, right, is that a nice win for us on the strategic outside is going to produce somewhere between $1 million and $2 million in revenue. Again, depending on the size and how many locations we get. And then the speed of being able to roll that out. So as we think about this year, we look and said, hey, we had -- in FY '17, there's really kind of 3 big wins, 1 happened early in the year, 2 kind of happened later in the year. So as you think about that, we got somewhere between an additional, call it, $4 million to $6 million in what we feel like is new opportunity for us that's came in, like I said, start -- one big win started early in the year and then a couple later. So we'll see that flowing through. And then it just depends, again -- our existing base depends on their turnaround schedule and the new guys. That number can bump up depending on turnarounds.

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Aaron Wong, [6]

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Got it. And so those wins were in the downstream space then?

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Robert M. Craycraft, BakerCorp International, Inc. - CEO, President and Director [7]

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Yes. Yes, midstream, downstream, yes.

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Aaron Wong, [8]

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Got it. And then 1 last question. I was wondering if you could elaborate on -- or actually maybe you could just provide some sort of guidance for the full year. I understand that you provided color for first quarter, but where do you approximately expect to end up on revenue and EBITDA? And what -- where do rig counts need to get to in order to start seeing some upstream come back?

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Raymond A. Aronoff, BakerCorp International, Inc. - CFO and COO [9]

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Yes, so I think, as one thing that Bob pointed out, we're really not building a whole lot of upstream oil and gas into our plan for FY '18. That to us is really upside, because we think that's where the most uncertainty exists in the business right now. We are seeing the continued steady growth of midstream and downstream. And if that continues, you would expect to see us kind of grow on the top and bottom line kind of middle-single digits for this year. But we're going to have to really see how the year progresses and how we see things stabilize going into the second quarter. But right now, like we talked about earlier, you're seeing the activity, the positive activity at that modest level.

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Aaron Wong, [10]

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Got it. So at this time, it sounds like top line and EBITDA should be up year-over-year?

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Raymond A. Aronoff, BakerCorp International, Inc. - CFO and COO [11]

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Yes.

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Robert M. Craycraft, BakerCorp International, Inc. - CEO, President and Director [12]

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Yes, and I think, hey, here is the -- and here is the question nobody knows sitting right here, right, is, if crude ends the year at $65, if we're on the steady trend up to -- even to $60, the slope of that curve goes up, right? I mean if we continue to kind of meander in the low $50s, it's going to be towards the low end of that. So again, I think, that's the -- everybody in the market is kind of waiting on that, are we really going to $60? Or are we really going to stay in the $50s, and -- but what we do hear, I've been on a few national account visits and talking to guys about their plans, what's interesting is our -- what I hear from our customers' are, they're planning a bigger slate in '18, because they feel like, hey, no matter what happens, '18 is going to be stronger. And they kind of have question marks around, hey, do we go ahead and start this project in Q4 of this year or just go to Q1 or is it going to go from Q3 to Q4. But we do -- we hear a lot of guys are planning some more significant turnaround activity in FY '18. And I think, Raymond mentioned earlier, a lot of accounts, they may have done 4 tank cleanings last year, they made do 6, 7 or 8 this year. And so as we see those guys planning that kind of day-to-day work and then also starting to plan for bigger projects in '18, we feel like we'll continue to gain momentum throughout the year. And the question is, is the slope of the curve in the back half will be correlated to more positive energy story?

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Operator [13]

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(Operator Instructions) Our next question is coming from Sean Wondrack of Deutsche Bank.

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Sean-M Wondrack, Deutsche Bank AG, Research Division - Research Analyst [14]

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As we take a look at your business. And obviously, the oil and gas market, you guys have done a great job taking out costs and haven't had a lot of help from the market. Have you thought about exiting any markets? Or divesting, whether it's a portion of your fleet? Just basically to rationalize fleet a little bit better.

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Robert M. Craycraft, BakerCorp International, Inc. - CEO, President and Director [15]

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Yes, so great question. So we really, primarily focus in the Niobrara and the Marcellus, right. So we're not in the Bakken at all. We do a little activity in the Eagle Ford and Permian but not much. So I mean those are our 2 main plays. We also have a long-standing kind of position in the Bakersfield play that -- where we have -- where we service and have a branch there. So we feel like -- we've made those selections probably 18 months ago which plays we really want to focus on. So we're going to play there. From a rationalization of fleet, not that we're going to sell the fleet, but we are moving fleet and reconditioning fleet, moving it from the oil and gas market back into the industrial market. And so our game plan is to have a steady diet of tanks coming out of the oil fields, getting refurbed, replenished, we've got to realign them, we've got to clean them up. And then we'll move those into the industrial market. So we've got a group of tanks that we're doing that with right now. Some of the tanks -- we're converting the tanks into some open top tanks and other type of things. So our game plan is to really reposition the fleet, both physically and from an end market standpoint to that. We can't do that all at once, but we'll be on a steady diet here over the next couple of years to reposition as much of that fleet as we can.

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Raymond A. Aronoff, BakerCorp International, Inc. - CFO and COO [16]

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And one other thing to think about, Sean, is that a lot of the oil field tanks were bought in very early. And they're still very young in their fleet age. And because we bought them to be fungible with the industrial markets, we're able to also use that as replacement capital for some of our older fleet. So as we retire older fleet, as Bob mentioned, pulling that out of the oil field, some of the plays that were big tank heavy plays, we can clean those up and use it as replacement capital as well. So that's how we look at kind of how we're thinking about our fleet.

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Sean-M Wondrack, Deutsche Bank AG, Research Division - Research Analyst [17]

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Great. That one makes a lot of sense. Do you think down the line, you would consider potentially -- since we don't really know how things are going to play out. But with the Permian basin being obviously the lower cost basin, and do you think you might try to move more into that basin? Or revaluate over time? How do you think about that and make that decision?

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Raymond A. Aronoff, BakerCorp International, Inc. - CFO and COO [18]

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We have a branch in Midland. I mean if you think about us, we do rentals in the Midland state. So renting in the Texas region is something that we do today, whether it be the Eagle Ford or the Permian. The question is whether or not we would be a true kind of water transfer company in those locations. And right now, the margins are not really attractive to us to really want to attack and go after those markets, especially to be a new entrant in that place. So right now, we're going to kind of remain as a rental -- specialty rental company in those regions and plays.

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Sean-M Wondrack, Deutsche Bank AG, Research Division - Research Analyst [19]

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Fair enough. And when we think about your CapEx spends here, the $25 million to $30 million you guided to. How much of that will be going to Europe And how much of that will be here domestically?

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Raymond A. Aronoff, BakerCorp International, Inc. - CFO and COO [20]

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So we have about $5 million that is going to Europe as planned. And then if we decided to release more capital, we -- Europe would be part of that additional capital that we would release.

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Sean-M Wondrack, Deutsche Bank AG, Research Division - Research Analyst [21]

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Great. And then has there been any talk about trying to increase your exposure in Europe, either through small tuck-in acquisition or otherwise?

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Raymond A. Aronoff, BakerCorp International, Inc. - CFO and COO [22]

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We are always looking at opportunities to see how we would grow. I mean, right now, as Bob pointed out, it's about not widening our footprint by adding more branches, but deepening our capability set with customers. And I think we're proving out right now that that's the right way to go. And we've, as Bob mentioned, we deployed our first line of filtration and pumps to only really 1/3 of our branch network. So we feel like we've got some room to grow through that mechanism right now. And then as that gets a little fuller, we can take a deeper dive on whether we try to go more organically with additional branches or whether we go start looking more aggressively at acquisitions over there.

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Sean-M Wondrack, Deutsche Bank AG, Research Division - Research Analyst [23]

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And then just for my last question, and I'll hop back in queue, because I think this might be getting missed, particularly in the decline year-over-year. How much have your incremental operating margins basically increased through these cost takeouts? And going forward, when we start to see increases in revenue, where do you foresee the drop down being to EBITDA? And how has that kind of evolved over time?

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Raymond A. Aronoff, BakerCorp International, Inc. - CFO and COO [24]

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So starting with the latter half first. I mean, one of the things that we believe we've done with the key initiatives that we've rolled out is created an infrastructure that as we bring on more work, that we're able to handle that work at the lower cost basis. I mean, that was really one of the key focuses for us, was to accept that the market was contracting through oil and gas and energy. And how do we continue to provide the same levels of service or even better levels of service in a market that we knew is going to become much more aggressive in the form of rate reduction and volume of work. So a lot of the work that we've built into that is really allowing us, as the market comes back, to see a higher amount of contribution margin, when you start looking it over kind of the macro basis. As we start to see the business come back, there may be some things we want to add back to the business that will make those decisions on. But we have the ability to run with our current infrastructure and see a significant higher volume of transactions. Because a lot of the things that you are going to add -- we need to add to the business would be drivers and technicians based on the type of work that you're executing in the field. But as far as the support function, whether it be kind of the field level support or the corporate back-office support, we feel like we've got that really well dialed into where we could add significant increases in volume of transactions before we would have to actually increase our cost basis. As far as the operating, it's in the kind of the 5% to 7% deleveraging on the gross margin. So it's been -- it's healthy for us on that side. Thanks for the question.

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Operator [25]

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At this time, I'd like to turn the floor back over to management for any additional or closing comments.

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Robert M. Craycraft, BakerCorp International, Inc. - CEO, President and Director [26]

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Hey, we appreciate everybody dialing in for today's call. And, as Raymond mentioned, we're celebrating our 75-year anniversary this year. And we have a rich history of servicing our customers. And we continued to evolve our platform and have created a strong foundation to build the business into the future. We recognize the need to continue to enhance our value proposition and operate more efficiently. And we believe we're in position to capture more of the market during the recovery. So it's interesting time. The last, probably, 3 years have been extremely interesting for everybody participating. But again, we haven't just been sitting back and taking what the market gives us. We've been trying to continue to attack and move and build the sale, so that when we do get those tailwinds, when we raise the sail, we'll capture more of the wind. And so we feel like -- we have that opportunity in front of us. The team has worked incredibly hard. It's been embracing the change, making the change happen. We've been enabling them with new tools and new processes and systems to make them more efficient in what they do. And we're starting to see those benefits. And so we're excited for that. And then that translates in, as Raymond said, a higher level of customer service and satisfaction in the end.

So again, we appreciate everybody's call. Look forward to talking to you soon. Have a great day. Thank you, Donna. Bye.

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Operator [27]

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Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time, and have a wonderful day.