Clean Harbors Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2023

There are 12 speakers on the call.

Operator

Greetings, and welcome to the Clean Harbors Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael McDonald, General Counsel.

Operator

Thank you, sir. You may begin.

Speaker 1

Thank you, Christine, and good morning, everyone. With me on today's call are our Co Chief Executive Officers, Eric Ersterberg And Mike Battles and our EVP and Chief Financial Officer, Eric Doukas and SVP of Investor Relations, Jim Buckley. Slides for today's call are posted on our Investor Relations website, and we invite you to follow along. Matters we are discussing today that are not historical facts These forward looking statements are within the meaning of the Private Securities Litigation Reform Act of 1995. Participants are cautioned not to place undue reliance on these statements, Information on potential factors and risks that could Our results is included in our SEC filings.

Speaker 1

The company undertakes no obligation to revise or publicly release the results of any revision to the statements made today Other than through filings made concerning this reporting period, today's discussion includes references to non GAAP measures. Clean Harbors believes that such information provides an additional measurement and consistent historical comparison of its performance. Reconciliations of these measures to the most directly comparable GAAP measures are available in today's news release, on our website and in the appendix of today's presentation. Let me turn the call over to Eric Osterberg to start.

Speaker 2

Eric? Thanks, Michael. Good morning, everyone, and thank you for joining us. Turning to our Q2 financial results on Slide 3. Our Q2 performance underscores the strength of our Environmental Services segment, where our adjusted EBITDA margin climbed by 140 basis This is a highly resilient business that is supported by scarce permitted assets, a strong safety record, technical expertise, A highly trained workforce, close customer relationships and effective capital allocation.

Speaker 2

Q2 marked our ES segment 7th consecutive quarter of growth and profitability. Its performance partly offset the decline of our Safety Kleen Sustainable Solutions segment, Which experienced some headwinds resulting from the adverse conditions that continue to affect the base oil and lubricant markets. Before I review the segments in more detail, I'd like to highlight our safety results as safety is central to everything we do. After a record Q1 performance, we delivered a 2nd quarter TRIR of 0.68, the best Q2 in our history, Which keeps us on track to achieve our ambitious annual TRI goal of 0.70. The record breaking heat across much of the country posed a unique challenge Q2, it continues to do so as we move through the Q3.

Speaker 2

Because our team is often required to wear personal protective equipment, Both outdoors and in plan, we are focused on monitoring temperature and hydration. To everyone on our team, we appreciate all the proactive steps You take to keep yourself and your colleagues safe. Turning to Environmental Services on Slide 4. Segment revenue increased 7%. The growth of our services business was underpinned by pricing and volume initiatives.

Speaker 2

Each of the segments 4 business units posted year over year gains With Industrial Services and Safety Kleen Environmental Branch Businesses leading the way. Industrial Services revenue grew 11% on the heels A strong spring turnaround season and initial contributions from our Thompson acquisition. Our 2nd full year of HPC, Which we acquired in late 2021 is trending better than we anticipated. Safety Kleen Environmental revenue climbed 16% With the demand for businesses core offerings continue to grow. For the 2nd consecutive quarter, we performed 250,000 parts wash services, An increase of 4% from Q2 last year.

Speaker 2

Field services revenue grew 7% despite not having any large scale emergency response related projects. Technical services revenue grew modestly, largely attributed to the many planned maintenance and repair days at our disposal facilities To address weather related outages that occurred in Q1, as expected, utilization at our incinerators reached 84% this quarter, Up 4 points sequentially, but down 6 points from Q2 last year, which had fewer down days. Looking ahead, we anticipate less down days in in the incinerators that limited utilization, but our operations team worked hard to maximize the throughput to address our increasing backlog of waste. Landfill volume in the quarter was flat with the prior year. This year, our base business was particularly strong with a good mix of high value waste, which resulted in average pricing increasing by 21%.

Speaker 2

Looking at segment profitability at 13% adjusted EBITDA growth, The ES segment once again outpaced the top line. Given our highly leverageable network of assets, higher revenue should consistently drive greater profitability. As noted last quarter, we are also benefiting from a number of productivity programs and cost reduction efforts across the organization. To counter inflationary pressures, we've been targeting $100,000,000 of company wide cost reductions in 2023, Much of it in ES. As a result of all these factors, we increased our ES margins and are now topping 26%.

Speaker 2

Overall, a great quarter for the ES segment. Before handing it off to Mike to take you through SKSS,

Speaker 1

let me touch on

Speaker 2

a recent development Related to PFOS that should benefit our Environmental Services business materially in the coming years. Turning to Slide 5, in July, the U. S. Department of Defense issued new guidelines related to the incineration A material containing PFAS, which research indicates is present at hundreds of military installations. The DoD has authorized commercial hazardous waste incineration as a method of addressing these forever chemicals.

Speaker 2

The DoD guidance also allowed for hazardous waste landfills as an alternative remediation method. Last year, we published the results of a comprehensive 3rd party study that clearly demonstrated that we could effectively destroy a wide range of PFAS compounds, Including AFFF Firefighting Foam at commercial scale, in that study, we proved that we can consistently achieve At least 6 nines of destruction, which is the gold standard for thermal methods. Additionally, the EPA conducted its own pilot study At its North Carolina facility and came out with similar conclusions about the potential for incineration. Given the compelling results of our study, We view the DoD's decision to lift the PFAS moratorium as a very positive development for Clean Harbors long term. That being said, we don't expect a material amount of opportunities from the DoD this year.

Speaker 2

The EPA still must set final guidelines related to acceptable levels of contamination in Soil and water and provide recommended methods of storage, removal, transportation and destruction. In the interim, We plan to work closely with the DoD to develop the right solutions at military installations to best protect our nation's armed forces. With that, let me turn things over to Mike to discuss SKSS and capital allocation. Mike?

Speaker 3

In our ES segment, they helped us deliver overall results in line with our guidance for the 23rd consecutive quarter. That consistency is something that we personally take pride in. Moving to Slide 6, SKSS had another challenging quarter as the segment fell short of our profitability expectations. While we lowered our expectations on our last call, we did not anticipate the unusual absence of the Q2 seasonal pickup in demand and pricing this year. In fact, after a price decline in early April, posted prices fell again in June, which was the culmination of a weak spot pricing environment all quarter long.

Speaker 3

While crude prices have risen more recently, they have not yet correlated to a rebound in base oil and lubricant pricing. On the top line, SKSS revenue dropped 15% based on weak pricing based on the weak pricing climate brought on by global market conditions In Q2 of last year, posted prices rose by $1 a gallon, whereas this year in Q2 posted prices fell by $0.60 With spot pricing exhibiting even deeper discounts. In 2022, customers were concerned about shortages and allegations. Conversely, this year buyers have been able to patiently wait on the sidelines, de stocking inventories and holding out for lower prices. As a result of these conditions, SKSS adjusted EBITDA decreased 45% with a year over year drop in margin As our near term refining spreads have been compressed, while market conditions have remained unfavorable, The SKSS team has acted quickly to counter the spread compression.

Speaker 3

The team is executing well In the areas we can control, such as collection pricing and volumes, as well as rapid production and as well as plant production and volumes sold. During the quarter, we shifted rapidly from a pay for oil to charge for oil pricing model, while generating record collections of 64,000,000 gallons. We also sold a record level of base oil gallons in Q2 as our re refining plants continue to run well. Blended product volumes blended product sales accounted for 19% of total output from our plants, flat compared with a year ago, but up from the 15% we reported in Q1. We continue to win back blended customers we lost in the back half of twenty twenty two due to added shortages.

Speaker 3

Our direct volumes, We represent our closed loop approach. We're at 7% in Q2, which is flat with a year ago and in line with our expectations. Our goal remains to increase our blended volumes this year through average on both the direct and wholesale sides. Overall, even with the declines we've seen this year in SKSS, this segment is still expected to deliver an approximately 20% adjusted EBITDA margin this year, And it remains a strong free cash flow generator and high ROIC business for us. Turning to Slide 7 and our capital allocation strategy.

Speaker 3

As part of our Vision 2027 strategy that we laid out at our Investor Day earlier this year, we have multiple avenues to grow our company. We continue to evaluate opportunities to invest in CapEx to drive organic growth, particularly in the facilities network, our maintenance shops and other areas. The build out of our new state of the art incinerator in Nebraska remains on plan, on budget and on track For opening in early 2025, we installed the kiln this quarter and are on track to hit a number of other critical construction milestones in the back half of this year. On the M and A front, the early returns on our Thompson and Duffer acquisition are very promising. The business is proving to be synergistic It should support cross selling going forward.

Speaker 3

We continue to see a good flow of potential bolt on transactions for both offering segments. In Q2, we closed a very small acquisition, less than $10,000,000 in size, where we added a company that leases more than 500 intermodal containers. We are confident that these assets will benefit us as we grow our business in the years ahead, particularly with the new incinerator coming online And larger PFAS opportunities starting to develop. Eric Dubious will discuss our financial activity for the quarter, I'd like to remind investors that our strong and flexible balance sheet allows us to remain opportunistic with respect to potential M and A. Overall, we remain on track to hit our financial targets in 2023 as the momentum in our ES segment offsets Continued to offset any declines in SKSS.

Speaker 3

Strong demand for ES has not abated and our Favorable market dynamics supporting our profitable growth in all of our Forest Business segment units. Growth in Industrial Services continued to be a meaningful contributor to our 2023 success as we move towards the fall turnaround season. Within our disposal network, our record Backlog positions us well for the back half of the year. The project pipeline within the ES segment shows no sign of slowing as the pace of reshoring picks up and Government infrastructure spending is starting to make its way into the market. Given the trajectory we've seen through 2023, We continue to expect nothing short of a record year in our ES segment.

Speaker 3

Although it's disappointing that summer driving the summer driving did not stabilize the pricing environment in SKSS, we have responded quickly to market conditions. We will continue to control costs across the business, Particularly on the collection side, while still ensuring that we have enough supply to maximize output at our re refineries. In total, we are maintaining our adjusted EBITDA and adjusted free cash flow guidance for the year as we believe our ES segment will offset the slowdown in SKSS. With that, let me turn it over to our CFO, Eric Douglass.

Speaker 4

Great. Thank you, Mike, and good morning, everyone. Turning to the income statement on Slide 9. As Eric and Mike outlined, Q2 was a strong quarter for us with our ES segment again delivering exceptional results, exhibiting continued profitable growth And exiting Q2 with significant momentum across many of our service businesses. Total revenues for the quarter increased $42,000,000 With our ES segment growing $81,000,000 to more than offset the lower top line figures for SKSS.

Speaker 4

Adjusted EBITDA was $287,500,000 in line with the guidance we provided in May, but down from the $309,100,000 reported a year ago when we benefited from much higher base oil pricing due to global supply disruptions. Our adjusted EBITDA margin was 20.6 percent in line with our expectations. Gross margin was 32.2%, Reflecting our ability to offset inflation with appropriate price increases in cost savings, while increasing productivity and realizing gains from operational efficiencies. SG and A expense as a percentage of revenue was 12% in Q2, consistent with our expectations. For the full year, we anticipate being in the low 12% range and essentially flat with 2022.

Speaker 4

Team continues to do a great job offsetting inflation and wage pressures with cost mitigation strategies. Depreciation and amortization in Q2 increased slightly to $89,700,000 again consistent with our expectations given the addition of Thompson. For the full year 2023, we continue to anticipate depreciation and amortization in the range of $360,000,000 Income from operations in Q2 was $189,800,000 largely driven by our strong performance in Environmental Services. Net income for the quarter was $115,800,000 Short term marketable securities at quarter end were $326,100,000 reflecting our decision to pay down the entire $114,000,000

Speaker 3

of debt

Speaker 4

that was outstanding on our ABL revolver. Given our strong current financial position, We thought it was prudent to lower our interest expense with some of the excess cash we had on hand. As a result of that action, We ended the quarter with debt of just over $2,300,000,000 We remain very comfortable with our overall debt portfolio as there are no significant amounts Coming due for a number of years. Leverage on a net debt to EBITDA basis as of June 30 was approximately 2 times And our weighted average pre tax cost of debt at the end of Q2 was just over 5%, with approximately 85% of our portfolio Being at fixed rates, turning to cash flows on Slide 11. Cash provided from operations in Q2 It was up 22 percent to $207,600,000 versus $170,600,000 a year ago.

Speaker 4

CapEx, net of disposals, was $121,500,000 in the quarter, up from prior year, Partly as a result of spend on our Nebraska incinerator project, which accounted for $22,000,000 of our Q2 CapEx. In the Q2, adjusted free cash flow was $86,000,000 which was right in line with our internal expectations and keeping us on track to hit our annual target. For 2023, we continue to expect our net CapEx to In the range of $400,000,000 to $420,000,000 Full year spend on our Nebraska incinerator is expected to be in the range of 85 $90,000,000 having spent $35,000,000 year to date and some major construction phases planned for the coming months. We are also continuing to make investments in both equipment and our transportation fleet with an aim to minimize third party rental spend, while accommodating the growth The business is need. During Q2, we bought back 36,000 shares of stock at an average price of $137 per share At a total cost of $5,000,000 we still have close to $100,000,000 remaining under our existing authorized buyback program.

Speaker 4

Moving to Slide 12. Based on our Q2 results and current market conditions for both of our operating segments, we are maintaining 2023 adjusted EBITDA guidance range of $1,020,000,000 to $1,060,000,000 with a midpoint of 1,040,000,000 Looking at our guidance from a quarterly perspective, we expect Q3 adjusted EBITDA To be approximately 7% to 9% below Q3 of 2022 due to a challenging year over year comp For our SKSS segment, but offset by continued positive growth in our DS segment. I'll now provide an updated breakdown of how we expect our full year 2023 adjusted EBITDA guidance to translate to our reporting segments. Environmental Services, we now expect adjusted EBITDA at the midpoint of our guidance to increase 15% to 17% from the full year of 2022. Demand for our range of services, particularly in industrial and at our disposal facilities continues to be very strong.

Speaker 4

As a reminder, our full year 2023 guidance for the ES segment includes $12,000,000 of adjusted EBITDA attributable to the Thompson acquisition. For SKSS, we now anticipate full year 2023 adjusted EBITDA at the midpoint of our guidance The decrease in the 35% to 40% range from last year, reflecting the ongoing pressure on base oil pricing. In our corporate segment, at the midpoint of our guide, we now expect negative adjusted EBITDA to be up 7% to 8% in 2023. The slight increase from our prior guidance reflects some higher expenses that occurred in Q2, primarily relating to insurance programs and professional fees. Overall, the team is doing a good job offsetting items like higher insurance expenses, salaries and corporate costs Related to the Thompson acquisition with cost savings programs.

Speaker 4

For 2023, we continue to expect to deliver adjusted free cash flow Between $305,000,000 $345,000,000 I want to remind everyone that this guidance includes approximately $85,000,000 to $90,000,000 Would be about $450,000,000 In summary, Q2 was marked by solid execution in both segments. Our ES segment delivered profitable growth above our expectations. In our SKSS segment, while the financials were less than anticipated, The team responded rapidly to declining market conditions. And as Mike said, did a nice job controlling what they could. Looking ahead, we are enthusiastic about our near and long term prospects, especially in the ES segment, where there are numerous tailwinds.

Speaker 4

We have not seen a meaningful slowdown in any of our core lines of business. Our sales pipeline as we sit here today is larger than it was 90 days ago. We had a healthy outlook for the second half of the year for multiple reasons, including the backlog of waste in our facilities, The additional waste streams that we continue to see enter the commercial marketplace, the emerging PFAS opportunity that Eric spoke about And the schedule of projects we anticipate commencing going forward. Our goal is to continue to capitalize on these positive market dynamics in ES, While managing through the current downturn in SKSS, while setting the business up for future growth as macro factors impacting SKSS stabilize. Overall, we continue to expect another solid year for Clean Harbors in 2023 as we work towards achieving our Vision 2027 goals.

Speaker 4

With that, Christy, please open up the call for questions.

Operator

Thank you. We will now be conducting a question and answer session. Your question comes from the line of Michael Hoffman with Stifel. Please proceed with your question.

Speaker 3

Hi, good morning and thank

Speaker 5

you for taking the time. So you said all this in the call On your prepared remarks, I just want to make sure we emphasize that all lines of business, Not just technical services and not just incineration saw growth in ES. And the pricing, is that Spread across all of them as well and or is it concentrated just in disposal?

Speaker 2

Yes, Michael, this is Eric. Thank you for the question. Yes, the pricing is across all lines of business. We continue to push price for disposal, Transportation, labor across all areas of our businesses and that continues to

Speaker 3

take effect. Michael, going back, this is Mike, just to add on to what Eric said. If you think back a few years, it was incineration scarce. And so we get pricing, we've always done pricing in our facilities, whether it be landfills, incineration, What's happened over the past couple of years is that there's been a switch and that getting qualified safe compliant labor It's also very tough, getting trucks and equipment also very difficult and that's allowed us to drive price kind of beyond just incineration, beyond just facilities You see that this quarter with the terrific results in the industrial side and the field service side

Speaker 4

that Eric mentioned in his prepared remarks.

Speaker 5

And historically, the turnaround business is a little stronger in the first half than the second half. Is there is that pattern holding or is it Reversed and that's helping give you me that much more confidence about totally yes directionally.

Speaker 2

It certainly gives us that confidence. But yes, the first half of the year was more turnarounds than traditional. We had very strong turnarounds Season for our industrial services, we expect that to continue and it's really reflective in the numbers of that business.

Speaker 5

Okay. And then, of course, everybody's got to ask this SKS question. I won't be the first one, I'm sure. How do you give the market Confidence on what you think the bottom is. And when you think about that bottom, can is there enough data, I can't To tell you whether there's a correction is done in the finished goods side of the market, Which is partly influencing this problem.

Speaker 5

There's just too much finished good out there and the blenders are going We don't need to buy oil to blend to make finished goods?

Speaker 3

Yes, Michael, this is Mike. I'll answer that question. At the end of the day, we feel that the business we did everything we could to kind of control the costs, control the costs, drive blended guidance, Drive down PFO pricing to CFO pricing, in the plant ran really well and we're executing on the strategy we talked about back In our Vision 2027 presentations back at the end of March, what's the bottom? Hard to say. I think that The midpoint of the business starts with 2 over the short term.

Speaker 3

And if prices are increasing, it's in the Mid to high 2s, the price is decreasing. It's in the high ones. And our midpoint of our guide today is in the 190 range. That's after 3 plus price decreases over the first half of the year. And I'm hopeful that with crude prices coming back a little bit over the past few We see base oil pricing increasing just as a modeling answer for the purposes of the back half of the year, we're assuming base oil prices Remain flat.

Speaker 3

And so I'm hopeful given the most couple of weeks that I've heard around crude price coming back, Maybe there's a base oil price increase, which was certainly going to help us and I get back to that, the 2 number we talked about a minute ago.

Speaker 5

Okay. And So you alluded to midpoint SKS 190 that puts ES at like 1.11 if you're landing at Somewhere around $255,000,000 to $260,000,000 on corporate overhead. Is that Yes, sir. We did all that math right now.

Speaker 3

That's exactly And really too, and so we can happy we're happy to answer questions about SKSS all day and to your point, Mike, we probably will. But the ES business continues to do incredibly well. As Eric said in his prepared remarks, the incinerators had challenges in April and into May, Yes, we still delivered 140 basis points of margin expansion in the ES business. And if you look at the guide and make an estimate for revenue, Our margins in the back half of the year for the ES business will be 150 basis points to 200 basis points better than prior year. And as such, we really are very bullish on that business and excited about the future.

Speaker 3

And I want to make this point on the call is that We gave our Vision 2027. Eric and I stood in front of the organization, stood in front of the investment community and talked about it. I'm more bullish About Vision 20 37 now than I was 90 days ago. And more importantly, our pipeline has not changed. Our pipeline still is Stronger today than it was 90 days ago, which again, I'm really excited about.

Speaker 5

Okay. Thank you very much for taking my queue.

Speaker 2

Thank you, Michael.

Operator

Our next question comes from the line of Noah Kaye with Oppenheimer. Please proceed with your question.

Speaker 6

Thanks. Yes, just a little bit more, Matt, that last year ES was 75% right of EBITDA pre Corporate expense and this year it's going to be 85% or more. So I think I'll focus on the 85%. Can we start with that PFAS commentary? Maybe you can level set for us how much PFAS Remediation revenue you've seen year to date and what's in the 2023 guidance?

Speaker 6

And then can you kind of break up the PFAS opportunity into Different chunks. Maybe you can talk about potential revenue just with DoD or the government, just different ways for us to wrap our heads around How big this could be for you over time?

Speaker 2

Yes. Noah, this is Eric. I'll take that question. First, I'd say that our pipeline Our key FOSS opportunities continues to grow. Not going to put any exact revenue number on it, but we can tell you confidently that The number of opportunities we're seeing across the board is a large opportunity for us.

Speaker 2

And we have really total comprehensive solutions that we like to talk about. We're doing sampling. We're doing analysis for our customers. We're able to provide remediation, full remediation of sites and transportation and a full suite of disposal capabilities From treatment, treatment of groundwater, treatment of industrial water, we can obviously provide landfill solutions with a closed loop landfill of managing the leachate. And then finally, obviously, the incineration that we talked about.

Speaker 2

That's really a Phenomenal study that came out, great release by the DoD to lift the moratorium. So the opportunity for us We're optimistic. The team has seen a lot of opportunities from all of our customers in a number of different areas. And we think our total waste solution is unmatched in the industry and it really continues to look like a good prospect for us.

Speaker 6

I appreciate that. Hopefully, you can put some numbers around it over time, but that sounds upbeat. You also made reference, I think yes, go ahead.

Speaker 3

It's pretty small this year. As Eric said in prepared remarks, the EPA has to kind of put more kind of guardrails as to how clean is clean. But it's a $40,000,000 $50,000,000 opportunity this year. It's not a needle mover per se.

Speaker 6

Yes. Appreciate that. And then you made reference to some of the IIJA funding starting to come through. That was, I think, $21,000,000,000 right, of appropriated money for environmental remediation. So just how much of that do you think Clean Harbors potentially captures and kind of over what time frame?

Speaker 6

I mean, we see some of the funding announcements already coming out of EPA, but I just want to understand how this impacts kind of the outlook for the year and maybe over a multiyear timeframe?

Speaker 2

Yes. No, I think that projection of the $20,000,000,000 of spending was over the course of 5 years. That a large part of that is Go get for us to be able to perform the remediation services and be able to feed volume into our landfills and our incinerators depending on the Characteristics. So, a good chunk of that $20,000,000,000 $21,000,000,000 is go get for us, go get for the industry and we're well positioned with all of the assets Great infrastructure that we have to be able to participate in a substantial part of that.

Speaker 6

Great. Thanks very much for taking the questions.

Speaker 3

All right. You too. Thanks, Noah.

Operator

Our next question comes from the line of Tyler Brown with Raymond James. Please proceed with your question.

Speaker 7

Hey, good morning guys.

Speaker 3

Good morning. Hey, Tyler.

Speaker 7

Hey, Eric Gee. Pricing and incineration, it was awfully good. And if I'm not mistaken, it was on a really tough comp. So can you just talk about the outlook in terms of price and volume in that market? Because we have heard about some weakness in the chem markets, Industrial markets aren't exactly the best.

Speaker 7

So maybe the backlog is smoothing that out, but can you just give us any color there?

Speaker 2

Yes, that's right, Tyler. Our price and mix continues to be about fifty-fifty. We have opportunity in the backlog of that incineration that we built up throughout the second quarter to bring that Into the Q3 and Q4 as our incineration utilization improves. But we're continuing to see we're not seeing any slowing of Chemical pricing or no give the backsies there. We're continue to be on the trend of Increasing our pricing, taking advantage of the difficult to handle waste streams, feeding a tremendous amount of volume Into our incinerators of drums and direct burn streams and we've also been leveraging our TSDF to handle a lot more volume And prep it for our incinerators.

Speaker 2

So that's helping us well, but price mix continues to be in that fifty-fifty area and we continue to be bullish about it.

Speaker 7

Okay, perfect. And then it looks like ES margins were up. I think you guys called it out 140 basis points year over year. I mean that's very solid, Particularly given that you're now starting to lap tougher comps. But if we were to take a walk and bridge That 140 basis points, what were the key drivers in there?

Speaker 7

Because I would assume that Thompson was actually dilutive to margins, but then maybe fuel was a good guy. Just Any thoughts on kind of how you got there? And then was it more driven by pricing or cost control

Speaker 8

or a little bit of both?

Speaker 2

Tyler, I'll start and then I'm sure my colleagues here will add on. The 140 basis This is driven by a number of things. You're correct in your assumption about industrial, a little bit dilutive on that. But we have We're steadfast about driving price in every single one of our lines of business for labor, equipment, materials and Also taking costs out of the business, we're focused on that. As mentioned in our discussion earlier in the call, we have a target of $100,000,000 of cost And we're executing on that to continue to expand the margins.

Speaker 2

We also are in the process of putting in a new system That's going to help support our industrial services platform to squeeze more margin out of that business and get more billable Hours on worksheets and get paid better for our services there. And all those things have culminated together and what we saw in Q2, what we continue to see and We continue to be again bullish on the outlook as we execute on the cost programs, execute on pricing, efficiencies within our business, leverage our labor network, which I think is really powerful. The team has done A great job of sharing resources. That industrial team from Thompson has played well into our core legacy industrial services to help So the sharing of assets, the sharing of people, those have all contributed to that increase.

Speaker 4

And I think, Tyler, just to add on to some of Eric's comments, this is Eric D. Again, I think you're right, Thompson, Probably a little anti dilutive to that, but if I think about the HydroChem acquisition that we did and continue to integrate that into the platform, I think this year we're really seeing some Better margins out of that business from a lot of the cost cutting and labor management that Eric mentioned. So better use of internal folks rather than third parties, Reduction in rental costs that will continue to drive through the business, but certainly that acquisition is proving to have been a good one for us at this point. And certainly the synergies from that are contributing to the margin growth in ES as well.

Speaker 3

Okay. The only thing I'd add, Eric said Eric said it well. The only thing I'd add is that the other thing that's happening is turnover is down. Direct labor turnover is down 200 basis points from the beginning of the year and 500 basis points year over year. And that investment we made in people And in our organization, I think is a material impact on our margins because those that turnover cost us a lot of money And that turnover coming down because of the investments we made in benefits and people is starting to really pay some dividends, something we're really proud of.

Speaker 7

Yes. And just my last one here. So I think you were at 26% in ES and I get it, this is seasonally a strong quarter. But I think that was kind of the best since 2012 when you didn't have as much lower margin field and industrial service work. So if we were to Dream the dream.

Speaker 7

I mean, why couldn't this business be a consistent 30% or a 30 plus percent margin business longer term? Thanks.

Speaker 2

Yes, Tyler. We're we

Speaker 3

think it can be.

Speaker 2

We're going to continue to execute on all the programs across our businesses With the market positions that we have in industrial and field and large and small customers Safety Clean Environmental and Small and Clean Harbors on the Large, we will continue to execute and drive towards that 30% and we see that in our path.

Speaker 7

Perfect. Thanks guys.

Speaker 2

Thank you.

Operator

Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your

Speaker 9

Hi, good morning, everyone.

Speaker 3

Hi, Gary. I'm wondering if

Speaker 9

we could hi. I'm wondering if we could just talk about The free cash flow cadence over the course of this year and how to think about conceptually, 24, obviously, An environment where equipment availability has been all over the map, etcetera. How should we think about the puts and takes around the free cash flow bridge 24 'twenty three outside of earnings and ultimately any opportunities either from a timing standpoint or Free cash flow improvement standpoint to 24 versus 23 compared to what we're seeing this year? Thanks.

Speaker 4

Yes, Jerry, it's Eric Dugas. I'll start here. And I think the first thing I would point out to is really strong Free cash flow so far this year, we're nearly $50,000,000 ahead of where we were last year despite some real headwinds with kind of cash taxes We paid on last year's profitable earnings and also the increased CapEx that we pointed to, some of which are a lot of which is Related to the Nebraska project. So really happy this year with where we are. I think we're well on our way to hitting the target for next year.

Speaker 4

When I think about 2024 and puts and takes, obviously, we'll have a little bit less I think being spent on the Kimball incinerator. So that's why we always like to talk about CapEx excluding that number, but we continue to go up. But long term, I think we are Kind of targeting net free cash flow conversion kind of in the low 40% range and above is when you look at our long term targets And really think with the business and the margin expansion we're seeing and many of the other long term tailwinds that we've talked about today, That's kind of where we look to long term.

Speaker 9

Okay. And separately, Safety Kleen Sustainability Solutions had pretty good margin performance sequentially, a good two points better than normal seasonality. It looks like that business might be bottoming and turning the corner just based on your performance there. Can you just talk about is that Consistent with what you're seeing, I know you took down the outlook, but it feels like sequentially, things are stabilizing. And if that continues, EBITDA for the business should be up 3Q versus 2Q.

Speaker 9

Thanks.

Speaker 3

Yes. And I think that you're right, Jerry. We did make a large shift From PFO to CFO, in the quarter, which had a dramatic impact on our profitability. And I think that really is adjusted to the team and their ability to drive That and still collect a record amount of gallons. So really kind of a great quarter by them.

Speaker 3

I'm hopeful that we're there. I certainly as we talked about it earlier, The model has base oil prices stabilizing and if it raises then probably a good guide to us in the back half of the year.

Speaker 9

And Mike, just given the complexity of transitioning from paying people to charging them, Was the exit rate significantly more positive than the full quarter average just because these types of initiatives, I think, take time to implement? Is that a fair characterization?

Speaker 3

They absolutely did. They started with they started in a we started the quarter in a paper oil and we ended in the kind of mid teens charge for oil at the end of the quarter.

Speaker 9

Super. Thank you.

Operator

Our next question comes from the line of David Manthey with Baird.

Speaker 8

Industrial exposure, has Clean Harbors disaggregated from trends in industrial end markets? And the reason I ask is you got 2.5 years of decelerating ISMs. It's been below 50 PMI for the last 9 months now, but yet you continue to see excellent trends to today and into the second half in your ES business. Just thoughts on cyclicality of the of the business today versus what you had in the past?

Speaker 3

Yes, Dave, this is Mike. I think that There are definitely I see your concern where market factor tend to go down. I think there's more complex waste streams coming into the network, which results in us being able to charge more and handle them. And so not all industrial production is weighted equally. I would say that The advent of electric battery manufacturing and other types of complex chemicals Around air conditioning and other types of chemicals in the marketplace that are really driving kind of more complex waste streams into our network.

Speaker 3

As such being able to counterbalance any industrial production trends you may be seeing in the macro environment.

Speaker 8

Yes, that's great to hear. Thanks for that, Mike. And second, on the PFAS outlook, I guess the EPA is signaling that they may not mandate enforcement against passive receivers of PFAS and it sounded like that's landfills and airports and municipal water systems and a lot of potential parties here. Are the enforceable situations and the self policing that will go on in this industry, are those enough To realize the opportunity that you see in front of you today?

Speaker 2

Yes. I'll answer that, Dave. Eric here. Right. The enforcement putting that aside, what I think the opportunity is, is regardless of past enforcement, there is a treatment That needs to happen, treatment and remediation.

Speaker 2

So that's where the opportunity is. And they're going to have lower discharge standards Water treatment and industrial streams and groundwater streams and obviously the remediation of the sites is going to fuel Material into our incinerators and into our landfills. So that's really where we see the opportunity.

Speaker 8

All right. Thanks very much guys.

Speaker 4

Thank you. Thanks,

Operator

Our next question comes from the line of Tobey Sommer with Truist. Please proceed with your question.

Speaker 10

Hey, good morning. This is Jasper Bibb on for Tobey. Industrial Services revenue was up 11% with Thompson. Longer term, how will you address the pricing and margin outlook for that business as you

Speaker 2

Yes, Josh, Eric here. We continue to drive price on a pretty set cadence with All of our customers in the industrial business. And as mentioned earlier, we also have a new platform that we're rolling out to Combine the systems for both autonomous industrial and those systems will really help us Deliver electronic worksheets that allow us to capture any leakage that we might be able to see across the business. So that combined with the efficiencies that we're realizing in the business by leveraging the combined headcount, leveraging the rolling stock, The assets, the people together, working together is all contributing to the expansion, the margin expansion of that business and will continue. So we're bullish about increasing the margins as we go forward by combining the businesses and getting more stickier and cross selling.

Speaker 2

There was a couple of new lines of business that we acquired through the Thompson acquisition that we're selling to our legacy HPC customers. So that's Powerful as well. And that wholesale team from the Thompson Industrial Group also recognizes the environmental lines of business that we can Cross sell into the customers there. So all those things combined contribute to improving our margins, improving our growth and stickiness with those customers across the board.

Speaker 10

Thanks. That makes sense. And then with respect to the SKSS guide, just to clarify, do you think you've now Fully adjusted your charge for oil there to align with demand conditions or would you expect to have to continue metering up those charges based on what you saw in July

Speaker 3

Yes, Josh, I think we have set ourselves up for a decent back half of the year. We're assuming pricing stays In our model, in our guidance, pricing stays solid and our yield and low pricing stays the same. So we're not so if pricing goes down, we'll adjust that yield and low pricing Like we did in the first half of the year. So I think we've done all the actions that we need to do, in my opinion, to kind of deliver on the numbers that are in front of us, Assuming stable base oil price.

Speaker 10

Got it. Last question for me on The DoD authorization of incineration for PFOS, just on timing, do you have any sense of a timeline for When federal RFPs for PFOS disposal contracts might materialize or is that, I guess, more dependent on what comes out from the EPA?

Speaker 2

We think, Josh, that we'll see that over the next year or 2, the opportunities with DoD. We're already working collectively with them in a number of different sites, number of different opportunities, and we think that will continue to grow here.

Speaker 10

Okay, great. Thanks for taking my questions.

Speaker 2

Thank you.

Operator

Our next question comes from the line Jim Ricchiuti with Needham, please proceed with your question.

Speaker 11

Thank you. How does the DoD Announcement affect conversations you may be having in the market with commercial customers, Other government bodies?

Speaker 2

Jim, I would say that there are there's strong set of customers that were involved in manufacturing into some of these PFAS compounds that I think They know well that incineration, thermal temperature incineration is really a preferred method here. And I think that resonates Well with the DoD, our experience and our interactions with chemical customers and DoD Based on the concentration in DoD of the AFFF that has shown contamination, thermal temperature, high temperature, recurrence, incineration, It seems to be a preferred method there in those high concentrations. And so we think that's an opportunity for us. That's why we really going back in time, We wanted to prove out through our testing that our incinerators is a great technology To effectively with 6 nines destroy that contamination and we think that there is Good audience, a solid audience that recognizes that, that is the best disposal method for highly concentrated contamination.

Speaker 3

I would add, Jim, that the DoD lifting of the moratorium kind of validated our study. And so I really believe that What it means in the back half of the year in 2024, as Eric said in his prepared remarks to put a finger on that, but it really just continues to Substantiate kind of our long term business model that incineration is a safe and effective way to handle these forever compounds.

Speaker 11

Got it. That's what I was driving at. And just with respect I may have missed it. Did you provide the Thompson contribution in the quarter?

Speaker 4

In the quarter, we didn't provide it mid single digit millions.

Speaker 11

Got it. And just as we think about the second half of the year, on the ES side, you alluded to some of The benefits you're seeing some improvement in turnover,

Operator

how much more

Speaker 11

of a tailwind Is pricing going to be in the second half versus the first half? And then just related to that, on The cost side, have you seen some moderation at all in other cost pressures in the business?

Speaker 2

Yes, Jim, we've certainly seen moderation really on the salary side across the workforce that's moderating. Our pricing efforts will continue to outpace inflation. We continue to execute well on that. So Well, we have a comprehensive program across all of our business units to continue to drive price Along with the efforts that as mentioned earlier on taking costs out of the business and continuing to get more efficient. So We will continue to execute on that plan.

Speaker 9

Thank you.

Speaker 3

Thank you. Thanks, Tim.

Operator

Thank you. Mr. Gersenberg, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Speaker 2

Thanks everyone for joining us today. Management will be participating in a number of IR events in the coming months. We look forward to interacting with you further at some of those events and please enjoy the rest of your summer. Stay cool. Thank you.

Operator

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

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Key Takeaways

  • Environmental Services (ES) segment posted Q2 revenue growth of 7% and 140 bps margin expansion—its 7th consecutive quarter of growth—backed by pricing, volume gains, productivity programs and a record safety TRIR of 0.68.
  • New U.S. DoD guidance lifting the PFAS incineration moratorium validates Clean Harbors’ third-party study showing six-nines PFAS destruction, positioning the company for future remediation work once EPA guidelines are finalized.
  • Safety-Kleen Sustainable Solutions (SKSS) revenue declined 15% and adjusted EBITDA fell 45% in Q2 amid weak base oil pricing, prompting a shift from pay-for-oil to charge-for-oil pricing, record collections of 64 million gallons and strong plant output.
  • Capital allocation remains focused on organic growth and bolt-on M&A, including a state-of-the-art Nebraska incinerator on budget for early 2025, plus strategic acquisitions like Thompson and a $10 million container-leasing business.
  • Clean Harbors reaffirmed full-year 2023 targets of $1.02 billion–$1.06 billion in adjusted EBITDA (ES +15%–17%, SKSS down 35%–40%) and $305 million–$345 million in adjusted free cash flow, supported by Q2 operating cash of $207.6 million and net leverage near 2×.
AI Generated. May Contain Errors.
Earnings Conference Call
Clean Harbors Q2 2023
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