Clean Harbors Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2024

There are 13 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the Clean Harbors Second Quarter 2020 20 Earnings Conference Call. 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. Sir, the floor is yours.

Speaker 1

Thank you, Latanya, and good morning, everyone. With me on today's call are our Co Chief Executive Officer, Eric Kerstenberg and Mike Battles and our EVP and Chief Financial Officer, Eric Douglass and SVP of Investor Relations, Jim Buckland. 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 considered forward looking statements within 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, July 31, 2024.

Speaker 1

Information on potential factors or 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 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.

Speaker 1

Let me turn the call over to Eric Roosterberg to start. Eric? Thanks, Michael. Good morning, everyone, and thank you for joining us. Because safety is the foundation of our core values at Clean Harbors, I will start by highlighting our total recordable incident rate, which on a year to date basis is 0.7 up, which is consistent with where we were a year ago at this time.

Speaker 1

The recent impact on some of our employees by Hurricane Barrel in the Gulf as well as both the Alberta and California wildfires is a reminder of how critical it is to be prepared for any kind of crisis situation. Thankfully, all of our employees in these regions are safe. Turning to our Q2 performance on Slide 3. We delivered exceptional results that surpassed our guidance, driven by record volumes of containerized waste and sustained pricing momentum. Revenue and adjusted EBITDA were the highest in our history with adjusted EBITDA margin improving 50 basis points year over year.

Speaker 1

Environmental Services continues to outperform. ES results are attributable in part to a robust demand for our facilities network and several service businesses, especially field services. This business benefited from its 1st full quarter of HEPCO, which we acquired in March. Our SKSF segment posted a substantial sequential increase from Q1, fueled by the start of the summer driving season and improved lubricant pricing. Corporate costs were higher in the quarter due to incremental headcount from acquisitions, greater incentive compensation and a handful of discrete expenses related to legal and environmental liability matters.

Speaker 1

Turning to Slide 4, Environmental Services enjoyed another fantastic quarter by turning increased revenue into even larger profit growth. EPICO accounted for more than half of the segment's 12% revenue increase with the remainder coming from organic gains attributed to volume and pricing. This top line growth drove an 18% increase in segment adjusted EBITDA, translating to 140 basis points of margin expansion. Adjusted EBITDA in Environmental Services has now increased year over year for 11 consecutive quarters. Our Technical Services business was a key contributor to the segment's performance with a revenue increase of 14%.

Speaker 1

We again collected record levels of drum volumes through the network, which is reflected in continued increase in deferred revenue on our balance sheet. Even with completing a major turnaround at our Deer Park facility early in the quarter, our incinerators achieved utilization of 88%. Average incineration pricing rose 3% in the quarter and we continue to expect our incinerators will deliver utilization in the mid to high 80% range for the full year. We also remain on track to open our new state of the art incinerator in Kimball, Nebraska in Q4. The team has done an outstanding job keeping that construction on schedule and the plant is coming together nicely.

Speaker 1

Landfills also had a strong performance in Q2 with both volume and average price up as we saw healthy drum volumes based business supported by project work. We continue to expect landfills to deliver a very good 2024 with a broad mix of waste streams and project opportunities. Field services generated the largest increase in the quarter, up 64%. While this was primarily driven by HEPCO, our legacy business posted low teens percentage growth. The acquisition has been a great fit with our existing field service operations.

Speaker 1

During the quarter, we responded to several larger emergency response events where both teams work side by side. These large events in total accounted for roughly $24,000,000 of revenue in Q2. We expect field services to continue to perform well as we fully integrate and internalize HEPCO's National Health Center Operations and collaborate on future emergency response events. In Q2, Safety Kleen Environmental Services extended its multi year momentum with revenue growth of 11% as its core offerings, particularly containerized waste remain at high demand. Industrial Services revenue declined 10% due to reduced turnaround activity compared to last year.

Speaker 1

We anticipate a strong turnaround schedule this fall and we expect to see a return to IS revenue growth in Q3. Overall, just another great quarter for our RES segment. With that, let me turn things over to Mike. Mike?

Speaker 2

Thanks, Eric, and good morning. Turning to Slide 5, SKSS rebounded from accounting in Q1 by achieving more than $51,000,000 in adjusted EBITDA, up nearly $22,000,000 sequentially. Our plants ran smoothly in the quarter, resulting in a 3% decrease in base oil and lubricant volumes sold from a year ago, which

Speaker 1

along with

Speaker 2

the acquisition of Noble Oil drove an 8% increase in revenue. Although the quarter opened with several announced posted base oil price increases, the market never fully incorporated those changes. Overall demand led to a weaker spot market for non contracted volumes and resulted in a small year over year decline in segment profitability. With the addition of Noble, our waste oil collections achieved a record level at 67,000,000 gallons in Q2, up 5% from a year ago. Average collection cost was at a small pay for oil level in the quarter.

Speaker 2

When you exclude Noble, our legacy collections average a slight charge for oil. We're continuing to procure the feedstock we need for our 9 re refineries at the best possible price. Part of our strategy to minimize the volatility in SKSS is to intensify our focus on value added products. Q2 blended volumes were up from the prior year, representing 19% of total gallons sold. Our Group 3 initiative is also part of the stabilization strategy.

Speaker 2

We dedicated 1 of our re refineries to full time Group 3 production and it ran well in Q2. We are encouraged about our ability to produce more Group 3. We will be running a pilot at another re refinery to expand this program in the quarters ahead. Last quarter, we discussed our multi year partnership with Castrol and its more circular program. Castrol officially launched the program in late May at a key transportation industry trade show.

Speaker 2

They have been employing considerable marketing efforts since the program was announced with 2 dozen media placements in key publications. While we can't share specifics about their sales progress, we can confirm that they have been building a pipeline of interest across many large fleet operators. Our multi year agreement with Castrol as a sustainability partner is a strong validation of our high quality re refined base oil. Purchases of base oil by Castrol have been strong and we're excited about the long term potential of this partnership. While we don't expect immediate significant gains from this program due to its long sales cycle, we remain optimistic about its future impact.

Speaker 2

Turning to capital allocation on Slide 6. Given our strong cash flow expectations in the second half, our current cash balance and low leverage, we are in excellent position today to execute the capital allocation strategy we outlined as part of Vision 2027. Halfway through 2024, we have demonstrated the key elements of our plan, continuing to grow the core business through investments like the Kimball incinerator and our expansion plans in Baltimore and making smart acquisitions where we can extract considerable value such as HEPCO and Noble. Looking ahead, we will continue to pursue similar opportunities, both internal and external that enable us to capture economies of scale, improve margins, increase cash flow conversion and ultimately generate the best returns for our shareholders. We continue to see a healthy pipeline of potential M and A as well as additional opportunity to invest internally.

Speaker 2

Coming off a strong Q2, we entered the back half of the year with good momentum. Within ES, our bullish outlook is supported by our record backlog, a growing project pipeline and demand for our broad suite of services. We're also excited about the prospects of our legacy field service business combined with EPO to further bolster our ER capabilities while providing numerous synergy opportunities. Within SKSS, we expect to see a stable performance in the quarters ahead despite the current market demand environment for base oil. We will continue to capitalize on initiatives like Group 3, blended sales and our cash flow partnership.

Speaker 2

Overall, our outlook for the balance of 2024 remains favorable. We expect to deliver an outstanding financial performance this year and remain on track to achieve our Vision 2027 goals. With that, let me turn it over to our CFO, Eric Dubious. Thank you, Mike, and good morning, everyone.

Speaker 3

Turning to the income statement on Slide 8, we delivered strong results this quarter, achieving record levels of revenue and adjusted EBITDA along with continued margin expansion. Throughout the first half of twenty twenty four, our ES segment has showcased its ability to grow profitably by leveraging our extensive disposal and recycling network coupled with our service businesses. We're also encouraged to see SKSS have a nice bounce back in Q2 after an uneven start to the year. On the top line, as Eric highlighted, we delivered a good mix of organic and acquisition related growth as we grew total revenues by more than $150,000,000 year over year. Adjusted EBITDA of $328,000,000 came in above our expectations.

Speaker 3

And was up over $40,000,000 from a year ago. Our adjusted EBITDA margin in the quarter was 21.1%, up 50 basis points year on year and driven by strength in the ES segment. Gross margin in the quarter was an impressive 33.3%, a 110 basis point increase from a year ago. This improvement speaks to the demand for our services and incremental volumes resulting in productivity gains and realized operational efficiencies across the network. SG and A expense as a percentage of revenue was 12.7% in Q2, higher than the prior year period.

Speaker 3

The primary drivers were increased costs from the acquired businesses, non recurring expenses related to legal and environmental liabilities and incentive compensation given the strong financial results we are seeing. For the full year 2024, we now anticipate our SG and A expense as a percentage of revenue to be in the mid to high 12% range, slightly ahead of last year, but decreasing longer term. Consistent with our expectations, depreciation and amortization in Q2 came in at just over $100,000,000 This is up from a year ago, primarily due to acquisitions. For 2024, we now expect depreciation and amortization in the range of $395,000,000 to $405,000,000 Income from operations in Q2 was $215,500,000 up 14% from prior year. Q2 net income was $133,300,000 resulting in earnings per share of $2.46 Both figures up 15% from prior year.

Speaker 3

Turning to Slide 9 and the balance sheet. Cash and short term marketable securities at quarter end were $493,000,000 up about $50,000,000 from the end of Q1. Our increased receivables balance at Q2 is largely driven by acquisitions and we expect to collect that cash in the coming months. We ended the quarter with just under $2,800,000,000 in debt, which reflects the $500,000,000 incremental term loan that we issued to finance the HEPAKO and Noble transactions in Q1 of this year. Our balance sheet remains in terrific shape.

Speaker 3

Our net debt to EBITDA ratio was 2.3x@quarterend with no significant debt amounts coming due until 2027. Our overall interest rate at quarter end was 5.7%. Turning to cash flows on Slide 10. Cash provided from operations in Q2 was $216,000,000 up from prior year. CapEx net of disposals was $132,000,000 which is down from Q1, but up more than $10,000,000 from prior year due to investments in our network, including $20,000,000 in Q2 spend on the new Kimbell incinerator, where our total life to date spend now sits at $175,000,000 For the quarter, adjusted free cash flow was 84,000,000 dollars which was slightly below prior year.

Speaker 3

For 2024, we expect our net CapEx to be in the range of 400 to $430,000,000 This range includes $65,000,000 related to Kimball $20,000,000 for the purchase and expansion of the Baltimore facility this year. During Q2, we bought back 23,000 shares of stock at an average price of 2 $14 a share. As of June 30, we had approximately $545,000,000 remaining under our authorized repurchase program. Moving to Slide 11. Based on our Q2 results and market conditions, we are raising our 2024 adjusted EBITDA guidance to a range of $1,125,000,000

Speaker 1

to $1,165,000,000

Speaker 3

with a midpoint of $1,145,000,000 and representing 13% increase for 2023 at this midpoint. This guidance assumes a $35,000,000 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 Q3 adjusted EBITDA growth of 20% to 24% versus prior year. We now expect our higher full year 2024 adjusted EBITDA guidance to translate to our segments as follows. Environmental Services, we expect adjusted EBITDA in 2024 at the midpoint of our guidance to increase 13% to 16% from 2023.

Speaker 3

With a very strong first half performance already complete, we are anticipating a similar performance in the second half. We expect to generate continued year over year volume growth in our core lines of business, while also continuing to capture synergies and benefit from the addition of HEPLACO. For SKSS, based on the current base oil and lubricant market conditions, we expect full year 2024 adjusted EBITDA the midpoint of our guidance to increase 3% to 5% in 2023. In our corporate segment, at the midpoint of our guide, we expect negative adjusted EBITDA results to be up 14% to 15% compared to 2023. Increase here relates to costs from our acquisitions, including some one time severance and integration expenses, higher incentive compensation given our strong results this year and the expenses related to discrete legal and environmental liabilities, which were incurred in Q2.

Speaker 3

As it relates to the acquisition related increases, some of these are synergy opportunities that we will realize in future periods. Percentage of revenue basis, we expect the corporate segment results to be essentially flat with the prior year. For 2024, we currently expect adjusted free cash flow to be in the range of $350,000,000 to 390,000,000 dollars with a midpoint of $370,000,000 As I pointed out previously, if you take that midpoint and add back the Kimbell and Baltimore spend, you arrive at adjusted free cash flow of $455,000,000 which translates to approximately 40% of our adjusted EBITDA midpoint expectation.

Speaker 2

In closing, Q2 was a continuation of

Speaker 3

the favorable business trends we experienced in Q1. We see positive signs and believe this momentum will carry through remainder of the year and I share Eric and Mike's enthusiasm about our growth prospects for 2024 and beyond. For the ES segment, we are excited about our backlog of waste and project opportunities, completing the full integration of HEPAKO and bringing Kimball online. For SKSS, we believe the business has stabilized in terms of collection, production and volumes, and we're excited about the initiatives we have underway. Overall, a great year is in store for us in 2024, both for the company and our shareholders.

Speaker 3

With that, Latanya, please open the call for questions.

Operator

Thank you. At this time, we'll conduct a question and answer session. Our first question comes from Tyler Brown with Raymond James. Please proceed.

Speaker 1

Hey, good morning. Good morning, Tyler.

Speaker 4

Hey, guys. Hey, big picture question. So obviously this quarter was great, very solid growth along with record backlogs. But as we watch the industrial production, the story in the industrial economy doesn't seem altogether that great. So I was hoping you guys could kind of bridge that gap.

Speaker 4

Is it just that there was a lot of tightness in hazardous waste markets maybe back in 2021, 2022? You're still feeling some of the reverberations of that? Has there been a steady stream of deferred cleanup work? Are you guys just winning market share? Just what do you think is driving the solid momentum?

Speaker 4

And is there really any reason to believe that that momentum can't continue into 2025?

Speaker 1

Think you made a lot of great points right there and they're all in line with how our business has been doing. There continues to be tightness across the whole hazardous waste industry, tightness incineration. Our team though has just done an awesome job on many different strategies though that we've had to grow all of our lines of business with our customers, get more penetrated into those customers. So when you think about our drum growth as an example, we've seen drum growth and growing our market share in the environmental business, the technical service area, the safety, clean environmental. We've also seen strong project growth across the board.

Speaker 1

We continue to see all of our facilities really handle a tremendous amount of volumes through them from incineration to wastewater treatment to landfill to our TSDFs. They've all done a great job handling this volume. So all in all, yes, all of those factors that you just mentioned have played into how we've done as a company and really growing our volumes and leveraging our facilities network that is really unparalleled. So great job to the team.

Speaker 4

Yes. And Eric, so I know that the segments have moved around a bit over the years, but isn't 27.5 percent of record margin in the ES? And I get that Q2 is typically your seasonally strongest margin quarter, but if you look at margins, they're up over 300 basis points on a 3 year stack. I know that 30% is an aspirational goal in ES, but maybe how aspirational really is it at this point? Is it something that could be achievable by 2027, particularly as Kimbell ramps up?

Speaker 1

Yes. We certainly think it's achievable, Tyler. It's when you look at that growth, it is to your point a record Q2 for margin even with industrial services having less turnarounds year over year. The team did a great job of leveraging the network and leveraging our fixed costs and taking out and managing efficiencies throughout the network. So a lot of great work that we put into getting to where we are today.

Speaker 1

And yes, we do believe that we will continue to be able to have margin expansion in the environmental business and shoot for that 30% goal to that 2027 area.

Speaker 2

Okay. Courtney, I'd add on that, Todd. That's been happening for the past few years. I mean, if you look back to 2018 2019, it's up over 500 basis points from that. So and that train kind of continues for all the reasons that Eric has just articulated.

Speaker 4

Yes, absolutely. And then just a little bit more color on the $24,000,000 of large scale What exactly was that? And does that revenue linger into the second half?

Speaker 1

No, I would say there was a couple of large events that we had, 1 in the Midwest and 1 in the Pacific Northwest. We had a couple of other sizable events as well that all went into that $24,000,000 that we point out. Some of that's going to continue to carry over into Q3. But for the most part, they're starting to wind down.

Speaker 2

We just want to call them out, Tyler, because they were so large. It did field service had a great quarter and it's an emergency response business at score. So it's not surprising. There just were some very large ones that really drove kind of the beat

Speaker 1

in Q2. And just to add to it, as we pointed out in our script, our teams between HEPAKO acquisition and our field service teams, I think they did a really solid job of responding to the needs of those ERs, supporting them together, taking care of them quickly and managing and minimizing the effect of the environment. So great job to the team there.

Speaker 3

Perfect. And just

Speaker 2

my last one, squeeze it

Speaker 4

in here. Obviously, cash flow is solid, likely to get better into 2025. Balance sheet is in good shape. Mike, you talked a little bit about the M and A pipeline, but can you give us a little bit more color there? There's a lot of interest in haz waste non traditional solid waste assets out there.

Speaker 4

Just seeing a little more color on the pipeline, either smaller tuck ins or possibly even something larger. Can you just talk about the prospects maybe this year and into next? Thanks guys.

Speaker 2

Sure, Tyler. So I'd say that as you've noticed, the multiples are going up.

Speaker 3

I mean the multiples

Speaker 2

for environmental type service businesses, I'd say, have been drifting up. Even though you think they'd be drifting down given interest rates, but I think that given recent transactions in the marketplace, you can see in public company transactions, you can see the multiples that are being paid by others. And so we're going to have to pay up. We think there's value there. But as I've always said, Tyler, we want to be disciplined in our assessment.

Speaker 2

We want to make sure that these assets make strategic sense and financial sense. And we walked away from some things that although may have been strategically don't fit financially. So we're going to compete, you need to be very disciplined. I'd say the pipeline is pretty strong on both, both on the environmental service business and on the oil business and it's all based on returns. I mean, this is nothing new here, Tyler, but the pipeline is strong.

Speaker 2

We're very active. I would say, as Derek said, I think HEPCO is going to turn out and Noble are going to be great actors. We already see the benefits of them already after 3 or 4 months. So I think that there's kind of more to come here. And you look at the cash flow generation and the leverage we have on the balance sheet, we're kind of in a great space to do it because I think that the leverage is actually going to continue to tick down in Q3 without M and A and get below 2 by the end of the year given kind of the forecast and guide we've given today.

Speaker 1

All right.

Speaker 4

Thank you very much.

Speaker 1

Thanks, Adam. Thanks, Simon.

Operator

The next question comes from Jerry Revich with Goldman Sachs. Please proceed.

Speaker 5

Hi. This is Adam on for Jerry today. Good morning.

Speaker 1

Good morning, Adam.

Speaker 5

I think incinerator pricing was 3% in the quarter. Just wondering how that breaks down between core price and mix? And then can you talk to us about your pipeline for your hazardous waste landfill and incinerator business? How do you expect product mix to trend in the back half of the year versus last year? Thanks.

Speaker 1

Yes, Jerry. So for the Q2, as we've talked about before, we had a really large shutdown at our Deer Park incinerator. That unit is one of the largest consumers of our direct burn bulk waste streams. So that certainly had an effect in the mix of that overall incineration pricing. Year to date, we're on a 5% to 6%.

Speaker 1

It's a little bit down from last year, but as things change

Speaker 3

a little bit.

Speaker 1

But overall, just again, continued strong performance. We'll continue to outpace inflation on the incineration pricing size and we have ways to continue to work on that. On the landfill and incineration pipeline area, they're strong. As we showed from our Q2 performance and year to date, both in projects and base business and drum volumes into our landfill, all those pipelines are up into those units. And a great job too on some of the really large projects that we've been able to leverage into those sites.

Speaker 1

On the incineration side, when we just met recently on our quarterly operating review and not just in incineration, but across the business, all the pipelines were really growing when we look at how we segment our business, look at lines of business, the different business units, real solid pipeline growth quarter over quarter and year over year in Q2. So they're solid. And you can see also from our deferred revenue, our deferred revenue ticked up to $108,000,000 So up, we're really excited to really leverage that Kimball incinerator that we're bringing online in Q4. So some solid momentum there.

Speaker 6

And then I was wondering if you

Speaker 5

could just talk about how you see the recent Chevron rolling affecting the PFAS opportunity, if at all, and more broadly hazardous waste regulations set by the EPA?

Speaker 1

Yes. Our interpretation, Adam, of Chevron is that it is not going to have really any effect on the regulatory environment for us and particularly PFOS. The regulations that are in play today when you think about repower waste codes around how waste is managed to the right disposal option, those aren't going to be changed. They've been in place for a long time. They're very, very rigid foundation of record regulations.

Speaker 1

We don't think Chevron at all affects that. And on the PFOS side, there's so much data and so much analytical over the years of how PFOS has really affected the environment. Hard to ever think that a Chevron rolling is going to affect how those regulations are going to continue to play out for the industry.

Speaker 3

Great. Thanks so much.

Operator

The next question comes from David Manthey with Baird. Please proceed.

Speaker 7

Hey, good morning guys. Hey,

Speaker 3

David. Hey, David.

Speaker 7

Yes, first question on Kimball. So it adds, I think, approximately 18% to your incineration capacity. And assuming it can take higher value waste streams, it could be even more than that as it relates to the dollars. But I'm trying to circle in here on the tech services sub segment revenue contribution from Kimbell. I think in the past back in many years ago, you gave us a breakdown of tech services between incineration, skilled labor and transportation, landfills, wastewater, TSCS, all kinds of things.

Speaker 7

When we think about that incremental capacity, does it just impact that incineration piece, which is maybe a third of tech services sub segment? Or do you assume that it's going to require some of those other services? So I'm just you've given us the EBITDA run rate you think you can get to. I'm just trying to get a finer point on revenues, if you could.

Speaker 1

Sure, Dave. I'll begin and I'm sure these guys will also add in. When you think about Kimball bringing it online, the 18%, we've talked about 70,000 tons of capacity that will add. And next year, we're really looking to exceed 30,000 tons through that unit. When you look at the revenue at a higher level and the collection from our customers, we don't just collect incineration waste.

Speaker 1

When we're out there collecting waste streams from our customers, there's a broad range, which we're able to leverage our network of incineration and landfill and wastewater treatment and recycling. So we're servicing customers based on all of their waste stream needs. Obviously, the network, the industry has been backed up on incineration. We're excited to get that capacity online. But to your question about revenue, it's a compilation of all those different waste streams that will benefit the technical services network.

Speaker 2

The only thing I'd add to that is that, so when you think about the new incinerator, David, 12%, not 18%. So it is a lot more capacity, but not the 18%. I'd also say when you look at tech service, when you look at our financials, as Eric said, it's not just incineration, we have 32 TSDFs, we have wastewater treatment facilities, we have solvent recycling facilities. It really is over 100 permanent facilities across North America. And so all those facilities handle ways different types of waste streams.

Speaker 2

And so it's really hard to kind of do we talk about incineration because it's the biggest part of it. I get that and landfills are a big part of it, but it's a very big business. TS is a very technical service is a very large business. And so I think that it's really important to think about it broadly. And so and it's really hard for us to kind of pin down like how much came from the facility versus transit disposal.

Speaker 2

The answer is that those businesses drove a lot and you see it in the tech services results in Q2. Tech services was up 14% year over year, which is a lot of that is I think that's by 2 thirds volume and 1 third price. And I think that's really testament to what Eric just said around all of the volumes we're getting in, not just in incineration, which meant volume the quarter, which is great, but all over the entire net.

Speaker 7

Got it. That's helpful. Thank you very much. And then second, just trying to scale the ER work that you referenced here this quarter, dollars 24,000,000 it's not the highest you've seen, but it's not nothing either. I'm just trying to understand, is that because of the addition of HEPAKO and that's kind of a normal rate you'd expect to see going forward?

Speaker 7

And related, that something that you'll continue to report going forward given that that's such a large portion of HEPCO's business?

Speaker 2

Hey Dave, so this is Mike. I guess we thought it was important because there were a fair amount of really large items. And as you know, you followed us for many, many years. We've had these large events, we've called them out. And I don't think they're like going to last for quarter to quarter.

Speaker 2

I think most of them are probably done kind of early Q3. And so these are just we just thought it was important given the really strong growth in field service business in the quarter, just so that as you think it from comparison to next year, frankly, we're going to say, look, there are some large events that we were the beneficiary of at pretty good margins, just as we think about that. So again, we have some cutoffs, there's some pretty large events. I'm not sure, you tell me if there's going to be large events in the back half of the year. It's up for us to tell.

Speaker 2

As you know, we've gotten quarters without them. So we'll as we see fit, given the size and scale of events, we'll call them out. But it was really more of a from a comparison standpoint, given the great results and the beat we had in the quarter to kind of we thought it was appropriate to call out these material items.

Speaker 1

And Dave, just one other point. It was not these events weren't also just due to HEPCO. It was really the network. It was really the mix across all of our field service business.

Speaker 7

I appreciate it. Thanks guys.

Speaker 8

Thank you. Hi, Dave.

Operator

The next question comes from James Ricchiuti with Needham and Company. Please proceed.

Speaker 6

Hi, thanks. Good morning. And maybe just a follow-up to what you're just discussing. I think you had been targeting a lot about $30,000,000 of EBITDA from hepico and that's now 35,000,000 dollars Can you talk about what's driving the higher expectations for that business? You only acquired it, what, March, so it seems to be tracking ahead of expectations.

Speaker 6

And I wonder if you could talk

Speaker 7

a little bit about that?

Speaker 3

Sure, Jim. Eric Dugas here. I'll start with that one. And you're absolutely correct. We did our expectations from HEPAKO for the full year did increase $5,000,000 partially due to some of the larger ER jobs that we've been talking about for the last few minutes.

Speaker 3

But also, I think the integration of HEPCO is probably a little ahead of schedule from what we projected 3 months back. The team has done a great job of integrating the HEPCO field services office into the legacy Clean Harbors network, sharing resources, sharing labor. And one of the bright spots to the acquisition we talked about was the emergency response line that HEPCO had and our ability to integrate our field services folks into that business. So what we've done here at Clean Harbors is really put a full court press on hiring some additional heads. We've been successful with that in field services.

Speaker 3

And it's been allowed us to internalize more of that work and drive more EBITDA into this year. So as we said a few times now, really excited about that acquisition. Like I said, a little bit ahead of schedule probably in terms of synergies and a little bit better on the business front as well. And those are all the reasons we increased that number. Yes.

Speaker 2

The only other thing I'd add since Eric gave me brought it up is that our voluntary turnover actually has gone down quite a bit and that's allowed us to kind of keep people longer and really good growth. It's over down over 200 basis points year over year and amazingly over 600 basis points since over 2 years ago. So the team has done a really good job of retaining and training good employees and that's really helped us on a variety of fronts, not just on field service, but across the organization and it gives a good safety and kind of better margins.

Speaker 6

Got it. And you guys talked a little bit about Group 3 and plans for expanding that. I wonder if you could maybe elaborate on what you're seeing and how you're expecting that business to perhaps scale over the next 1 to 2 years?

Speaker 2

Yes, Jim. We had a we ran a refinery now full time on Group 3, actually ran well in the quarter. We've been using that COOP 3 into our blended gallons. I think it's been a success. And when I think about the pilot we're running now and for this for another plant to get that running, It's just different type of oil re refining process.

Speaker 2

So we got to test that out, but there's good growth in this business. We think there's over 20,000,000, 25,000,000 gallons of incremental Group 3 out there and we can dedicate 2 or 3 plants to run and use and that will be able to a good cost save and ability to drive kind of more planted gallons into our network at a higher price point.

Speaker 6

And last question just on PFAS. I wonder the conversations you're having with customers in this area, how are things potentially changing versus earlier in the year? Just give us a sense as to how you're seeing that business evolve for you?

Speaker 1

Yes, James, Eric here. So when we talked about PFOS, as you know from the past, we've really looked at providing total solutions from performing analytical to remedial event to incineration landfill capabilities and really managing projects from drinking water and industrial water. And to be honest with you, we've really seen growth in all of those areas. Our water treatment that we've seen for PFOS has increased industrial and drinking. Our project business of remediation of contaminated soils has been increasing as well as some of our analytical that we've started on the front end.

Speaker 1

So we're really seeing it from all areas. The other key areas is AFFF change outs. So there's been some discussion and we've seen it in certain projects where we've had to go in and remove AFFF. And one other last compliment to that is when today you have an emergency response or somebody has an event at their facility and their foam dumps, that foam is no longer being really discharged on-site. It really has to be removed from site.

Speaker 1

And so we're seeing those types of activities as well.

Speaker 9

Got it.

Speaker 7

Thank you.

Speaker 8

Thank you. Thanks, Tim.

Operator

The next question comes from Tobey Sommer with Truist Securities. Please proceed.

Speaker 10

Thanks. I'll follow-up on that last question. How do you see the potential for a new presidential administration to potentially change or diminish the PFAS opportunity through a different sort of blends as far as environmental rules and regulations?

Speaker 1

Yes. So we really don't think that change administration would have any effect on what is happening with record regulations or PFAS regulations at all. It will be continue to we think it's going to continue to be business as usual.

Speaker 2

The company has been growing for 40 years, Tobey, 45 years next year and through Democrats, Republicans, conservatives, liberals, I mean the company and we're talking about hazardous waste here, right. So it's important that I don't think that that really changes the overall kind of view based on the administration.

Speaker 10

Thanks. News reports out in recent months about potentially large ESM and A opportunities in the market, how would you describe your appetite for transformational deals?

Speaker 2

We're open to those. We're open to those types. They got to meet kind of our strategic sense and meet our strategic hurdles in our financial hurdles. But we're certainly open to those. We talked about vision 2027 of spending a lot of capital to grow that business, double the size of the business within 5 years.

Speaker 2

We're on that track. We're kind of I think we're right on track and what we said back in the day, back in 2013. And I'm excited about those opportunities, big and small, big and small. It's like sometimes the small deals are the hardest ones to do because they take so much work to kind of get done. And so we're open to those.

Speaker 2

They just kind of make sense.

Speaker 7

And then if

Speaker 10

I could ask you to elaborate a little bit on the incinerator capacity and utilization topic. As new capacity ramps, historically, has there been an influence or a change in the pricing trend in the quarters where that capacity is entering the market?

Speaker 1

No, there hasn't, Tobey. We really do not anticipate any pricing change. In fact, we're going to continue to drive price improvement across the network. So the capacity will ramp up as we talked about earlier. We look to do about 30,000 tons next year and grow sequentially after that.

Speaker 1

We don't and the backlog again of drums and how our team has been doing and collecting drum volumes from all of our different customers will continue to fuel that EBITDA growth.

Speaker 10

That's a more bullish answer than some alternatives. Thank you very much.

Speaker 2

Thanks, Tobey.

Operator

The next question comes from Brian Butler with Stifel. Please proceed.

Speaker 9

Good morning. Thanks for taking my questions.

Speaker 2

Hi, Brian. Hi, Brian.

Speaker 9

First one just on the SKSS business, when you maybe a little bit more color on kind of how the spot price and the charge for oil is kind of trending into the back half and maybe what's built into the 2024 guidance of that 3% to 5% kind of improvement?

Speaker 2

Well, the good thing, Brian, is we've gotten into 45 minutes into this call. We first looked at SKSS, so there you go. Good for you. I think if you think about the back half of the year, it's only 12% of the business, but happy to answer your question on it. The back half of the year, when you think about our oil pricing, we've actually put a very kind of conservative view on our pricing trend.

Speaker 2

If you think about kind of when you get to the midpoint of the guide we gave this morning. We feel like we're making good traction on Group 3. We're making good traction on cash flow, making good traction on blended volumes. And so I think all those are going to help us stabilize that business and continue to grow it. And so when you look at that kind of the growth rates we have for the year, as you see 3% to 5% pretty modest, but we don't really have aggressive pricing in the back half of the year to kind of achieve those numbers.

Speaker 1

Also we'd probably just build on it, Brian, that the team continues to execute on our blended sales strategy year to date. Our blended sales and volume is up year over year. So good job in how we're trying to stabilize that. And as Mike talked about earlier in the call, our Group III efforts are beginning to pay off. So there's some nice things going on there.

Speaker 1

Yes.

Speaker 9

Okay, great. That was my one question for SKSS. Now I'll go to ES now. Just maybe some high level thoughts on as capacity is getting added to the incineration market with you, Veolia adding, maybe we could talk about how do you view the potential for captive incinerators maybe coming back and looking at commercial as an option as more capacity kind of manifests in the commercial side?

Speaker 1

Yes, Brian. First, as we've mentioned in the past, all of the captive units out there, those companies are our customers. We continue to work as partners with them to help to manage their variety of waste streams. I think when you think about taking a captive to commercial in any sizable scale, it is really, really difficult. There is individual state and EPA regulations that you have to go through.

Speaker 1

So it's hard to imagine that any type of captive knowing that we know them all and we work with them all is going to really have any material type of change in the market conditions of what's going on.

Speaker 2

A more likely scenario, Brian, would be that they would close given the process and the cost and the regulations and compliance and that creates more opportunity for us and the network frankly.

Speaker 1

Yes, I guess that was the focus of the question was what's

Speaker 2

that potential of them closing as

Speaker 3

more capacity gets added?

Speaker 1

Few that are prime targets. Their utilization is down over the past few years. So that and also the products that they're making have changed. And that means that the waste streams that those captives have been consuming affect the utilization of those units. We also believe that, while we know that EPA is out there and it's going to be looking to change MAC guidelines again, which is they're required to do by the statute.

Speaker 1

And so they're going down that path to evaluate that. So those if capital has to be invested by those companies to upgrade those units that are having lower utilization, All those types of things are catalysts which could affect a captive coming offline.

Speaker 9

Okay. And then one last on PFAS real quick. Can you maybe give an update on the PFAS destruction from an incineration and the OTM-fifty testing? Has that progressed? And is there maybe an update there?

Speaker 1

Yes, we are it's progressing well. We'll be doing that OTM-fifty testing this fall, working jointly with the EPA on achieving and proving out once again that RECRA high temperature thermal destruction is really the preferred method. And so we're proceeding very well on that.

Speaker 9

Great. Thank you for taking my questions.

Speaker 8

Thank you. Thanks, Brad.

Operator

The next question comes from Noah Kaye with Oppenheimer. Please proceed.

Speaker 11

Hey, thanks for taking the questions. It's an election adjacent question, really about the fund flow under IIJA. Yes, I think even just looking at Superfund, right, we've got 2.5 bill out of the 3.5 bill already obligated, but most of that has not been spent yet. I guess, how are we actually seeing some of that spending impact your P and L this year. Is that more of a tailwind for 2025, 2026?

Speaker 11

Anything you can do to help quantify that is helpful. And then do you think there's a possibility for kind of an increase in awarding activity as we kind of get into the election season?

Speaker 2

So Noah, it's very difficult for us to this is Mike. It's very difficult for us to kind of directly correlate here's the investment that they're making in infrastructure spend or in the CFS Act or wherever and then how that affects kind of our financial statements and kind of how it all rolls down. But I will tell you from a project level standpoint, Q2 is one of the best quarters in the company's history from the level of project work. So it's like I can't draw like that came from the government spent X amount that drove the type of investment by this company and drove the contractor go try this stuff and came to us. But I will tell you that that seems to be a very strong pipeline of work and that pipeline looks really good into 2025.

Speaker 2

So that can I give you like, well, here's how much has been spent, here's how much it impacts us? No, I cannot. But what I can tell you is that we are seeing a very strong pipeline of work. Q2 was terrific and there are no signs that we see from our pipeline work and from talking to the leadership team and the sales organization that would change that view. So I love the view that all the spend that you're talking about continues on into 2025.

Speaker 2

We're cleaning up some nasty messes in Superfund and in other areas and it's a great way to invest in America.

Speaker 11

Thank you, Mike. You mentioned earlier you're on track for vision 2027. I will say, by the way, as far as M and A, transformational M and A goes or any kind of M and A, if you pay the multiples that you're getting on this first year of HEPCO, that'll be just fine with investors. But do you feel like you're on track?

Speaker 1

Totally. Do

Speaker 9

you feel

Speaker 11

like you're on track for the M and A plus organic version of those targets in Vision 2027, the $600,000,000 EBITDA, dollars 200,000,000 free cash flow incremental. With HEPCO and Noble, right, you're probably around 50 to 60 correct my math. So there's a fair way to go. What is the view on whether you're tracking towards those targets?

Speaker 2

Yes. No, it's not a straight line. It never was. And the fact we showed it as kind of as a direct line was just because we had to take something. But the path to success is never that easy.

Speaker 2

And so I would say that we spent almost $500,000,000 in the first half of the year, literally closed it 3 months ago. And now you're asking kind of when we're going to do more. The answer is that we're going to integrate these strong businesses. We're going to cater to look for opportunities and we're going to be smart about it and make sure that we're not wasting shareholder capital to do it. And so and that doesn't necessarily mean in the M and A world.

Speaker 2

I mean, we did I think that the Baltimore project and the Kimbell project will be unbelievable returns to our shareholders. I think there's more of them like that out there that we as a leadership team are continuing to evaluate that are going to cost big bucks that are going to drive our way to get to the answer. So it's not necessarily like buy your way to it. What we won't do is waste your capital to do it. We're going to have things that make sense to us that fit in our strategic portfolio as well as our financial portfolio.

Speaker 2

And we're going to get there and I think we're on track.

Speaker 11

I appreciate it. Thanks all.

Speaker 2

All right. Thanks,

Operator

Our next question comes from John Wyndham with UBS. Please proceed.

Speaker 9

Hey, thanks for taking all

Speaker 12

the questions and obviously great result on the quarter. Maybe I want to step back a little bit from the quarter. I'd be interested to hear your thoughts on your exposure to growth in the electricity system in the United States. 1 of the bigger trends going on right now is a resumption of electricity growth, which means more natural gas, more infrastructure investments in transmission. I'm just wondering if you could talk about certain parts of your Environmental Services business that may have exposure to that.

Speaker 12

Appreciate it. Thanks.

Speaker 1

Yes, John. This is Eric here. So we through our field service business, we really support some of the nation's largest utilities from helping to maintain those units and as they see growth, what's going on, we'll continue to support their growth. Our service with those utilities, We've gotten a number of different accolades on how we're doing with them. We work really in conjunction with them as partners.

Speaker 1

And so as the utility infrastructure is growing, we're going to continue to grow with those clients. So good opportunity for us, particularly around field services.

Speaker 3

Thanks. Thank you. Thanks, Tom.

Speaker 9

There are

Operator

no further questions at this time. I would like to turn the floor back over to Mr. Gerstenberg for closing comments.

Speaker 1

Thank you and thanks for joining us today. We hope everyone listening enjoys the remainder of their summer and we will be seeing some of you as we get back out on the road in the coming months. Please stay safe out there.

Operator

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.

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Key Takeaways

  • Record Q2 results: Clean Harbors achieved its highest-ever revenue and adjusted EBITDA, with a 50 basis-point year-over-year margin improvement.
  • Environmental Services outperformance: The segment grew revenue 12% and adjusted EBITDA 18% (140 bp margin expansion), driven by the EPICO acquisition, organic volume/pricing gains and 88% incinerator utilization; its Kimball, NE plant remains on track for Q4 startup.
  • Field Services acquisition synergies: The HEPCO acquisition powered 64% revenue growth in Q2 and generated $24 million from large emergency response events, with integration and collaboration advancing across the network.
  • Safety-Kleen rebound: SKSS delivered $51 million in Q2 adjusted EBITDA (up $22 million sequentially), 8% revenue growth, record 67 million gallons of oil collected and continued progress on Group 3, blended products and its Castrol partnership.
  • Robust cash flow and capital strategy: Q2 operating cash flow was $216 million, net debt/EBITDA stood at 2.3x, and the company is funding investments like the Kimball incinerator and Baltimore expansion while raising its 2024 adjusted EBITDA guidance to $1.125–$1.165 billion.
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Earnings Conference Call
Clean Harbors Q2 2024
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