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spk01: Greetings, and welcome to the Clean Harbors fourth quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. 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.
spk08: Thank you, Christina, 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, 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 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 23, 2022. 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. 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 these 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. With that, I'd like to turn the call over to our CEO, Alan McKim. Alan?
spk07: Thanks, Michael. Good morning, everyone. Thank you for joining us. We concluded 2021 with another great quarter. The environmental services and safety clean sustainability solution segments each contributed meaningfully to our strong Q4 performance. We surpassed $1 billion in quarterly revenue for the first time in our history and delivered adjusted EBITDA of $174.3 million. Strong execution in Q4, aided by a favorable market environment, resulted in adjusted EBITDA and adjusted free cash flow ahead of our guidance. Overall, 2021 was an exceptional year for Clean Harbors, and I'm proud of the way our team delivered for customers and executed on our strategic objectives. Behind our 2021 financial accomplishments were a number of business highlights, including the investment such as our $1.2 billion acquisition of Hydrochem PSE, as well as the planned expansion of our incineration facility in Nebraska, many customer wins, including major awards in the retail space, enhancements in our ESG reporting, which have led to ratings improvements, and strategic structural enhancements, most notably the creation of our sustainability segment. In addition, we overcame the deep freeze in the south that temporarily shut down six of our incinerators in early 2021. We've also been successfully navigating the various phases of the pandemic and combating inflationary pressures certainly not seen since I started the company. While 2021 was not without its challenges, we met those obstacles head on and delivered an outstanding performance, including record profitability and free cash flow. Turning to our segments, starting on slide four, environmental services revenue grew 36% in Q4. reflecting the addition of HPC coupled with strong customer demand and higher pricing. The integration of HPC has gone extremely well, and we're reaping the benefits of their talented team, industry-leading automation technology, and terrific assets. As expected, the cultural fit has been seamless, and we continue to see immense potential to capture synergies and generate cross-selling opportunities. Segment revenue excluding HPC grew by more than 10%, reflecting higher disposal volumes and stepped-up activity at our service businesses, which have mostly returned to pre-pandemic levels. For example, revenue in our legacy industrial services business grew 26% as we benefited from a robust fall turnaround season. In field services, our legacy-based business, excluding HPC and decontamination work, was up 27%, sparked by cross-selling and a good mix of smaller response jobs. Safety Clean Environmental continued its steady rebound, posting a 6% increase from Q4 a year ago. Looking at profitability in the environmental services segment, adjusted EBITDA was 8% higher in the quarter due to the growth in revenue and the addition of HPC. From a margin perspective, we had a tough comparison with Q4 of 2020, which saw $4.7 million from government-assisted programs versus only $240,000 in Q4 of 2021. We also had much more higher margin COVID decon work a year ago. In addition, like all companies, we experienced inflationary pressures and increased costs in the second half of 2021 in parts of our business. We are continuing to roll out increased pricing for all our project and contract work. Customers have an understanding of the current environment we're all facing. And as a result, they're accepting higher than historical price increases. We also are walking away from business when customers are not as receptive to our pricing initiatives. We expect our aggregate pricing actions to offset inflation in 2022. And at the same time, we are implementing other initiatives to reduce our costs, enhance productivity, and increase efficiencies to improve our margins overall. Looking at a disposal network, incineration utilization was strong at 92% in the fourth quarter, up from 84%. Utilization increased because we had fewer turnaround days than a year earlier, allowing us to process more material at our plants and really cut into our waste backlog. We also won projects that included some higher volume waste streams. Our average price per pound was flat from a year ago, based on the mix in the quarter. A pickup in environmental remediation projects in the quarter enabled us to grow our landfill tonnage by 15% from Q4 a year earlier. In the fourth quarter of 2021, revenue from high-margin COVID-19 decontamination work totaled approximately $11 million, greater than anticipated due to the emergence of the Omicron variant but down substantially from $31 million in Q4 a year ago. For the full year, we generated $59 million of COVID decon revenue and recently surpassed over 21,000 responses since the program started in early 2020. Potswasher services grew to 228,000 in the quarter as most safety clean branch core offerings continue to trend positively. Moving to slide five. Revenue in our SKSS segment was up more than 60% through a combination of higher base oil and blended pricing, robust demand, and good production at our plants. Adjusted EBITDA increased more than $40 million as we capitalized on market conditions to maximize our re-refining spread. Adjusted EBITDA margins topped 29%, on product pricing gains and strong management of our collection costs at the front end of our refining spread. We believe the strategic and structural enhancements that we made to our waste oil collection and supply organization have strengthened this business. For example, waste oil collections were up sharply again, growing 14 percent to 56 million gallons. Based on market conditions, our percentages of blended products and direct volumes came in as expected in the quarter, particularly given the additive shortages the market faced in Q4. We expect those volumes to begin to grow again in 2022. Turning to slide six, we continue to execute on all phases of our capital allocation strategy. In Q4, we moved ahead with the Kimbell Incinerator expansion project, which remains on schedule. We also continue to evaluate other ways to grow our disposal capabilities and our re-refining capacity in support of our strategy for disciplined organic growth. On the M&A front, we're continuing to look for potential acquisition candidates that will support growth in each of our two operating segments. We think there are a number of attractive bolt-on opportunities in the marketplace for us to pursue. Before turning it over to Mike. I'd like to end on three key points on slide seven. First, our success over the past five years that you can see on this slide demonstrates what this team and our company is capable of achieving regardless of market conditions. I know we have the best team in the business. Our bench has never been deeper or stronger as we have a great mix of veteran leaders that know the space and talented new faces who we bring fresh perspectives into our industry. Second, demand for our services has never been stronger. One of the advantages in investing in Clean Harbors is that we are a well-diversified company that addresses a broad array of industry verticals through a range of our service offerings. I can't remember a time in recent memory where market demand was so robust across the board with multiple tailwinds. spoken at length about the volumes of waste in our incineration and TSDF network. But our future demand looks even stronger when you add the incremental volumes from retail wins, the healthy project pipeline we're seeing, including opportunities around PFAS and Superfund, and the overall reshoring trend in the U.S. On the service side, everywhere we turn, there are demands for our valuable, skilled workforce. the labor shortages in the market. And that really goes across the board, industrial services, field services, safety, clean, environmental, and tech services, all businesses. And my third and final point is that 2022 will certainly be as active a year for us. We have a long list of initiatives underway to drive success and build considerable shareholder value. And these include improving on our safety performance, which did have a challenging year in 2021, capitalizing on all the market demand that I just mentioned, exercising on our pricing power to cover off the inflation we're seeing, continue to not only retain, but really recruit more of a talented workforce that we have today, completing the HP integration, which would include achieving a $40 million run rate of synergies by the end of 2022. We expect to make significant progress on the Kimbell build-out. And lastly, leveraging our strong balance sheet to accelerate our growth momentum. So I think there's no shortage of activity at the harvest coming this year. We've set the stage for another great performance by the company, which will benefit all our stakeholders in 2022 and beyond. So with that, let me turn it over to Mike.
spk05: Thank you, Alan, and good morning, everyone. Turning to our income statement on slide nine, Revenue increased 41% in the fourth quarter, driven by the addition of HPC in early October and good growth in our legacy business. Top-line growth excluding HPC was 20%. Adjusted EBITDA was 23% higher than a year ago, coming in at $174.3 million. SG&A on a percentage basis was up 20 basis points from a year ago to 14.2%, largely due to higher incentive compensation as well as severance and integration costs. For the full year, SG&A costs as a percentage of revenue were lowered by 20 basis points to 14.1%. As we look ahead to 2022, we expect SG&A costs as a percentage of revenue to come down from the 2021 level to a mid-13% range as we leverage the HPC revenue, work to control cost, and expect less severance and integration costs this year. Over the past five years, we've made a concerted effort to lower SG&A costs as a percentage of revenue to the use of technology and other workforce initiatives. If we hit our target for 2022, we will have lowered our SG&A costs as a percentage of revenue by almost 200 basis points in total over that timeframe. Depreciation and amortization in Q4 increased by 82.9 million, reflecting the addition of the HPC assets. For the full year, depreciation and amortization was 298.1 million toward the lower end of the range we provided in November. For 2022, which includes the full year impact of HPC, we anticipate depreciation and amortization in the range of $330 to $340 million. Income from operations in Q4 increased by 33%, reflecting our revenue growth as well as efforts around pricing and managing our re-refining spread. For the full year, our income from ops climbed by 38% to nearly $347.9 million. Turning to the balance sheet on slide 10, Cash and short-term marketable securities at quarter end were $534 million. The decline from September 30th reflects the approximately $250 million we used as part of the funding for the HPC acquisition. You can also see the impact of that transaction in our debt balance as we enter the year with debt of more than $2.5 billion. Leverage on our net debt basis using our 2021 EBITDA was approximately 3.1 times. Based on the midpoint of our 2022 EBITDA and free cash flow guidance, we expect leverage to be less than 2.5 times at this time next year. Our weighted average cost of debt going forward is 3.55%. That number reflects a new swap agreement we recently put in place to limit our exposure on some of our variable rate debt. And we continue to have no debt maturities until 2024. With approximately 70% of our debt at fixed rates, We are in a great position interest-wise, even in a rising rate environment. Turning to cash flows in slide 11, cash from operations in Q4 was a healthy $177.8 million. CapEx net of disposals was $89.5 million, up significantly from a year ago as we added HPC and are moving forward with some growth investments, particularly in our plants. Our spend on the new Kimbell incinerator was $4.1 million in Q4 and totaled $7.2 million for the year. We delivered Q4 adjusted free cash flow of $88.3 million and a record $326.3 million for the full year. For 2022, we're currently expecting our net capex to be in the range of $310 to $330 million. The large year-over-year increase reflects four items. a full year of HPC capex, growth in legacy clean harbors business, particularly landfill expansion, inflationary costs for materials and vehicles, and approximately $40 to $45 million on the Kimbell project this year. During Q4, we bought back approximately 56,000 shares of stock at a total cost of $6 million. We still have more than $150 million remaining under our existing buyback program. Moving to slide 12, Based on our 2021 results and current market conditions, we expect 2022 adjusted dividend in the range of $765 to $795 million with a midpoint of $780 million. This guidance assumes approximately $115 million of contribution from the base HPC business or $101 million on an incremental basis from 2021. In addition, there are $20 to $25 million of cost synergies We expect to realize in 2022, out of a total of $40 million, we expect from the deal on an annualized run rate in 2023 and beyond. Looking at our guidance from a quarterly perspective, we expect Q1 adjusted EBITDA to be 30% to 35% higher than what we posted in 2021, largely due to the addition of HPC and higher profitability in the SKSS segment. Here's how our full year 2022 adjusted dividend guidance translates to our three segments. In environmental services, we expect adjusted dividend at the midpoint of our guidance to increase in the low 20s on a percentage basis from full year 2021. Even with much lower decontamination work and no money from government assistance programs, we expect a significant increase through the addition of HPC, organic growth in our core lines of business, increased pricing to offset inflation, and our comprehensive cost mitigation initiatives. As a point of reference, this segment received government assistance of $10.2 million in 2021. For SKSS, we anticipate full-year adjusted EBITDA at the midpoint of our range to decline in the mid-teens compared with 2021. As we did successfully throughout 2021, where we exceeded guidance in every quarter and raised it three times during the year. We're baking in some conservative assumptions around the re-refining spread, even though we've not seen a narrowing at this time. Also, this segment received government assistance of $1.4 million in 2021. In our corporate segment, at the midpoint of our guide, we expect negative adjusted EBITDA to be up around 4% or 5% from 2021, largely due to a full year addition of HPC corporate costs offset by lower incentive comp year over year, given the great year we had in 2021, as well as lower severance and integration expense. Based on our current EBITDA guidance and working capital assumptions, we now expect 2022 adjusted free cash flow in the range of $250 to $290 million, or a midpoint of $270 million. That midpoint includes our significant Kimball CapEx investment of $40 to $45 million. While that CapEx increases increase reduces our reported free cash flow, we view that as an acquisition-style investment that will produce strong levels of returns over the long term. I should point out that our record adjusted free cash flow in 2021 reflected a strong positive working capital contribution as we lowered our DSO to a company-wide focus on collections. Let me conclude my prepared remarks with one final thought. When new investors ask me about clean harbors, The point I emphasize with them is the resiliency of our organization. Just look at our five-year EBITDA and free cash flowcharts that are on slide seven. Despite the pandemic and all the accompanying market turbulence that impacted us and our customers over the past two years, we marched on doing what we do best, actively managing the business. We introduced a first-to-market national decontamination offering that many large-scale customers came to rely on. We took aggressive cost actions at the outset of the pandemic and temporarily reduced our variable expenses before ramping back up as the business recovered. We reshaped the structure of our waste oil collection business and closely aligned it to our re-refining operations, which had a hand in the widening of the spread in 2021. Our resiliency goes well beyond our 500 permits, high barriers to entry, and comprehensive set of offerings. It's a 40 plus year track record that has become part of our identity as an organization. As Alan said, 2022 will not be without its challenges, whether that's inflation or labor availability or severe weather. Regardless of what those conditions are, we are confident in our ability to respond, maintain the profitable growth path that we're on, and deliver significant value to our shareholders again this year. With that, Christine, please open up the call for questions.
spk01: 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.
spk02: Hey, good morning, guys. Good morning. Hi, Tyler. Hey, just a couple quick housekeeping items. But one, what is the assumption that's built into the 22 guide around decon work? And then two, given the success, it sounds like your incentive comp accrual increased in 21. Just how much of a benefit in dollars would that be if it just normalized?
spk05: Yeah, Tyler, I'll take both those. So when you think of DECON for 2022, you know, less than $10 million. I mean, that's a good thing, less than less. We saw a little bit early in the year, but it's been slowing way down. When you think of incentive comp, you know, I'd say it's $5 to $6 million of tailwind into 2022 collectively across the organization.
spk02: Right, okay. Okay, that's very helpful. And then, so... You know, again, Mike, thanks for all the guidance. I know you don't guide to revenue or margins, but there's just a lot of noise in ES margins. I mean, we're layering in HPC. We're taking out DECON. We're lapping these government payments. But if you stripped all of that away at a very high level, I mean, are you expecting your core ES margins to expand in 22, again, with all the pricing and cost initiatives that you guys have talked about?
spk05: Yeah, Tyler, you know, it's a fair question. You know, it's getting tough to forecast, you know, revenue, even on the ES side. But I would say to you that we have made real good progress on the pricing initiative that Alan mentioned in his prepared remarks. And we're really kind of making, covering off on inflation, plus cost action should get our, should get margins to expand. The way I'm thinking about it, and kind of, this is more of a first half, second half, I'd say first half, you know, margins are we'll be under pressure. I mean, Q1s are in the Q2. Back out, they'll be much better. I think when you look at ES for the year, kind of year over year, I think it's going to be flattish for the year.
spk02: Okay. Okay. That's helpful. And then, so, Alan, on the 92% incinerator utilization, I mean, that's a great number. I assume it's basically full practical utilization. But looking ahead, just given the backlog, the incremental 3M tons, I mean, should we assume that that's kind of where The utilization will sit. Maybe it bounces around a little bit with Q1 or downtime, but just any thoughts there? Eric could probably take that one.
spk07: Eric?
spk09: Yeah, I'll take that, Tyler. So for the full year in 2022, we expect our utilization to improve overall annually from 2021. We continue to have a strong backlog. The 3M volumes continue to flow into our network. we have a strong project pipeline that will help with that utilization as well. So all things considering, we expect overall annual utilization to improve year over year.
spk02: Okay, that's great. And then just my last one real quickly. So it's a little bit of an odd question, I guess, but I have read a few stories about bird flu kicking back up in the Midwest. So Alan, I know that was a major emergency response event back in 2015. I'm just curious if you're seeing Any calls on mobile incineration or just anything to note there? Sure. Eric, do you want to take that? Sure.
spk09: I'll answer that as well, Tyler. This is Eric. We have not seen anything yet that has been substantial. We're obviously continuing to be tied in with the government to be able to respond to that, but we haven't seen anything substantial at this point.
spk02: Okay. Okay. All right. Appreciate the time, guys. Okay. Thanks, Tyler.
spk01: Our next question comes from the line of Noah Kay with Oppenheimer. Please proceed with your question.
spk04: Thanks so much for taking the question. Obviously a big event from an M&A perspective in the industry over the last few weeks with RSG announcing the agreement to acquire U.S. Ecology. I guess certainly would welcome your thoughts on potential applications for the industry broadly, but what I really want to ask here is about behavior in the industry and and particularly during such an inflationary period, you know, RSU really seem to have a thesis that, you know, the environmental services space is going to continue to go through maturation and improving rationality in terms of competitive behavior and pricing. You know, you talked about having such a shortage of, you know, skilled labor in the industry amidst other inflationary pressures. I guess, what are you seeing in terms of competitive behavior in the market right now as you look across lines of business? And how does that play into your expectations around pricing for 2022?
spk07: Yeah, I think probably the biggest issue that all competitors face is staffing, transportation costs, hiring drivers, everything that you read about, even shortages of people moving rail cars. And so a backlog of rail is even a challenge for many of us in the business. And I think that our observations at this point in both segments is really people struggling and dealing with those kind of issues, and certainly not in a position where they're discounting their services to take on more that they can't already handle. And we're probably in the same boat here. As I mentioned, our book is extremely strong. Our backlog is stronger than ever. You know, we have several thousand positions open. We continue to look at opportunities. We have approximately 20,000 employees. We look for an additional 10% growth this year in staffing, and that is really driven by our sales and the opportunities we see in the market. And I think those opportunities are probably across the board with our competitors as well.
spk04: Right, thanks. And second one, you mentioned in the prepared remarks looking for ways to increase disposal capacity. I think, Mike, you might have mentioned some increased capex in the outlook for landfill expansion. Can you just touch on that a bit more? Obviously, there's a strong backlog here, but maybe you can comment on the drivers, the need to expand your disposal capacity and where you think you may see the most progress outside of what you've already announced with Kimball?
spk07: Yeah, I'll just comment that this year is probably going to be our most significant spend in landfill expansion, I think, Eric, over about $15 million, roughly?
spk09: Close to $29 million.
spk07: Oh, double that.
spk09: With the expanded cells.
spk07: Okay, good. So why don't you touch on that, if you would?
spk09: Yeah, so we have a big investment in a few of our landfills of expanding cell capacity. Obviously, the pipeline that we see across our project space is robust. We continue to target improvement within our capacity in our incinerators. We annually target 5,000 to 10,000 tons of growth initiatives. As Mike had mentioned, we had a nice expansion this past year in aragonite, our incinerator in Utah, where we added a shredding system. So we continue to look at key projects throughout our network to expand our capacity.
spk07: I think California was the $15 million expansion roughly, but Willow.
spk04: Okay, that's great, Colin. Thank you.
spk07: Thanks, Donald.
spk01: Our next question comes from the line of Hamza Mazzari with Jefferies. Please proceed with your question.
spk12: Hi, this is Mario Cordolacci filling in for Hamza. Just, I guess, going back to the RSG U.S. Ecology DLP, Maybe you can just remind us, as of today, what your market share is in hazardous landfill volume and incinerator capacity. And then, I guess, also, where do you see yourself in consolidating the space? I know you talked about having an active M&A pipeline, and you're looking at potential candidates. But maybe you can give us an update on, I guess, where you stand and kind of your expectations for where you can be as a consolidator also in this space.
spk07: Yeah, I think, you know, obviously U.S. Ecology is a wonderful company with tremendous assets and been a competitor of ours for as long as we've been in the landfill business, particularly dating back to 2002, I should say. And, you know, we, as Eric mentioned, you know, we're going to spend a significant amount of capital expanding our existing landfills we continue to look at opportunities to expand our landfill footprint. There hasn't really been any green-filled landfills built in dozens of years that I can think of. On the incineration front, as you know, we're the number one player in incineration. We built an incinerator in El Dorado, and now we're really duplicating that plant in Kimball. And quite frankly, we continue to see opportunities, particularly on the incineration front, because many of our customers, captive incinerators, are looking for alternatives, you know, to either shut those down or to divest them. And so we really are focused, you know, on expanding our existing landfills and adding more incineration capacity across the board.
spk12: Do you have an update for kind of the market share? I think the last thing I saw you guys put out was in 2019 with like 66% share in capacity, in incinerator capacity, and I think 30% in hazardous landfill volume. Is that pretty consistent now compared to when it was back in 2019?
spk05: Yeah, Mario, I'd say that's fairly consistent. I would say like 70% in sin and maybe 30%, one-third, two-third type of thing in landfills.
spk12: Got it. Okay. And then just, just the last one, just given what's going on with the oil markets, I don't believe you guys forecast spread. Um, but maybe you can just kind of give us an idea of, of how you're thinking about, um, I guess the, the, the conflict and, and, and how it's driving, um, oil prices and, and, and I guess where the, how much can you guys benefit from this? Or, um, I know it's obviously about managing the spread, but just give, just give us more color around, um, Again, kind of the impact and maybe even benefit or if there's any kind of negative take on this as well to your business, just would love to get your thoughts.
spk07: Sure. I think, well, a couple of things. One would be I think clearly we're seeing the benefit of IMO 2020. Even after going through the pandemic, you know, not really clearly seeing the full impact of that, you know, through all the changes that went on and shipping and shipping. and other changes to the petroleum market, so to speak. I think clearly we're seeing that with the demand on low-sulfur oil driving record pricing in that area. So with that, we certainly see a huge growth in the volumes of waste oil that are available to us at a much lower cost because of that. We're also seeing customers being very – demanding more of our green oil, our re-refined oil. And our pricing discount that had historically been in place really has been eliminated. And we are now able to price our base oils at a very strong market rate because of the demand for our recycled products. And so we continue to look at opportunities to expand our production to improve on our processes to drive more volume of base oil through our refineries and other opportunities to continue to grow that side of our business because we think that is the long-term trend for the use of these waste oils that have been generated. Great. Thank you very much. Okay. Thanks, Mario.
spk01: Our next question comes from the line of Michael Hoffman with Stiefel. Please proceed with your question.
spk11: Thank you for taking the questions this morning. We have a bunch of housekeeping ones on internal growth. I'm not internal growth. Internal cost of inflation. Can you share with us what you're estimating that is in your business model?
spk05: Yeah, Michael. I'd say it's mid to high single digits in the 2022 model.
spk11: So, I mean, well, that's an enormous range. So is it 5% or 8%?
spk05: It depends what parts of the business we're talking about, right? So it's hard to – it's not one number that fits all things, right? So some parts of our business, inflation is a little more temperate, and some parts are pretty aggressive. It depends if it's a labor-intensive type of business or not.
spk11: Okay. So that leads me then to the price question, and you've made the comment – I think it was in Alan's opening remarks that you will cover the cost of inflation with price. So that says across the book, you've got variability of price between five and 10%, one. Two, do you see 21 as maybe being a seminal event where you can go forward from here as inflation normalizes and retain more pricing control in the business. It becomes more of a factor.
spk07: I guess, Michael, I would say that our relationship with particularly our large accounts has been one where if they're going through downturns and suffering through challenges like they did when the crash of Crude Oil took place as a result of COVID, we gave a lot of concessions. and, and, and, uh, even though we had contracts in place. And so we're doing just that today where, look at, we, we have a lot of long-term contracts that are worth, you know, several billion dollars. And we're, uh, realizing that we have significant cost increases because of crude oil, because of transportation costs, because of labor, and really this whole supply chain disruption has taken place. And so, you know, we're going back to those same accounts and, uh, really driving price increases, not to gouge or to drive margin. We're driving, you know, to keep up with inflationary costs. And I think customers are very willing, you know, to take on those cost increases because they see it as legitimate. It's really us for us to continue to drive margins by driving operational excellence and cost initiatives and other ways of improving our business, as well as driving our top line and cross-selling, particularly on the HPC side, that's where we're really going to see some margin flow through in our business this year.
spk11: Okay. Fair enough. Mike, within the guidance, have I sort of calculated the way you framed SKS down year over year? It's about $35 million of the $100 million of spread advantage, you're assuming, comes out.
spk05: Yes, sir.
spk11: Okay. So I got that right. All right. And then on deferred revenue, you know, it looks like the seasonal pattern between 3 and 4Q was pretty muted and then it's pretty healthy year over year. So that's another data point that says really, really strong demand and incineration essentially sold out. What's your assumption of, one, is that a correct assumption? And two, what's your assumption of what's not reflected in that number that's still sitting at the customer?
spk05: Yeah, so the deferred revenue made some real progress in Q4. You know, Eric and the team did a good job of kind of, you know, kind of thinking creatively about how to move waste more efficiently and got after that backlog pretty good. I still think there's a lot of waste at customer sites. You know, the good thing, Michael, when you think about 2022 and what's not there, what made me one of the happiest things when I did the analysis, when we looked at the quarterly reviews, what landfill volume is picking up. And so that really is an area we, you know, we've been on these phone calls for two years now talking about landfill volumes being down year over year. And that's really talking about larger projects. And that really is, I think, how we're going to grow and how we're going to, you know, maybe exceed the guidance we're giving you this morning is those landfill projects, you know, kind of coming to fruition. We've been talking about that pipeline for a year or so now. And the good news is we're hopeful that the variants, you know, COVID's in the rearview mirror and those projects start to free up. And so I think that That's, you know, the incinerators are running well. We got more opportunity there. But really, it's the landfills where I think we're going to drive good growth in 2022.
spk11: Okay. And then on the labor side, Alan, everybody's facing this issue. This isn't unique to Clean Harvest for sure. But would you characterize that the business could have grown more if you had more labor, but you're not losing business? It's a function of nobody could do it because there's a labor issue?
spk07: Well, I think we do have a lot of subcontractors and partners. And so I do believe that we're meeting customer demand, but it's costing us more. And I think that has been part of our margin issue. And so we, again, we need to drive price improvement across some of those areas where we're seeing increased costs. And our recruitment, we need to accelerate that. And so we actually have reorganize somewhat in our recruiting training onboarding area to accelerate that and create sort of the labor pools that we need for the peaks and valleys of what we see in our business throughout the year okay and then Mike we bridge a couple things between capital spending and free cash flow on the guide and they kind of go hand in hand obviously so in free cash flow
spk11: If I remember correctly, you had a pretty good asset sale number, so I've got that's a headwind. I heard earlier that Tyler's question, there's five to six million of cash that gets paid out in the spring for comp. Kimball, what's the incremental on the landfill cell development versus a year ago? I hit all the items that I would have to think of as headwinds to the free cash, some of it's in capital spending, some of it's things like asset sales.
spk05: Yep, so the way I'd say it, Michael, is that Kimball is, let's say, $35 to $37 million more this year than last year. Landfills, as Eric was just mentioning, $15 to $20 million more. Asset sales, as you saw in the earnings release, we did $22 million last year. We're probably closer to $10 this year as we look at the press release. And the working capital is probably a $20 million good guy we made, as I said in my remarks. You've got kind of DSO improvements in other areas. So I think kind of all those add up to kind of mid-80 number. And so you take that and add that to the 270, and you get to like a 350, 360 number, which I think is pretty good growth. But that's how I think about it. Which then, if you take it over EBITDA, 45% conversion ratio, which I think is fairly consistent with historical patterns.
spk11: Great. And then for our modeling purposes, how do we layer in Kimball data? in 2023 and 2024 as far as what we're spending so we get that number right?
spk05: I think it's about $80 million, Eric. Yeah, $80 million over the next couple of years. Yeah, I thought it was $80 million in 2023, and then I forget what the 2024 number is.
spk11: Okay, so use $80 million in 2023, and then it comes down to, I think you're spending, I've forgotten now, $180 million, is it?
spk05: Yeah, $180 million all in.
spk11: Okay, that's great. Terrific. Thank you very much. Thanks, Michael.
spk01: Our next question comes from the line of David Manthe with Baird. Please proceed with your question.
spk03: Hi. Good morning, everyone. Thank you. Hi, David. First off, Hydrochem, I think back in early August, they were predicting – $744 million in revenues and $115 million in EBITDA for the year for a 15.5% EBITDA margin. Can you comment on how that came in? Was it better or worse than that generally?
spk05: Yeah. In Q4, it was $160-something million, $165 million. Is that the number? And it was about $15 million of EBITDA. But included in that EBITDA was like $5 to $6 million of severance and integration costs. That's the 2021 number. 2022, we talked about, you know, in my prepared remarks, I think it's $115 million plus $20 to $25 million of incremental EBITDA due to synergies. So I think those are good numbers to kind of grind yourself in. And as Alan said in his remarks, I think that the integration went real well and the team did a great job.
spk03: Okay. Okay. As we think about the 40 million run rate synergies after the first year of ownership, should we assume that the exit velocity when we get to the fourth quarter of this year or entering the first quarter of next year is at that 10 million a quarter rate, or is there more scaling up to go from there? I'm just trying to get an idea of the timing on the synergies.
spk05: We're making real good progress. We meet every other week with the team and Eric and
spk03: alan or others are on the call and we and uh we're making we're in good shape we'll get there by the end of the year i believe okay and then on the um some of those uh non-recurring type items i i think you mentioned uh 8.6 million in severance costs in the fourth quarter and then in the third quarter i want to say there was close to six million of acquisition costs um which I assume that both of those numbers are included in adjusted EBITDA. First of all, is that right, Mike? And then second, as you look at your guidance for 2022, do you make any allocations for those type of expenses or do you assume those are zero and then go from there?
spk05: Dave, so the answer to your first question is yes, we do include them in our adjusted EBITDA as a bad guy to adjusted EBITDA. We do try to call them out. and talk about them, but those are in the number. The second point is that we do assume some small amount of severance and integration costs per year in the guide, and it's a kind of high single-digit number.
spk03: Okay. Terrific. Thanks a lot, guys.
spk05: Thank you.
spk01: Our next question comes from the line of Jerry Ravitch with Goldman Sachs. Please proceed with your question.
spk06: Yes, hi. Good morning, and nice quarter. I wonder if you could talk about what like-for-like incinerator and landfill pricing was. I know it makes matters a bunch. Can you just talk about what it was in the fourth quarter, and what are your expectations for those product lines specifically in 22?
spk05: Yeah, Jerry, I'll start, and Eric and Alan, please feel free to chime in. On incineration volume, what happened in Q4 was actually the pricing was flattish, as I think Alan said in his remarks. but it was really because of mix. And it's a great story because we're getting a lot of more project work that has lower price points, but that was part of the over-deliverance in Q4 versus the guide we gave you three months ago. So that is kind of a great story. The pricing was really strong. The team did a good job of driving price in Q4. It just got muted a bit by the mix issue, and I'm really happy about the mix issue because it really drove our utilization way up. And so, again, I'm really... That really is a great answer. As you think about 2022 and our ability to kind of over-deliver on the numbers we're giving you this morning, I think that's going to be part of the story.
spk06: And is it possible just to quantify what the like-for-like pricing would have been, mix-adjusted?
spk05: Yeah, I'd say the market basket in kind of instant all-in is high single-digit.
spk06: Okay, terrific. And then in terms of normalized incinerator capacity utilization, where can we view effective capacity on an annualized basis at this point based on the way the plants are operating?
spk05: You know, Eric mentioned it a minute ago, but I think that there's an opportunity there to increase capacity. And again, it comes down to kind of the project work and, you know, if you think about an incinerator, there's different pipes, you know, drum volumes, direct burn, and then bulk solids and liquids, and those bulk solids and liquids are kind of project work, and I'm really, again, Eric and I, the team is bullish about that ability to grow that in 2022. Yeah, I would say... Yeah, no, that's clear.
spk09: Go ahead, Eric. Jerry, just to build on that, as mentioned earlier, we continue to try to expand our capacity across the network, and 87% to 90% on an annual basis is solid based on the ups and downs of project business that flow into the units.
spk06: Terrific. I appreciate it. Thanks. Thanks, Jerry.
spk01: Our next question comes from a line of Larry Solo with SJS Securities. Please proceed with your question.
spk10: Hey, guys. Good morning. Just a couple here. Most of my questions have been answered, but I've got a couple. Interesting commentary. You mentioned in some areas you guys are actually benefiting or people are turning to you more with some shortage in skilled labor, and obviously you guys are feeling the shortage of skilled labor, but perhaps your demand is actually higher. better or because of that shortage? Just trying to clarify. That's what I heard.
spk07: Yeah, I think we see more, particularly some of our largest accounts, looking to continue to outsource and bring us in to provide client services. And we have several hundred locations where our teams show up every day, and we see opportunities for growth in that where whether it's an environmental program or it's an industrial services program, we see outsourcing as a continuous trend, and that's what's driving that.
spk10: And you guys are obviously growing fast, so you're hiring. How about your attrition rate? Obviously, a lot of companies are facing difficulties with attrition. Do you have a rough idea of 2021? I assume you hired more than you lost, but can you give us any thoughts on that?
spk07: You know, I think we've seen, obviously, it depends on... what particular jobs that we're talking about. But we did see with HPC that they had a much higher turnover rate with their direct workforce than historically we have in our organization. So that's something that's immediate for us to start working on. We did see a higher turnover in some of our indirect SG&A kind of employees and you know, people working from home, going hybrid, people, you know, sort of the great resignation you hear about, we certainly didn't, you know, we did get impacted by that as well, but not significant, I would say. I think we continue to have a real strong workforce with a lot of tenure here, and we want to continue to build on that.
spk10: Right. How about just a follow-up on the inflation? You know, obviously, you guys are pushing hard on price, and historically, you've you've gotten, especially in the incinerator business, but you've been able to get past some prices in most of your businesses. Obviously, now with inflation, you're pushing harder. Maybe this is hard to measure, but you're getting less benefit now. Your price increase is just being offset by inflation, or are you still getting that incremental low to mid single-digit average benefit?
spk07: You know, we really accelerated the pricing effort here and the communication on pricing. And myself and a whole team of leaders meet on a weekly basis across the company, across different parts of the businesses to measure the results, talk about the challenges, talk about the opportunities. And I think that message has really been given to the entire workforce about the need for us to really focus on that number one issue, which is driving price improvements when you see this kind of inflation happening.
spk10: Okay, just last question on this unsafety claim on SKSS. You guys mentioned $35 million, sort of $190 plus or minus is sort of the guidance this year. That's taking a step back on pricing and some of the unsustainability of the spread. If we look back to pre-COVID, 2019, you did like $130 and you put that on the segment. roughly that $60 million difference, obviously some IMO in there benefits, some of your reorganization, your spread management, but is there still some fudge in there, some unsustainability in that number, you think?
spk07: I don't think so. I think it's a pretty conservative number, at least considering where the first two months are looking here. We've got a strong book. Obviously, we've seen base oil price increases come out in the last two weeks here, a strong demand for our products. And so I think Mike is as conservative as he always is, but I'd like to think that there's no reason for us not to continue to improve that business, that site. One of the opportunities will be that obviously we took advantage of the strong base oil demand and pricing But as we move forward here, more of our blended products being sold direct to our customers is where we will see continuous margin improvement. And that has to be our primary goal for this year is to drive that direct market. We really held back because of additive shortages. We had a huge amount of several force majeures placed on us and a lot of problems, both with additives, with hydrogen supplies last year. So all of those things I hope will be behind us this year, and I'd like to think that we can do better. Right.
spk10: Okay, great. Thanks. I appreciate it.
spk01: 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 Chris Grenja with Needham & Company. Please proceed with your question.
spk13: Hi. Good morning, and thanks for taking the question. If you could briefly, could you discuss how the integration of Hydrochem is proceeding relative to your expectations and what key major milestones are left there? Thank you.
spk07: Sure. I would say that most of the, well, certainly from day one, their business is running on our financial systems, but there are some legacy systems that HPC is operating on. that will be converted over in the next two or three months here as we continue to integrate the businesses. There's also sort of some challenges regarding legal contracts and branding. And so you'll hear about us coming out with a brand that will tie together the legacy Clean Harbors industrial business with the HPC business and then move forward with getting one brand new standard contract with certainly our top 100 accounts that represent a substantial amount of that $750, $800 million of business that HPC had. So those things are certainly in the process. They're being worked on, and that's part of, I think, the synergy that Mike talked about that will be coming out by the end of this year.
spk13: Great. And with the termination of the Vertex asset deal, to what extent could you accomplish some of the things that you were targeting with that acquisition, either organically or via some other means?
spk07: Certainly, yeah. We've been looking at making both investments in that area of our business, as you know, as well as looking at acquisitions. And, you know, the company over the past five years bought TFI and Emerald and SYN and EnviroWaste and And so we look at sort of a mix of both internal investments as well as potential acquisitions, and we think that that would be our continuous focus moving forward here.
spk13: Excellent. Thank you very much. Yep.
spk07: Thanks, Chris.
spk01: We have no further questions at this time. Mr. McKim, I would now like to turn the floor back over to you for closing comments.
spk07: Okay, terrific. Thanks for joining us today. We have a packed IR calendar in March with in-person conferences with Raymond James and Jeffries. We look forward to sharing the Clean Harvest story with you at those events, and have a safe day.
spk01: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
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