Clean Harbors, Inc.

Greetings, and welcome to the Clean Harbors, Inc. First Quarter 2022 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, Inc., Thank you, sir. You may begin.

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, May 4, 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-GATT 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 GATT measures are available in today's news release, on our website, and in the appendix of today's presentations. With that, 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. I'd like to start today's call with a topic I'm passionate about, and that's safety. It's our priority here as we focus across the organization our number one core value. Having had the privilege of being in this seat for more than 40 years, I've always envisioned that by continuing to integrate safety into our culture, that we could show continuous improvement and really generate an annual total recordable incident rate of under one, with our true goal of being zero incidents. We took a significant step toward that milestone in Q1, concluding the quarter with a TRIR of 0.97. When you look at the waste industry, that level of safety would far exceed anything that our peers are delivering. And I want to express my appreciation to our entire team for looking out for one another and more importantly, practicing our core safety philosophy of safety starts with me, Libet365. That mindset is critical in order for us to achieve our goal of a sub 1-0 TRIR for this year. Turning to our Q1 financial results on slide three, we exceeded our Q1 guidance as both segments performed ahead of expectations. Our results were consistent with the past several quarters, with strong demand across our key lines of business, driving healthy top line growth. In what has historically been a seasonally weakest quarter, margins came in at a solid 15.4%. Outside of the first quarter of 2021, this quarter was our best Q1 margin performance since we purchased Safety Clean in 2012. Despite supply and inflationary challenges, the team executed well. implementing comprehensive pricing programs supported by cost control initiatives. A couple of metrics that are not on the slide, but I wanted to mention this morning are hiring and turnover. On the hiring side, our recruiting team has done an excellent job attracting new talent and expanding our workforce, given all the demand for our services. In Q1, we added a significant number of billable employees. and expect to extend that hiring momentum in the coming quarters. The opportunity to work for a sustainability-focused company that protects the environment has really been a strong selling point for our recruiting team. Over the past several years, we've made substantial investment in our workforce. These have included offering additional benefits, absorbing healthcare cost increases, increasing compensation, and promoting more employees from within. These investments have resulted in a decreased voluntary turnover. After a brief uptick in the second half of 2021, voluntary turnover has since receded to pre-pandemic 2019 levels. Clean Harbors is a place where many people have built and are continuing to build a successful career. With more now than 6,000 of our employees having been with us over 10 years, and of those, even 1,500 have been here more than 25 years. That creates a lot of stability across our business and a wealth of institutional knowledge that enables us to train the next generation of leaders here. Turning to our segment starting on slide four, environmental service revenue grew 45% in Q1. This increase reflected the HPC acquisition in late 21 and healthy organic growth driven by customer demand and increased pricing. While we're still in the early innings of integrating HPC, after just one full quarter, we're already beginning to benefit their broad capabilities, particularly as we've moved into the spring turnaround season. The potential to capture synergies and to cross-sell our products and services is quite extensive. During the quarter, the pace of activity in our services business quickened considerably, resulting in strong organic growth. Revenue in our legacy industrial service business, if you exclude HPC, grew 24%. Likewise, our base business in field services, not including HPC, and the decontamination work in both the periods, increased 28%, driven by cross-selling and a steady flow of small to medium emergency response jobs. Safety, clean, environmental also continued at positive momentum, increasing 9% from a year ago. Looking at the ES segment profitability, adjusted EBITDA climbed 31% in Q1 on strong revenue and pricing, coupled with cost control initiatives. As expected, segment margin was down year over year. This is primarily attributed to a tough comp with Q1 of 2021, which included both the government assistance and a higher level of COVID emergency response work, as well as the fact that we have yet to fully integrate the HPC business. Environmental service margins should improve as we move through the year, and we would expect the incremental benefits of our pricing, cost reductions, and synergy initiatives, excuse me, to more than offset the impact of inflation. Within our disposal network, incineration utilization improved to 85% from 80% in Q1 a year ago. Average incineration pricing was up 2% from a year ago based on mix in the quarter, which included some project volumes. So if you use a market basket approach, our average price was up 7%. A pickup in projects also enabled us to increase the tonnage into our landfills by 14%. The head of our remediation team recently commented that the first half of this year is already the strongest that we've seen in the last five years. Revenue from COVID decontamination work totaled approximately $9 million in Q1. That amount was greater than we anticipated, but down substantially from $28 million in Q1 a year ago. We did not expect much more COVID work here in 2022. Pot washer services were flat with a year ago, while most safety clean branch core offerings, including containerized waste pickup and vac services, grew at a very strong pace. Moving to slide five, revenue in our SKSS segment was up 44 percent through a combination of healthy production levels at our plants and higher base and blend product pricing backed by overall market demand. Adjusted EBITDA rose by more than 20 million, or 64 percent. We continue to capitalize on market conditions to maximize our re-refining spread through product pricing gains and effective management of our collection costs. Waste oil collection volumes were up again, growing 13% to 53 million gallons, and at a PFO lower than Q4, as we had to address some inflationary pressures in that business. Our percentage of blended products and direct volumes came in as expected in the quarter, given the ongoing additive shortages in the market and the profitability that we're generating in our base oil. Turning to slide six, I want to touch on a handful of growth initiatives that we have underway. This is an exciting time at Clean Harbors. Given all the demand we're seeing, we're really laying out the foundation for our momentum to continue in years ahead. We have invested in a number of areas, such as expanding our inside sales team, supporting our safety clean environmental business, we were already seeing a lower customer churn. With bringing HPC into the fold, we've launched a renewed focus on cross-selling. For example, at a top industrial service customer in the chemical industry, we leveraged the HPC relationship to secure a greater share of industrial cleaning, specialty services, and waste disposal work at one of their sites. And in Canada, we parlayed HPC's custom tooling technology to convert a customer from performing a turnaround at their plant every three years to really making it more of an annual event. And our technology-based solution created a more efficient and expedited process for the customer, overall shortening the shutdown period. From a branding perspective, we've combined the Hydrochem PSE name with our legacy Clean Harbors Industrial Services brand, to create HPC Industrial whose logo you can see on the slide. We will officially be rolling out this new branding in all our contracts and legal entities on July 1st. We're confident that by combining our industrial services organizations under one brand, we'll simplify our service and communications to our industrial service customers. Finally, when we look at the incineration market, capacity is scarce. We're bringing 70,000 tons of additional capacity online in early 2025, which is attractive to companies that are weighing whether to shut down their captive incinerators. Turning to slide seven, we continue to evaluate opportunities to execute on elements of our capital allocation strategy. Internal investments are being prioritized around expanding throughput in our network, whether in disposal, recycling, or re-refining. certainly with the Akimbal incinerator being our most substantial long-term investment that remains on schedule. We're also adding a considerable amount of landfill cell capacity this year. On the M&A front, we continue to look at several bolt-on acquisition candidates that could support growth for one or both of our two operating segments. So let me conclude by reiterating what our numbers over the past few quarters have proven, that demand has never been stronger. Within our disposal network, we have a healthy backlog of volume and a strong sales pipeline, particularly within waste projects. Underlying trends, such as U.S. infrastructure spending, chemical manufacturing, and reshoring of multiple industries, are providing encouraging backdrop for our entire environmental segment. Within SKSS, the demand environment for our sustainable products remains very strong, supported by global supply dynamics and the rise in value of our re-refined base oil. We will continually carefully manage the front end of our re-refining spread, achieve greater transportation efficiencies using rail, and really target market-specific pricing to help counter those rising costs that we see. Across the organization, we are confident that we have pricing and cost reduction strategies in place To offset inflation in 2022, we have a uniformity of our systems and processes that enables us to respond quickly to market conditions, and we have an industry-leading team that is second to none. And we have instilled a culture of accountability and continuous improvement here at Clean Harbors, and that drives our results. So as I look out over the remainder of 22 and beyond, the market conditions are highly favorable across all our core lines of business. And we continue to expect Clean Harbors to deliver strong, profitable growth and a robust free cash flow this year. So with that, let me turn it over to Mike Battles.

Mike? Thank you, Anand. Good morning, everyone. I just want to mention that I have a bit of a cold this morning, so I apologize in advance. Let's start with our income statement on slide nine. Revenue increased 45% in the first quarter, driven by the addition of HPC, which we closed on in October, and healthy organic growth in our legacy businesses. Top line growth excluding HPC was 22%. Adjusted EBITDA was 39% higher than a year ago, coming in at 180.3 million. SG&A expense on a percentage basis improved by 220 basis points from a year ago to 12.9%, primarily due to our effective cost controls and reduction efforts, along with leveraging the HPC revenue. We're starting to see some of the early synergy benefits from the acquisition in these numbers. In addition, we benefited from the $3 million break fee related to the proposed vertex acquisition that we collected in the quarter. For the full year, we now expect ex-DNA expense as a percentage of revenue to be around 13%, which is a significant improvement over 2021 levels. Appreciation and amortization in Q1 increased to $84.3 million, primarily related to the addition of the HPC assets. For 2022, we continue to anticipate depreciation and amortization in the range of 330 to 340 million. Income from operations in Q1 increased by 71%, reflecting revenue growth as well as our efforts to better manage and price our re-refining spread. Turning to the balance sheet on slide 10, cash and short-term marketable securities at quarter end were 415 million. The decline from year end was expected, and reflects typical Q1 seasonality and incentive compensation that was paid out in March for the terrific 2021 financial results. We ended the quarter with debt of just over $2.5 billion. Leverage on a net debt trailing 12 months EBITDA basis was approximately three times. Based on the midpoint of our new 2022 EBITDA and free cash flow guidance, we expect to reduce our leverage to approximately 2.2 times year-end. Our weighted average cost of debt is 4.46%, with about 70% of our debt at fixed rates. While the market finally saw its first rate hike in two years in March, we believe we are well positioned, even in a rising interest rate environment. Turn to cash flows on slide 11. Cash from operations in Q1 was a negative $38.6 million, which was largely expected. CapEx net of disposals was $69 million, up approximately 70% from a year ago, as we added HPC and began to ramp up the spend on our new Kimball incinerator. That investment in Nebraska accounted for approximately $5 million in Q1, and we still expect that to be in the range of $40 to $45 million for the full year. Adjusted free cash flow in Q1 was a negative $107.6 million due to the high capex, incentive comp, working capital, and timing of some items, including an extra payroll period versus a year ago. For 2022, we continue to expect our net capex to be in the range of $310 to $330 million, reflecting the Kimball spend, the full-year impact of HPC, an above-average landfill expansion year, and inflationary costs for supplies and vehicles. During Q1, we bought back just over 41,000 shares of stock At a total cost of 3.7 million, we have 152 million remaining under our existing buyback program. Moving to slide 12, based on our first quarter results and current market conditions for both our operating segments, we are raising our 2022 adjusted dividend guidance to a range of 800 to 830 million, with a midpoint of 815 million. Looking at our guidance from a quarterly perspective, We expect Q2 adjusted EBITDA to be 25% to 30% higher than what we posted in Q2 of 2021 due to HPC, higher profitability in the SKS segment, and continued strong demand in the ES segment. Here's how our revised full-year 2022 adjusted EBITDA guidance translates to our three segments. In environmental services, we now expect adjusted EBITDA at the midpoint of our guidance to increase in the mid-20s on a percentage basis from full year 2021. HPC, pricing strategies, volume growth in our core lines of business, and multiple cost mitigation initiatives we believe will more than offset the inflation, the lower decon revenue, and lack of pandemic assistance versus 2021. As a point of reference, this segment received government assistance of $10.2 million in 2021 and assumes none this year. For SKSS, we now anticipate full-year adjusted EBITDA at the midpoint of our guidance to decline mid-single digits for its impressive 2021 results. Given where we are today and the current market conditions, our original assumptions that this segment would produce significantly less adjusted EBITDA than in 2021 no longer seem realistic. Our revised guidance assumes that our re-refining spread starts to narrow in the third quarter and more in the fourth quarter compared with a year ago. with the first half of this year exceeding 2021. But as we see here in early May, that spread has not started to narrow at all yet. This segment received government assistance of $1.4 million in 2021 and assumes none this year. In our corporate segment, at the midpoint of our guide, we continue to expect negative adjusted EBITDA to be up around 5% from 2021, largely due to the addition of a full year of HPC corporate costs and wage inflation, offset by lower severance and integration expense compared with a year ago, along with the vertex payment. Based on our Q1 free cash flow results and working capital assumptions, we continue to expect 2022 adjusted free cash flow in the range of $250 to $290 million, or a midpoint of $270 million. I'd like to remind everyone that those numbers include the substantial investment in our Kimball facility of $40 to $45 million. Let me conclude by echoing Alan's comments on the current demand environment for our company, which we expect will support strong profitable growth throughout the remainder of the year. On our Q4 call, I highlighted the fact that we are an amazingly resilient company, which is something that I believe is underappreciated about Clean Harbors. What I've seen as CFO in the past six years is that we have worked extremely hard to instill consistency across all elements of our organization. That focus has fostered greater predictability in our results that enables us to invest prudently, make informed strategic decisions around M&A, and generate stronger shareholder returns over both the short-term and long-term. I'm personally very bullish about 2022, as both our operating segments have decidedly favorable outlooks. 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 David Manthe with Baird. Please proceed with your question.

Thank you. Good morning, everyone. Good morning. First off, thinking about your key verticals like chemical, manufacturing, refining, and so forth, the cyclical components of your business, how are you thinking about those in the coming year here at the U.S. economy and the global economy if it slows as is generally expected?

Yeah, Dave, I'll take a shot at this. And Alan can chime in or Eric can chime in. The market demand continues to be very strong. We have some waste streams, given our increase in deferred revenue, are out a few months now to try to get an open slot for incineration. All lines of business are kind of back beyond 2019 levels. So it's hard for me to comment on macro factors, but certainly what we see is very strong demand across all verticals.

Okay, thank you. And second, Alan, thanks for the update on the personnel and labor situation. But if you had to gauge it, one to ten, one being really bad, ten being completely fine, where do you stand today? Maybe if you could address the financial impact on your cost stack of using outside service providers versus what you'll see when you can ultimately internalize those functions.

Yeah, thanks, Dave. So we're probably at a seven, seven, eight, you know, in regard to staffing levels that we would like to have. So we are seeing increased costs both with temporary labor as well as subcontracting. We enjoy some really strong relationships with our subs, and certainly that does pressure our margins when we do sub. But I would say we're probably in that range, and I think that we saw a nice improvement in the first quarter. Eric, you might want to touch on the gains that we've seen.

Yeah, we've really flattened out our turnover from an increased turnover in 2021. We've rebounded back, and we've been able to decrease our turnover. while adding substantial labor billable workforce throughout the Q1 as we finished here, and we continue to have momentum in Q2. And we're really seeing that across all of our services for our customers. But as Alan mentioned, we continue to have a reliance on subcontracted and temp workers to help us to get us through this demand.

Got it. Thanks, guys. Yep.

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

Hi, this is Adam on for Jerry today. Thanks for taking my question. In industrial and field services, could you update us on how much market share you have today in these businesses and how you're thinking about potential for further consolidation in this space?

Sure, I'll take a shot. I think, you know, it's a pretty fast fragmented industry. As you know, there's a lot of small regional players in both industrial and field services. And then there's certainly some of the more larger national players, both in the U.S. and Canada, quite frankly. And so I don't probably have a number to share with you about what that percentage is, what market share would be. But we certainly have a leadership position in some of the emergency response capabilities that we offer. You know, we're the go-to company very much when there's a major event, and we're probably handling 6,000 or 7,000 emergencies a year. So that is something that we, I think, would say that we are the market leader in. And certainly on the industrial side, with our capacity and capabilities on turnaround work, I think we have by far more equipment and personnel to do those kind of services. Wouldn't you think, Eric?

Absolutely. And I'd also just add with the larger customers that have multiple sites and industrial as well as in field service, larger players like utilities that cover large geographies, we have a very strong presence with all those customers. Yeah.

Thanks. That's helpful. And I'm wondering when you expect the mix of blended products in your safety clean segment to begin to normalize. And once that normalizes, how should we be thinking about the impact on margins?

Sure. So there's still a hydrogen, excuse me, an additive problem and a hydrogen problem. So our volumes were constrained somewhat in the first quarter because of the hydrogen. and we think by the middle of May, our hope is that will come back, and so we'll see much stronger volumes even than the ones that we've seen in April and here in early May. On the additive front, we're hoping by the end of this year, there's been a significant disruption in additive suppliers, and many of our products that have all been approved have, you know, got their million-mile approval, so to speak, We just can't shift different additive packages in and out of these products that we have approved. So we've been very much constrained on that. And I would say probably moving into next year, you'll start seeing that become a growth area for us again.

Great. Thanks so much. Okay.

Our next question comes from the line of Tyler Brown with Raymond James. Please proceed with your question.

Hey, good morning, guys. Can you all hear me? Yes. Okay. My headphones are a little bit muted this morning. But hey, Mike, I just want to ask a little bit about the EBITDA guidance. So I think you beat the midpoint of Q1, call it by $9 million. You guided to Q2 EBITDA. It looks to be, I don't know, $20, $30 million above the street. And I realize the street is certainly not your guidance budget. But my point is, is it feels like the $35 million guide raise at the midpoint is simply on a better Q1 and a better Q2. So one, am I in the right ballpark there? And two, does it just feel like there's some conservatism in the back half here? Maybe you're just going to wait and see kind of how things play out?

Yes, Tyler, that's accurate. Because you just don't know. You don't know, and there's a lot of factors that can go a lot of different ways. We're hopeful that You know, our internal forecasts are higher than what we have guided today, and that's consistent with what we've been doing over the past few years. Okay.

Okay, that's helpful. Thanks for that. And then I think ES margins were down about 100 basis points year over year in Q1. I know there's a ton of noise. You got HBC, government funds, decon, inflation, et cetera. But if you kind of parsed it all out, Did the core margins improve year over year, and are you still expecting those margins in that segment to be flattish for the full year?

Yeah, Tyler, so a couple things. So first of all, when you look at Q1 ES margins, which are down 200 basis points year over year on a reported basis, if you back out the decontamination work and the higher margins on that business, the government money in HPC, as we can estimate it for an apples-to-apples comparison, Our margins are either flat to up a bit on, let's say, legacy ES, which is really a testament to the pricing and the cost controls we put in place. It's something we're really proud of. And if you look out for the rest of the year, Q2 will still be down versus prior year. Q3 will be flattish. And Q4, I think, will be up quite a bit year over year. And so I think when you look at the full year for ES margins for 2022 versus 2021, that'll be flattish to 2021, which is great. Okay.

Okay, yeah, that's helpful. And then, Alan, I think last quarter you talked about increasing your cadence on pricing, and if that required you to walk away from some business, then so be it. But I'm just curious how some of those broader pricing discussions have gone.

Yeah, we have been meeting, you know, regularly every week across the business and looking at all of our major pricing and pricing pricing initiatives, and we certainly have walked away from some of our lowest margin business where we weren't able to get the kind of price increase we needed. And in this market, with the labor constraints, equipment constraints, and really the lack of capacity that we have available in some of our waste disposal parts of our business, it's the right thing for us to do. And so I think that's why, you know, to Mike's point, I think we made up a lot of margin from the benefits that we had in the first quarter in a really high-cost inflationary environment that we're operating in, particularly when you look at diesel today on the street being over $6 a gallon. And so we've been very aggressive and really driving pricing initiatives, and we'll continue to do that as inflation continues to work its way through the company.

Right, right. And just my last one, I thought the commentary on safety about the tier ratio of Spot 97 was interesting, but I just want to make sure I understood the messaging there. Was that, were you highlighting that that was like a best-ever safety performance for a quarter, or is that just that we're kind of getting to our near-term goal around one, or just can you talk a little bit more about that and some of the benefits financially, culturally, that you see with obviously a really strong safety strategy? record.

Yeah, I think if you look at the trends over the last 10 years, we've seen a continuous improvement with safety. Last year was an anomaly, we thought, because of COVID. And seeing safety now under one is really, we've been under one before, but I think what was important coming out of the first quarter, when you're coming out of the winter season, it's typically when we don't see a safety number like that. But our overall goal this year is one. That's set from the management team and particularly right across the whole organization. And that would be a phenomenal number for 20,000 people that are working in all sorts of difficult environments and very dangerous work that we do. So we just wanted to make a point that it's great For our employees to be safe, it's also economically, it's very good as well from a workman's comp and insurance standpoint. It is a phenomenal improvement if you look at it over the past 10 years. Okay.

Yeah, that's helpful. And then, sorry, squeeze one quick one. Just on the landfill cell capacity this year, is that a material piece of the CapEx profile? Is that a multi-year spend or is that something that falls off in 2023-2024?

It's something, this is Eric, that will be something that will fall off in 23-24. We have a higher spend this year because in multiple sites we have landfill expansion that we're doing based on fill rates.

Okay. All right. Thank you. I'll turn it over. Thanks.

Our next question comes from the line of Jim Rusciotti with Needham. Please proceed with your question.

Hi. Thanks. Good morning. I'm hoping you might shed a little bit more light on the cost reduction strategies you alluded to, just particularly in light of the cost pressures, the wage inflation, and obviously the significantly higher transportation costs, which I'm sure you're incurring. I mean, what can you say about what you're doing on the cost side? How meaningful is it in terms of offsetting some of these pressures?

Hey, Jim, this is Mike. I mean, cost containment is everything we do here. It's part of our core. We look at costs, consolidating sites, internalizing maintenance, you know, leveraging our footprint, you know, selling, you know, looking at unprofitable branches and if they need to be closed, closing them. I mean, we are constantly looking at ways to drive costs out of the business. You know, low-performing individuals, and especially in SG&A, we look hard at that. We're constantly trying to make sure that we are You just can't price your way to glory here. It's a mix of cost containment, and maybe that's just keeping the cost flat, because we know inflationary pressures are putting pressure on almost all line items in our P&L. So really, it is just part of our mantra, and nothing changes here at Clean Harbors, even in an inflationary environment.

Yeah, and I think I'd just add that every year for 15 years, we have a number of strategic initiatives around driving costs and improving the business, whether it's through technology investments or it's leveraging, as Mike mentioned, our footprint. We're 750 locations today, leveraging rail and our whole rail infrastructure, for example. So I think, as Mike mentioned, those initiatives are something that each and every year we do to drive costs out of the business.

Got it. And, yeah, you talked about momentum in the industrial services business going into the spring turnaround season. I'm wondering what you're seeing both legacy and the legacy business in HPC. I mean, you gave us some color on that. And, Mike, quickly, I may have missed it, but did you actually say what HPC contributed in revenue in the quarter? I may have missed it.

Yeah, the revenue in the quarter is about $184 million. Thank you.

And again, just this momentum that you're seeing going into the turnaround season, are you seeing some benefit from the combined company just cross-selling, or is this just healthy conditions in both the legacy business and the HPC business that you brought on?

It's a combination of both. We've certainly been able to leverage our cross-sell with the HPC business, their automation technology into our past legacy Clean Harbors industrial clients. And we've seen a very robust demand going into the second quarter from industrial turnarounds. And so we're really leveraging the combined workforce and taking that opportunity with us.

Got it. I'll jump back in the queue. Thank you. Thanks, Jim.

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

Good morning. Thank you for taking the questions. Sorry about your cold, Mike. So I'd like to dig a little deeper on the fundamentals of business. And in ES, when we think of the volumes in the traditional treatment storage disposal side, what was the trend with landfill liquids and incineration? And have you seen a peak?

Yeah, Michael, demand continues to be robust and increasing. We came out of March with our strongest volumes ever and strong liquid demand for incineration, strong direct burn, strong container volumes. And as mentioned earlier by Michael and Alan, the project services, robust demand there into our landfills. So it's strong trends across all verticals, as mentioned before as well.

Okay. And then In industrial field services, I think what I'm hearing is that HPC aside as an incremental ad, the customer demand is returning to some sense of normal maintenance cycles. Is that an accurate observation?

Yeah, I think that's an accurate observation, Michael.

It is. And that's a pretty significant statement in itself since it's been disrupted for two years. Yes.

I would say, Michael, though, that with the price of crude, and particularly with diesel, that there are going to be some companies in the refining side to be pushing to try to maximize what's going on right now in the marketplace, because there's such a huge shortage of both base oil and diesel oil, jet fuel. And so there is somewhat of a you know, a little bit of conservative fear in regard to whether those plants will actually come down with the market the way it is.

Yeah, well, the refining margins haven't been this good in probably a decade.

Right. Michael, just not to put too fine a point on it, industrial services with NQ1 without HPC is up 28%. And so that speaks to the recovery that we're seeing kind of across the board in industrial services.

Okay, that's a big statement. And then when safety clean was a standalone company, I remember one of the things you always had to watch is you get gasoline over $4 consumer stop driving that lengthens the parts washer service cycle. You know, we touched $5 someplace, it was as high as nine, but anyway, touch $5. So what are you seeing in the parts washer service cycles as you exited one queue?

We looked at that because obviously that was a concern. You know, service cycles haven't really changed. They've been hanging around the same, you know, nine weeks for the past four or five years. And if you look at even Q1, nothing has changed in that area.

So that might argue, because we think there's a theory now that maybe the old $4 threshold is now $5 before we stop driving. That would seem to support that.

I think in our waste oil volume, clearly we're seeing a heavy demand and our volumes are up and we expect to collect well over 230 million gallons this year. So I would say that we are not seeing that kind of reduction at all.

Nothing yet. Okay. So then I was going to switch gears to SKSS. I want to make sure I heard the question or comment correct. So on the front end, you actually were able to reduce what you were paying for oil sequentially, and I'm assuming that's over and above anything having to do with IMO 2020 at this point, despite that crude oil prices are as high as they are. What's allowed you to do that?

You know, I think we had a good message to our customers about those rising costs that we were incurring ourselves to be able to provide the service. Because there are a lot of cost increases in transportation and rail services. which is an important factor in moving around a lot of the products that we have to move. And quite frankly, I think customers realize that. And so we have given some of that back in the first quarter and certainly will here in the second quarter too because of the strength in the market out there. So we're trying to work with our customers both good and bad times. But I do believe that compared to where we would have been 10 years ago to today, I think we're doing a really good job of managing the spread in the business.

Okay. And then on the back end, I get that there are additive and hydrogen issues that are impacting blending and the like, but is the demand for a sustainable gallon narrowing the discount you used to have to take for posted prices?

It certainly is. I think that we're clearly able to get more of a market price today than we ever have. And I think Greg Lennington and the team here have really done a nice job of creating value for our products. And we'll be coming out with some new marketing initiatives here in the coming weeks and months here that we think will really expand our visibility to our customers with the whole messaging of being a green product.

And then Do you have a feel for how much the posted price would need to correct? And there's two influences here. Supply demand is out of balance because of Russia now, and we're at a really high oil price. But if oil prices come in and the world absorbs Russia, what happens to posted prices? What are your thoughts about that?

You know, I think it's far out right now based on what we see with diesel and jet fuel prices. and with demand on base oil. Base oil demand is really strong. And I think it's back to the issue that we're seeing that, you know, cars are out in the road. You know, I think we have not yet seen a big slowdown. And even with diesel at $6 a gallon up here in the Northeast. So I think it's going to be a while myself, Michael.

Okay. And then I get that there are limits on being able to meet the demand. What's the What is the level of demand, though, on blended if we really are now in the sustainable commitments by various companies?

You know, I think over the next five years, if we could get to $25 million on the direct blended, that would be a good target for us to go at. We're at about $12.9, $13 million right now. So I think that would be a good number to kind of write down.

Okay. And then... Mike, free cash flow doesn't change in 2022 despite the raised guidance. I'm assuming you have a use of cash as working capital, AR is up in response to the sales, and that's the issue?

Yeah, Michael, if you look at March revenue versus February revenue, it's up $90 million. And if you look at March revenue versus prior year, it's up $140 million. And both those things kind of put pressure on our investors The AR bucket's all current, and as such, that is a cash flow bad guy. The other thing that happened is that we had an extra pay period. Just the way the timing of how the quarter ended, we had an extra pay period of about $20 million, $22 million in Q1 versus last year, and that also put some pressure on that. But I feel like given the new guidance and even with that working capital as a whole we're in a bit, I think we're fine from where we're going to land for the year.

So there's an opportunity that you might be able to collect your money a little bit faster, and then that's the upside to the free cash flow.

That's right. That's right. And the EBITDA guide is up, and that should translate into faster collections.

Okay. And then, Alan, I don't know how to ask this question without sounding gratuitous, but I've always thought you were really good at seeing where the puck was going in this industry. What do you think this business looks like, given – EUSA College being bought and what's going on? What does it look like in three to five years?

Well, I think environmental regulations, infrastructure, I think are all going to drive more volume. And I think we're in for a good run. I think we've seen a continuation of customers looking at alternatives to running their own waste treatment plants, whether it's a water treatment or an incineration facility. So I I really feel like we're going to see more outsourcing. We see more outsourcing on the industrial and tech services side. So our presence on our customer sites is growing and many of our employees show up every day at these large chemical plants and refineries and pharmaceutical locations. I think that is a demand shift that's happening. I don't know. I think overall, unless there's some significant great recession, that we have a really good market in front of us right now.

Okay. Thank you very much.

Yep. Thanks, Michael. Thanks, Michael.

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

Thanks for taking the questions. I'm just trying to think about CAPEX good and bad headwind, tailwinds for 23 versus 22. You mentioned that landfill cell constructions are probably going to come down. I wonder if it's possible to roughly dimension that. And then obviously Kimball stepping up is going to be a little bit of a headwind. So, you know, obviously you're not going to be giving 23 guidance today, but just wondering how to think about those fairly known pieces.

Yeah, no, so I'd say that on the landfill volume, landfill cell construction is probably 10 to 15 million of incremental spend in 2022. And on the Kimball construction, that's going to ramp up in 2023. If it's 40 to 45 million here in 2022, it's going to be in the 80s in 2023, because that's when a bulk of the actual construction of the kiln is happening. So You know, those are some of the easy puts and takes that we know of. Obviously, the business will be bigger. We'll generate more kind of operating cash flow in that area.

Yep. Yep. Makes sense. Thanks. And then just to go back to pricing and incinerator, you know, so obviously utilization began to trend better over the balance of 2021, you know, so you won't necessarily have that mixed headwind perhaps or at least not to the same extent. How should we think about, you know, pricing trajectory here? your expectations, and if you can disaggregate price versus, you know, mix effects as we go forward for the balance of the year.

Yeah, so I certainly can speak to Q1. So when you look at the kind of ES business and you look at it organically, taking out HPC, and you can do the math on that, it's about 17% kind of organic growth. And I would break that down between half of that price and half of that volume, mix a pretty small number. The volume is pretty much in, you know, field industrial and SK branch business doing, you know, kind of getting back to 2019 levels. The pricing is across the board, primarily in, you know, the tech service business where we're going to have the most disposal usage. I'm not sure of that. And going forward, it's kind of hard to say. You know, I see here when you think about pricing in the SKSS business, I mean, I don't see the spread narrowing here today. It's tough to tell exactly when.

Okay, very helpful. Thank you.

Our next question comes from the line of Zane Karimi with DA Davidson. Please proceed with your question.

Hey, good morning, guys, and thank you for taking my questions. Good morning. First off, on SKSS, it had another strong quarter, but can you elaborate on what change occurred from a waste oil collection standpoint? that helped improve the margins year-over-year, and to what degree the effective management of collections persists or expands from current levels?

So I think certainly the volumes are up in the first quarter over a year-ago quarter, and I think our price management in that first quarter was real effective with dealing with the inflationary costs that we were experiencing in our labor costs and our transportation costs to service those customers. And certainly in the second quarter here and moving back into the third quarter, you know, we'll be giving some of that back reflective in our guidance, you know, because we are seeing a stronger price per gallon for our base oil. And so I think those are a couple of the factors that really impacted that. Mike, I'm not sure if you wanted to add anything.

Yeah. Yeah, Zane, I think that if you look at Q1 over Q1, you know, the spread didn't really start to widen in our business until Q2 of last year. So Q1 was still a relatively easy comp versus Q1 of last year. It really was in Q2 where the spread started to expand And then it expanded kind of all year. So that's helping us a bit here when you look at kind of 2022.

Thank you. And on the incinerator front, I believe, Alan, you mentioned earlier that bringing them the incremental 70,000 tons of capacity by 2025, when looking at other incinerator-based piers, they're beginning to weigh the benefits of staying open versus shutting down. But can you elaborate on that opportunity you see for clean harbors, either from like a TAM pricing or servicing standpoint?

Sure. I would say that, you know, over the past several years, we've seen captives, which at one time were over 100 captive incinerators, to now down to about 50, maybe even a little bit less than that. And still a number of them that are operating are you know, getting old in age and certainly they need to meet the new max standards in some cases if they want to do any capital investment. So we're, you know, we're anticipating a continuation of that trend from 100 down to 50 and then continuing go down. And that's why the timing of Kimball we think is important to be able to not only take the growth in the market that's happening because of on-shoring and just the overall growth in the chemical industry, but also because of reduction in captives.

Thank you. I'll jump back into the queue there. Okay. Thanks, Dan.

Our next question comes from the line of Alexander Leach with Barenberg. Please proceed with your question.

Hi, guys. Thanks for taking my question. You talked a bit about the front and back end of the re-refining spread, but was there any sort of quantifiable benefit from you know, IMO 2020 limiting outlets now that we're sort of past the COVID-related noise?

Clearly, there's a strong market for collections out there that we are going into this year with the best inventory position we've been in a long time. And that, you know, typically you see an inventory build up in the fall and then you burn down a lot of that or basically process a lot of that inventory, but we're very strong inventory-wise. So we would envision to expand our recycled fuel oil sales program this year because of the excess material that we're having, particularly on the industrial side, not necessarily on the used motor oil side. And I think all of that speaks to what's happened with IMO. I think the use of, you know, low sulfur oil, moving a lot of the ships to a half percent sulfur. I think that's definitely had an impact on the market in a favorable way for us.

Okay, great. And just on driver attrition in the quarter, it seems like the wide industry has really been accelerating pay for drivers in Q1. But as you mentioned in your prepared remarks, voluntary turnover has fallen. So why is retention increasing? improve despite such a hiring market recently to drivers specifically.

Eric, would you like to comment on that? Yeah, we certainly implemented many programs across all of our drivers to do a better job of retaining them. Our equipment, certainly, and pay increases across the board, better pay programs, being able to leverage those better, and multiple driver committees. that we've had and just making it a better sustainable place to work for drivers across the board.

And I think our net driver headcount is up quite a bit here after the first quarter. So although we continue to have a large number of openings, I think that really is going to support more of our growth and internalization rather than the subcontracting because our subcontracting for transportation continues to be very, very high. But I think that Eric and the team have done a nice job of having a net increase in overall driver headcount going into this second quarter. Okay. Yes. That'd be great. Thanks. Yep.

As a reminder, if you would like to ask a question, press star 1 on your telephone keypad. Our next question is a follow-up question from Jim Rusciutti with Needham. Please proceed with your question.

In the past, you've talked about some opportunities related to PFAS. And I'm just curious, do you still see anything on the horizon near term or is things in that area just seem to be getting pushed a little more to the right?

We continue to see our overall pipeline continue to grow about PFAS opportunities, remediation type, but it still is still an overall small part of what we're looking at. Still need regulation change to accelerate that, but we do see a growing pipeline.

And just with respect to, obviously, we're seeing... with the revision to EVDA, you'll be paying down debt, then that leverage is going to look a little better by year end. You talked about M&A. What, as you think about bolt-on type acquisitions, I wonder, you know, is there an opportunity to do anything more meaningful and what types of even bolt-ons in both businesses would you be looking at in this environment?

Yeah, I'll take a shot at it. So I think, you know, there's a, a pretty steady pipeline of opportunities that Brian Weber, who heads up our M&A area here, is seeing. And it really encompasses all the different lines of business that we're in. And so, you know, we continue to vet out those and try to, you know, mindful of what we're trying to accomplish in regard to adding capacity, disposal capacity in our environmental business. How do we, you know, kind of leverage our scale? How do we get more capacity to process our oil? Because as we continue to grow volumes, we're looking at maybe acquisition, but also making internal investments to process more of the oil ourselves and expanding our plants. And so because we're in so many different lines of business under those two segments, I think that we just see an awful lot of opportunity out there. And so we're trying to be selective and make sure that we kind of achieve the goals that we want within each of those two businesses.

Thank you.

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.

Thanks, Christina. Thank you for joining us today. The team will be out at the Waste Expo next week and participating in the Stifle Investor Summit on Monday. And so we'll also have a number of conferences in early June. So we look forward to sharing our story with you at those events. Have a great, safe day. 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.