Clean Harbors, Inc.

Greetings, and welcome to the Clean Harbors fourth quarter 2020 conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael McDonald, General Counsel for Clean Harbors. Thank you, sir. You may begin.

Thank you, Christine, and good morning, everyone. With me on today's call are Chairman, President, and Chief Executive Officer Alan S. McKim, EVP and Chief Financial Officer Mike Battles, and SVP of Investor Relations Jim Buckley. Slides for today's call are posted on our 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, February 24th, 2021. Information on potential factors and risks that could affect our actual results of operations 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 in today's call, other than through filings made concerning this reporting period. In addition, today's discussion will include references to non-GAAP measures. Clean Harvest believes that such information provides an additional measurement and consistent historical comparison of its performance. Reconciliations of non-gap measures to the most directly comparable gap measures are available in today's news release on our website and in the appendix of today's presentation. Now, I'd like to turn the call over to our CEO, Alan McKim. Alan?

Thanks, Michael. Good morning, everyone, and thank you for joining us. Starting on slide three, we concluded 2020 with a strong fourth quarter. our environmental service segment outperformed our expectations, driven by a combination of factors, including the level of high-value waste in our disposal network, greater than expected COVID decontamination work, and ongoing cost controls. Total fourth quarter revenues were in line with expectations as our safety clean business remained constrained by the effects of the pandemic. Adjusted EBITDA in Q4 increased to $136.1 million, which included 5.6 million in benefits from government programs, primarily from Canada. For the full year, adjusted EBITDA grew by 3% to 555.3 million, with annual margins growing to 17.7%. We generated record adjusted free cash flow of 265 million, a noteworthy accomplishment considering the economic disruption caused by the pandemic. Without question, the success we achieved in 2020 is a direct result of the dedication, flexibility, and perseverance of our exceptional team. 2020 was a challenging year on many levels. I'd like to publicly acknowledge all the employees across our organization, particularly those on the front lines for their outstanding work this past year. Thanks to you, we delivered essential products and services to our customers despite facing many obstacles as the pandemic disrupted how we normally conduct business, and we did so safely all year. Turning to our segment results, beginning with environmental services on slide four. Revenue, while down year over year due to market conditions, was up on a sequential basis. Typically, Q4 is a seasonally weaker quarter for us, But the $18 million increase from Q3 is evidence that many of our markets are on the road to recovery. We also saw strong disposal and recycling volumes to close out the year. Adjusted EBITDA grew by 13% from a year ago, with margins up nearly 400 basis points. This was driven by a combination of business mix, cost savings, and $3.9 million in benefits from government assistance programs in Q4. Revenue from our COVID-19 decon work totaled $31 million in Q4. For the full year, our team completed nearly 14,000 responses and was an essential resourcing in protecting our customers, people, and facilities. In Q4, we benefited from a record level of drums collected, as well as some high-value, complex waste streams we received into our network. This resulted in an average price per pound increase of 16% from the year earlier period when we saw more bulk streams. Incineration utilization in the quarter was 84% due to a higher than expected number of maintenance days. Landfill volumes were down 37% in the quarter as the lack of remediation and waste projects opportunities intensified with the resurgence of the pandemic. However, our strong base landfill business largely offset that decline with a 42% increase and our average price per ton. Moving to slide five, safety clean revenue was down 15% from a year ago, but was flat sequentially as the ongoing recovery offset normal year-end seasonality. Vehicles miles driven had been on a nice upward trajectory throughout the summer, but plateaued a bit in Q4 with the COVID-19 surge resulting in some new local restrictions in areas such as California, and all across Canada. Most of our core services in the SK branch business were down year over year as a result, but flat from Q3. SafetyClean's adjusted EBITDA declined 21%, mostly due to the lower revenue and business mix. This decline was partly offset by our cost reductions initiatives, as well as the government assistance programs that provided $1.4 million of benefits in Q4. Waste oil collections were 49 million gallons in Q4, with a healthy average charge for oil, given the lack of available outlets for generators. On the SK oil side, we saw a typical seasonal softening of the demand for base oil and lube products. However, due to lower production levels in the traditional refinery space, available base oil and lubricant supplies shrank in the quarter, resulting in a rising price environment that should benefit us here in 2021. Percentages of blended products and direct volumes can end as expected and consistent with prior year. Turning to slide six, looking back at 2020 from a capital allocation standpoint, our strategy due to the pandemic was focused on capital preservation, which served us well. CapEx in Q4 was slightly higher than the prior year, but our full year spend was down from 2019. Moving forward, we expect to focus on internal growth capital on our plants and other assets that we believe generate the best returns. From an M&A standpoint, our opportunity pipeline is healthy as businesses emerge from the pandemic, and we gain a clear line of sight on our end markets. We prudently increased our level of share repurchases in Q4 and had an active repurchase program for the year. And Mike will provide the detail on our buyback shortly. Looking ahead, we're beginning 2021 in excellent shape, both operationally and financially. The markets we serve are on an upward trajectory. For our lines of business that have been held back by the pandemic, such as waste projects and remediation, we expect a measurable recovery this year. In 2021, we expect to pursue growth opportunities to our core suite of service offerings and by capitalizing on market conditions. And Mike is going to talk about our new sustainability report in a moment. But let me say that we expect to take full advantage of the growing market acceptance of our sustainable offerings in 2021 and beyond. We provide a broad array of green solutions that go well beyond our role as the largest collector and recycler of waste oil. Within environmental services, we entered the year with higher deferred revenue, and given the availability of waste in the marketplace, expect strong incineration performance in 2021. We anticipate our offerings within industrial services and tech services to grow from last year. We expect field services to generate 25 to 35 million of COVID-related revenues in 2021. Within Safety Clean, we remain below normal demand levels as we kick off 2021. However, later this year, we anticipate a steady recovery in the SK branch business. For Safety Clean Oil, our refineries are producing well, and as I mentioned, pricing for both base oil and blended products is favorable to start the year. We will continue to actively manage our charge for oil rates, while focusing on growing collection volumes to supply our re-refinery network and take advantage of market conditions for recycled fuel oil. In summary, while 2020 did not go as we originally envisioned for our 40th anniversary due to the pandemic, we did achieve record adjusted EBITDA and adjusted free cash flow thanks to our amazing team. As I look at 2021, the underlying dynamics in both our operating segments remain positive and we expect a strong sales growth year with healthy free cash flow as a result. I anticipate another great year for the company in 2021. So with that, let me turn it over to Mike Battles. Mike?

Thank you, Alan. Good morning, everyone. Before I take you through the financials, let me comment briefly on our first ever sustainability report, which is available on the IR section of our website. We're proud of this document, which we created based on the Sustainability Accounting Standards Board Framework, The document highlights the integral role that sustainability plays in our business decisions, as well as our environmental, social, and government's goals and benchmarks for 2030. The at-a-glance page of the report, shown on slide 8, is an overview of some of our ESG benchmarks. I want to reiterate the point that Alan made about ESG and sustainability as foundational to our business. For many customers, we are their sustainability solution. When companies generate potentially harmful byproducts, they call Clean Harbors to safely remove and dispose of them. When they accidentally release chemicals into the environment, they call Clean Harbors to help clean it up. When they have waste oil, solvents, precious metals, or paint, they call Clean Harbors to recycle. The new report also highlights the vital role our employees play in our performance. We strive to create a diverse and inclusive culture, one that values the unique backgrounds, perspectives, and experiences of our people. We are committed to building a sustainable culture through training programs that enable our employees to enjoy long and successful careers at Clean Harbors. I encourage everyone to take a look through the report. It provides a detailed picture of how closely intertwined sustainability is with our entire organization, culture, and business model. Now let's turn to slide nine in your income statement. We ended 2020 on a high note with another strong financial performance. If you'd asked me back in April, when the pandemic began, what level of revenue, adjusted EBITDA, and adjusted free cash flow we would have delivered this year, these would have not been the numbers. Our Q4 adjusted EBITDA results exceed the guidance we provided in November. Revenue declined 9% year over year, but was up from the third quarter, despite Q4 typically being a sequentially lower quarter due to seasonality. Our efforts to control costs and grow our highest margin businesses combined with some further government program assistance, resulted in 180 basis point improvement in gross margin. Adjusted EBITDA grew 3% to 136.1 million. Our Q4 adjusted EBITDA margin, rising 190 basis points from last year, speaks to the effectiveness of the actions we have taken this year. We have improved our adjusted EBITDA margins on a year-over-year basis for 12 consecutive quarters. For the full year, our adjusted EBITDA margins grew 17.7%, grew to 17.7%. If you excluded the 42.3 million of government assistance, those margins would have been 16.3%, or a 50 basis point improvement from 2019. SG&A total costs were down in the quarter, based on our lower revenue and cost controls. But on a margin basis, we're essentially flat. For the full year, SG&A as a percentage of revenue was 14.3%, which beat our target of 14.5%. For 2021, using the midpoint of our guidance range, we would expect SG&A to be up in absolute dollars from the prior year and essentially flat on a percentage basis. Depreciation and amortization in Q4 was down to 71.4 million. For the full year, our depreciation and amortization was 292.9 million, which was within our expected range. For 2021, We expect depreciation and amortization in the range of 280 to 290 million. Income from operations in Q4 increased by 18%, reflecting a higher gross profit, cost controls, and mix of revenue. For the full year, our income from operations rose 10% to 251.3 million. Turning to slide 10, we concluded the year with our balance sheet in terrific shape. Cash and short-term marketable securities at December 31st were $571 million, up nearly $40 million from the end of Q3. Our debt was at $1.56 billion at year end, with leverage on a net debt basis at 1.8 times, our lowest level in a decade. Our weighted average cost of debt is 4.2%, with a healthy mix, healthy blend of fixed and variable debt. With the recent revolver we put in place, We have no debt maturities until 2024. Turn to cash flows in slide 11. Cash from operations in Q4 was $113.2 million. CapEx net of disposals was up slightly to $43.6 million. That combination resulted in adjusted free cash flow in Q4 of $69.6 million. For the year, we hit our net CapEx target, excluding the purchase of our headquarters, with $165.6 million of spend. That helped us deliver record annual adjusted free cash flow of $265 million, which is toward the high end of our guidance range. For 2021, we expect net capex in the range of $185 to $205 million, which is higher than prior year. Our net capex as a percentage of revenue ranks as one of the lowest amongst our specialty waste peers. During the quarter, we increased the level of our share repurchases as we bought back 500,000 shares at an average price just under $71 for a total buyback of $35 million. In 2020, we repurchased slightly over 1.2 million shares. Of our authorized 600 million share repurchase program, we have just under $210 million remaining. Moving to guidance on slide 12, based on our 2020 results and current market conditions, we expect 2021 adjusted EBITDA in the range of 545 to 585 million. As we noted in this morning's release, we are revising our calculation of adjusted EBITDA to exclude stock-based compensation to be consistent with all of our company's loan agreements and facilitate comparison with industry peers. That amount in 2021 should be about 16 to 18 million compared with 18.5 million in 2020. Looking at our guidance from a quarterly perspective, we expect Q1 adjusted EBITDA, using our revised definition, to be 5% to 10% below prior year levels given the record Q1 results we posted in 2020 prior to the pandemic taking hold and the deep freeze we are experiencing in the Midwest and the Gulf here in February. Here's how our full year 2021 guidance translates from a segment perspective. In environmental services, we expect adjusted to decline in the mid single digits on a percentage basis from 2020. We expect to benefit from growth and profitability within incineration, a rebound in the majority of our service businesses, along with our comprehensive cost measures, but not enough to fully offset the decline in high margin decontamination work, as well as the large contribution from government assistance programs in 2020 that totaled $27.1 million in this segment. For Safety Clean, we anticipate adjusted dividend to increase in the mid to high single digits on a percentage basis from 2020, despite the fact this segment received $12.2 million in government assistance last year. We expect a mild rebound in the branch business, weighted toward the second half of the year post-vaccination. At the same time, we expect SK Oil to deliver a vastly improved performance in 2020 given the current base oil industry supply dynamics, as well as our ability to aggressively manage our re-refining spread and collect more gallons of waste oil. In our corporate segment, we expect negative adjusted EBITDA to be flat with 2020, which includes 3 million of government assistance. For 2021, our EBITDA guidance assumes receiving 2 to 3 million of Canadian government assistance. We are not assuming any additional CARES money in 2021 at this time, while we are reviewing the new program. Based on our EBITDA guidance and working capital assumptions, we now expect 2021 adjusted free cash flow in the range of $215 to $255 million. We believe this puts us in a great position to execute on our capital allocation strategy. In summary, although the pandemic is still with us, we enter the new year with strong momentum in multiple service businesses, and most importantly, across our facilities network. Industrial production in the U.S. is back on the rise by all indications, particularly in the chemical space. The Chemical Activity Barometer, published by the American Chemistry Council, shows that industry levels have been climbing sequentially from May to January, and January was the first time in 10 months that the activity levels were above the prior year, which is a great sign for us. In addition, our re-refinery business is off to a great start given the current marketing conditions. We expect some of the project and turnaround work that was pushed out in 2020 to benefit us this year, and the overall sales pipeline remains strong. While we are seeing COVID cases decline sharply in recent weeks, we anticipate continued opportunities for near-term decontamination work and disposal of vaccination waste volumes. Overall, the number of favorable industry and regulatory trends should support our business moving forward. And while we don't give specific revenue guidance, We certainly expect a return to top line growth in 2021. With that, Christine, please open up the call for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Tyler Brown with Raymond James. Please proceed with your question.

Hey, good morning, guys. Hey, Tyler. Hey, Mike. Appreciate all the guidance, but I do want to come back to the Q1 guide real quickly. So you mentioned it, that Q1 was a really good quarter, if I actually go back and look at my notes. But you also talked about these winter storms. Is there any way that you could kind of quantify maybe cost, downtime, how much of a drag that's going to be?

Yeah, Tyler, so we're just experiencing it right now like the rest of our competitors are and certainly has an impact in the Gulf and in Texas. And at the end of the day, we think those plants have been down for a bit. I think they're coming back online kind of today and tomorrow. I don't think it's a huge number. And also, as you know, Tyler, when these things happen, as you see in the paper in Bloomberg and other areas, Pipes are cracking, and that's going to create spill opportunities for clean harbors to be there to help clean it up. And so I don't think it's a huge number. I think it is a number, certainly, in Q1.

Okay, interesting. So, Alan, this is a bigger picture question. So I'm curious what you mean by when you say that you're seeing customers shifting towards greater environmental responsibility that aligns with your offering. That was something that you guys put in the press release. So is that a comment about captive incinerators maybe shutting down or plants being more stringent on their cleaning? I guess my big picture question here is in a clearly more ESG-focused world, do you think that that translates into a better growth algorithm for clean harbors than maybe it has in the past?

I do. I think that, you know... I think people are becoming more and more aware of the environment, and certainly you're hearing more about the warming of the planet and the effects of emissions. And I think when you look at our ESG report, it really is fantastic about how we are really a net benefiter from a greenhouse gas standpoint. And I think people will realize that. whether it's outsourcing waste from their own captive or it's relying on us to recycle solvents and oils and so many other things, paint waste and the like. I think more and more of our offerings would be prioritized or accepted because of that green nature of what we're doing.

Yeah, nope, that's very helpful. And then my last one, just quickly on CapEx. So I think you're calling it for I'm going to call it gross capex of 200 million. I look back over the last few years and you exclude the headquarter buyout. It's been sitting around there. So as we look out, is that a pretty good placeholder? And then, Alan, you mentioned some of those, I think, internal growth opportunities, some of that spend. So how do we think about capex maybe on down the road balancing some of those investments?

Hey, Tyler, I'll start with the first one, and Alan can talk about growth CapEx. So, you know, as we mentioned, you know, our CapEx as a percentage of revenue has, you know, is one of the lower amongst the industry, and that stays there. You know, six, six and a half percent, I think there's a pretty low, pretty low answer. I think as revenue grows, I think that we'll continue to make those CapEx investments. That excludes any type of large, you know, incinerator or any other types of big CapEx that's out there. If that were to happen, we certainly would call that out.

Yep, okay, perfect, thank you.

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

Good morning, everyone, and, you know, great execution to your team from the front line up in a challenging year. I want to press a little bit on the capital allocation questions here. I think, you know, clearly you're extremely cash-rich, Following up on Tyler's point, there's a big CapEx spend envisioned for 21. Can you just give us a little bit more insight on how you stack everything up in terms of priorities here? Repurchase some color on the M&A pipeline. Clearly, this isn't an optimal leverage position for the company at this point, looking at growth. So, you know, what do you want investors to expect that you're going to do over the next 12 months to address that?

I think our priority really is acquisitions. I think the company has shown that it has done some really fantastic deals to be able to acquire companies, move them to our platform, and really take advantage of the scale that we have. And I think that would be at the top of our list. I think over the past year, uh, clearly we have been, uh, you know, impacted our ability to, to go through a normal process of due diligence and, uh, integration and any, any, uh, the way that we typically would go about an MNA, it's really been disrupted because of the pandemic. And we really think that, you know, with, with this pandemic now getting behind us, as I think many people feel like it is over the next few months, you know, that, that, um, we can be more aggressive and, uh, And I think that would be the key thing that you should be looking for with use of capital this year.

Okay, that's very helpful. And then can I push a little bit more on the question around ESG and related tailwinds with respect to the closed loop offering? Looking at where Performance Plus and EcoPower are now, and the opportunity for a recycled oil, a greener product to get more penetration in the market. How big of a priority is that for you in this next year or two to really push that direct sales percentage upwards? Do you see any traction happening because of some of these sustainability considerations? And again, what do you think investors should be expecting in terms of the trajectory for that direct sales to grow?

Yeah, I think you'll continue to see us improve in that area. I think the Department of Energy finally came out with a study that we have been waiting for to be updated from 2006 or 2008, which was very favorable to the use of waste oil and to recycled lubricants and base oil. And there were about 18 recommendations that come out of that DOE study that just came out last month And our hope is that this administration will take a number of those recommendations and implement change, whether it be on incentives or getting government to be a larger buyer of these re-refined products. The government today is a large customer of ours, but predominantly Army customers. And so many of the other agencies would be strong buyers of our re-refined products. So I think you're going to see a real favorable movement with this administration taking some of those DOE suggestions and moving forward with them.

Great. Looking forward to that. Thank you so much. Thanks, Don.

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

Yeah, hi. Good morning, guys.

Good morning.

Hi, David. So incinerator utilization used to hit the 90% range and higher periodically, but really over the past two or more years, it's only done so in one quarter. And I'm wondering, is there any structural reason why this is, or should we expect that to continue? Just any help on that. It seems like it used to be 90% pretty regularly, and now it's rarely so.

Yeah, Dave, this is Mike. I'll take a shot at it. I mean, I think what's happened over the past couple of years is those kind of higher margin streams have come into the network. And the reason why they're higher value, they're harder to destroy, and they do take some time in the kiln. And that has... has prevented us from doing other types of low-margin soil jobs. And overall, it's a good thing, frankly. And my view, as I've said time and again, is that mid-'80s, high-'80s, anywhere in that range is good. And then from there, it's just a mix of business that goes from there. Certainly nothing structural. And we certainly know where the money is being made and know where the value is and take very good care of those incinerators.

Okay. Yeah. Sounds like a high-class problem. That's good. And second, in the release, you said with fewer waste oil outlets available, market rates charged for used motor oil remained high. Can you outline any near-term cyclical issues, but also the longer-term secular factors that are at play behind that statement?

Yeah, I think there's just been such a glut of re-refined products. As you know, the major refineries out there certainly have scaled back a lot of their plants, and with that, the reduction in fuel and gasoline and subsequently base oil, so that's been positive for our base oil business. But as it relates to jet fuel particularly, which is basically kerosene, You know, we've seen a lot of that surplus, you know, go into the fuels market and the bunker market, and particularly with IMO going to a half percent sulfur. You know, it appears to us that what we've seen is those surplus gallons going into the fuels market rather than the aviation market, and therefore the output for recycled fuel oils, you know, like the surplus of industrial oils that we see. has shrunk and some of it might have been pandemic related, but I think more of it was just a change in how the market is moving with IMO. And so I think this year as the airline industry recovers and everybody's guess on when that's going to take place and how fast it's going to happen, we think we're in a really good position here to, again, see our base oil and our re-refined oil become real attractive. outlet for waste oil.

Sounds good. Thank you very much.

Okay.

Thanks, Dave.

Our next question comes from the line of Hamza Mazari with Jefferies. Please proceed with your question.

Hi, this is Mario Portolacci filling in for Hamza. Just a question on PFAS with the new head of the EPA. Could you just talk about whether you think legislation gets done quickly or a timeline you think that that could happen in regarding PFAS and then any updated views or your best guess on what will happen there. Just wondering if you have any high level thoughts on potential revenue opportunities or at least how much of the pie you think you guys can capture if that becomes an opportunity. And then alternatively, do you view PFAS legislation as a negative or a neutral or positive for the solid waste companies?

So I'm not going to comment on the solid waste companies. I'll let the solid waste guys comment on that. But, you know, I'd say that, you know, I think that the Democratic House, Senate, and White House is going to move along PFAS legislation much faster than in another scenario. And I think that we know that PFAS is dangerous. We know that it ultimately will get some form of hazardous designation. You know, the challenge today is PFAS is not hazardous, and so we've got to work through that. But I do think that it certainly is not really in our budget or guidance numbers today, but certainly I think that has a long-term impact in the industry. And regardless of how it needs to be disposed, whether through landfills, closed-loop landfills, or incineration, or water treatment, we have all those solutions. So I think we're in a really great position today. to address the PFAS issue as it becomes more and more real.

Yeah, I think from a legislative standpoint, it would be positive for our business. Absolutely. It wouldn't be a negative at all to us at this point.

Great. And then just following up on the M&A question, I mean, could you give us a little more detail on where you're particularly focused in 2021? And then maybe you can comment on what valuations are looking like right now.

Yes, certainly the waste disposal side of our business, our tech services business, which now includes safety, clean, environmental. That is an area where we have, we think, some real opportunities to continue to grow, to drive more volume across our network, to leverage our recycling assets. We have last year put in significant capital investments incinerators to expand our capacity. Some of it includes shredding. Others are just more tankage and more feed systems and better feed systems. You'll continue to see us invest more in our end disposal and our recycling assets. And so expanding our collection network and growing our volume, which we've been really successful looking at. The fourth quarter was up about 50,000 drums. I think when you look at our deferred over $70 million, that kind of speaks to just the volume of waste that we have in the network. And that is really where we want to focus our M&A activity on, is to continue to grow that side of our business.

Got it. And then just one more, and I'll turn it over. And then just... some clarification. I might have missed it earlier in the call or in the prepared remarks, but could you just remind us what you're thinking on COVID-19 cleanup or how much is baked in to 2021? And then can you also just remind us what the margin profile is for that business?

Sure. So it's about $120 million for 2020, and we said $25 to $35 million in revenue in 2021. I think that's a reasonable estimate. The margin profile is a high margin business. It's in mid to high and upper 30s.

Great. Thank you so much. Thank you.

Our next question comes from the line of Michael Hoffman with CFO. Please proceed with your question.

Thank you very much. Can we do a little bit of a waterfall, if we could, to take your – Revise to the 573 on a like to like basis to the guidance EBITDA and waterfall the known it doesn't repeat. There's a reduction in decontamination and then sort of recovery part. What are those pieces to bridge the say the midpoint of 2021?

Yep, Michael, I'll take a shot at that. So you know that the two big kind of headwinds we have going into 2021. we're assuming that the decontamination work drops kind of precipitously from the $120 million we did in 2020 to, let's say, a midpoint of $30 million in 2021. So that $90 million drop of revenue is going to take a number of 30%, 35%. It's going to have a big impact on our earnings. And then also, we did get $42 million of government funding, both in the U.S. and with the majority in Canada, that drops also from, let's say, $42 million to $2 or $2.5. And so those are, let's say, the two kind of monster headwinds that we're going to have to address here in 2021. And that's a good thing. I'm really bullish on, as I said in my prepared remarks, about our end markets and the growth in our end markets, whether it be in waste projects and remediation, whether it be household hazardous waste days in, let's say, in the ES side. And, of course, on the SK side, the re-refiners were down for months last year. We shut them down because of lack of demand. And so those come back on, and we should have a really good year. And so I think that, you know, you look at the numbers on an apples-to-apples basis, it's down a little bit, and you're like, well, gee, that's interesting. But really it's due to kind of the one-off unique things and the overall business growing again, which is really what we needed to do.

So if I follow that math and it's a baseline starting at 500 goes to midpoint at 545, so you're up 8% on a like-to-like basis.

That's right, about that, yep.

Okay, and so am I thinking about this number correctly? If I take the 120 out of 20 and then compare revenues year over year, you're down almost 390 million.

That's right.

That 390 is... Would you call it all pandemic related? You know, because of whatever got disrupted, delayed, deferred, that's all pandemic related?

Absolutely.

Therefore, is there any assumption in your outlook of some of that already being recovered in the guidance? And how much are you assuming? And therefore, that's the potential upside surprise, the pace of which we resume that same 390 of activity.

That's absolutely, you got exactly right. It is, you know, that is the organic growth number, if you will, taking out the decon work. And that is the X factor, is how fast do people get on the road again? How fast do people kind of, you know, kind of change their motor oil again? That is, you know, the environmental services business did pretty well. And we're going to lose the decon work, but then we're also going to pick up, you know, let's say household hazardous waste days, which have been on hold for months. And those, I think that's a kind of a modest growth in that business.

I think we should also mention that we gave away quite a number of price concessions to a lot of our top accounts, and when crude oil crashed in the second quarter, a number of our customers came to us looking for concessions, and certainly we gave those, and we've been working with our customers. But our goal this year is to normalize our pricing again, And we've recently raised prices on our incineration business, particularly because of just the sheer demand and volume. So I think there's some price improvements in there, both on concessions getting back to normal and the price increases. Absolutely, James. You're right.

And so how would you want us to think about that 390? How much of that 390 – and let's just apply the corporate average margin, call it 17.5 to that – how much of that's in – the low to the high of guidance?

The high end of the guidance, we get all the way back there. On the low end, we're obviously well short of that.

Okay. So that's the way to think about what that opportunity is. And then can we talk about some of your metrics? You all have done a really good job of moving the free cash flow as a conversion of your EBITDA out of the 30s into the 40s. You're in this sort of low 40% of EBITDA now, 43%, 45%. Is that sort of where it is and now it's all about the sustainable growth of it, doing the asset utilization and pricing, or is there still improvement in the actual ratio?

You know, Michael, I'm sitting here with my CEO. He'll never say we're done. He would never acknowledge that, oh, no, we're in great shape, just keep it going. I do think there's opportunity there. The team does a great job of kind of – we have five refurbishment jobs, for example. We build our own trucks. There's And we're going to continue to do that, maybe expand on that. There's opportunities here to drive more free cash flow, better working capital management, better controls of inventory and receivables. I mean, I don't think there's a – I think cash conversion is going to be fair.

So if you thought about that, that was a setup. I knew Alan was sitting there going, of course it's going up. Where can it go? What's practical?

Yeah, and our goal is to get to $300 million in free cash flow, and I don't think it all has to be through earnings. And so I think that we have, as part of our incentive plans, we all have targets to lower our receivables. We all have targets to lower inventory and to manage our working capital better, and I think there's opportunity there using systems and processes for just that.

And if I thought about that $300 million as a percentage of your EBITDA, what do you think that is?

The time will tell how fast, but I do think that we've had great trajectory. As you know, we've had an 8%, 9% CAGR on free cash flow over the past few years, and that should continue.

Okay. Then lastly for me, on safety clean oil, what was the plant production volume in 20, and are we back to 150 million is what should be produced in 21? So I can compare those two numbers.

I don't have the historical number, but all plants are kind of fully operational here in 2021.

So 21, you assume to do, you should, all things being equal, put out 150 million gallons of base oil.

Probably a little bit less than 2019 still because of the pandemic. The pandemic still having impacts on overall miles driven. But, you know, we certainly, as you know, we shut down four of our plants for, you know, a number of weeks already. because of, and several for months, because of not enough oil to collect because of all the shutdowns and not enough oil to sell because of the same. So I think you're going to see that come back nicely this year.

Okay. And I've said one last one. I just want to clarify on PFAS. You don't actually need legislation. If EPA puts out an MCL and then enforces to the MCL, that in itself will drive the part of the market that's most important to you, which is remediation. And legislation would be more about what might happen on the drinking water side. Would you agree with that?

Yeah, I think that's true. And we're certainly seeing opportunities. We have a pipeline of PFAS opportunities, for sure. And we see customers realizing that they need to get ahead of that. And again, most of this that we see is a lot of it is foam fire related and fire foam related, I should say. And I think those are the natural locations where they're trying to quantify and understand what the remedy is going to be. But the legislation or EPA mandating certain changes I think would be helpful to have a framework to work around.

Got it. Thank you so much.

Have a good year. Thanks, Mike.

Our next question comes from the line of Jeff Silver with BMO Capital Markets. Please proceed with your question.

Thank you so much. I was looking over the transcript from last year's call at this time, and obviously it was before the pandemic really had an impact, but there was a lot of conversation about IMO 2020. You talked a little bit about this, and I know it may be tough to quantify, but is there any positive impact that you're building into your guidance for 2021 from that?

Not yet. No, it's really been such a disruption, as you know, particularly with just the jet fuel market, particularly the glut in that fuel. So I think until that works itself out, it's really difficult to quantify right now.

Okay, that's fair enough. And then one kind of housekeeping note. Mike, you talked a little bit about The change in the adjusted EBITDA calculation for next year, I do understand it. But why now? I mean, the peers have been doing it for a long time. It's been in your leverage agreements for a long time. What precipitated this change?

Yeah, Jeff, good question. Two things. First of all, we did change kind of all our debt agreements. And the last one was to change was the revolver, which we did in November. And so we thought that was a good time to do it. And we thought the first of the year would be a perfect time to do it and set expectations appropriately. And those were kind of the driving reasons.

Okay, great. That's very helpful. Thanks so much.

Okay, Jeff.

Our next question comes from the line of Larry Solo with SGS Securities. Please proceed with your question.

Great. Thanks, guys. Good morning, and congrats on a really good year and a challenging environment for sure. Thanks, Larry. Absolutely. Just a few questions just on the mix and the pricing. You mentioned, Alan, you're going to perhaps firm up some pricing on the incinerator and the disposable business at least. Just trying to parse that out. Obviously, mix has driven a great improvement the last few years, and even this quarter. Just looking at the quarter first, was there anything unusual with the 16% increase in price per pound on the incinerator side and over 40 in the landfill? Any unique waste streams in there? I think there was something that arrived late in the third quarter that sort of benefit this quarter? And, you know, the second part of the question is, as you look out over the next few years, do you see sort of some of these gains in mix at least slowing? Can you continue to, you know, at least maintain this pricing and maybe improve it slowly over time?

Yeah, Larry, I'll start now, and feel free to chime in. You know, Larry, this is really just a continuation of what's been happening all last year, where, you know, kind of high-margin waste streams, us going after aggressively marketing and going after these waste streams, and achieving getting these waste streams into our network. Alan talked about drum volumes. Drum volumes are a very profitable business for us. We have a lot of drums in Q4. And I don't see that – I don't think that's a unique Q4 thing. I think that the price per pound was great, probably a little higher than normal. But, you know, we've had this – we've had double-digit, you know, kind of pricing all year, Larry, and that just continues here in Q4. I don't see that changing. You know, we talked to the team. And they say the pipeline is strong to continue to get these kind of high-margin streams, and I don't see that kind of changing, certainly in the near term.

And I think just two things that I would add to it is that we're seeing new generators, right? And so you've got this chemical renaissance where, you know, low natural gas pricing has really brought back, you know, a number of plants and manufacturing to the states. And so we're seeing, you know, the new plants now starting up, new waste streams coming into the market, and some of those are real – difficult streams to handle. We're also seeing captives, you know, reducing and also being impacted from the pandemic and subsequently maybe outsourcing more of their material than they historically had because of the pandemic or because of the maybe demand on some of their operations. So there has been a little bit of that going on on the captive side. So I think both those things really help us from a mix. an average price per pound.

And on the captive, as they start to outsource more, does this inevitably lead them towards a full closure of their captive? I would think if they outsource more, maybe that's even less efficient for them, sort of double-paying, if you will.

You know, most captives have been built as sort of an end of the pipe of their production facility, and many times it's because of the difficult type of waste streams that they are that they actually... put that kind of capital investment in. And with all the changes that have gone on in the chemical industry, the acquisitions, the divestitures, the impact on regulations to those plants has certainly driven some of them to look at outsourcing, as well as a reduction in some cases of volumes being handled at those captive sites, making it economical to now look at outsourcing it rather than continue to run a captive plant maybe at 30% or 40% utilization. So I would say those are the things that are driving that change, Larry.

Right. Okay. And just switching gears real fast, on the safety clean side, you mentioned collection prices remain high. As the price of oil starts to come back up, or at least in the beginning of 2021, it's certainly rebounding. Does this face more challenges that, you know, the maybe, you know, oil places don't want to necessarily give you their, you know, their oil at such a high price if the underlying value is increasing?

No, Larry, it's really, we may have just spread, as we've said before, and that would put some pressure on our charge for oil program. But I think that, you know, really what we need is demand to come back, and we do see that happening here in 2021. Okay.

And then just lastly, on the cost cuts and whatnot, obviously in 2020, I think you guys did a, you know, expedited job and sort of keeping the cost down as revenue sort of swooned in the middle of the year. I would think this makes for a little bit of a difficult comp as things come back, but it does seem like you guys are, you know, some of this has been sort of offset by productivity gains and maybe you're not bringing back all of your staff or maybe it's less third party and more direct expenses or direct employees. Perhaps you could just give us a little more light on that.

I think a little bit of both, right? You know, certainly... We have learned, you know, to operate with a lot less people and a lot of people working from home. And so we have certainly been able to reduce costs in many areas of the business, and we think that those costs can continue to be at those reduced levels. And that's, I think, why, you know, you're looking at SG&A and some of the benefits we see grow through there this year. Mike, did you want to add anything?

Yeah, I was just going to say, Larry, that as you look at 2021, you know, things like that we got a natural benefit for, like health care or T&E or commissions, I mean, those we hope come back with the economy coming back and people being able to travel and people hitting their incentive targets and getting commission payments. That's great. But that only happens if the economy does come back. If it doesn't come back, I think that we'll still stay at these lower levels. I also would say that, you know, Alan and the team did a good job of using the pandemic and leveraging the pandemic to look at third-party spend and drive and do a lot more things internally, whether it be third-party subcontractors, third-party labor, third-party trucking. I mean, those costs, they don't come back. I think those costs stay out of the business, and we definitely use the pandemic as a catalyst to drive some of those costs out of the business.

Got it. Okay, great. I appreciate that. Thanks, guys.

Thanks, Larry.

As a reminder, if you would like to ask a question, press star 1 on your telephone keypad. Our next question comes from the line of Jim Ricciuti with Needham. Please proceed with your question.

Hi. Good morning. The question on the COVID-related work that you're anticipating, you know, let's call it the $30 million at the midpoint. Is the assumption that that's more, I would assume, is more front-end loaded? Are you seeing that happening? that activity at a relatively higher level in Q1 again because of what we're seeing?

Yeah, Jim, that's definitely loaded in the first half of the year. We do think that, you know, with the turn of the calendar, as you know, we had a great finish in that decon level that was still there. It didn't change in January. We do see it now, as I mentioned in my prepared remarks, we do see it starting to slow, and frankly, that's a good thing. So it's mostly that midpoint of $30 million is definitely a first-half phenomenon.

And certainly we have a backlog in our field services business so that, you know, our intent here is we're going to take a lot of those people and responses and get back into the basic field services side of our business, which certainly got impacted quite a bit with the COVID, but the response work certainly offset that. But, you know, we have a lot of backlog across our business here, and we think, you know, that capacity will free up and be utilized in other parts of our business now.

Alan, is there any way to maybe size that field service backlog that might have been deferred a bit just because of you dealing with some of the COVID-related emergency work?

Yeah, it's hard to quantify, you know, but, you know, the pipeline is really good in that business. It's strong. With the consolidation of safety, clean, environmental, with clean harvest projects, you know, tech services, we're seeing a lot more project opportunities coming across. And quite frankly, you know, those are smaller jobs, but a lot more of them. And honestly, we weren't as responsive probably to that cross-sell as we could have been last year due to just the demand we had from COVID. And so I think we're going to be more responsive. We're going to, you know, convert more of that, those opportunities into field services moving forward.

And it sounds like you've been encouraged by the pickup in the ES business, certainly from the lows. I think that's probably fair to say. I'm wondering, as you look at that business, which areas, chemicals clearly has been a nice recovery. Which areas have been lagging that we might start to see pickup as you think about 2021?

Certainly the refining side of our refining business, which is about a $500 million business for us, they've really been hit hard, particularly in the Gulf area, as you know. And so I would say that's going to lag. The oil and gas industries, particularly in Western Canada, some of the work that we do out in the oil and gas industry, Drilling side, you know, the waste disposal we get off of the drilling rigs and what have you, that's obviously just starting to come back. So those are some of the parts of the industries or the verticals that we're seeing lag behind. But our, you know, manufacturing is really strong. Chemical is really strong. Pharmaceutical, biotech, those industries are really strong. We're in some really nice business in that area. So I think all in all, we feel pretty good that, you know, our customers are coming back.

On the SK business, the branch business, maybe you can just remind us seasonality in Q1. I guess what I'm asking is, it was kind of a flattish Q4 versus Q3. Are you seeing signs there of the pickup inactivity, or is it still too early in the year to really draw any conclusions from what you're seeing?

You know, I think, you know, the safety clean branch business, which is 200 locations strong, um, you know, it did get impacted certainly with some of the weather related shutdowns that you're seeing here in the last couple of weeks, but, and moving into, you know, 2021, you know, we, we saw a lot of markets still frozen, you know, with, with COVID and, and, uh, shutdowns, uh, particularly in Ontario, Quebec, Alberta, California. significant shutdowns and curtailment of activities out there. So that really hurts the safety cleaning branch side of the business. But we're really optimistic that when things turn on and the government opens up more of the country, both the U.S. and Canada, then we'll see a real uptick in activity for the branch. And I think that's why Mike sort of said it's more back-end loaded there.

Fair enough. Last question. Mike, I may have missed it. Did you give any guidance for tax rate in 21?

I didn't, but it should be in, you know, kind of mid to high 20s.

Okay. Thank you.

We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Okay, thanks for joining us today. We continue to maintain a busy IR calendar with many upcoming virtual events, including J.P. Morgan, Raymond James, Bank of America, and Stiefel. And we look forward to connecting with many of you there, and I hope that all of you and your families stay safe. Thank you.

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.