Clean Harbors, Inc.

Greetings. Welcome to the Clean Harbors third quarter 2021 conference call. At this time, all participants are in 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, Mr. McDonald. You may begin.

Thank you, Robin. 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, President and Chief Operating Officer Eric Gerstenberg, 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 discuss 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, November 3rd, 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 revisions to the statements made in today's call, other than through filings made concerning this reporting period. Today's discussion will include references to non-GAAP measures. Clean Harvest believes that such information provides an additional measurement in consistent historical comparison of its performance. Reconciliations of these measures for the most directly comparable gap measures are available in today's news release, on our website, and in the appendix of today's presentation. And now, I'd like to turn the call over to our CEO, Alan McKim. Alan?

Thanks, Michael. Good morning, everyone. On slide three, you can see the strong contributions we received from both environmental services and safety clean sustainability solutions business. really imposing the highest quarterly revenue in our history. Within environmental services, we benefited from a consistent flow of high-value waste streams in our disposal and recycling network. We also benefited from a recovery in a number of service businesses in the quarter, particularly our industrial services business. The SKSS segment outperformed our expectations. Market conditions caused the re-refining spread to remain wide all quarter, and the team executed well in a disruptive environment. Product demand was robust throughout Q3 due to the industry supply shortfalls and growing interest in our sustainability offerings. Without question, our industry has had to deal with economic headwinds, including higher supply chain, labor, and transportation costs. We met those head on, putting in place a multitude of necessary price increases to offset the rising expenses. Adjusted EBITDA grew 10% from a year ago, resulting in a healthy 19.5% margin. Adjusted free cash flow was in line with our expectations, and we're on track to hit our new increased annual target. Turning to our segment starting on slide four, environmental service revenue grew 15%. Favorable mix in pricing in our disposal network, combined with increased activities in a number of our service businesses, including industrial and field services, really drove the year-over-year increase. Industrial services grew 24% as customers continued to move forward with large turnarounds to reduce the backlog of maintenance projects that have been deferred due to the pandemic. Our base business and field services, excluding decontamination work, was up approximately 25%. reflecting a more typical level of scheduled work and other smaller response jobs. As expected, adjusted EBITDA in the ES business segment was down from the third quarter of 2020 when we recorded a much higher level of government assistance and had significantly more high-margin COVID decontamination work. Backing out those items from both periods, adjusted EBITDA in the segment would have increased year over year. Government assistance programs in this segment totaled $1.1 million in this year's third quarter, compared to $11.2 million a year ago. Q3 of this year also saw significant inflationary pressures in third-party costs, and we partially offset those with higher revenue, pricing, and cost mitigation strategies. Incineration utilization was 82% up from the prior year. we expect to see a lower number of turnaround days in Q4 and should generate stronger utilization to close out the year. Our measure of that expected utilization and current demand for our disposal services is our deferred revenue. At 86.6 million as of September 30th, deferred revenue is at its highest level in our history. Our kilns remain busy as we finish out a very strong year. In Q3, a favorable mix of waste supported by our pricing initiatives pushed our average incineration price up 18% from a year ago. Some of that increase resulted from a temporary high-value waste stream project at our Canadian plant. But if we focus exclusively on our U.S. incinerators, our average price was up 11% in the quarter. Environmental remediation projects remain limited in Q3. With the resurgence of the Delta variant causing an uptick in cases in some regions, a number of customers pushed back cleanup projects and regulators eased completion deadlines. Though landfill volumes declined 5% as a result, strong base business drove a 17% increase in average pricing per ton. Revenue from COVID-19 decontamination work totaled $8 million in the quarter, somewhat higher than we had anticipated due to the uptick in cases, but still down significantly from $20 million in Q3 a year ago. Demand for our core safety clean offerings was positive in Q3. Pot washer services were $232,000 in the quarter. Moving to slide five, SKSS revenue was up 60% to nearly $206 million. as product demand remained robust throughout the quarter. Base oil and blended pricing were substantially higher, and volumes were stronger than the third quarter of last year when the pandemic negatively affected production. Adjusted EBITDA increased more than 41 million year-over-year, while margins topped 34 percent. These results were driven by the further widening of our re-refining spread and the return to more typical production levels. Improvement in the SKSS margin also resulted from the cost and productivity initiatives that we implemented as part of our organizational change that we made over the past year. Waste oil collections were strong, exceeding 60 million gallons for the first time since the pandemic began. Given the margin opportunities in base oil and the additive shortages that exist in the market, the percentages of blended products and direct volumes came in as expected. Turning to slide six, in early October, we completed the acquisition of Hydrochem PFC, a transaction we expect will contribute significant value to Clean Harbors in the coming years. We believe that the addition of HPC will afford us economies of scale in our network and with our combined resources. As a result, we expect to achieve at least $40 million of synergies after our first full year of operating HPC. And not included in that number are any cross-selling opportunities, which we are confident will be broad-based from this combination. The initial integration is proceeding smoothly. We're already starting to capitalize on HPC's leadership in industrial cleaning, specialty maintenance, and utility services, including its unique automation technologies. We've had a number of executive team gatherings as part of our Stronger Together branding campaigns. And for me, those meetings really have reinforced the natural cultural fit between our organizations, a cornerstone of making a large deal like this work. I'm excited about the opportunities ahead. Turning to slide seven, we're continuing to invest CapEx to grow our business, particularly on the disposal side. We completed a large investment in our Utah incinerator this year, following a number of permit modifications. And this investment enables us to increase our containerized waste throughput while managing waste within the total thermal capacity of the unit. As first noted on our Q2 call, we are moving forward aggressively with our plan to add a new incinerator in Kimmel, Nebraska. And on the M&A front, while the HPC transaction closed quickly, our planned acquisition of the Vertex re-refining assets is taking a bit more time to complete. We are cooperating fully with the Federal Trade Commission, which has made an additional request for information as part of the Hotspot-Rodino review. We're working through that request and now envision that acquisition closing in the first half of 2022. We'll continue to look for opportunities, whether those are internal or external, which will generate the best returns on capital. With our debt level and leverage up significantly as a result of HPC, We'll more closely evaluate reducing our debt going forward. We also intend to continue with share repurchases, although at a slower pace than we have in the recent years, given our other near-term capital priorities. So in closing, I'm extremely proud of what our team has accomplished, not just in Q3 REIT, but this entire year. We've executed sharply, capitalized on favorable macro trends, and we've benefited from a rebound in the industrial cycle which has really helped our services business. However, one area that I've been disappointed in recently is our safety. And after a strong start in Q3 in July, there were far too many safety incidences in August and September. Fortunately, all of these were minor, but whenever people get hurt, our performance is diminished. And we're really working with our operational leaders to reinforce our safety practices and ensure that everyone understands the benefits of our Safety Starts With Me culture here. We enter the final quarter of the year in great shape to close out an excellent 2021. However, we do see the challenges created by labor availability and inflation, as well as supply chain and transportation limitations. While we're not completely immune to those obstacles, our company is better positioned than most to address those costs through aggressive pricing, as well as cost mitigation plans and productivity gains. So I expect us to perform well here in Q4 and enter 2022 with a really strong tailwind in terms of market demand. So with that, let me turn it over to Mike Battles.