Clean Harbors, Inc.

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

Thank you, Christine, and good morning, everyone. With me on today's call are Chairman, President, and Chief Executive Officer Alan S. McKim, EVP and Chief Financial Officer Mike Battles, President and Chief Operating Officer Eric Gerstenberg, and SVP of Investor Relations Jim Buckley. Slides for today's call are posted on our Investor Relations website, and we invite you to follow along. Matters we are discussing today that are not historical facts 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, August 3, 2022. Information on potential factors and risks that could affect our 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 includes 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, 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?

Thanks, Michael. Good morning, everyone, and thank you for joining us. I'd like to start by talking once again about safety and It's a critical metric for us and our employees that is often underappreciated by investors. For customers, it's one of the most important numbers that we deliver and can oftentimes decide who wins in a competitive bid. For 2022, we challenged a team with an ambitious goal of delivering a total recordable incident rate, or TRAR, of under one for the year. Through June 30th, we are currently at 0.82%, and in a good position to achieve that milestone for the first time in our 42-year history. Our level of safety far exceeds anything that our peers are delivering and is a competitive differentiator for us. The team is doing a phenomenal job this year. Turning to Q2 financial results on slide three, we far exceeded our guidance for the quarter on the strength of both of our operating segments, each of which was a great story to tell. I'll let Mike walk you through the specifics of our financials, but I want to focus on four key takeaways from our results this quarter before going through the segments. First, demand for our services, particularly our scarce disposal assets, has never been higher. As U.S. manufacturing continues to flourish, we are processing more volumes of high-value waste than ever before, largely due to partnerships with companies like 3M, who closed their captive incinerator earlier this year, and other captives are also in the final stages of determining whether they will shut down and outsource. Second, Hydrochem PSE, now branded as HPC Industrial, which includes our legacy industrial service business, is proving to be a great acquisition. The deal elevated our industrial service offerings, provided us with an impressive set of assets and talented employees, and gave us a market leadership position. While we still have work to do to capture all the synergies available to us, the cultural fit remains strong, and we are excited about the long-term prospects for this business. Third, all our service businesses, whether the field services, safety, clean, and environmental, our retail or energy services are on a positive trajectory. While our organic growth results were impressive this quarter, We believe they could have been even higher if the labor market weren't so tight and we could have hired more and faster. And lastly, the rise in our safety, clean, sustainability solutions profitability to record levels is not transitory. While we are benefiting from a historically widespread, many of the favorable market changes are long-lasting in nature. For example, the positive impacts of IMO 2020 are permanent. And as ESG becomes more prevalent, we are seeing interest in our sustainable base oil and blended products grow exponentially. We expect to command a premium for our green products in the future. Years ago, we were forced to discount our base oil output to move volumes. Those days are long gone. Overall, in an inflationary and supply-change challenged environment, our team executed exceptionally well. to meet the record demand for our services through effective pricing, cost reduction programs, process improvements, and best-in-class industry performance. Turning to segments on slide four, environmental services grew 51% in Q2. Approximately 60% of that growth was generated by the addition of HPC. While the remainder of the results of increased disposal, recycling, and service demand, excuse me, incineration utilization was 90%, and average incineration pricing increased by 18%. At the same time, landfill volumes rose by 36% from a sizable pickup in remediation and waste projects. We capitalized on an extensive spring turnaround season in our industrial services group, while field services grew 35%, through a steady stream of emergency response projects and the addition of HPC's utility business. COVID decon work generated $5 million in the quarter, about half the size of a year ago. Safety Clean Environmental also grew 21% in Q2, with healthy demand for its core service offerings. Looking at our environmental service segment profitability, adjusted EBITDA rose 53% in Q2 on the higher revenue, supported by our pricing efforts to offset inflation, coupled with cost reductions and technology investments to enhance our overall productivity. Segment margin expanded by 40 basis points from a year ago, and more than 500 basis points on a sequential basis from Q1. If you exclude HPC, which has not even hit its full stride in terms of capturing synergies, margins were up 250 basis points from a year ago. Moving to slide five, revenue in our safety clean sustainability segment was up 31% in Q2 on the back of higher pricing of our oil products versus a year ago. Adjusted EBITDA rose by more than 30 million or 53%. We continue to maximize our re-refining spread by carefully managing our collection costs on the front end and capitalizing on pricing and market demand on the back end. Waste oil collection volumes were up again in the quarter as we gathered 60 million gallons at favorable cost levels, up from 57 million a year ago. Our sales 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 on our base oil sales. The value of our base oil also continues to rise not just due to industry conditions, but the recognition of the quality, scarcity, and reliability of our re-refined products. In conjunction with that view, we recently launched our Clean Plus brand to really fully capture that value. Turning to slide six, we continue to evaluate opportunities to execute on all elements of our capital allocation strategy. On the M&A front, we completed a bolt-on acquisition late in the quarter of a vacuum gas oil refinery and waste oil collection business based primarily in Georgia and Florida. This acquisition will not only generate additional production for us, but will reduce our overall transportation costs by providing a local outlet for the waste oil we collect in the Southeast U.S. Part of our strategy also includes divesting businesses that we believe are outside of our core focus. In Q2, we sold non-core Western Canadian assets that were part of our legacy oil and gas segment for proceeds of approximately $18 million. Given the unique nature of these assets and the limited crossover with Clean Harbors Core Services, we determined that this business would perform better under new ownership. From a CapEx perspective, the build-out of our Nebraska incinerator remains on plan and on schedule, and that substantial investment will bring 70,000 tons of needed capacity into the market in early 2025. In the interim, We are continuing to make investments around our expanding throughput in various parts of our disposal and recycling network to facilitate our growth. And this year, we're adding a considerable amount of landfill cell capacity. Mike will touch upon our debt and share repurchase program in his comments. But let me conclude by saying that we see no indication of the trends that supported our stellar Q2 results slowing in the back half of 22. Our network of disposal and recycling assets remain in high demand, and that demand should accelerate faster in the years ahead through infrastructure spending, strict enforcement of US and Canadian regulations, captive incinerator closures, a robust project pipeline, and reshoring of multiple industries. We will continue to invest in and grow our network in order to meet this increased demand. Within our service businesses, we are continuing to hire as rapidly as possible to meet the demand and to facilitate additional growth. For SKSS, our refining business is well managed in all phases from the collection to the production to sales. There's been a paradigm shift in this business over the past two years since the implementation of IMO 2020. In addition, our sustainability products continue to gain traction with our customers. So as we move through the back half of 22, we will continue to leverage our superior systems and processes to drive margin improvement like we've seen in the first half of the year. We have an industry-leading executive team and focused and fostered a culture of accountability to optimize our performance. We expect to deliver record top and bottom line results this year, along with a robust free cash flow to support our capital allocation strategy. So, with that, let me turn it over to Mike Battles. Mike?

Mike Battles Thank you, Alan, and good morning, everyone. Let's start with our income statement on slide eight, revenue increase to a record $1.3 billion in the second quarter. Of the $430 million increase from last year's second quarter, we estimate that approximately $210 million is related to HPC. Excluding HPC and currency impacts in both periods, our revenue grew by approximately 25% on an organic basis. Adjusted EBITDA was 65% higher than a year ago, coming in at $309.1 million. That equates to a margin of 22.8%, a 250 basis point improvement year on year. We delivered that record margin performance with improvement in our gross profit and strong controls over SG&A costs. Gross margin improved 50 basis points to 33.8%. which speaks to our intelligent pricing and the productivity improvements Alan touched on. SG&A expense as a percentage of revenue improved by 190 basis points from a year ago to 11.5% due to leveraging revenue from HPC and eliminating or reducing a range of non-billable costs. Despite inflationary pressures that remain pervasive, SG&A on an absolute dollar basis was up only $31.5 million, on approximately $430 million of additional revenue, which is fantastic. For the full year, we now expect SG&A expense as a percentage of revenue to be approximately 12%, which is substantially below our 2021 level. Depreciation and amortization in Q2 increased, as expected, to $87.9 million, reflecting the addition of the HPC assets. For 2022, we now anticipate depreciation and amortization in the range of $335 to $345 million. Income from operations in Q2 increased by 92%, reflecting our sizable revenue growth combined with our efforts for across-the-board margin improvements. Turning to the balance sheet on slide 9, cash and short-term marketable securities at quarter end were $415 million, flat with prior year. We ended Q2 with debt of just over $2.5 billion. Leverage on a net debt to EBITDA basis has now declined to approximately 2.6 times after being north of three times to start the year. Based on the midpoint of our new 2022 EBITDA and free cash flow guidance, we expect to reduce our leverage to below two times by year end. Our weighted average cost of debt is currently 3.84%, with about 70% of our debt at fixed rates. Even with the recent rate hikes, We are confident that we are in good shape from a debt perspective. Turn to cash flows on slide 10. Cash from operations in Q2 was 170.6 million, in line with our expectations. CapEx net of disposals was 76 million, up approximately 60% from a year ago, as we've added HPC, made progress with our Nebraska incinerator, and expanded sales at several of our landfills. The new incinerator accounted for 9 million in Q2, and approximately $14 million year-to-date. We now expect that to be in the range of $45 to $50 million for the full year, slightly ahead of our previous range as the build-out is proceeding well. Adjusted pre-cash flow in Q2 is $94.6 million, compared with $114.6 million in Q2 a year ago due to higher CapEx previously mentioned and the expansion of working capital related to the growth of the business. For Q2, we now expect net CapEx to be in the range of $320 to $340 million, up slightly from our previous guidance due to the increase in our 2022 Kimball spend and inflationary cost for supplies and vehicles. During Q2, we bought back 335,000 shares, a stock at a total cost of $30 million. We have approximately $120 million remaining under our existing buyback program. Moving to slide 11, based on our outstanding second quarter results, and current marketing conditions for both operating segments, we are substantially raising our 2022 adjusted-dividend guidance to a range of $975 to $1.005 billion, with a midpoint of $990 million. Looking at our guidance from a quarterly perspective, we expect Q3 adjusted-dividend to be approximately 50% higher than what we posted in Q3 of 2021. Due to HPC's contribution, continued strong demand in the ES segment, and increased SKSS segment profitability. Here's how our revised full year 2022 adjusted EBITDA guidance translates to our segments. In environmental services, we now expect adjusted EBITDA at the midpoint of our guidance to increase approximately 38% from full year 2021. We will benefit from volume growth across all our core lines of business and the addition of HPC. We are offsetting the impacts of inflation with the implementation of our comprehensive pricing strategies and enhancing our profits and margin through a myriad of cost reduction activities. For SKSS, we now anticipate full-year adjusted EBITDA at the midpoint of our guidance to increase approximately 35% from 2021. Given the current marketing conditions, these improvements we have made in that business and in issues we have underway, such as Clean Plus, we are not expecting our spread to narrow much in the back half beyond typical seasonal slowdowns. In our corporate segment, at the midpoint of our guide, we now expect negative adjusted EBITDA to be up approximately 10% from 2021, a slight increase from previous guidance. The year-over-year increase is largely due to the addition of a full year of HPC corporate cost and wage inflation, offset by lower severance and integration expense compared with a year ago. Based on our first half free cash flow results, working capital assumptions, and revised adjusted EBITDA guidance, we are also raising our 2022 adjusted free cash flow to a range of 310 to 350 million, or a midpoint of 330 million. As a reminder, that range includes the significant investment in Kimball. Excluding that investment, our adjusted free cash flow midpoint would be approximately $380 million this year. In closing, I share Alan's enthusiasm about our growth prospects for 2022 and beyond. I talked about Clean Harbor's resiliency in our Q1 earnings call. I believe that characteristic is a hallmark of our organization, evidenced by our profitable growth trajectory and consistently strong performance. We are a critical vendor and partner for our customers, and for many of them, We serve as their sustainability solution. I personally remain very bullish about both our operating segments, even in the face of inflationary pressures. 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 Noah Kay with Oppenheimer. Please proceed with your question.

Good morning. Thanks for taking the questions. These are some pretty incredible results, so congratulations to the team on this. And I would like to maybe start with, Picking up on some of the comments you made around the outlook, and Mike, your comment around resiliency, I think, is something that a lot of investors are trying to wrap their heads around right now. We hear a lot of commentary broadly about an economic slowdown, decelerating manufacturing indicators. And it looks like for your business, I mean, all the lights are green at this point. So can you talk a little bit about what gives you confidence in the sustainability of some of the trends in environmental services into the back half and potentially beyond.

Noah, maybe I'll start this, Alan. You know, I think the company has grown, you know, through many recessions and passed through many recessions and really have tried to take advantage of the opportunities that those downturns present. And whether it's looking at M&A or it's, expanding geographically to continue sort of growth and keeping our top line going and our profitability going. So I think, you know, from our experience going through all those downturns in the past, I think we feel really confident in our ability to, you know, deal with whatever gets thrown at us from a slow-down standpoint. But I think the, you know, the growth that we're seeing with expanding manufacturing, with onshoring, I think is – Quite significant, and I think we're seeing it in our volumes coming into our plants. When we look at our deferred, our deferred, Eric, is up again. You might want to speak to that backlog that we have.

Yeah, we continue to have a very strong backlog of deferred inventory. Our bulk volumes have continued to grow. Our project business is up. And across the board, as you know, we have a very, very diverse customer base. And that customer base has been spinning off volumes into all of our plants, not just our incinerators, our recycling plants, our water treatment plants, our landfills. All volumes of waste and flavors have been increasing. And so very strong outlook going into the future here.

Yeah, no, I also say that there's strength in regulatory enforcement. We've certainly seen that in the first half of the year, and I don't see how that changes going forward. So all those three things, Alan's talking about reshoring, Eric's talking about our pipeline and the high-haz waste streams that we take, and the increased regulatory enforcement, all kind of bode well regardless of what happens in the market. As Alan said, you know, he's been doing this for 42 years. He's seen plenty of recessions, and we always come out on the other end stronger.

Appreciate the commentary. And then just want to pick up on your comments around SKSS product pricing and potentially being able to price that at a premium to the market. I guess, you know, can you give us some additional color around that? Is that something you're seeing currently? Do you see that happening more around base oils or blended products? Just help us understand what exactly you mean by, you know, the level of pricing and the timing around pricing at a premium.

Yeah, no, this is Mike. You know, we certainly see the early innings of this. I mean, we came out with a new brand. We're getting a lot of traction in the marketplace. You know, as Alan said, the days of discounting our base oil are kind of long gone, and we're actually pricing that at or above. And there's more work to do there. I mean, I think people have to understand the sustainability nature of it and kind of how we can provide kind of documentation of sustainability and energy savings to our customers. But that is just, I see that as a boon for the long term, not just here in Q3 and Q4.

Right. Just to confirm, you're pricing base oil now at or above the market?

I would say we're probably at market now, whereas we were discounting quite a bit. I also think that we've put together a better logistics plan to manage the business in such a way where we're not held somewhat captive if our plants are full and we need to move product, we're now able to reposition product to get closer to the market. And I would just say manage the overall supply chain much better instead of discounting to move products. And so I think those two factors have allowed us to keep our pricing relatively at market pricing right now, and we think we can even do better than that.

Really appreciate it. Thank you.

Yep.

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

Hey, good morning, guys. Hi, Tyler. Hey, congrats on the quarter here. Hey, I'm EF Allen. Is there any way you could parse the 18% incinerator pricing between call it core price and mix? It seemed like mix was a good guy.

Yeah, Tyler, this is Eric. I'll answer that. It's Mix pricing is about 50% and mix is about 50% of that. We continue to be seeing strong demand with very toxic, difficult to handle waste streams and that volume mix change continues to help us accelerate that overall 18%.

Okay, that's helpful. And then you guys mentioned in the release about captive incinerator closings. I was just curious, if that was just a broader statement with the closure of things like Cottage Grove or if you're seeing additional closures in the market.

Yeah, Tyler, this is Eric again. I'll answer. As you know, all of the captive incinerators continue to be our customers as well. And we've had strong partnerships with them, just like the evolution of the 3M partnership. So we see other captives that are closing here shortly. And we work in conjunction with them to handle some of those difficult waste streams. So that pipeline continues to be strong. Okay.

Yeah, that's very interesting. Okay. Just shifting gears over to SK. So I want to kind of focus on the part that you have a little bit more control over on the front end. So you mentioned IMO is seemingly having an impact and I don't know exactly how to ask this question, but basically if you looked at history, I mean, how much better is your PFO tracking versus what you might have expected at this level of base oil in the past? I mean, again, I don't know if that's a great way to ask the question, but I'm trying to understand how much of the better spread is based on some of your front-end actions.

Sure. So we bought SafetyClean in 2012, and as you know, they were doing about $150 million, and the following year, probably close to $70 million. experienced a significant downturn in base oil pricing as a result of the disconnect that happened back then with crude oil. And so, honestly, you know, looking at safety clean 10 years later, we're probably 500 million EBITDA or better. And I think what we have seen is our ability to manage the spread, our ability to manage particularly what we pay for oil on the street, And I would say that sitting here, we're probably paying a third less than what we would have been paying when we first bought safety clean back in early 2013. I would also say that IMO 2020 really has increased the demand on diesel. I think there has created a surplus in bunker oil and a surplus in subsequently used motor oil. And so the market is long. We anticipate that continue. And that's why we think there's really been a shift here. and we don't anticipate that changing. Many ships have put scrubbers on, but we really think that continuous demand on marine diesel is going to continue to play out real positively for us in the future.

Okay, yeah, that's extremely helpful. But on the flip side, on the back end, so I'm just going to look at this really simply, I'm a pretty simple guy, but Basically, you're selling some 140 million gallons of base and blended oil annually. You've got the addition of Clean Plus. You're trying to help the market understand the green aspects of re-refined oils. So basically, the idea is that should help you improve your price realization versus call it the base oil index. Basically, you can't control base oil because it's a commodity, but you can improve your quote-unquote spread to that index. Is that kind of a good way to think about it conceptually?

Yeah, certainly as it purely relates to basal. But, you know, a real opportunity here is to continue to grow our blended business where we even have a better margin than our basal margin. And we've really been constrained over the past two years with additives. We even had a recent force majeure because of the flooding out in St. Louis, for example. So additives has been a real problem, not only for us, but for the industry, which has curtailed demand to some extent for our base oil, but also our ability to actually manufacture the necessary blended oil that we want to sell and that we have a demand for. And so we believe we'll continue to grow our direct and our indirect blended oil. materials and really branding that as a green product, we think we will have a premium margin because of that side of the business.

Okay, excellent. My last one, Mike, did the Georgia re-refinery close this quarter? It appears maybe it did, but how much capacity does that plant have?

Capacity is 18 million gallons with potential to expand.

And it did close in Q2, late in Q2, Tyler. And, Tyler, it's 150 million. We sell 150 million gallons of oil a year, not 140. What's the 18?

Exclusive of the 18 is an inbound UMO number. We're making BGO with that plant down there.

Okay. Okay. All right. Perfect. Thank you, guys.

Yep.

All right, Tyler.

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

Great, guys. Thanks for taking the question, and congrats as well on a fabulous quarter. I guess the first question, Alan, maybe just on the environmental piece. You know, we've all been worried about sort of the sustainability on the SKSS, but an amazing quarter, and you've listed a host of things that sounds like your visibility, at least through the end of the year, for the margin improvement is strong, and it probably points to even improvement in margins as you just, with synergies from the large acquisition you made. But just going forward, I think there's still concerns that maybe some of this is not sustainable. Maybe you have this perfect storm going on, and as the economy slows over the next couple of years, just trying to play devil's advocate. I know you listed a whole bunch of things that will offset this on-shoring PFAS infrastructure bill, but do you have any concern that just a general economic slowdown will inevitably lead to some slowdown in your business?

Hi, Larry. I'm going to start then Alan will jump in. You know, so first of all, when you think about the ES business, we talked about, you know, last quarter, the ES margins, as we look at the year, year on year would be flat the prior year. We see that given the strong performance here in Q2 and our view of the back half of the year, we think that's going to be up, you know, 80, 90 basis points year on year. So when the dust settles on 2022, we think, those margins will be up substantially from 2021, which were an all-time record, just so people kind of get their head around that. And so where we go from there, I think the pipeline remains incredibly strong. You know, we had a quarterly operating review last week, and we kind of asked that question less than six or seven times, and everyone kind of said, you know, pipelines are really very robust, and those go out, you know, well past, you know, into 2023 and beyond. So, again, I'm really... very bullish about kind of our long-term view on that. And, you know, we talk about cost containment activities. I mean, the list is long, and we're building a new list. And so that list will continue. And that's part of our culture. That's part of Clean Harbors. That's when I talk about resiliency. That's what you see. And so that really is kind of what we're working on right now because we know that's going to be challenging.

Absolutely. Okay. And just switching gears, just on SKF, I know the Georgia facility, the small or the 18 million gallons you added, sounds like a nice incremental purchase there. What are your thoughts about more expansion on that side? I know you guys took a shot at some of the Vertex assets last year. Are there still things, are there still assets out there, refineries that you guys are looking at? I would think a possible additional acquisition is what you're focused on. Is that a fair statement?

I think clearly there's some opportunity in the M&A space, certainly, and I think there's also opportunities to expand our existing plants. Eric, you might want to speak to that.

Yeah, well, we took the Synergy asset into our network. We have the ability to continue to expand our hydrotreating capacity in our existing plants. We also have some targeted efficiency projects to grow our throughput across every one of our re-refineries. So we're very bullish about continuing to grow internally, but also look at acquisitions.

Okay, great. And then just lastly, back to this on the PFAS, I know I mentioned that earlier, could you just give us a general update, anything going on on that space? I suppose you're not building it too much. There's a lot going on, but in terms of near-term revenue opportunities, I assume you're not building it too much in your 2022 guidance, but could you just maybe just give us a sort of a quick update on that? Thanks.

Yeah, so on the PFAS side, obviously the regulations continue to evolve and Clean Harbors continues to be very well positioned through not only our treatment assets, our landfill assets, but most importantly, our incineration assets. And we continue to believe that RECRA permitted high temperature thermal destruction through our units is really the preferred disposal methodology for PFAS contaminants. In fact, we've done some testing with a third-party testing company, and we've proven out what we've suspected all along, that our emissions are really five to eight times the order of magnitude safer than the most stringent state and federal guidelines out there. We're really excited about the future. We have not factored in a big growth because of PFAS, but that market will continue to evolve.

Absolutely. Great. Thanks, Alan. I appreciate the call.

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

Yeah. Good morning. Thank you. So speaking about the structurally higher growth, spreads in the oil business. Could you talk about how you're currently sourcing used motor oil? And what I mean by that is approximately how much is contractual versus just negotiated on the street? And of those contracted volumes, could you discuss the escalation indexes versus what you might have had five years ago? I suspect they're more favorable for you these days, but if you could just give us some color on that.

Sure.

I'll start here. You know, certainly we have our national accounts, and one of the things that we offer a lot of major corporations is a North American footprint, and so we negotiate those contracts and really make sure that they're good for both sides. We also have a lot of branch-owned accounts, and so that business is negotiated at the local level based on those markets and We typically are looking at pricing our services based on what the recycled fuel oil market is because that's where a lot of oil goes. Basically, a lot of your off-spec oil, your industrial oil, a lot of the hazardous waste that we collect from oil spills and tank cleanings and all those kind of things all go into that local recycled oil market, which we participate in quite aggressively, quite frankly. So I think we really look at our market pricing today much more granular, much more regional, and we don't lock ourselves into anything that's going to get us in trouble. And I think that's all through our learnings back in that early 2013-14, but we're not going to go back there. I think the bottom line here for us as well is that all of those used motor oil customers are generating other demands for services, whether they're pots washers or they're you know, oil filter disposal or it's containerized waste. Emergency response. Emergency response. So we're driving a lot more high-priced containerized waste into our network through our sustainability solutions segment. And that's really the win that I think we're really seeing today.

Okay. Thanks for that. And I don't mean to throw a wet blanket on your excellent results today, but if we were to enter a recession in 2023, you mentioned reshoring, and we've talked a lot about the U.S. chemical renaissance and other factors that are favorable to you. But could you just discuss, when you think about your cyclical end markets, what would the impact of a, say, minus 5% industrial production print be like if that was the state of being in 2023 for Clean Harbors?

Yeah, Dave, you know, thanks for the wet blanket. I appreciate that. You know, I guess, you know, we go back, you go back to, you know, kind of 2020 where the pandemic hit and everything kind of stopped. But you look at our EBITDA over the past, over that time period, and we continue to grow as if, There wasn't a pandemic at all. It's hard for me to say what we would do, but as I said before, we're incredibly resilient and incredibly reactionary. And that means taking out costs and managing the business more effectively and closing sites and shuttering plants. I mean, going back to 2020, we closed five of our six, you know, re-refinery. That was an amazing, over the course of like a month. And we made that from the idea we had to do it to the fact we started the process. That just shows how fast we are, how nimble we are, And so regardless of what happens, and I think going back to 2008, I think most of the business kind of hung together very well. Areas like tech service and other areas grew because these things are very hard to find other homes for. So I really do believe that if a recession were to happen, no one wants that to happen. You know, I think that we'll be kind of well positioned like we have been for 42 years. I mean, Alan's kind of, as Alan said earlier in his earlier questions, like, you know, he's seen plenty of recessions and we come out We use that as an opportunity to get nimble, that maybe M&A will be available to us, and we can grow even faster.

Okay. Thanks a lot, Mike. Appreciate it.

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

Michael, are you there? I'm here. Hi, Michael. Hey. Alan, I've covered you for a long time. I don't think I've ever heard you use the word thrived in a quote in a press release. That's how strong you feel about the business right now.

Right, yeah.

So, Mike, taking your guidance about segments, ES around 890, SKSS around 310, that's corporate overhead around 210, that gets you to the 990s.

Yeah, I think you're pretty close. I think it's a little higher on the ES side and a little higher on the corporate side. But I think you're in the ballpark, Michael.

Okay, so we might be in like the 225, and that puts us in right around a 910. Okay, that gets me to the SKSS. So you all have, and all of us have sort of looked back on 19 and said that was kind of a normal world, and SKSS did round numbers 130. and now we've had this extraordinary spread expansion. At this point, we're up somewhere in the $180 million difference. How much of that at this point do you really think is structural? Because your guidance this year in February, you acknowledged there would be some narrowing, and the guidance reflected that. We've now plowed right through that. What stays with us of that 180 as supply and demand rebalances increase? I don't think oil is coming down below 80 anytime soon, so maybe 80 is the base there. Help us understand what the flexion is on that 180.

Yeah, Michael, I think you're right. We had talked about normal years being 130, but a lot of things have changed since 2019, which includes regulation, which includes breaking out the SK oil business. between, you know, kind of sustainability being much more of a focus of our customers, and all those things have kind of changed kind of my thinking, and let's say our thinking, about kind of what this business does long term. And I'm, you know, whether it be, you know, whether it be, you know, the business, you know, growing to be, you know, to managing the front end of the spread. Alan talked about it on the call, but I'm going to give you some more color on this. You know, having tankage in the right place and having better terminals and more terminals to store our oil. All those small things, when you break the business out, it's not just changing an org chart. It's actually kind of focusing energy on the business to manage it better. And so now we have a winter storage program where we take base oil and move it down closer to our customers in the wintertime so that we don't run short and have to go out and buy oil in the marketplace. And all those small things are really, I think, going to change the game forever. I mean, obviously, crude prices are up, and 6% of base oil is coming from Russia and Ukraine. I'm sure that's not going to get better anytime soon, but I'm here to tell you that I think that the new norm is much, much higher than, say, the 130 that we talked about. Hard for me to say that today, what that's going to be, but certainly it's much closer to where we're going to end in 2022 than where we ended in 2019. That's for sure. Okay.

Eric, on the Georgia plant, the 18 million gallons, what's the yield into the VGO? Is it the same three quarters of? 70%, 75%. And then is there a plan to put a hydrotreater on and convert that to base oil, or do you take that VGO and push it into your other plants and turn it into base oil?

We certainly, in the short term, plan to move that VGO into our other plants. But we've had some initial discussions about expanding some hydrotreating capacity there in the future.

Okay. And then on the incineration side, between yourselves and Gum Springs or Veolia, there's a fairly significant percentage increase in the market. Veolia comes, I think if I've got this right, comes on first. So how do you feel about the impact of, that potentially a hundred thousand tons coming in relative to where your pricing structure is today, the supply demand, how, how, how does that normalize some of that, you know, that capacity in the marketplace?

Yeah, we feel pretty good about, um, the, the capacity that's coming on and the utilization continuing to be high across all of our units. The, uh, The volume of waste being generated across multiple different customer groupings continues to expand. Our incinerators are really uniquely positioned to capture very difficult-to-handle waste streams and mix, and that's what we're seeing in the market. That's what we've really focused our structure around is handling more drums, handling more direct burn. So we continue to be very bullish about it, and that capacity will come on. I'm not sure. I really don't think that Gum Springs will be before us, but we really feel good about our position here, and that added capacity is much needed in the market.

Okay, so that takes me to the next piece of this broadly. I think this might be a reasonable statement. I think you all have enjoyed a rate of change in price that you probably have never seen since the beginning of the company. So you've changed unit prices pretty much across all product lines. What is your comfort and confidence that you hold on to the unit price changes when and if we do enter into a cycle and eventually there's a cycle?

Michael, certainly, as Alan, you know, costs continue to rise, right? Whether it's natural gas, transportation costs, just the overall cost of service, labor, all those inflationary costs that we've all seen are not gonna go away. And so we've had to be aggressive in pricing for our services, but at the same time, taking out a lot of costs here. We had, you know, reduction in force in April. We continue to look at opportunities to move costs to lower cost jurisdictions, expand the use of our rail network to lower our transportation costs. I mean, anything you can think of, right, is on our list of things to do. to really address the pressures. But the bottom line is we need to continue to move pricing, and particularly in our industrial business, where our margins are not where we want them to be, and the fact that we don't have enough capacity to service all of the customers that we have. With the labor constraints, equipment constraints that we have, we're out two years on trying to get tractors in some cases. And so, like we worked with our customers during COVID, where we gave some concessions back, we'll work with our accounts. But overall, we need to continue to address the issues of our margins as inflationary costs and other costs continue to increase here.

So, last one for me. There was an industrial recession in the second half of 2015, all of 2016. What is different about Clean Harvest today versus... that operating period and therefore gives the market more confidence that this 990, while it might have some spread compression on oil and in that maybe that's, you know, not really 940, but that's the baseline.

You know, if you remember after the EverReady acquisition and a lot of our growth and expansion going after a lot of the oil sands work and a lot of the fracking work, I mean, we were generating close to $150 million in EBITDA on that part of our business. We'll probably generate $25 million in EBITDA on that business now because we've sold a lot of those assets, as you know, and we've really tried to focus on the pure environmental side and the industrial service side of that business. And so when we were going through all those challenging times during that recession, as you talked about, we made up for that loss. We grew in other parts of our business. And I think we grew because... The nature of our customer base, the verticals that we service, whether it be health care and the expansion we're doing in health care, adding autoclaves, expanding our medical waste capabilities, the retail side of business. The retail side has been a real growth market for us, whether it's the pharmaceuticals or the big boxes. The regulatory environment on them has been extremely stringent on how they're dealing with their returns and their waste materials. That market's really been growing. And so when we look at some of these verticals that historically might not have been of any size, we're really seeing those grow for us. And we continue to, you know, kind of drive route density, go after those small quantities. And I think those are the things that we can do and grow through another recession.

Thank you so much.

Thanks, Michael.

Thanks, Michael.

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

Hi, thank you. I wanted to just go through HTC if I could, which seems to be performing better than expected. And I'm wondering, comment on a couple of things. In terms of the cost, are you a head target there? Are you, you know, have your expectations for that business changed versus where you were? earlier in the acquisition?

Yeah, Jim, this is Eric. Our synergies continue to be on track as we go through 2022 here. We still have a lot of opportunity to continue to work with our branches. Most importantly is really working with those large customers that we're servicing there and continuing to expand the margins that we're getting with those customers, develop partnerships with them better, support them better, But we're really just midway through some of the synergies we've looked at.

I think I would say we're probably lagging on the pricing initiatives. So keeping up with the tremendous cost increases that we've taken on simply from inflationary cost increases, I would say that's one part of the business that's lagged, and we're hoping that we can continue to do a better job in that area.

When would you anticipate potentially, without talking too about price increases and specifics, but when would you start to assume some of that might begin to flow through?

You know, we're, we've been doing it, uh, you know, it's, it's taken longer than we've wanted to. We've, we've rebranded it. Uh, we've had to merge and consolidate contracts. Uh, and so it's taken a little bit of extra time for us to, to make both the legal and pricing contracts, uh, rationalized and, uh, But we're in the midst of doing that, and I would expect that we'll continue to see that throughout the rest of this year.

Yeah, it certainly has started to show up here in the second quarter, but we have a long way to go here in the latter half of this year.

Got it. And you talked about cost containment, but you're also dealing with a lot of inflationary pressures. I'm just curious, have you begun to see any plateauing of some of the cost pressures that that you've been experiencing over the last several quarters in either part of the business?

Jim, this is Mike. No, we really haven't. We certainly see, you know, the things that we see so far, you know, obviously fuel prices are coming down a bit, which is helpful. But outside of that, you know, some of the things, some of the price increases we see don't, like wage inflation, that doesn't go away. And so I feel like that's not going back. Certainly some of the commodities for steel and steel drums and so forth have started to slow down, but we really haven't seen it in our pricing just yet, in our cost structure yet.

Eric, you might want to speak to just the QSOL pricing as an example of what we saw from where we were to where we are today as an example.

Yeah, the materials that we use in our parts washers, both the solvents and a QSOL cleaning solution, have really elevated over 250% over the past year. and a year and a half. So we're continuing to see that. So costs are continuing to increase in certain areas. On the labor side, as Mike said, while we've been fairly successful at adding over 1,000 people year to date, we still have a long way to go on continuing to retain good employees and grow our employee base.

Are you seeing moderation in the attrition levels?

We are. We are. We produced our attrition.

Yeah, I think we're flat. I think we're flat, Jim, from where we were, which is good, which I think is we started to see that plateau. And so as Eric said, we've done a better job of hiring people, so that's why we're up headcount from year end.

Got it. Thanks. Congratulations on the quarter.

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

Hi, this is Adam Bubis on for Jerry today. Excluding the new Nebraska incinerator, can you talk about the magnitude of capacity increases you expect to achieve from investments in existing incineration plants alone?

Yeah, Adam. This is Eric. We continue to look and target 5,000 to 10,000 tons a year of incremental capacity across our network of incineration. But I'd also say that we also are expanding our other plants, not only the landfills at cell capacity, our recycling infrastructure, our water treatment infrastructure, so a number of different areas that we're growing capacity in because we've seen the demand across all of the different types of disposal waste streams throughout our network.

Got it. That's helpful. And then on the landfill side, what was landfill pricing this quarter on a mix-adjusted basis? And how should we think about mix-adjusted pricing going forward amid recent industry consolidation?

You got us on that one, Adam.

I'd say that certainly the volumes are up quite a bit. And when project work happens, that usually takes our average price down. I'm not sure what that mix-adjusted number is. but certainly the landfill has performed very well this quarter, and we see a really strong pipeline of waste projects coming into our network.

Got it.

Thanks a lot. Going back to industry consolidation, I think that's good for Clean Harbors. I think that they're going to be very disciplined in their pricing, and I think we're the beneficiary of that.

And I think the other thing, just to add to what Eric was mentioning, not only are we expanding our oil recycling, but we're expanding our solvent recycling to meet the demands, particularly in the chip manufacturing. We have new plants being built in Ohio. We're expanding our Ohio recycling facility. We have several solvent recycling plants where we want to make additional investments. Clearly, the goal here is to recycle and reuse as much as we possibly can. And we're doing a really good job of that. We're getting buyers of those recycled products. But I think in the end, you need more incineration capacity because the captive market is going to continuously look at the high cost of natural gas, look at it as a non-core part of their business and outsource a lot of those difficult to treat waste streams. So when we look at the expansion of capacity like we did with Eldo, we have no doubt that that capacity is going to be needed.

Great, thank you. Yeah.

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 Zane Karimi with DA Davidson. Please proceed with your question.

Hey, good morning, gentlemen, and congratulations on the strong results.

Thanks, Zane.

Thank you. Maybe an extension on Jim's question earlier, but the environmental service business seems to have a lot of things working together to produce these strong results. But could you help differentiate how much this growth was organic versus HPC contributions? And how are the rates of growth and margin profiles of the legacy biz versus HPC differing at this point?

Yeah, Zane, this is Mike. So from an organic standpoint, the environmental services business grew at 24% organically. It grew 46% reported. So that is kind of what the differing pieces are. I'm not sure if I'm answering your question or not.

Yeah, yeah. And then from a margin perspective, are you seeing any differences there between the legacy business versus the HPC contributions?

Yeah, sure. So the environmental services margins are up you know, 40 basis points kind of year-on-year. But if you take out Hydrochem and do it in apples-to-apples comparison, we're up over 250 basis points year-on-year. So it really is a testament to the pricing and cost controls we talked about on this call that really have been driving that good margin improvement. You know, kind of up with Hydrochem and even up better without it. And if you go one step further, And back out, government funding and decon work from last year were up almost 300 basis points year on year.

Okay, okay. Thank you for that, Keller, there. And then through the era of COVID, employee turnover has been a fairly impactful theme across almost all industries in which there are more and more new employees in important roles. So maybe can you speak to how or if this has seemed to impact your emergency response or accident response jobs? Any updates on the number of emergency response jobs types of jobs today?

Yeah, let me start and maybe Eric can chime in here. But I think one of the key things to mention here is that, you know, we've been here since COVID began. Our people in the field perform probably 23,000 responses. And so it was a monumental task for our teams to come into work and service our customers, not only from an emergency standpoint, for the basic everyday services that we offer. So our hats off to them. Um, you know, we, we have a hybrid workforce, uh, across some of our office locations, uh, and, and we're mindful of the fact that, you know, some people are still hesitant to commit to the office, but we're doing a pretty good job there. I would say that, uh, our, our new hires in the field, you know, clearly we realize how important it's going to be to onboard them. And we've made new investments in HR recruiting, really to try to get close to the market and really close to the needs of the organization. And I think so far that's been pretty good. Eric, you might want to comment on that.

Yeah, no, thanks, Alan. At the tail end of last year, we really restructured our recruiting onboarding organization to align it directly with the business units. So all senior business leaders and recruiting are extremely well aligned to really focus on, number one, decreasing the turnover, which we've been successful at stabilizing that, and increasing our new field employees and bringing them on, fast and efficiently and well-trained, and we're seeing the dividends of that paid off. But as we spoke about earlier in the call as well, though, we still have a long way to go to really get our workforce where it needs to be. But we're seeing positive trends with what we've done across the business.

Okay.

Okay. Thank you for both those responses there. Appreciate the color. Okay.

There are no further questions at this time. I would like to turn the call back over to Mr. McKim for closing comments.

Okay. Thanks for joining us today. The team will be active on the investor relations front in the next several months, starting with the Raymond James event in New York City later this month. So have a great rest of the summer and stay safe. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.