Clean Harbors Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 1, 2024

There are 11 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the Clean Harbors First Quarter 2024 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 turn the floor over to your host, Michael McDonald, General Counsel for Clean Harbors.

Operator

Sir, the floor is yours.

Speaker 1

Thank you, Christine, and good morning, everyone. With me on today's call are our Co Chief Executive Officers, Eric Rosenberg and Mike Battles and our EVP and Chief Financial Officer, Eric Douglass 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 are considered forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Participants are cautioned not to place undue reliance on these statements, which reflect management's opinions only as of today, May 1, 2024.

Speaker 1

Information on potential factors and risks that could affect our results is included in our SEC filings. The company undertakes no obligation to revise or publicly release the results of any revisions of 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.

Speaker 1

Let me turn the call over to Eric Burstenberg to start. Eric? Thanks, Michael. Good morning, everyone, and thank you for joining us. Before we get into our prepared remarks, I want to take a moment to recognize our 23,000 strong Clean and Harvest team for their efforts in Q1.

Speaker 1

Thank you for your focus and dedication to safely delivering on our commitments to customers and the communities we serve. I also wanted to welcome the hepico and Noble teams to Clean Harbors. We look forward to your leadership and insight as we continue to set the standard for our industry. I also wanted to highlight our safety results for Q1, not a financial metric, but in our view, the most important metric. Our total recordable incident rate or TRIR was 0.69 per quarter, which gets us off to a good start to the year.

Speaker 1

Starting on Slide 3, we opened the year with an even stronger than expected Q1 performance as we exceeded the guidance we provided on our year end earnings call. Our 5% top line growth drove a 7% increase in adjusted EBITDA with margins improving year over year. Robust demand continues across our Environmental Services segment. All of our ES Businesses, Technical Services, Safety Kleen Environmental, Industrial Services and Field Services delivered better than expected growth in the quarter. Volumes coming into our disposal and recycling network continue to increase.

Speaker 1

Our ES segment grew both organically and through strategic M and A from EPICO. Within SKSS, which Mike will cover in more detail, lubricant pricing was soft until the very end of the quarter. Our corporate segment was up year over year due to compensation, acquisitions and professional fees. Turning to Environmental Services on Slide 4. Segment revenue increased 10% with 2 thirds driven by organic growth from volumes and pricing and a third from the acquisitions of Thompson and HEPAKO.

Speaker 1

Adjusted EBITDA increased 16%, resulting in margin expansion of 130 basis points from the Q1 of 2023. Q1 represented our 10th consecutive quarter of year over year adjusted EBITDA growth in this segment and the highest Q1 adjusted EBITDA margin for the ES in company's history. Our technical services business was the primary contributor to ES top line growth, posting a revenue increase of 11%. A record level of Q1 drum volumes flowed throughout our network, which also helped drive the record deferred revenue you see on our balance sheet. As a result of heavy Q1 maintenance schedule and weather disruptions in January, which we noted on our year end call, incineration utilization was 79% in the quarter, in line with our expectations.

Speaker 1

Average incineration pricing increased 6% in the quarter, thanks to mix and pricing. Despite all the turnaround time we've had in the early part of 2024, we still expect that our incinerator should deliver mid to high 80s utilization for the full year. Although landfill was down modestly year over year, healthy drum volumes and base business drove a 16% increase in average price per ton. As with our incinerators, landfill should deliver a very good quarter in 2024 given the market conditions we see today. Those favorable conditions should also support the other 100 plus permanent hazardous waste management facilities we maintain in our network.

Speaker 1

Safety Kleen Environmental Services generated another quarter of record revenue growth climbing 9% largely on the strength of containerized waste and other core services. Field service revenue was up 10% in Q1, driven by consistent base business, ER events and high employee utilization. The field service results included in the 1st week of contributions from Pepco, which we acquired towards the end of March. Early returns on that acquisition have us very encouraged about its future potential. Industrial service revenue grew 7% in the quarter, largely from the addition of Thompson as that group continues to focus on higher margin work and cost controls.

Speaker 1

Overall, Lee has produced an excellent start to 2024 in Q1. With that, let me turn things over to Mike. Mike?

Speaker 2

Thanks, Eric, and good morning. Turning to SKSS on Slide 5, the year began with a challenging demand environment for both base oil and lubricants, which led to lower pricing, particularly for our non contracted volume sold in the spot market. Our volumes produced and sold were similar to the prior year. So it really was the pricing environment that impacted us, which you can see in the year over year adjusted EBITDA comparison. The weakness in pricing was partially offset by the shift we had completed to a charge oil collection model versus the pay for oil average we had a year ago in our waste oil collection services.

Speaker 2

We gathered 55,000,000 gallons of waste oil as we aggressively manage our spread to gather feedstock at the best price possible. Despite the difficult Q1, we're encouraged by more recent trends. Waste oil demand has begun to recover, leading to a rising market prices as we head into the balance of the year. In Q1, we increased our blended sales volume by 36% as we focus on more value added products. Blended sales, where pricing tends to be less volatile than base oil, accounted for 21% of our total volumes sold, up from 15% a year ago.

Speaker 2

Another program, which will insist in both the stability and profitability of this segment is our Group III base oil project. We now have dedicated 1 of our smaller re refineries to full time Group 3 production. We are enthusiastic about the long term potential for this initiative as we move to open more Group 3 production in the coming quarters. And lastly, we have been hard at work in recent years to find the ideal partner that recognizes the value of our Clean Plus base oil and lower carbon footprint it carries. We wanted to align with someone who has a brand recognition to meaningfully impact the lubricants market.

Speaker 2

Turning to Slide 6, we are partnering with Castrol on the nationwide launch of More Circular, a lower carbon footprint offering. This is exciting and innovative program and we're thrilled to work alongside with the industry leading brands to bring it to their customers. Under the terms of this multi year agreement, Castrol will be responsible for selling this sustainable product offering by using a considerable marketing muscle to drive its success. Safety Kleen will be responsible for the collection of waste oil from Castrol customers in the program. We will also supply our base oil to Castrol to include in their more circular lubricants.

Speaker 2

We see this arrangement as a strong validation of our high quality sustainable base oil given the recognition of Castrol's lubricants and brand. This program evolved following a series of highly successful market trials and will be officially launched later this month at a key industry expo. We are thrilled to have Castrol's endorsement by partnering with us on their closed their own closed loop solution. We have said that as EV transition plays out we said that as the EV Denderson plays out over the next several decades, we see our green base oil as an ideal bridge for this market. It offers an opportunity for companies, particularly those with large vehicle fleets to immediately lower their carbon footprint.

Speaker 2

We look forward to updating you on this promising program in the quarters ahead. Turning to Slide 7, Eric and I along with the entire executive team are laser focused on our capital allocation strategy. We are now in the 2nd year of Vision 2027, our 5 year growth plan that relies on a mix of organic growth and acquisitions. As I outlined on our last call and I believe it bears repeating, the foundation of the strategy is to drive margin improvement every year through pricing and productivity gains and by achieving economies of scale on not only a highly leverageable network of permanent facilities and unique assets, but also a highly trained personnel who provide our customers with increased value from our services. This will continue to lead to increasing cash flow generation and long term shareholder value creation.

Speaker 2

The HEPAKO acquisition with a headline M and A transaction in Q1, we also recently completed an attractive bolt on deal with the acquisition of Noble Oil to support our collection footprint in the mid Atlantic market and add more re refining capacity. We continue to evaluate other potential transactions and see a healthy pipeline of candidates. We expect to remain active with acquisitions as which remains which remains on track to open commercially in Q4. Suffice to say, we are eager to bring this $200,000,000 investment online as that capacity is much needed the market based on many trends from reshoring to new regulations that's PFAS to government infrastructure spending. Adding this permitted scarce asset will create another long term competitive advantage for Clean Harbors.

Speaker 2

On our last call, we detailed the planned $20,000,000 expansion of our Baltimore facility to create a regional hub with manufacturing capabilities. We completed the purchase in Q1 and we'll be investing in and upgrading the site over the course of the year with material savings to be achieved in 2025. Let me conclude my remarks by emphasizing how bullish we are on our growth prospects in 2024. Favorable market dynamics and the current economy should support our continued momentum. We have a clear line of sight across multiple businesses that should enable us to achieve our profitable goal plans for this year.

Speaker 2

Demand for our services continue to accelerate as evidenced by Eric's mention of our record deferred revenue and strong pipeline of products. In addition, our conversations with customers about their future needs and the opening of the Kimball incinerator reinforces our confidence in the ES segment. For SKSS, with all the initiatives highlighted earlier, several of which had great multiyear potential, we expect to return that segment to more stable profitable growth in 2024. Overall, we have much to be excited about in both our operating segments this year. With that, let me turn it over to our CFO, Eric Dubious.

Speaker 2

Thank you, Mike, and good morning, everyone.

Speaker 3

Turning to the income statement on Slide 9. We started off the year on a strong note with another great performance by the ES segment. The positive demand trends that have underpinned 3 straight years of healthy revenue growth in this segment continued in Q1 as revenues across all four businesses in Keyes were up from the prior year. Adjusted EBITDA of $230,000,000 was above the expectations we provided on our Q4 call and up $15,000,000 from a year ago. Our adjusted EBITDA margin in the quarter was 16.7%, up 20 basis points year on year and driven by the ES segment.

Speaker 3

Gross margin in the quarter was 29.5%, an increase of 80 basis points from a year ago. Within gross margin, we are seeing the benefit of our continued focus on pricing, greater productivity and operational efficiencies. SG and A expense as a percentage of revenue was 13.2% in Q1, which is slightly higher than the prior year's quarter. Some of that increase was acquisition related as we absorbed some initial SG and A costs and incurred some incremental transaction related severance costs as well as higher professional fees. We expect this percentage to improve in the upcoming quarters as we continue to manage SG and A headcount and further integrate the HEPCO and Noble Oil acquisition.

Speaker 3

For the full year 2024, we anticipate our SG and A expense as a percentage of revenue to be in the mid-twelve percent range, which is consistent with prior year. Depreciation and amortization in Q1 came in at $95,000,000 up from a year ago due to our acquisitions. For 2024, we now expect depreciation and amortization in the range of $390,000,000 to $400,000,000 Income from operations in Q1 was approximately $125,000,000 up slightly from the prior year. Q1 net income was $69,800,000 resulting in an earnings per share of $1.29 Turning to the balance sheet highlights on Slide 10. Cash and short term marketable securities at quarter end were $443,000,000 In connection with the Heppaco and Noble transactions, we added 500,000,000 in incremental debt to our term loan to finance those deals.

Speaker 3

Even with those additional borrowings, our balance sheet remains strong. We ended Q1 with total debt of $2,800,000,000 a net debt to EBITDA ratio of 2.4 times continue to have no significant debt amounts coming due until 2027. Our weighted average pre tax cost of debt at quarter end was 5.7 percent. Turning to cash flows on Slide 11. Cash provided from operations in Q1 was 19,000,000 reflecting our seasonally weakest quarter.

Speaker 3

CapEx net of disposals was $137,000,000 up significantly from prior year due to investments in our facilities network, including approximately $20,000,000 for our Kimball expansion and $15,000,000 for our Baltimore facility. In the quarter, adjusted free cash flow was a negative $118,000,000 which was in line with our expectations. In addition to CapEx spend, this total reflects the timing of incentive comp payments, interest payments and working capital. For the full year 2024, we now expect our net CapEx to be in the range of $400,000,000 to 430,000,000 dollars This range includes the new additions of HEPAKO and Noble Oil plus approximately $65,000,000 to complete the construction of our Kimball incinerator and approximately $20,000,000 for the purchase and expansion of the Baltimore facility. During Q1, we bought back approximately 7,000 shares of stock at a total cost of $5,000,000 or an average price of approximately $183 a share.

Speaker 3

At March 31, we had $549,000,000 remaining in our repurchase program. Moving to Slide 12. Based on our Q1 results, current market conditions and our recent acquisitions, we are raising our 2024 adjusted EBITDA to a range of $1,100,000,000 to $1,150,000,000 with a midpoint of 1,125,000,000 dollars This guidance assumes $30,000,000 of contribution from HEPLACO this year and approximately $5,000,000 from Noble Oil. Looking at our annual guidance from a quarterly perspective, we are expecting Q2 adjusted EBITDA growth of 7% to 8% versus prior year. We expect ES to continue its upward trajectory and SKSS should benefit from the rising base oil pricing environment to deliver growth versus prior year.

Speaker 3

We now expect this revised full year 2024 adjusted EBITDA guidance to translate to our segments as follows. In Environmental Services, we expect adjusted EBITDA in 2024 at the midpoint of our guidance to increase 10% to 12% for 2023. Leveraging our network of assets, volume growth in our core lines of business, pricing strategies, the addition of HEPCO and multiple cost mitigation initiatives will drive this result. For SKSS, we expect full year 2024 adjusted EBITDA at the midpoint of our guidance to increase 6% to 8% from 2023. Given current market conditions and where we are today, we expect pricing to improve here in Q2 and into the back half.

Speaker 3

The promising initiatives that Mike outlined give us confidence that we can achieve this anticipated level of growth despite the slow start of the year. In our corporate segment, at the midpoint of our guide, we expect negative adjusted EBITDA results to be 8% to 9% to be up 8% to 9% this year compared to 2023. More than half of that increase is additional costs from the acquired companies and related severance and integration costs. Looking at it as a percentage of revenue, we expect corporate segment results to be flat to slightly down from prior year. For adjusted free cash flow, we continue to expect a range of $340,000,000 to 400,000,000 dollars 2024 or a midpoint of $370,000,000 If you take that midpoint and add back the Kimball and Baltimore spend, you arrive at adjusted free cash flow of $455,000,000 which is greater than 40% of our adjusted EBITDA expectations at the midpoint.

Speaker 3

In summary, Q1 was a great start to the year. We expect the favorable demand environment to support strong profitable growth throughout the remainder of this year. The ES segment has a healthy backlog of waste, a robust project pipeline including DFAS opportunities and our services business all have good momentum. And we expect our SKSS segment to begin posting year over year growth this year. Overall, we look forward to the remainder of this year and continue to execute against our longer term vision 2027 goals.

Speaker 3

And with that, Christine, please open the call for questions.

Operator

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

Speaker 4

Good morning and well done given this is normally a seasonal tough quarter. If we think about in ES, you said it in the comments, but I want to clarify, you absolutely had volume growth where last year we were really looking at most of the growth is price driven and some M and A. There is a clear volume improving volume trend. And then on the price side, you're managing a positive price cost spread. So you're driving operating leverage there as well.

Speaker 4

Is that a correct observation?

Speaker 1

Absolutely, Michael. This is Derek. Our volumes have been very strong to start 2024 here, particularly in the drum growth area across our network of TSDFs, incinerators, so real strong volume growth across the board. Price efforts, as you know, we continue to have a very disciplined pricing approach across the board and we see that continuing to outpace inflation, continue a lot of focus there.

Speaker 4

And then on the billable hour segments IS and field services, can you talk about what your billable hour utilization look like?

Speaker 2

Yes, Michael, this is first of all, Michael, congratulations on your new role. We're all excited for you. We're going to miss you. We're all excited for you for your new role in the NWRI, so congratulations. The answer to your question on utilization, we have been able to do a good job of utilizing people.

Speaker 2

We've got some good data and out of the system to really drive utilization for both FS and IS. And I think that what's really been driving that productivity is also we've been doing a good job with voluntary turnover. Our turnover is down 400 basis points year over year and having more experienced people in those roles drive productivity, less training time, less startup time and that's really been helping us with utilization, which is again a key metric that we measure across the organization, especially in those high labor hours like in IS and FS.

Speaker 1

Just to add one other point, Michael, to that is that we really have seen a great job by our teams cross selling and driving utilization of people by sharing people and assets across branch types within our network. So that's a real positive trend for the team working together out there to service our customer needs.

Speaker 4

And just to tease that a little bit, given the performance, it feels like you ought to be in the mid to upper 80s and billable hour utilization, which is a nice place to be in that type of business?

Speaker 3

Absolutely. That's where it is. That's where it is.

Speaker 4

Yes. Okay. And then with regards to PFAS, we all know and I think we all believe there's a great opportunity coming and you have an underlying base level of activity. But one of the things we still need just to manage everybody's expectation is a remediation MCL. We've got a drinking water, but that's not really your niche, even though you are doing drinking water at Naval Base Pearl.

Speaker 4

We really need a remediation MCL. Is that correct in understanding what creates the real momentum eventually?

Speaker 1

Yes. No doubt about it, Michael. But I continue to reiterate that we really are in the drinking water. We're seeing a lot of opportunities there. As you know from our total focus here across the board, we're really focused on sampling, analysis, baseline, whether it be a remediation event, whether it be drinking water, whether it be industrial and giving our customers that baseline so that we can help them make strategic decisions on the way forward.

Speaker 1

Certainly, we're we've mentioned many times that our pipeline continues to grow and we're the total solutions provider with our network of incinerators and our landfills and our wastewater treatment plants and our team remediation that's out there treating them drinking in industrial water. So the pipeline, we see strong. Our team is out there. We're also working with EPA directly on our aragonite incinerator where we're doing updated testing. There's been more parameters that have been put in place on a new method for background incineration, throughput and efficiency and we've we're working with them to redo and upgrade that test to show that to continue to show that high temperature recra thermal incineration is the preferred method.

Speaker 1

So your point is dead on with remediation. We need that standard. However, we continue to see bullish opportunities and pipeline growing there in many different areas.

Speaker 4

And just to close the loop on your comment about the testing, you feel really good about being able to meet OTM50 where you hit the ball out of the park on OTM45, but there's nothing about OTM-fifty that you say preclude you from proving to EVA thermal is the right answer?

Speaker 1

Highly, highly confident. Not a problem.

Speaker 4

And would you use the same consulting group to help do that test since they've got an experience?

Speaker 1

Yes, absolutely. Absolutely. I think it's also important to note that we see more and more interest in cooperation with EPA on helping to make sure that the tests and the parameters and everything that we're doing there, they're supportive of. So good cooperation.

Speaker 4

All right. Well, thank you, Clean Harbors for the kind words. I do appreciate that and thank you for taking the questions.

Speaker 3

Thanks, Michael. All right, Michael. We'll see you Monday.

Operator

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

Speaker 5

Yes. Hi, good morning, everyone.

Speaker 3

Hi, Jerry. I'm wondering if

Speaker 5

we could just ask you to update us on your M and A pipeline today. Obviously, pretty active couple of quarters for you folks. Can you talk about what's the range of outcomes in terms of potential additional deal flow over the next 12 to 24 months based on your discussions?

Speaker 2

Yes, Jerry, this is Mike. I think that it's a pipeline remains really strong. And we closed 2 deals here, both the HEPCO transaction, which was pretty material, but also an acquisition in the oil space. And we look at a lot of deals in both parts of the business, 2 to 3 a week at least and we have discussions and a lot of them don't make the cut. So it's hard to kind of prove a negative on this call, but we do do a lot of these.

Speaker 2

It has to make strategic sense, it has to make financial sense. We kind of we have to measure that, but the pipeline remains strong on both businesses. Obviously, we're excited about the HEPAKO deal. I think that's going to turn out to be a home run. Noble also should be a really good deal.

Speaker 2

We're looking for acquisitions in that type of area. So pipeline is strong, very active. Our leverage is in pretty good shape. It would generate a fair amount of interest in our term loan we did for the connection with the EFCO transaction. I think more to come, very active.

Speaker 2

As we try to go after Vision 2027, we're going to generate a fair amount of free cash flow in the back half of the year and we want to put to work.

Speaker 5

Super. And then in terms of the marketing arrangement that you reach with Safety Kleen, can you expand a little bit about that? Where is the pricing point versus virgin base oil? Are we starting to see premium open up and what's the opportunity under the agreement for that premium to widen over time?

Speaker 2

Yes, I think that it's we don't give out financial details on our deal with Castrol. We're really excited about the opportunity. As I said in my prepared remarks, it validates sustainability of our base load. It immediately lowers our customers and their customers' carbon footprint. There's a lot of good value we're talking about going after large fleets for years and we partnered with CatFol They have the marketing and the sales muscle to go and penetrate those markets.

Speaker 2

And I think that it really is going to be a great partnership. And I do think that, overall, selling more contracted oil is at a better price than the spot market. So but we're not going to give financial details on this call.

Speaker 5

Okay. And in terms of the Industrial Services business, at the Analyst Day, we discussed pretty clean runway in terms of improving billable terms and driving higher contracted billable hours. Can you just update us on progress on that journey this year? How much of a contributor was that in the quarter? And where do we stand in terms of potential additional upside on continuing to improve those terms?

Speaker 1

Yes, Jerry. Our industrial team continues to do a solid job of placing more of our employees at a billable rates within the sites that we work on day in, day out. Large chemical plants, large refineries, building out our in site programs, the tools that we can provide from them, the automated tools, all that is in an effort to have more of our industrial teams day in, day out with high billable hours at our customer sites and the team is really focused on doing that and the results are showing that.

Speaker 5

So it was a meaningful driver in the quarter,

Speaker 2

Eric? It

Speaker 1

has. We've seen our utilization of our employees continue to improve year over year. That along with some of the things that we've been doing on a pricing side, better truck price improvement on our billable labor on-site has also been a key driver. The Thompson Industrial continues to work with our teams very well. And the teams working together, Thompson and our HBC on customer sites and growing our verticals has also shown up in our results.

Speaker 3

Okay. Thank you.

Speaker 2

You're welcome. Thanks, Jay.

Operator

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

Speaker 4

Hey, good morning. This is Jasper Bibbond for Tobey. Following up on the Environmental Services outperformance in the Q1 and the higher guide, would there be any way to, I guess, quantify the expected pricing outperformance relative to your initial assumptions?

Speaker 1

Yes. Across the board, we would say that about 50% to 60% is price and about 40% volume. And we're really focused on making sure price is ahead of inflation and our cost structure along with efficiencies improvements that we're seeing and volumes are robust as we mentioned second half of the year when we look to get our new kibble incinerator on the second half of the year when we look to get our new Kimbell incinerator on board here.

Speaker 3

And so, Jeff, this is Eric. Just adding on to that comment a little bit. I would say that in terms of pricing, I think it was in line with our expectations in terms of what we see in the marketplace and what we're able to do against our goals. I think volume became a larger piece of the pie here in Q1 because of the significant growth that we're seeing on drum counts that Eric Christenberg mentioned earlier. So the sixty-forty pricing, we probably came into the quarter thinking would be a little bit higher on the pricing side of that equation, but volumes have just been really strong, not just with drums, but also you probably noticed the growth in field services as well as SK Brands.

Speaker 3

Those businesses both grew at about 10% this quarter. So volume is certainly a key component this quarter as well.

Speaker 4

Yes, that's helpful. And then you mentioned the improvement in base oil demand for quarter. I was just hoping you could maybe give a bit more color on what you've seen in April so far from a pricing and spread perspective?

Speaker 2

Yes, this is Mike. I think that we ended the quarter kind of on a good note. There were 2 posted price increases, not all of which will get into Q2, but a good chunk of them will. And I think that we have a big we have some growth from Q1 into Q2. And we see kind of summer driving season, the normal seasonality returning.

Speaker 2

And I think April so far is actually going to be a pretty good month in the oil business. That gives us a good running start into the quarter.

Speaker 4

Makes sense. Last one for me, just any change to the interest expense assumptions for the 2024 guide with the incremental borrowings in the quarter?

Speaker 2

No, I think we're still

Speaker 3

in line kind of with what we guided to. We did guide, I think, as we came to the quarter for some incremental debt. But that incremental debt, the $500,000,000 today, it's roughly at 7%. So I'll let you kind of do the math there. But when you think about overall cash flow for the year, some of the incremental cash that we'll see from acquisitions is being offset by the incremental interest as well as some capital investments that we always do with some of these things.

Speaker 3

And that's what's driving the flattish kind of free cash flow or flattish to what our guidance was in Q1. So, but again, as Mike said, really strong balance sheet. We have some moving parts in our debt portfolio coming up here and we'll continue to be very smart with we manage that. Yes.

Speaker 2

I think the team has done a good job of managing interest rate risk. It's only at 5.7% here in Q1 and the team has done a good job of getting good returns on their cash. So that's at 4% or 5%. So really the arbitrage or the incremental debt hasn't been too bad from the P and L.

Speaker 4

Got it. Thanks for taking the questions.

Speaker 2

Okay. Thank you.

Operator

Our next question comes from the line of James Ricchiuti with Needham. Please proceed with

Speaker 6

your question. Hi, good morning. Question on HEPAKO. I know it's early, but I'm just wondering how we should be thinking about the revenue synergies. It seems like there's some real good opportunity here.

Speaker 1

Yes, James. So Eric here, I'll begin. One thing that HEPCO has really brought to the table is their penetration in the rail vertical. They've had some great relationships with some of the largest railroads and have had a great team that responds to not only events, but ongoing services for the rail industry. That we're going to plan on building on that nationwide, so that we're a participant in all rail activities.

Speaker 1

So that's a great revenue synergy there. We also, have seen some great work with our teams working together across the customer base and sharing assets already. Out of the 40 different branches that HEPCO has brought to the table, There's about 22 of those that are in new markets for us, so that we can grow with the customer base there. The other 18 ish are working in conjunction with our teams at existing field service branches, sharing assets and people to grow our revenue base. So great opportunities there.

Speaker 1

They also brought to the table a wonderful national response call center that allows small spills in particular and servicing large trucking companies to have our network respond and internalize those throughout North America. So great opportunities in all three of those areas.

Speaker 2

Yes. So far, Jim, it really is a hand in glove. You really see a great partnership. And even in the we owned it for a week in the month of March, and we were already cross sharing resources across the network even in the 1st week of ownership, so which is just terrific.

Speaker 6

Got it. By the way, did you size the acquisition related severance expense that impacted SG and A? Or maybe could you size that?

Speaker 3

Yes. There were about $4,000,000 of severance and integration kind of running through corporate this quarter.

Speaker 6

Got it. And last question great. Thank you. Last question I had is just in light of the announcement with cash flow, and by the way, congratulations on that. I'm wondering is that spurring discussions?

Speaker 6

Are you in discussions potentially that you could talk to with other lubricant suppliers or will you just see how this plays out and hopefully others come on board?

Speaker 2

Yes. No, we just announced the partnership with CATTRO. We're going to work with CATTRO. We have we did some trials, did some pilots, great relationship. We're excited about working with Castrol.

Speaker 2

So we're going to drive that. They have this great brand, a very well respected brand in the industry and we're excited to work with them. And James, just

Speaker 1

to add to that, as Mike mentioned earlier, the great partnership there is really to help grow fleet sales. Castro brand has been in a number of large fleets already and that circular offer of collections and then putting our re refined base oil into those fleets under the Castro brand is the real opportunity there. So great stuff.

Speaker 6

Yes, makes sense. Good partner to have. Thank you. Congratulations.

Speaker 2

Thank you.

Operator

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

Speaker 7

Good morning, everyone. Thank you.

Speaker 1

Hi, David. Hi, David.

Speaker 7

First question, big picture. Should we assume that the guidance update here reflects the acquisitions being added and a little bit of 1Q outperformance and maybe some a little change in the corporate expense. But the message here, if I'm reading it right, confidence is high, but there's no real underlying change in your EBITDA expectations, just given that we're early in the year? Is that how we should read this guidance update?

Speaker 3

Hey, Dave, it's Eric Dugas. I think you're reading it into it the right way. Being early in the year, the guide is the raises, counting the new acquisitions, as we talked about and laid out in the prepared remarks, and then kind of the success we saw in Q1 and then maybe a little bit of uptick throughout the whole year. But given Q1, given history of wine and meat and beef, we set up some guidance that we feel very comfortable beating here going forward. But you're reading into it the exact right way.

Speaker 7

Okay. And on the Q1 turnarounds, were any of those unplanned and therefore offsetting expected work for later in this year? I think that you have sort of a once in every 5 year kind of turnaround at Deer Park coming up in the second quarter. And as it relates to that, just wondering if we should factor that into utilization or ES growth profitability in the second quarter specifically?

Speaker 1

Yes, David, a couple of things there. We did have a little bit a small amount of weather related activities that were associated with that deep freeze that occurred in January, but it was pretty small. Last year when we ran into those issues, we spent some nice capital on upgrading the weather protection across our El Dorado facility. So that prevented one of our trains from having to come down in those deep freeze. So we really saw the results of being able to stay online for the most part through that deep freeze.

Speaker 1

There is a little on one of the trains. In addition to that, we have planned turnarounds. We had a major outage that we did up at our Canadian incinerator at Sarnia that really drove most of the incremental down days that we had year over year in Q1. So that was planned activities. So by and large to answer your question, planned activities, we do have a large shutdown that we're working through at our Deer Park plant.

Speaker 1

As you mentioned, that's a 7, 8 year event that we're doing to retool some of the wastewater treatment activities down there that are on the back end of that plant. That is proceeding extremely well. Team is doing a good job. So we expected the 90% to 79% 80% that area and we still fully anticipate with the activities that we have underway that will be into that mid to high upper 80s for 2020 4.

Speaker 2

The only thing I'd add to that, Dave, is that to that point in Q2, the margins in ES, there won't be enough there'll be a good margin growth and there'll be material margin growth, but it won't be as substantive as what we see in Q1.

Speaker 7

Right. And just to follow on that train of thought here, my understanding is that the kiln right now in Deer Park isn't able to take certain materials because of the state of the kiln today. And I'm wondering going forward, could we see an uptick in value there given that you'll have that refreshed and ready to go?

Speaker 1

David, the Deer Park incineration units have very robust capabilities. They take a very diverse suite. That site along with our El Dorado site can take everything. So the it's not that we're adding additional capabilities. The capabilities there are as robust as any plant in our network and any plant in the industry for that matter.

Speaker 1

So, we do we handle a significant amount of the direct burn streams from that Gulf market on there. But by and large, very robust capabilities and that will continue.

Speaker 7

Got you. Thank you.

Speaker 2

Thanks, Dave.

Operator

Our next question comes from the line of Timna Tanners with Wolfe Research.

Speaker 8

I wanted to ask about the base oil outlook, what you're budgeting in your guidance given the comments about the uptick. It's so great to see some of the measures you're taking. We're hopeful to see, the negative comparisons behind, but just wanted a little bit more color on how you're thinking about the trajectory in your estimates forecast.

Speaker 2

Yes, this is Mike. Thanks for the question. We are going to have it's a pretty modest uptick. We try to be thoughtful as we've given guidance. Been burnt a little bit in the past by us.

Speaker 2

We were although the base oil prices posted pricing has gone up quite a bit over the past month or so. We've been pretty cautious and it's pretty modest increase in the pricing environment. We're hopeful to come back here 90 days from now and report a nice beat to that number. And to your point, put the negative Bs kind of behind us.

Speaker 8

Okay, fair. That's helpful. And then regarding capital allocation, what drives the pace of buybacks quarter to quarter? How do you think about that? How do you balance the pipeline for M and A with buybacks and any debt pay down, which you don't have to do it sounds like, but could do?

Speaker 8

Just any thoughts there.

Speaker 3

Yes, Timna, Eric here. When we think about buybacks, we're really opportunistic under that program. I think we utilize it when we think the share price is extremely undervalued and we also utilize it So it's not to dilute our current shareholders as new shares come into the market. So that's really the way we've handled that program in the last couple of years when each of last 2 years we bought back about $50,000,000 and that's accomplished those goals. So I would anticipate that we'll continue to use the program in that manner.

Speaker 3

When I think about overall capital allocation, as evidenced by what we did this quarter with the 2 acquisitions, acquisitions and accretive internal growth projects like Kimball and like the Baltimore project, those are where we'll put most of our capital and we'll continue that going forward. And that's always an option. We certainly like our debt portfolio from the perspective of we do have some debt where we can pay down if that's an attractive option for us. But certainly, I think acquisitions has and will continue to be the heavy hammer there when it comes to capital allocation.

Speaker 8

Okay. Helpful very much. Thank you.

Speaker 1

Thank you. Thank you.

Operator

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

Speaker 9

Hey, good morning. Thanks for taking the questions. First, you discussed it previously, just hoping to get a little bit more granular on the free cash flow guide walk, raising EBITDA 50,000,000 dollars operating cash flow, looks like about $10,000,000 or so. So it doesn't sound like that was interest expense, maybe some CapEx related to HEPCO. But just help us maybe think about the bridge there?

Speaker 3

Yes. I mean Noah, it's Eric. I think you'd start with the uptick in EBITDA from the acquisitions and the good Q1 growth. And then I think it was a reconcile from kind of EBITDA to free cash flow and the rationale for keeping free cash flow guide flat to what we said last quarter is really the incremental debt. So you've got based upon today's rates about $25,000,000 of incremental interest payments on the debt.

Speaker 3

And then as we know, when we buy these acquisitions, there's always some incremental CapEx. So there's probably another as you saw, we increased our capital expenditures this year by $10,000,000 So you've kind of got $35,000,000 there in our free cash flow guide that's incremental to last quarter. But keep in mind, I think when we look at certainly the 2 acquisitions, we have a little bit of synergies kind of built into the forecast, not much as we continue to integrate this business throughout the year. But as those synergies come, particularly with HEPLACO, we feel really, really good about the synergies having owned them for about a month now. Certainly from a free cash flow perspective, those things will become more accretive towards the end of the year and certainly on into 2025.

Speaker 9

Thanks for anticipating the synergies question. I think you had targeted $20,000,000 after year 1 and if you're not putting in much this year, obviously that could be upside. Okay. How do we think about Kimball ramping capacity and how we think about mix? Maybe we can sort of start with 4Q and then think about the plan for, call it, the first half of next year.

Speaker 1

Yes. Noah, Eric here. So we're excited to be on schedule to open Kimbell in Q3 and into Q4 of this year. Coming online, our focus will be again really around the drum volumes that are throughout our network that we've seen really substantial drum volumes increase year over year. So we'll have really a ramp up in Q4 and then into 2025, we would anticipate doing 20,000 tons, 25,000 tons to 30,000 tons through that unit, 2025 around that sweet spot of drums and also direct burns and lean water streams as we ramp up throughout the course of the year.

Speaker 9

Okay, terrific. And just to circle back on PFAS, Michael asked the questions around that opportunity. I guess just to simplify it for me, what impacts has the team seen as a result of some of these regulations? And I know there was some visibility to those coming, so not necessarily suggesting a spigot was open, but just talk about the impacts on the pipeline that you've seen now that we have some official regulations and the CERCLA designation?

Speaker 1

Yes. No, as we've said previously, are doing about $50,000,000 to $70,000,000 of PFOS related work throughout our network from all the different opportunities we see on our total PFOS solutions. Our total pipeline seems to be growing at about 15% to 20% each quarter as we go into 2025. So real strong pipeline growth. And I would say the pipeline growth is pretty diverse.

Speaker 1

It's looking at industrial water opportunities, drinking water opportunities, sampling and background analysis, but also remedial events. We do see activity where already customers are saying, hey, we want to plan a remediation because we have a construction event that we want to use that site for. We also see some opportunities across with AFFF change outs throughout different districts where regulations and the heightened awareness of all PFOS related is causing fire departments to want to have a plan where they or I'm sorry, different customers that they need to have a plan to change out their ALLF in their lives that need to be drained and recharged. So that disposal of existing ALLF is some of the opportunities that we see as well and how we might service that on a broad basis knowing that there are many areas that need that before they have an event. They need to make sure they put non PFOS related AFFF in their line.

Speaker 1

So that's it's really across the board where

Speaker 2

we're seeing opportunities. So Noah, just go back to Michael's question and your question. Obviously, new regulation, very important. How clean is clean? We've said that many, many times.

Speaker 2

But I don't think we're stopping nor our customers stopping in areas like AFFF and other areas where we know there's a high concentration of PFAS. We're doing we rolled out the total PFAS solution. We talked about that last quarter. We're doing a lot of training, a lot of marketing around that. We're getting kind of all our sales organization kind of educated on the benefits.

Speaker 2

It affects all our businesses. As Eric said, AFFF firefighting foam, whether it be soils, whether it be even field service clean out work, it's going to affect all different lines of our business as we continue to grow. And I do think that this has got the fact that we got the drinking water standards out there and they're getting more and more regulation around circular rules around this and we have that solution. It's very, very important for us and our customers to have a total obstruction solution and we have that today.

Speaker 9

Perfect. Thanks so much for the comprehensive answer.

Speaker 3

Thank you. Thanks,

Operator

Noel. Our next question comes from the line of Larry Solow with CJS Securities. Please proceed

Speaker 10

my questions have been answered. Noah stole my last couple there. I guess just coming back to the cadence on SKSS. It sounds like, obviously you're building in a pretty nice ramp. It looks like you almost have to get to like an average of like $50,000,000 a quarter to kind of get to the midpoint of the number.

Speaker 10

So do we is it kind of an ease second quarter a little bit up and then the back half of the year is really where you get the full impact of of these projects too and some of the ramp of the base oils, the blended I mean?

Speaker 2

Yes. You got it right, Larry. It's a pretty big jump from where we ended Q1 into Q2. I think that's better pricing, that's better production in our plants and a few other good things that are happening for us including Group 3 and our rollout. And so a bit of a beat in Q2, obviously a big beat in Q3 because of where we are versus the beat we added in Q3 and Q4.

Speaker 10

Right, got you. Okay. And then just on Kimball, on the CapEx, I think $65,000,000 this year, does that is that basically complete the majority of the bulk of the spending and then going forward just the incremental maintenance stuff?

Speaker 1

Yes, that's right, Larry. It will. The $65,000,000 will get us to that $200,000,000 mark and we'll have some related startup additional capital, but that's really gets us full spend.

Speaker 10

Got it. Okay, great. And then just lastly, I heap a call, it sounds like you're reaffirming all the sounds like things are going good. It's early on, obviously, early days. But the synergies, I guess, you're not building in much this year, it feels like, right?

Speaker 10

But maybe there is a little bit upside there, but you're still kind of holding firm. So within the 1st 12 months, you don't realize that $20,000,000 But beyond that 12 months, that $20,000,000 should be realized, right? Is that kind of the way to look at it? Like you could do $60,000,000 EBITDA next year maybe or fair?

Speaker 3

Yes, that's how we're thinking about it, Larry. I think a smaller amount of synergies this year, obviously, as we roll in, we'll have some offsetting severance integration costs we talked about, but certainly that $20,000,000 number, 12 months from now, that's the run rate. And I think safe to say, we feel really good about that strong possibility. It's probably even a little bit better. So really love the acquisition fits in nicely.

Speaker 3

And as Mike and Eric alluded to, we 1st week in March, really nice to see them fit in with Clean Harbors. So feel good.

Speaker 2

Got it.

Speaker 10

Great. Excellent. Thanks. Thanks, guys. Appreciate it.

Operator

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

Speaker 1

Thanks for joining us today. Next week, management will be at the Waste Expo in Las Vegas and participating in Steifel's Investor Summit there as well as the Oppenheimer Industrial Growth Conference later in the week. We also have several conferences lined up in Boston and New York in early June. With that active calendar, we look forward to seeing some of you at these and other events. 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

  • Strong Q1 Performance: Exceeded guidance with 5% revenue growth and 7% adjusted EBITDA increase, driven by robust demand across all Environmental Services businesses and margin expansion.
  • Record Environmental Services Results: Segment revenue rose 10% and adjusted EBITDA grew 16%, marking the tenth consecutive quarter of EBITDA growth and highest-ever Q1 margin.
  • ReRefining Advances in SKSS: Despite soft base oil pricing, blended sales volumes jumped 36%, a shift to a charge oil collection model improved spreads, and Group III base oil production was dedicated at one refinery.
  • Strategic Partnership & M&A: Launched a nationwide “More Circular” program with Castrol to supply sustainable base oil, while acquiring HEPAKO and Noble Oil and investing in the Kimball incinerator and Baltimore hub to support Vision 2027.
  • Raised Full-Year Outlook: 2024 adjusted EBITDA guidance increased to $1.10–1.15 billion, with net debt/EBITDA at 2.4× and planned CapEx of $400–430 million to fund growth and integration.
AI Generated. May Contain Errors.
Earnings Conference Call
Clean Harbors Q1 2024
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