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spk01: Greetings, and welcome to the Clean Harbor's second quarter 2023 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. Thank you, sir. You may begin.
spk03: Thank you, Christine, and good morning, everyone.
spk02: With me on today's call are our co-chief executive officers, Eric Gerstenberg and Mike Battles, and our EVP and chief financial officer, Eric Dugas, 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're 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 2, 2023. Information on potential factors and risks that could affect our results 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 today other than through filings made concerning this reporting period. Today's discussion includes references to non-GAAP measures. Clean Harbors believes that such information provides an additional measurement and consistent historical comparison of its performance. Reconciliations of these measures to the most directly comparable GAAP measures are available in today's news release, on our website, and in the appendix of today's presentation. Let me turn the call over to Eric Gerstenberg to start. Eric? Thanks, Michael. Good morning, everyone, and thank you for joining us. Turning to our Q2 financial results on slide three, our second quarter performance underscores the strength of our environmental services segment, where our adjusted EBITDA margin climbed by 140 basis points from a year ago. This is a highly resilient business that is supported by scarce permitted assets, a strong safety record, technical expertise, a highly trained workforce, close customer relationships, and effective capital allocation. Q2 marked our ES segment's seventh consecutive quarter of growth and profitability. Its performance partly offset the decline of our safety clean sustainable solution segment, which experienced some headwinds resulting from the adverse conditions that continue to affect the base oil and lubricant markets. Before I review the segments in more detail, I'd like to After a record Q1 performance, we delivered a second quarter TRIR of .68, the best Q2 in our history, which keeps us on track to achieve our ambitious annual TRIR goal of .70. The record-breaking heat across much of the country posed a unique challenge in Q2 and continues to do so as we move through the third quarter. Because our team is often required to wear personal protective equipment, To everyone on our team, we appreciate all the proactive steps you take to keep yourself and your colleagues safe. Turning to environmental services on slide four, segment revenue increased 7%. The growth of our services business was underpinned by pricing and volume initiatives. Each of the segment's four business units posted year-over-year gains, with industrial services and safety clean environmental branch businesses leading the way. Industrial services revenue grew 11% on the heels of a strong spring turnaround season and initial contributions from our Thompson acquisition. Our second full year of HBC, which we acquired in late 2021, is trending better than we anticipated. Safety claim environmental revenue climbed 16%, with the demand for businesses' core offerings continuing. response-related projects. Technical services revenue grew modestly, largely attributed to the many planned maintenance and repair days at our disposal facilities to address weather-related outages that occurred in Q1. As expected, utilization at our incinerators reached 84% this quarter, up four points sequentially but down six points from Q2 last year, which had fewer down days. Looking ahead, we anticipate less down days in the back half of this Average incineration price was up 8% in Q2. We made some important repairs and investments in the incinerators that limited utilization, but our operations team worked hard to maximize the throughput to address our increasing backlog of waste. Landfill volume in the corridor was flat for the prior year. This year, our base business was particularly strong with a good mix of high-value waste, which resulted in average pricing increasing by 21%. Looking at segment profitability at 13% adjusted EBITDA growth, the ES segment once again outpaced the top line. Given our highly leverageable network of assets, higher revenues should consistently drive greater profitability. As noted last quarter, we are also benefiting from a number of productivity programs and cost reduction efforts across the organization. To counter inflationary pressures, we've been targeting 100 million of company-wide cost reductions in 2023. much of it in ES. As a result of all these factors, we increased our ES margins and are now topping 26%. Overall, a great quarter for the ES segment. Before handing it off to Mike to take you through SKSS, let me touch on a recent development related to PFAS that should benefit our environmental services business materially in the coming years. Turning to slide five, in July, the U.S. Department of Defense issued new guidelines related to the incineration of materials containing PFAS, which research indicates is present at hundreds of military installations. The DoD has authorized commercial hazardous waste incineration as a method of addressing these forever chemicals. The DoD guidance also allowed for hazardous waste landfills as an alternative remediation method. Last year, we published the results of a comprehensive third-party study that clearly demonstrated that we could effectively destroy a wide range of PFAS compounds, including AFFF firefighting foam, at commercial scale. In that study, we proved that we can consistently achieve at least six nines of destruction, which is the gold standard for thermal methods. Additionally, the EPA conducted its own pilot study at its North Carolina facility and came up with similar conclusions about the potential for incineration. Given the compelling results of our study, harvest long-term. That being said, we don't expect a material amount of opportunities from the DOD this year. The EPA still must set final guidelines related to acceptable levels of contamination in soil and water and provide recommended methods of storage, removal, transportation, and destruction. In the interim, we plan to work closely with the DOD
spk06: Thanks, Eric, and good morning, everyone. Let me echo Eric's comment about the great work of our team this quarter. We had a number of standout performers in our ES segment that helped us deliver overall results in line with our guidance for the 23rd consecutive quarter. That consistency is something that we personally take pride in. Moving to slide six, SKSS had another challenging quarter as the segment fell short of our profitability expectations. While we lowered our expectations on our last call, we did not anticipate the unusual absence of the Q2 seasonal pickup in demand and pricing this year. In fact, after a price decline in early April, posted prices fell again in June, which was the culmination of a weak spot pricing environment all quarter long. While crude prices have risen more recently, they have not yet correlated to a rebound in base oil and lubricant pricing. On the top line, SKSS revenue dropped 15% based on weak pricing based on the weak pricing climate brought on by global market conditions compared to a year ago when scarcity of supply was customers' primary concern in the wake of major market disruptions. In Q2 of last year, posted prices rose by $1 a gallon, whereas this year in Q2, posted prices fell by $0.60, with spot pricing exhibiting even deeper discounts. In 2022, customers were concerned about shortages and allocations. Conversely, This year, buyers have been able to patiently wait on the sidelines, destocking inventories, and holding out for lower prices. As a result of these conditions, SKSS adjusted dividends decreased 45% with a year-over-year drop in margin as their near-term refining spreads have been compressed. While market conditions have remained unfavorable, the SKSS team has acted quickly to counter the spread compression. The team is executing well in the areas we can control, such as collection pricing and volumes, as well as plant production and volume sold. During the quarter, we shifted rapidly from a pay-for-oil to charge-for-oil pricing model, while generating record collections of 64 million gallons. We also sold a record level of base oil gallons in Q2, as our re-refining plants continue to run well. Blended product sales accounted for 19% of total output from our plants, flat compared with a year ago, but up from the 15% we reported in Q1. We continue to win back blended customers we lost in the back half of 2022 due to additive shortages. Our direct volumes, which represent our closed-loop approach, were at 7% in Q2, which is flat with a year ago and in line with our expectations. Our goal remains to increase our blended volumes this year through efforts on both the directs and wholesale sides. Overall, even with the declines we've seen this year in SKSS, this segment is still expected to deliver an approximately 20% adjusted dividend margin this year, and it remains a strong free cash flow generator and high ROIC business for us. Turning to slide seven in our capital allocation strategy, as part of our Vision 2027 strategy that we laid out in our investor day earlier this year, we have multiple avenues to grow our company. We continue to evaluate opportunities to invest in CAPEX to drive organic growth, particularly in the facilities network, our maintenance shops, and other areas. The build-out of our new state-of-the-art incinerator in Nebraska remains on plan, on budget, and on track for opening in early 2025. We installed the kiln this quarter and are on track to hit a number of other critical construction milestones in the back half of this year. On the M&A front, The early returns on our Thompson and Duffer acquisition are very promising. The business is proving to be synergistic and should support cross-selling going forward. We continue to see a good flow of potential bolt-on transactions for both offering segments. In Q2, we closed a very small acquisition, less than $10 million in size, where we added a company that leases more than 500 intermodal containers. We are confident that these assets will benefit us as we grow our business in the years ahead particularly with the new incinerator coming online and larger PFAS opportunities starting to develop. Eric Dugas will discuss our financial activity for the quarter, but I'd like to remind investors that our strong and flexible balance sheet allows us to remain opportunistic with respect to potential M&A. Overall, we remain on track to hit our financial targets in 2023 as the momentum in our ES segment continues to offset any declines in SKSS. Strong demand for ES is not abated, and our favorable market dynamics supporting our profitable growth in all of our fourth business segment units. Growth in industrial services continues to be a meaningful contributor to our 2023 success as we move towards the fall turnaround season. Within our disposal network, our record backlog positions us well for the back half of the year. The project pipeline within the ES segment shows no sign of slowing as the pace of reshoring picks up and government infrastructure spending is starting to make its way into the market. Given the trajectory we've seen through 2023, we continue to expect nothing short of a record year in our ES segment. Although it's disappointing that the summer driving did not stabilize the pricing environment in SKSS, we have responded quickly to market conditions. We will continue to control costs across the business, particularly on the collection side, while still ensuring that we have enough supply to maximize output at our re-refineries. In total, we are maintaining our adjusted EBITDA and adjusted pre-cash flow guidance for the year, as we believe our ES segment will offset the slowdown in SKSS. With that, let me turn it over to our CFO, Eric Dugas. Great.
spk12: Thank you, Mike. And good morning, everyone. Turning to the income statement on slide 9, as Eric and Mike outlined, Q2 was a strong quarter for us. with our ES segment again delivering exceptional results, exhibiting continued profitable growth, and exiting Q2 with significant momentum across many of our service businesses. Total revenues for the quarter increased $42 million, with our ES segment growing $81 million to more than offset the lower top-line figures for SKSS. Adjusted EBITDA was $287.5 million, in line with the guidance we provided in May but down from the $309.1 million we reported a year ago when we benefited from much higher base oil pricing due to global supply disruptions. Our adjusted EBITDA margin was 20.6% in line with our expectations. Gross margin was 32.2%, reflecting our ability to offset inflation with appropriate price increases and cost savings, while increasing productivity and realizing gains from operational efficiencies. SG&A expense as a percentage of revenue was 12% in Q2, consistent with our expectations. For the full year, we anticipate being in the low 12% range and essentially flat with 2022. The team continued to do a great job offsetting inflation and wage pressures with cost mitigation strategies. Depreciation and amortization in Q2 increased slightly to $89.7 million, again consistent with our expectations given the addition of Thompson. For the full year 2023, we continue to anticipate appreciation and amortization in the range of $350 to $360 million. Income from operations in Q2 was $189.8 million, largely driven by our strong performance in environmental services. Debt income for the quarter was $115.8 million, resulting in a GAAP earnings per share figure Turning to the balance sheet highlights on slide 10, cash and short-term marketable securities at quarter end were $326.1 million, reflecting our decision to pay down the entire $114 million of debt that was outstanding on our ABL revolver. Given our strong current financial position, we thought it was prudent to lower our interest expense with some of the excess cash we had on hand. As a result of that action, we ended the quarter with debt of just over $2.3 billion. We remain very comfortable with our overall debt portfolio as there are no significant amounts coming due for a number of years. Leverage on a net debt to EBITDA basis as of June 30th was approximately two times, and our weighted average pre-tax cost of debt at the end of Q2 was just over 5%, with approximately 85% of our portfolio being at fixed rates. turns cash flows on fly 11. Cash provided from operations in Q2 was up 22% to $207.6 million versus $170.6 million a year ago. CapEx net of disposals was $121.5 million in the quarter, up from prior year, partly as a result of spend on our Nebraska incinerator project, which accounted for $22 million of our Q2 CapEx. million, which was right in line with our internal expectations and keeping us on track to hit our annual target. For 2023, we continue to expect our net capex to be in the range of 400 to 420 million. Full year spend on our Nebraska incinerator is expected to be in the range of 85 to 90 million, having spent 35 million year-to-date We are also continuing to make investments in both equipment and our transportation fleet with an aim to minimize third-party rental spend while accommodating the growth that the businesses need. During Q2, we bought back 36,000 shares of stock at an average price of $137 per share and a total cost of $5 million. We still have close to $100 million remaining under our existing authorized buyback program. Moving to slide 12, based on our Q2 results and current market conditions for both of our operating segments, we are maintaining our 2023 adjusted EBITDA guidance range of $1.02 billion to $1.06 billion with a midpoint of $1.04 billion. Looking at our guidance from a quarterly perspective, of 2022 due to a challenging year-over-year comp for our SKSS segment, but offset by continued positive growth in our ES segment. I'll now provide an updated breakdown of how we expect our full year 2023 adjusted EBITDA guidance to translate to our reporting segments. In environmental services, we now expect adjusted EBITDA at the midpoint of our guidance to increase 15% to 17% from the full year of 2022. Demand for a range of services, particularly in industrial and at our disposal facilities, continues to be very strong. As a reminder, our full year 2023 guidance for the ES segment includes $12 million of adjusted EBITDA attributable to the Thompson acquisition. For SKSS, we now anticipate full year 2023 adjusted EBITDA at the midpoint of our guidance to decrease in the $35 ongoing pressure on base oil pricing. In our corporate segment, at the midpoint of our guide, we now expect negative adjusted EBITDA to be up 7% to 8% in 2023. The slight increase from our prior guidance reflects some higher expenses that occur in Q2, primarily relating to insurance programs and professional fees. Overall, the team is doing a good job offsetting items like higher insurance expenses, salaries, and corporate costs related to the Thompson acquisition with cost savings programs. For 2023, we continue to expect to deliver adjusted free cash flow of between $305 and $345 million. I want to remind everyone that this guidance includes approximately $85 to $90 million for the new incinerator this year. If you add that spend back, the midpoint of our adjusted free cash flow guidance In summary, Q2 was marked by solid execution in both segments. Our ES segment delivered profitable growth above our expectations. In our SKSS segment, while the financials were less than anticipated, the team responded rapidly to declining market conditions and, as Mike said, did a nice job controlling what they could. Looking ahead, we are enthusiastic about our near and long-term prospects, especially in the ES segment, where there are numerous tailwinds. We have not seen a meaningful slowdown in any of our core lines of business. Our sales pipeline, as we sit here today, is larger than it was 90 days ago. We had a healthy outlook for the second half of the year for multiple reasons, including the backlog of waste in our facilities, the additional waste streams that we continue to see enter the commercial marketplace, the emerging PFAS opportunity that Eric spoke about, and the schedule of projects we anticipate commencing going forward. Our goal is to continue to capitalize on these positive market dynamics in ES while managing through the current downturn in SKSS, while setting the business up for future growth as macro factors impacting SKSS stabilize. Overall, we continue to expect another solid year for Clean Harbors in 2023 as we work towards achieving our Vision 2027 goals. With that, Christy, please open up the call for questions.
spk01: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Michael Hoffman with Stiefel. Please proceed with your question.
spk07: Hey, good morning, and thank you for taking the time. So you said all this in the call on your prepared remarks. I just want to make sure we emphasize it. All lines of business, not just technical services and not just incineration, saw growth in ES, and the pricing, is that spread across all of them as well, and or is it concentrated just in disposal?
spk02: Yeah, Michael, this is Eric. Thank you for the question. Yes, the pricing is across all lines of business.
spk06: We continue to push price for disposal, transportation, labor across all areas of our businesses, and that continues to take effect. You know, Michael, going back, this is Mike. I'll just add on to what Eric said. You know, if you think back, you know, a few years it was, You know, incineration is scarce, and so we get pricing, we've always gotten pricing in our facilities, whether it be landfills, incinerations, TSDS, what have you. What's happened over the past couple of years is that there's been a switch in that getting, you know, qualified, safe, compliant labor is also very tough. Getting trucks and equipment, also very difficult. And that's allowed us to drive price kind of beyond just incineration. beyond just the facilities. And you see that this quarter with the terrific results in the industrial side and the field service side that Eric mentioned in his prepared remarks.
spk07: And historically, the turnaround business is a little stronger in the first half than the second half. Is that pattern holding or is it reversed? And that's helping give you that much more confidence about totally yes directionally.
spk02: It certainly is. was more turnarounds than traditional. We had very strong turnarounds season for our industrial services. We expect that to continue. And it's really reflective in the numbers of that business.
spk07: Okay. And then, of course, everybody's got to ask this SKS question. I won't be the first one, I'm sure. How do you give the market confidence on what you think the bottom is and when you think about that bottom, is there enough data, I can't find it, to tell you whether there's a correction is done in the finished goods side of the market, which is partly influencing this problem. There's just too much finished goods out there, and the blenders are going, you know, we don't need to buy oil to blend to make finished goods.
spk06: Yeah, Michael, this is Mike. I'll answer that question. You know what? At the end of the day, you know, we feel that the business, we did everything we could to kind of control the costs. Control the costs, drive blended guidance, drive down PFO pricing to CFO pricing. You know, and the plans ran really well. And we're executing on the strategy we talked about back in our Vision 2027 presentations back at the end of March. You know, what's the bottom? Hard to say. I think that the midpoint of the business starts with two over the short term. And if prices are increasing, it's in the mid to high twos. If prices are decreasing, it's in the high ones. And our midpoint of our guide today is in the 190 range. That's after three-plus price decreases over the first half of the year. And I'm hopeful that with crude prices coming back a little bit over the past few weeks, we see base oil pricing increasing. Just as a modeling answer, for the purposes of the back half of the year, we're assuming base oil prices remain flat. And so, you know, I'm hopeful, given the most couple weeks that I've heard around, you know, crude prices coming back, maybe there's a baseball price increase, which will certainly kind of help us kind of get back to the two number we talked about a minute ago.
spk07: Okay. And just so you alluded to midpoint SKS 190, that puts ES at like 1.11 if you're landing at somewhere around 255 to 260 on corporate overhead. Yes, sir. We did all that math.
spk06: That's exactly right. And really, too, we're happy to answer questions about SKSS all day, and to your point, Michael, we probably will. But the ES business continues to do incredibly well. As Eric said in his prepared remarks, the incinerators had challenges in April and into May, and yet we still delivered 140 basis points of margin expansion in the ES business. And if you look at the guide in making estimates for revenue, our margins in the back half of the year for the ES business will be, you know, 150 to 200 basis points better than prior year. And as such, we really are very bullish on that business and excited about the future. And I want to make this point on the call is that, you know, we gave our Vision 2027, you know, Eric and I stood in front of the investment community and talked about it. I'm more bullish about, you know, Vision 2027 now than I was 90 days ago. And more importantly, our pipeline has not changed. Our pipeline still is stronger today than it was 90 days ago. Again, I'm really excited about it.
spk07: Okay. Thank you very much for taking my cue. Thank you, Michael.
spk01: Our next question comes from the line of Noah Kay with Oppenheimer. Please proceed with your question.
spk10: Thanks. Yeah, just a little bit more math that, you know, last year ES was 75%, right, of EBITDA pre-corporate expense, and this year it's going to be 85% or more. So I think I'll focus on the 85%. Can we start with that PFAS commentary? Maybe you can level set for us how much PFAS remediation revenue you've seen year to date and what's in the 2023 guidance. And then can you kind of break up the PFAS opportunity into different chunks? Maybe you can talk about potential revenue just with DOD or, you know, the government, just different ways for us to wrap our heads around how big this could be for you over time.
spk02: revenue number on it, but we can tell you confidently that the number of opportunities we're seeing across the board is a large opportunity for us. And we have really total comprehensive solutions that we like to talk about. We're doing sampling. We're doing analysis for our customers. We're able to provide remediation, full remediation of sites and transportation. and a full suite of disposal capabilities from treatment, treatment of groundwater, treatment of industrial water. We can obviously provide landfill solutions with a closed-loop landfill of managing the leachate. And then finally, obviously, the incineration that we talked about. That's really a phenomenal study that came out, great release by the DOD to lift the moratorium. So the opportunity for us continues to be there, and as in a number of different areas, and we think our total waste solution is unmatched in the industry and really continues to look like a good prospect for us.
spk10: I appreciate that. Hopefully you can put some numbers around it over time, but that sounds upbeat. You also made reference, I think. Yeah, go ahead.
spk06: It's pretty small this year. As Eric said in his prepared remarks, the EPA has to kind of put more kind of guardrail to how clean is clean. But, you know, it's a $40, $50 million opportunity this year. It's not a needle mover per se.
spk10: Yep. Appreciate that. And then you made reference to some of the IIJA funding starting to come through. You know, that was, I think, $21 billion, right, of appropriated money for environmental remediation. So just, you know, how much of that do you think Clean Harbors potentially captures and kind of over what time frame? I mean, we see some of the funding announcements already coming out of EPA, but just want to understand how this impacts kind of the outlook for the year and maybe over a multi-year time frame.
spk02: Yeah, no, I think that projection of the $20 billion of spending was over the course of five years. A large part of that is go get for us to be able to perform the remediation services. and be able to feed volume into our landfills and our incinerators, depending on the characteristics. So a good chunk of that $20 billion and $21 billion is go get for us, go get for the industry, and we're well-positioned with all of the assets and the great infrastructure that we have to be able to participate in a substantial part of that.
spk10: Thanks very much for taking the questions.
spk03: Thank you. Thanks, Alan.
spk01: Our next question comes from the line of Tyler Brown with Raymond James. Please proceed with your question.
spk08: Hey, good morning, guys. Hey, guys. Hey, Eric G. Pricing in incineration, it was awfully good. And if I'm not mistaken, it was on a really tough comp. So can you just talk about the outlook in terms of price and volume in that market? Because we have heard about some weakness in the chem markets. The industrial markets aren't exactly the best. So Maybe the backlog is smoothing that out, but can you just give us any color there?
spk02: Yeah, that's right, Tyler. Our price and mix continues to be about 50-50. We have opportunity in the backlog of that incineration that we built up throughout the second quarter to bring that into the third quarter and the fourth quarter as our incineration utilization improves. But we're continuing to see. We're not seeing any slowing of chemical pricing or no givesy-backsies there. We're continuing to be on the trend of increasing our pricing, taking advantage of the difficult-to-handle waste streams, feeding a tremendous amount of volume into our incinerators of drums and direct burn streams. And we've also been leveraging our TSDFs to handle a lot more volume and prep it for our incinerators. So that's helping us well, but price mix continues to be in that 50-50 area, and we continue to be bullish about it.
spk08: Okay, perfect. And then it looks like ES margins were up. I think you guys called it out 140 basis points year-over-year. I mean, that's very solid, particularly given that you're now starting to lap tougher comps. But if we were to take a walk and bridge that 140 basis points, what were the key drivers in there Because I would assume that Thompson was actually dilutive to margins, but then maybe Fuel was a good guy. Just any thoughts on kind of how you got there? And then was it more driven by pricing or cost control or a little bit of both?
spk02: Tyler, I'll start, and then I'm sure my colleagues here will add on. The 140 basis points was driven by a number of things. You're correct in your assumption about industrial, a little bit dilutive on that. But we have... We're steadfast about driving price in every single one of our lines of business for labor, equipment, materials, and also taking costs out of the business. We're focused on that. As mentioned in our discussion earlier in the call, we have a target at $100 million of cost savings, and we're executing on that to continue to expand the margins. We're also in the process of putting in a new system that's going to help support our more margin out of that business and get more billable hours on worksheets and get paid better for our services there. All those things have cumulated together, and what we saw in Q2, what we continue to see, and we continue to be, again, bullish on the outlook as we execute on the cost programs, execute on sharing resources. That industrial team from Thompson has played well into our core legacy industrial services to help support their work. So the sharing of assets, the sharing of people, those have all contributed to that increase.
spk12: And I think, Tyler, just to add on to some of Eric's comments, this is Eric D., You know, again, I think you're right, Thompson, probably a little anti-diluted to that, but if I think about the Hydrochem acquisition that we did and continue to integrate that into the platform, I think this year we're really seeing some better margins out of that business from a lot of the cost-cutting and labor management that Eric mentioned. So better use of internal folks rather than third parties, reduction in rental costs that will continue to drive through the business, but certainly that acquisition is proving to contributing to the margin growth in ES as well.
spk06: The only thing I'd add, the Eric said it well, the only thing I'd add is that the other thing that's happened is turnover is down. Direct labor turnover is down 200 basis points from the beginning of the year and 500 basis points year over year. And that investment we've made in people and in our organization I think is a material impact on our margins because that turnover cost us a lot of money, and that turnover coming down because of the investments we made in benefits and people is starting to really pay some dividends, something we're really proud of.
spk08: Yeah. And just my last one here. So I think you were at 26% in ES, and I get it. This is seasonally a strong quarter, but I think that was kind of the best since 2012 when you didn't have as much lower margin field in industrial service work. So if we were to kind of quote-unquote dream the dream, I mean, why couldn't this business be a consistent 30% or a 30-plus percent margin business longer term? Thanks.
spk02: Yeah, Tyler, we think it can be. We're going to continue to execute on all the programs across our businesses, you know, with the market positions that we have in industrial and field. lean harbors on the large, we will continue to execute and drive towards that 30%, and we see that in our path.
spk08: Okay. Thanks, guys.
spk03: Thank you.
spk01: Our next question comes from a line of Jerry Revich with Goldman Sachs. Please proceed with your question.
spk04: Hi. Good morning, everyone. Hi, Jerry. I'm wondering if we could Hi. I'm wondering if we could just talk about the free cash flow cadence over the course of this year and how to think about conceptually 24, you know, obviously an environment where equipment availability has been all over the map, et cetera. How should we think about the puts and takes around the free cash flow bridge 24 versus 23, you know, outside of earnings and ultimately any opportunities either from a timing standpoint or – Free cash flow improvement standpoint, 24 versus 23 compared to what we're seeing this year. Thanks.
spk12: Yeah, Jerry, it's Eric Dugas. I'll start here. And, you know, I think the first thing I would point out, too, is, you know, really strong free cash flow so far this year. We're nearly 50 million ahead of where we were last year. CapEx that we pointed to, some of which or a lot of which is related to the Nebraska project. So, you know, really happy this year with where we are. I think we're well on our way to hitting the target for next year. You know, when I think about 2024 and puts and takes, you know, obviously we'll have a little bit less, I think, being spent on the Kimball incinerator. So that's why we always like to talk about CapEx excluding that number, but we continue to go up. You know, but long term, I think we are kind of targeting that free cash flow conversion kind of in the low 40% range and above is when you look at our long-term targets, you know, and really think with the business and the margin expansion we're seeing and many of the other long-term tailwinds that we've talked about today, that's kind of where we look to long-term.
spk04: Okay. And separately, you know, safety, clean, sustainability solutions had pretty good margin performance sequentially, you know, a good two points. better than normal seasonality, it looks like that business might be bottoming and turning the corner just based on your performance there. Can you just talk about is that consistent with what you're seeing? I know you took down the outlook, but it feels like sequentially things are stabilizing. And if that continues, EBITDA for the business should be up 3Q versus 2Q, I think.
spk06: Yeah, and I think that you're right, Jerry. We did make a large shift. from PFO to CFO in the quarter, which had a dramatic impact on our profitability. And I think that really is a testament to the team and their ability to drive, you know, and still collect a record amount of gallons. So really kind of a great quarter by them. I'm hopeful that we're there. I certainly, as we talked about it earlier, you know, the model has baseball prices stabilizing. And if it raises, then probably a good guy to us in the back half of the year.
spk04: And, Mike, just given the complexity of transitioning from paying people to charging them, was the exit rate significantly more positive than the full quarter average just because these types of initiatives, I think, take time to implement? Is that a fair characterization?
spk06: They absolutely did. We started the quarter in a pay-for-oil, and we ended in a kind of mid-teens charge-for-oil at the end of the quarter.
spk03: Super. Thank you.
spk01: Our next question comes from the line of David Manthe with Baird. Please proceed with your question.
spk11: Hi, good morning, guys. First question on industrial exposure. Has Clean Harbors disaggregated from trends in industrial end markets? And the reason I ask is you've got, you know, two and a half years of decelerating ISMs. It's been below 50, the PMI, for the last nine months now. but yet you continue to see excellent trends to today and into the second half in your ES business. Just thoughts on cyclicality of the business today versus what you had in the past?
spk06: Yeah, Dave, this is Mike. I think that there are definitely – I see your concern where market factors tend to go down. I think there's more complex waste streams coming into the network, which results in us – you know, being able to charge more and handle them. And so, you know, not all industrial productions weighted equally. I would say that, you know, the advent of electric battery manufacturing and other types of complex chemicals around air conditioning and other types of, you know, chemicals in the marketplace that are really driving kind of more complex waste into our network and as such being able to counterbalance any industrial production trends you may be seeing in the macro environment.
spk11: Yeah, that's great to hear. Thanks for that, Mike. And second, on the PFAS outlook, I guess the EPA is signaling that they may not mandate enforcement against passive receivers of PFAS. And it sounded like that's landfills and airports and municipal water systems and a lot of potential parties here. Are the enforceable situations and the self-policing that will go on in this industry, are those enough to realize the opportunity that you see in front of you today?
spk02: Yeah, I'll answer that, Dave. Eric here. You know, the enforcement, putting that aside, what I think the opportunity is, is regardless of past enforcement, there's a treatment that needs to happen, treatment and remediation. And they're going to have lower discharge standards for water treatment and industrial streams and groundwater streams. And, you know, obviously the remediation of the sites is going to fuel material into our incinerators and into our landfills.
spk03: So that's really where we see the opportunity.
spk11: All right. Thanks very much, guys.
spk03: Thank you. Thank you.
spk01: As a reminder, if you would like to ask your question, press star one on your telephone keypad. Our next question comes from the line of Toby Solmer with Truist. Please proceed with your question.
spk09: Hey, good morning. This is Jasper Bibon for Toby. Industrial services revenue is up 11% with Thompson. Longer term, how will you address the pricing and margin outlook for that business as you continue to build your market share there?
spk02: Yeah, Josh, Eric here. We continue to drive price on a pretty set cadence with all of our customers in the industrial business. And as mentioned earlier, we also have a new platform that we're rolling out to combine the systems for both the industrial and those systems will really help us deliver electronic worksheets in the business by leveraging the combined headcount, leveraging the rolling stock, the assets, the people together, working together is all contributing to the expansion, the margin expansion of that business and will continue. So we're bullish about increasing the margins as we go forward by combining the businesses and getting more stickier and cross-selling. There was a couple of new lines of cross-sell into the customers there. So all those things combined contribute to improving our margins and improving our growth and sticking us with those customers across the board.
spk09: I think that makes sense. And then with respect to the SKSS guide, just to clarify, do you think you've now fully adjusted your charge for oil there to align with demand conditions, or would you expect to have to continue metering up those charges based on what you saw in July pricing?
spk06: Yeah, Josh, I think we have set ourselves up for a decent back half of the year. We're assuming pricing stays in our model, in our guide. Pricing stays solid and our UMO pricing stays the same. So we're not, you know, so if pricing goes down, we'll adjust that UMO pricing like we did in the first half of the year. So I think we've done all the actions that we need to do, in my opinion, to kind of deliver on the numbers that are in front of us, assuming stable base oil prices.
spk09: Got it. Last question for me on the DOD authorization of incineration for PFAS. Just on timing, do you have any sense of a timeline for when federal RFPs for PFAS disposal contracts might materialize, or is that, I guess, more dependent on what comes out from the EPA?
spk02: We think, Josh, that we'll see that over the next year or two, the opportunities with DOD. We're already working collectively with them think that will continue to grow here.
spk09: Okay, great. Thanks for taking our questions.
spk03: Thank you.
spk01: Our next question comes from the line of Jim Rashudi with Needham. Please proceed with your question.
spk05: Thank you. How does the DOD announcement affect conversations you may be having in the market with commercial customers and other government bodies?
spk02: You know, Jim, I would say that there's a strong set of customers that were involved in manufacturing some of these PFAS compounds that I think they know well that incineration, thermal temperature incineration, is really a preferred method here. And I think that resonates as well with the DOD. Our experience and our interactions with chemical customers and DOD based on the concentration and DOD of the AFFF that has shown contamination. Thermal temperature, high temperature, record incineration, it seems to be a preferred method there in those high concentrations. wanted to prove out through our testing that our incinerators is a great technology to effectively, with six nines, destroy that contamination. And we think that there is a good audience, a solid audience, that recognizes that that is the best disposal method for highly concentrated contamination.
spk06: I would add, Jim, that the DOD, you know, lifting of the moratorium kind of validated our study And so I really believe that, you know, what it means in the back half of the year in 2024, as Eric said in his prepared remarks, to put a finger on that. But it really just continues to substantiate kind of our long-term business model. That incineration is a safe and effective way to handle these forever compounds.
spk05: Got it. That's what I was driving at. And just with respect, I may have missed it. Did you provide the Thompson contribution in the quarter?
spk12: In the quarter, we didn't provide it at mid-single-digit millions.
spk05: Got it. And just as we think about the second half of the year, on the ES side, you alluded to some of the benefits. You're seeing some improvement in turnover. How much more of a tailwind is pricing going to be in the second half versus the first half? And then just related to that, on the cost side, have you seen some moderation at all in other cost pressures in the business?
spk02: Yeah, Jim, we've certainly seen moderation really on the salary side across the workforce. That's moderating. Our pricing efforts will continue to outpace inflation. We continue to execute well on that. So we'll We have a comprehensive program across all of our business units to continue to drive price along with the efforts that I mentioned earlier on taking costs out of the business and continuing to get more efficient.
spk03: So we will continue to execute on that plan. Thank you. Thank you. Thank you.
spk01: Thank you. Mr. Gerstenberg, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.
spk02: Thanks, everyone, for joining us today. Management will be participating in a number of IR events in the coming months. We look forward to interacting with you further at some of those events, and please enjoy the rest of your summer. Stay cool. Thank you.
spk01: Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
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