Clean Harbors, Inc.

Greetings, and welcome to Clean Harbor's third 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. To ask a question today, please press star 1 on your telephone keypad. You may press star 2 to remove yourself from the queue. 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 our co-chief executive officers, Eric Christopher 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 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 under-reliance on these statements, which reflect management's opinions only as of today, November 1, 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-GAP measures. Clean Harvest believes that such information provides an additional measurement, consistent historical comparison of its performance. Reconciliations of these measures to the most directly comparable GAP measures are available in today's news release, on our website, and in the appendix of today's presentation. Let me turn the call over to Eric Rosenberg to start. Eric? Thanks, Michael. Good morning, everyone, and thank you for joining us. Turning to our Q3 financial performance on slide three, our environmental services segment delivered its eighth consecutive quarter of profitable growth in Q3, and we expanded our margins by 120 basis points. While we experienced some planned challenges in the quarter, demand remains high for those scarce workforce continues to be highly utilized and in demand from customers. Our SKS segment faced some production challenges at our re-refineries in the back half of the quarter that led to lower than expected sales volumes and profitability. While volumes were off, pricing significantly improved in late Q3. With our aggressive shift to a higher charge for oil throughout Q3, we cycled through our higher priced inventory and we have returned to full production in our plans to start Q4. All of this will enable us to end the year strong in SKSS. Mike will discuss more of this in his prepared remarks. Given some of the challenges arising in both operating segments, we fell short of our financial expectations in Q3. About half of the Q3 miss was related to environmental services segment, and the other half was related to SKSS. We will get more into the details in a moment, but we believe our Q3 shortfall is unrelated to demand or market conditions. We believe the outlook for both segments continues to be strong. Before turning to the segment detail, I want to highlight our outstanding safety results. Safety forms a backbone of our reputation and our relationship with our customers. In Q3, the team battled through record-breaking summer heat and other adverse weather conditions to deliver a quarterly TRIR of 0.62, the best Q3 in our history, which keeps us on track to achieve our ambitious annual TRIR goals To everyone on our team listening today, thanks for all you do and keep everyone safe and allow our colleagues to go home uninjured every day. Turning to environmental services on slide four, segment revenue increased 6% due to growth of our services businesses, higher disposal revenue, and the addition of Thompson Industrial. Overall, growth was underpinned by a mix of pricing and volume initiatives in the various business units. In Q3, our safety, clean environmental services business led the way with 14% top-line growth, extending its already outstanding 2023. Parts wash services were up from prior year, reflecting the expansion of every day's customer base for its core offerings. Field service revenue was up 3% in the quarter, despite no large-scale emergency response events and a limited number of medium-sized projects. Technical services rose and lower fuel recovery revenue this year versus last, when diesel prices hit $7 a gallon. While our facility's revenue grew in Q3, we expected a stronger performance, but we were impacted by the additional maintenance days, particularly in late September. Overall, our plants have been running extremely hard since the pandemic, with a high mix of highly complex waste streams and significant volumes of containerized waste. During the quarter, we had to pull forward a plan approximately 8 to 9 million of aggregate EBITDA between repairs and lost revenue. We also made some needed preemptive repairs and other critical investments at other locations that yielded about 3 million in additional costs than originally expected. We have been doing considerable repair work this year at our southern plans due to the after effects of the deep freeze in the winter of 2021 and other small freeze earlier this year. Given these events, Incinerator utilization came in below our Q3 expectations at 86%, flat with the prior year. Average incineration pricing was up 3% in the quarter due to continued pricing initiatives offset by limitations on processing our backlog of containerized incineration waste in the quarter, mainly related to our plant turnarounds. We view this mixed shift as temporary as the plants are running well today. The backlog and drum count, both at our sites and within the marketplace, remains at extremely high levels, which will drive more favorable mix in the coming quarters. Landfill volume in the quarter was up 19% as we won several large projects, including one in western Canada. Base business in landfills also remains healthy. Industrial services grew 5% in the quarter as we expanded our presence in the southeast and into some select verticals such as the steel industry through the Thompson acquisition. The team is focused on capturing significant in those efforts. Turning to overall segment profitability, adjusted EBITDA growth was 11%, far outpacing revenue as we leveraged our network in vital fixed assets. The productivity and efficiency initiatives we have ongoing in both our plants and our service branches are having a positive impact on margins. We are taking out costs to counter inflation, but we are also exploring ways to apply data analytics, AI, and robotic process automation to In Q3, we saw our ES margins top 25% with solid growth, and we see the opportunity to increase our longer-term ES margins to 30% or higher. Before handing it off to Mike, let me provide an update on the construction of our Kimbell incinerator on slide 5. The $180 million project is proceeding extremely well. I recently traveled out to the facility and met with an part of his state. Governor Pillen and the other elected officials signed the final steel beam that was put in place as part of the topping off ceremony in early October. When I visited the site, I was impressed by how well all the key components of the plan are coming together. Our team is doing a terrific job keeping us on track and on budget. As you can see on the slide, the rotary kiln is now in place we will be moving forward rapidly with construction. Our initial goal when we launched this project was to have the facility operational in the first half of 2025. Given that we are slightly ahead of schedule today, we are now targeting the new kiln start date to be prior to the year end 2024. We are all excited to ship this incinerator into commercial operation given the demand we continue to see in the marketplace along with what we expect to see in the years ahead as ongoing conversations with owners of captive incinerators. We expect 70,000 tons of capacity at Kimball to be readily absorbed by the marketplace. With that, let me turn things over to Mike to discuss SKSS and the capital allocation. Mike?

Thanks, Derek, and good morning. We're all excited to see Kimball come online as rapidly as possible. It will be a big win for the company and our stakeholders. Moving to SKSS on slide six. This segment underperformed this quarter, but we're seeing much better days here in Q4. On the top line, Q3 SKSS revenue declined 21 percent, primarily due to lower base oil pricing versus a year ago when supply scarcity drove pricing to record levels. We entered Q3 on a downward trend in pricing, with posted pricing dropping 60 cents in Q2, including a June reduction that impacted us in the first part of Q3. Subsequently, prices stabilized in mid-August, followed by a second price increase in September. Given the rising pricing environment, some of which did not take effect until October, we're off to a good start in Q4, selling base oil in October at favorable pricing. Looking at year-over-year profitability, after our record Q3 adjusted EBITDA a year ago, lower pricing in this year's third quarter put pressure on our adjusted EBITDA and margins. In terms of expectations, The biggest factor to our miss in this segment was interruptions to expected production at several of our eight re-refineries, including a delayed restart of our California facility. These disruptions had the dual impact of higher than expected plant costs, as well as lower volumes of base oil and other products for us to sell. In fact, in September, we sold more than 4 million gallons less of base oil than we had forecasted when we spoke to you in early August. These repairs and costs were all completed in Q3, and since then, our plants have run extremely well, including our California facility. As most of you know, we actively manage the re-refining spread in this business. As we've outlined on previous calls, base oil pricing was on a downward trajectory for much of the year until recently. In response to market conditions, the SKSS team has been hypervigilant in addressing the spread compression we saw in the first three quarters. we have continued to collect the volumes we need for our plants at the best pricing possible to stabilize that spread. In Q2, we shifted from a pay-for-oil or PFO approach to a charge-for-oil model. In Q3, we raised that average CFO even further while collecting 59 million gallons. As we look ahead to the fourth quarter, we see both ends of our re-refining spread improving. We consumed our higher-priced inventory in Q3 and will benefit from lower-cost inventory being sold in Q4. In addition, the two price increases we saw in the back half of Q3 will also benefit us in Q4, as we tend to sell greater volumes in the quarter. Blended products is another area where we see incremental sales momentum. This value-added set of products is derived from processing our base oil into finished lubricants such as motor oil or hydraulic fluids. Blended product sales accounted for 21% of the total output of our plants in Q3. That's up from 17% a year ago and 19% in Q2 as we continue to win customers in this area. Our direct volumes, which represent our closed-loop approach, were at 8% in Q3, up from 7% in Q2. Our goal remains to increase our blended volumes not only this year, but on a go-forward basis with both direct and wholesale channels. Overall, it's been a challenging year for SKSS. The team has managed well through the pricing turbulence. We are on track for record collections at favorable CFO levels and will deliver record annual volume produced in our plants despite the Q3 upsets. A strong Q4 will enable us to conclude Q3 and enter Q4 on a positive note in this segment. Even within a weak Q3, we expect this segment to still deliver on adjusted bidder margin north of 20% this year. It remains a strong cash flow generator and a high ROIC business for us. One of the ways we intend to probably grow SKS in the coming years is to upgrade some of our Group 2 output into Group 3 product. We're excited to share today that we recently concluded a successful scaled pilot project to make Group 3 oil at one of our plants. We are confident that we will meet the required industry specifications sell it into the marketplace. The value of qualified Group 3 base oil versus Group 2 varies over time, but more recently, it typically carries a premium of $1 to $2 per gallon. Throughout 2024, we intend to scale up the project and initially produce a few million gallons of Group 3 oil at one of our locations. We will then bring that successful program to some other facilities in the coming years to extract even more value from existing assets. Turning to slide seven in our capital allocation strategy, nothing that happened in Q3 changes our perspective on the Vision 2027 strategy that we laid out at our investor day in March. We expect to grow both organically and through acquisition. Given the highly leverageable network of assets and people, we have seen the positive margin improvement that as economies of scale provide for both cost synergies and cross-selling. So whether it's pursuing the next Kimball-like internal project or accretive acquisitions, we have multiple avenues for growth. We continue to assess opportunities to invest in CapEx to drive organic growth. On the M&A front, we evaluated a number of candidates in Q3 and, as always, remain highly selective. We continue to see a healthy flow of potential transactions for both operating segments. Eric Dugas will cover our balance sheet in more detail, but I wanted to highlight that we are very well positioned to be opportunistic with respect to potential M&A. At year end, we expect to be at our lowest leverage point in more than a decade. To summarize, while our Q3 results did not meet your expectations, we view the factors behind our performance as short-term in nature. We expect our ES segment to continue to deliver profitable growth and margin improvement in the coming quarters. We see high demand for our services nearly across the board, with customers valuing our breadth of offerings and strong service and safety records. We expect each of our four businesses within the ES segment to achieve profitable growth in 2023. Our backlog of waste positions us to close out the year on an upward trajectory, The plans are running great, and the project pipeline within the ES segment also remains healthy as spending on reshoring, government infrastructure, and regulatory-driven cleanups continue. Within SKSS, we remain focused on controlling costs across the business, particularly on the collection side, while still ensuring sufficient supply to maximize output at our re-refineries. Given where base oil and lubricant markets are today, We expect to post a large sequential increase in profitability in Q4 and enter 2024 with positive momentum in this business. With that, let me turn it over to our CFO, Eric Dukas.

Thank you, Mike, and good morning, everyone. Turning to the income statement on slide 9, as Eric and Mike outlined, Q3 was a challenging quarter for us compared to expectations, particularly on the plant side. But the overall demand picture remains strong. Our EF segment continued to achieve profitable revenue growth, which essentially offset the year-over-year top-line decline in SKFS that was driven by lower base oil pricing and resulted in Q3 revenues that were essentially flat with a year ago. As Eric Gerstenberg outlined at the start of the call, adjusted EBITDA came in below our expectations at $255 million, compared with the $308.6 million in Q3 last year. Our adjusted EBITDA margin in the quarter was 18.7%. Gross margin in the quarter was 30.9%, lower than Q3 of last year due to large year-over-year decline in SKSS. While ES gross margin was up 190 basis points to 33.2% as we offset inflation and wage pressures with appropriate price increases and realized cost savings. we remain focused on increasing productivity and operational efficiencies along with pricing initiatives within ES to continue to drive margin expansion. SG&A expense as a percentage of revenue was 12.5% in Q3 due to higher IT investments and related professional fees. For the full year, we now anticipate being in the mid-12% range. Overall, the team has done a good job managing SG&A headcount while battling inflation and wage pressures. Depreciation and amortization in Q3 increased to 93 million, consistent with our expectations and reflecting the Thompson acquisition completed earlier this year. For 2023, we continue to anticipate depreciation and amortization in the range of 350 to 360 million. Income from operations in Q3 was $154.4 million, down from prior year as expected, given lower overall profitability. Net income for the quarter was $91.3 million, resulting in earnings per share of $1.68. Straight to the balance sheet highlights on slide 10, cash and short-term marketable securities at quarter end were $420 million, up to approximately $94 million In looking at our debt portfolio, we remain very comfortable with where we sit today. We ended this past quarter with debt of $2.3 billion and with no currently outstanding amounts coming due until 2027. Leverage on a net debt to EBITDA basis as of September 30th remained at approximately two times, and our weighted average rates. Starting cash flows on slide 11, cash provided from operations in Q3 was $220.1 million. CapEx net of disposals was $105.4 million in the quarter, up from prior year due to the Kimball project, which accounted for $22 million of our Q3 CapEx. In the quarter, adjusted free cash flow was $114.7 million. For 2023, we continue to expect our net CapEx to be in the range of $400 to $420 million. Full year spend on the Kimball incinerator is now expected to be approximately $85 million. In addition to that project, we continue to see opportunities to invest in other areas of the business, including equipment and our transportation fleet. These investments will minimize third-party rental spending as well as maintenance costs by replacing older equipment and foster growth through those added resources. We also are continuing to invest in our plants, including winterization projects at our incinerators down south. During Q3, we bought back more than 58,000 shares of stock at a total cost of $10 million. Approximately $85 million remains on our existing buyback program. Moving to slide 12. Based on our Q3 results and current market conditions for both our operating segments, we are revising our 2023 adjusted EBITDA guidance to a range of $1.005 billion to $1.025 billion, with a midpoint of $1.015 billion. Looking at our annual guidance from a quarterly perspective, we expect Q4 operating segments. For full year 2023, adjusted EBIDA guidance will translate to our operating segments as follows. In environmental services, we now expect adjusted EBIDA at the midpoint of our guidance to increase nearly 15% in the full year of 2022. With the Q3 plant challenges behind us, we expect higher For SKSS, we now expect full year 2023 adjusted EBITDA at the midpoint of our guidance to decrease in the 40% range due to lower base oil pricing this year versus last. With the recent uplift in base oil pricing that Mike referenced, we expect to see a sequential increase in Q4 from Q3 that should allow us to close out the year strong. In our corporate segment, At the midpoint of our guide, we now expect negative adjusted EBITDA to be up approximately 9% this year from 2022. This reflects areas such as increasing insurance costs and salaries and benefits, as well as impacts of the Thompson acquisition. In light of the reduction in adjusted EBITDA, we are also revising our within the range of $300 to $330 million, or a midpoint of $315 million. Let me remind everyone that this year's free cash flow guidance includes approximately $85 million for the Kimbell Incinerator project. If you add that spend back, In conclusion, I want to echo some of the thoughts that both Mike and Eric shared. While we reported results below our expectations, nothing that has occurred in the quarter has changed our view of Clean Harbor's multi-year growth prospects. Despite the plant challenges in the quarter, our ES segment delivered top-line growth and leveraged that to achieve meaningful margin expansion and increase EBITDA. In our SKSS segment, Our re-refineries are all back running well again, and our California re-refinery is back online. We expect a good Q4, enabling us to exit 23 with positive momentum. Looking ahead, we remain enthusiastic about our growth prospects in both segments. Our sales and project pipelines remain healthy. And finally, while I appreciate the fact that analysts and investors want to ask about our expectations for 2024, Consistent with our historical practices, we are not providing guidance at this time as we have a budgeting process that we need to complete first. I will say that there is nothing in our 2023 performance or in the market today that leads us to meaningfully deviate from the 2024 expectations that we assumed in our Vision 2027 organic growth model that we introduced back in March. And as Mike mentioned, we also intend to remain opportunistic on the acquisition front to complement our organic growth. With that, Christine, please open up the call for questions.

Thank you. We will now be conducting a question and answer session. In order to ask a question today, 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, you may need to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Tyler Brown with Raymond James. Please proceed with your question.

Hey, good morning. Good morning.

Hey, so I just want to kind of make sure I have it. So I know that you didn't give specific Q3 guidance, but you obviously had a number implied in your prior midpoints. So can you just kind of walk us through the delta of call it this 255 versus maybe the two, I'm going to say 285-ish that was likely in that prior guidance. So basically, how does that $30 million break down? Was it $8 to $9 million from Arkansas, $3 million from some other incinerators, and then the rest was SKSS? Is that a good way to break it down or just any help there would be helpful?

Yeah, sure, Tyler. This is Mike, and I'll answer the question. So the way it broke down from what we said earlier, 90 days ago, was about 12 million of the MIS was in the environmental services segment. As Eric mentioned in his prepared remarks, it centered around pulling the turnaround forward along with some other challenges, some preemptive things we did to other plants. About 13 million of the MIS is in the SKSS segment, and that had the double impact of a plant going down late in the quarter, as well as, so that's additional costs to get it back online, as well as the lost revenue from not being able to sell that much oil in Q4. As I said in my remarks, we were down 4 million gallons in the month of September, which was a surprise to us. The last piece was corporate costs. The last piece was corporate costs of about 5 million. There were some one-off projects we did that cost more than we expected in the quarter, as well as insurance costs.

And then on SKSS, what exactly happened? Was it a mechanical issue? Was it a chemistry problem? I'm just curious.

Yeah, Tyler, just to clarify that within SKSS, we were starting up. We didn't have an accelerated turnaround come forward from Q4 into Q3. In SKSS, what we were doing is we were restarting our California-based plant coming online for base oil. started that plan up earlier in the year. We were making VGO, and as we progressed through Q3, as we progressed into Q3, we anticipated being online for base oil and generating base oil and selling that volume. Actually, we brought it online delayed in the quarter at the tail end of Q3, which was the effect there, along with some other minor production issues at some of the other plants, but the core issue in our SKSS segment was bringing on the California refinery later than we expected generating base load.

Okay, that's very helpful. On the Group 3 pilot program, I think, Mike, you said it would be a few million gallons in 24, but how big do you think that could be over the next few years in It seems like $1 or $2 uplift is a pretty big deal. And was that contemplated in that Vision 2027?

Tyler, so, yeah, we did envision having some Group 3 base oil in the Vision 2027. It's kind of how we get back to 2022 levels, how we get back to $300 million plus. Group 3 base oil was certainly part of that. We think that gets up to, depending on how we do it, and how many plants we can roll it out to. It was a very successful pilot. It could be 25 million gallons or greater. And so I'm of the view over the next couple, three years, that that becomes part of our process. And we're really excited about that pilot. And we're going to make, you know, we're going to make a lot of that base oil in 2024. We're going to probably use it more internally to make blended oil ourselves. But there'll be some to sell in the marketplace, and we're excited about that.

Okay, good. My last one here. I know there will probably be some talk about demand. It sounds like demand is pretty good. But did the auto industry disruptions impact you at all noticeably in Q3?

Yeah, Tyler. Eric answering here. We did have some effect of the auto strikes, both in our industrial services business and some of the waste streams that some of the supporters, suppliers to the auto industry have. They were off in Q3. But we see that coming back. as we get into Q4 here.

Yeah, okay. Just curious there. Okay, I'll turn it over. Thank you. Okay, got it.

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

Hey, good morning. Your date reminds me of an old John Wayne movie when he got asked, off day or day off? Good morning. Good morning, Michael.

Good morning.

So when I look at, just to get the numbers right, I mean, the simple math is you land on ES at around $1.89 billion, $1.90 billion, SKSS at $185 million. You've got $259 of corporate overhead. There's your midpoint of your guidance. That's the neighborhood we should be in, right?

Maybe a little lighter in SKSS and maybe a little higher in ES, but I think directly you're right.

Okay. So that puts us – if I'm a little lighter, I'm in a 56, 57 million kind of quarter pace. You can't annualize it because 1Q is a little weaker. But if I did a sort of a three times that plus the 1Q, that puts us in the low 200s for next year. And I know you're not doing guidance, but we all have to model. And it would be silly for us to be sitting out there with something stupid. Yeah.

Yeah, Michael, I think, as I said in my remarks, we can't give kind of full-year guidance, but I think you're kind of within the area code of what we're thinking there.

And then back to, you know, if you have just normal plant activity, utilization rates, normal maintenance cycles, you know, again, we're sitting here looking at, you know, something that's like 7%, 8% segment EBITDA growth in the ES business. That's not an unrealistic way to think about it as well.

Yeah, no, that makes sense to us. And just to ground people in, you know, for the year, if we hit the midpoint for environmental services, if we hit the midpoint of our guide we gave this morning, you know, for the year, for 2023, it'll be 9% revenue growth, 15% dividend growth, and 150 basis points of margin expansion in 2022. So to think for a moment that, you know, 6%, 7% or whatever number you were talking about, Michael, about EBITDA growth into 2023, into 2024, excuse me, that doesn't seem crazy for me.

Okay.

Yeah, and just to reiterate one other final point, each quarter this year, as you know, Michael, our performance in the ES segment has outpaced our expectations, and we continue to have margin expansions. outlook in ES continues.

So one of the things, and I'm going to oversimplify this, and it's not that Clean Harbors was never doing pricing, but I think that the industrial waste industry has adopted a pricing mantra coming out of hyperinflation that is different than history. What comfort can you give us all that that discipline didn't get tarnished in 3Q or going into 4Q and is sustainable. You can manage an overall price-cost spread, and therefore it's a component of organic growth and operating leverage going into 24.

Yeah, Michael, it's Eric Dugas. I'll take this one and then allow Eric and Mike to kind of chime in.

But, you know, pricing continues to be a strategic initiative of ours. In Q3 here, for the reasons we've discussed, you know, we did have the plant challenges. We did have a small... mixed change for some of the streams that we didn't see come through that are coming back through in October here. But, you know, I would think going forward, pricing will continue to remain quite strong. And just to kind of provide a little color, in more recent times, you know, we're seeing kind of early returns in October here where the volumes are extremely strong. The drone volumes are at kind of an annual high here, and really that just gives us some good evidence that going forward, pricing momentum remains.

All right.

And last one.

Go ahead, Eric. Sorry.

Thanks, Michael. Just to add, we're going to successfully hit our target this year of over $200 million of price increases to really curb what's been happening with inflation across the business and expand our margins. As we go into next year, we fully anticipate that we'll hit a goal north of $150 million. And, you know, that's going to be temptations. down a little bit, but we continue to be very regimented on our approach of making sure our price improvement helps us to expand in margins, but also continues to accelerate past our increase in costs.

Yeah, Michael, and one last point that both those points are really sound from Eric and Eric, but what allows us to get that price is that the sales pipeline remains very strong, and I want to make sure that people on the call understand that, that our sales pipeline, as we go into Q3 was actually higher than Q2, and the highest it's been all year. So when you think about – and pipelines are just that. They're sales pipelines. Sometimes they don't materialize. But make no mistake that we feel good about going – allowing us to get that price is the pipeline that allows us to kind of continue to drive that price.

Okay. And then this is a nuanced question, Eric Dugas. In the revised EBITDA buildup, you know, you have about a $16 million dip at the midpoint in net income, but you only have a $10 million in cash flow from operations. So is there a working capital savings that's been captured to help keep the free cash at that midpoint of 315?

Yeah, I think that's right, Michael.

We are seeing some good improvement here on the working capital side. And just looking at kind of trends and how it plays out into Q4, you know, that's exactly kind of how we were thinking about it.

And you'll be able to hold on to that going into next year. This isn't a timing issue. This is structural.

Correct. Okay. Free cash flow next year continues to look pretty strong.

Okay. Thank you for the questions.

Thank you, Michael.

All right, Michael.

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

Hi. Good morning, everyone. I have a question.

Should we read anything into the fact that deferred revenues took down a bit sequentially despite the lower than expected utilization? And then if you can talk about the price mix and the backlog, I think you might have mentioned it, but is the value sitting there higher than what you incinerated this quarter?

Yeah, David, this is Eric. I'll take that. Yeah, we did have a slight tick down in the deferred inventory. However, based on that pull forward of our turnaround, our incineration drum deferred inventory actually went up throughout the quarter. So we continue to have significant drum inventory to work off as we proceed through the fourth quarter and into 2024. So that really makes up the substantial part of the difference there.

And, Dave, I'm not sure if you're asking about price. Price and mix, you know, pricing in incineration was, you know, kind of low single digits, you know, three I think was the number. But really that's, you know, pricing up, you know, eight or nine and mix kind of bringing it back down to three. And so that's really what's happening here. So the pricing that we talked about with Michael and other investors, that remains very strong going into 2024.

Got it. And then second, on a mid-80s incinerator utilization you've been reporting lately, at times in the past that used to be consistently 90% plus. Is utilization going to be lower on a secular basis today for some reason, or is that extra, say, 5% of future opportunity?

Yeah, Dave, I'll take that. This is Eric. Our incineration utilization each quarter of this year improved. Our low point was the first quarter where we were dealing with some of those freeze issues. Our expected annual utilization would be in the high 80s on an annual basis. This year we'll come in at that 85, 86, 87% on an annual basis. The reason that incineration utilization runs in that area is because of our focus on really managing significant amount of drums and high-value direct burn waste streams. such as the things that are out there as PFAS opportunities or the project business coming from Superfund sites. That's where we would leverage that incinerator utilization into those very high 80s and into the low 90s area.

And just to clarify for some investors that we have a 70,000 ton incinerator in Eldorado, Arkansas. A down day is a lot of production. We don't assume any days in that calculation so that when we say kind of high 80s, that's assuming a normal amount of down days. And so that's really the – I want to make sure people understand we'll never get to 100% because there will be – we take those plans down twice a year for maintenance, and so those are part of the calculation of utilization.

Yep, thanks very much, guys.

Thanks, Dave.

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

Yes, hi. Good morning, everyone. And Mike, I look forward to starting a new streak here starting today. It's been quite a run. I was wondering who was going to bring it. Can I ask on Kimball, nice to hear that the plant is coming online nicely. Can you update us on how quickly you expect to ramp up the earnings power of that plant over what time horizon? Can you hit the type of numbers we were talking about at the analyst day now that we're coming closer to that date?

Yeah, Jerry, Eric here. As we go into the tail end of 2024, we'll begin to bring online and process through many of the backlog of drums. As we go into 2025, we'd expect that we'd be in that 20,000 to 40,000 ton range, beating through that unit as we go forward and ramp up from there. Our expected overall operational utilization should be in that 50,000 to 55,000 tons over the course of two to three years.

That's a quick start. Okay, great. And then in terms of just to expand on the Group 3 economics, can you just say more, if you don't mind, what's the capex per gallon, just to expand on that? on that opportunity set, and I don't know if you're willing to venture an estimate on, you know, looking across your footprint, you know, where do you think the facilities have enough space and capability set to roll out if you do decide to roll it out across the portfolio in SKSS?

Yeah, Jerry, so I'll start on this. This is Mike. So I'd say that You know, the capex required is not a ton of capex to kind of drive Group 3. It's really getting a high-quality base oil, high-quality used motor oil to derive that Group 3 quality. So that's the challenge, right? So you want to try to make sure you're capturing high-quality Group 3 oil and getting it into our plants and allowing it to run kind of uninterrupted. So you can't mix Group 2 and Group 3 together. It gets contaminated, so you've got to be very careful on that. So it's really a lot of process change and maybe some other things like that. I'm not sure it's going to be a huge capex item. I don't know, Eric, if you want to add anything to that.

No, I think that's fair, Mike. I think we have some minor changes to do. We have capacity that we've set aside at a few of our smaller plants to be able to properly aggregate and run those units dedicated to making it Group 3.

and we'll be rolling that out as we go through 2024 and into 2025.

So, Jerry, I don't think it's going to be a huge cost item to get to that answer, but I do think it's going to be a great bridge.

As we try to bridge back to the $300 million, I think that's going to be a great bridge to kind of get us there.

And can I ask the blue sky scenario? You know, how many gallons can we produce? What is it? What's our best sense?

Yeah, we said on that, we got asked that earlier, 25 million gallons we thought would be a good goal. Trying to get to that answer. That's going to take some work, but I think that's a really reasonable goal.

Across the footprint. Okay. Thank you. Yep. All right, Jerry.

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

Mr. K, you need to disconnect the other line. We're getting an echo. All right. I'll circle back. You need to disconnect the other line.

Why don't we move on, Christine, and we'll come back to Noah. Okay. Our next question comes from the line of James Rusciutti with Needham. Please proceed with your question.

Hi. Good morning. Apologies. I joined the call a little bit late. You may have covered this. Did you say what Thompson added and whether you're on track with your expectations for full-year adjusted EBITDA in 2023 from this business?

Yeah, this is Eric Dugas speaking.

We were on track to add an increment of about $12 million was the budget we had, our target for Thompson in total, and that's kind of what we're trending towards in the year.

Got it. And a follow-up question for me is just I wonder if you could give us an update on some of the initiatives you have with respect to PFAS? Yeah, James. This is Eric. I'll take that. We continue to really focus on our total solutions portfolio for PFAS.

We've implemented successfully with our field crews being able to perform sampling. We perform analysis within our lab network. We're bringing that online. to help our customers get a baseline understanding of their PFAS contamination levels. We've seen our pipeline continue to grow around not only drinking water, industrial waters, as well as remediation events. And through our network, we continue to believe, along with our incineration testing, thermal incineration through our units is really the preferred method, and we've communicated that throughout our customer network. And so our total solutions of sampling, analysis, drinking water, industrial water, remediation, transportation, disposal leveraging our incineration network, our landfills, and our water treatment plants continues to be a real successful outlook for us as our pipeline grows.

Any change in your expectations with respect to this as you look out over the next year? And, again, I know you're not giving guidance for 24, but just a small part of your business, I'm just wondering if this is moving perhaps more slowly or, you know, if you're seeing the traction with your customers with respect to this.

Yeah, I would say, James, you know, there's still much to come with the regulatory parameters to be laid out, but I would tell you that our pipeline has grown and that we continue to be optimistic as we go into 2024 about how leveraging our total solutions for all of our customer base, which is quite diverse, as you know, will really yield rewards for us across the network. Got it. Thank you.

Hey, Jim, just to interject and make sure I was clear with the answer on Thompson, the $12 million incremental EBITDA, that's what we were kind of forecasting in the ES services segment. There's obviously also some incremental kind of corporate-related costs of $2 million to $3 million there. So you're looking at, you know, a $9 million kind of all-in number from Thompson this year.

Got it. Thank you. Thanks for clarifying that. Appreciate it.

And the Thompson team, I know they're listening on the call. They're They're actually doing a great job. The innovation is going very well. We're really pleased with the early days in the Thompson acquisition, so we're really excited about it.

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

Great. Good morning, guys. Thanks for taking the questions. Most of mine have been answered. I do have a couple. Hey, Mike. I am looking forward to the new scoreboard going up in the office, too. Just a follow-up on the PFAS you mentioned, waiting for some regulatory stuff to come down. Can you give us a high level from where we stand today? What can we look for? I guess it would probably be more towards the end of this year or maybe in 2024 on the regulatory front in terms of milestones to look for.

Really, standards we're looking for, Larry, around remediation and what contamination industrial and particularly contaminated soils that would set a baseline to get activity to begin to remediate down to those standards. That's what we're looking for.

And timeline, is that a 2024 event?

Yeah, we would hope that in 2024 we would see some strong movement towards those standards being set.

So the regulatory EPA said December, But they said August earlier, so it's been moved a couple of times. So at this point, probably we wouldn't want to draw a line to say it, but what we've heard is kind of mid-December, but I heard mid-August a few months ago.

Right. I think I heard late December, too, and lastly. So I thought maybe that might push into 2024. But even so, hopefully within the next six months or something, we get something at least, right, or some more clarity at least. Right. Okay. And then just on the incinerated business, and, you know, obviously you mentioned we're still kind of running in a capacity constraint environment. Can you just kind of give us sort of the state of the union there? You know, I know I think Veolia had a little more capacity this year. I don't know if other small guys are putting through some throughput improvements, but, you know, kind of where we stand there. It sounds like you guys are confident that your increased volumes will – be filled pretty quickly. Just kind of what gives us that confidence. And I think you mentioned some potentially more closing captives there. If you can give us some update on that front, that would be great.

Yeah, Larry, a few items there. First, I'd like to clear up that Veolia has not been able to bring on an earlier capacity this year. So they're the same timeline we are. In fact, it might be a little bit longer than what we're anticipating. Okay. the overall industry capacity continues to be very challenged. This is why we're investing in Kimball, why Wigoli is investing. We think that capacity, even with the coming on of both the plants, capacity will be tight, will continue to be tight in the years to come. The captive relationships that we have are outstanding. Everybody who has a captive is also a customer of ours, and we continue to work closely with them as they change their waste stream mix to be able to make sure that we are making adjustments with our plants to be able to support whatever captive closures may come.

Okay, fair enough. Great. Thank you again. Appreciate the call. Thanks, Larry.

Our next question comes from the line of Toby Somer with Truist. Please proceed with your question.

Thanks. I wanted to start out and maybe you could... dig into and speak to what the right level of sort of ongoing corporate cost growth there should be. You mentioned insurance a couple times. Maybe you could disaggregate some of the influences in the reported quarter year over year and then help us understand an expectation for a trajectory over time going forward.

Yeah, sure, Toby. It's Eric. I'll take that one. So when you think about kind of the year-over-year growth that we saw, obviously still seeing inflationary pressures on wages and things. Obviously, I think all companies are seeing that and we're seeing it as well. So you see some increases there. You also see some increases from investments that we're making in several of our technology platforms. So those are probably the two largest year-over-year. Going back to salary and wages, I think the team has done a great job kind of keeping corporate headcount very flattish throughout the year absent the Thompson acquisition. So that's how we would kind of bridge the year over year. I think as you go forward, we're certainly trying to keep corporate costs, you know, as a flat percentage of overall revenue, I think kind of below that 5% range. And then year over year, you know, every year we target, you know, $100 million worth of cost savings initiatives. Many of those are in the corporate area. We'll continue to target those. But, you know, we usually target, you know, a 3% to 4% year-over-year growth rate on those.

And just to be fair, Toby, we continue to make investments in our people. We continue to drive, you know, to absorb healthcare costs of our employees, which has helped drive turnover down almost 40% down from the 2000. Voluntary turnover down, you know, 35%, 40% down from the 2022 highs. And that really is a testament to us continuing to make investments in our people. not just through better base wages, but better benefits, better opportunities, better career opportunities, and I really think we're seeing the benefit of that. As Eric talked about, the safety stats that he talked about and how proud we are of those, I think that has a direct relationship to us lowering voluntary turnover because we know in the first six months, first year, a person's employment, that's when injuries happen. So we're really proud of that. It's not free to add these additional costs to our employees. We're really proud of what we're doing there.

Thanks. So we're, I don't know, plus or minus seven months post getting together for investor day in Chicago area. What do you feel more comfortable about at this point over the time period you outlined? Is it the organic revenue growth or the margin expansion?

So Toby, it's interesting. So when we started the year, just to get the level set people, you know, we, had environmental services guide. They took the midpoint of our guide, but we said back in March, we said it'd be a little over a billion dollars. And where we ended, if you take the midpoint of our guide, is almost $1.1 billion. So that's up $80, $90 million, depending on what Matthew used, from where we started the year to when we end the year. That really bodes well for 2024. That's $4 billion up to $5 billion comes from the ES businesses. So that type of you know, give it a growth. You know, we're hopeful. And margin expansion, 150 basis points I mentioned earlier, is something that we're really excited about. Because I think that, as Eric said in his remarks, you know, trying to get to 30% is a good goal for us in the ES. And you say, well, we're at 20, we'll end the year at 24, 25%. And is it really possible to get to 30 from there? And the answer is, if you look at for the last five years, we did improve almost exactly 500 basis points from 2018 to to the midpoint of our guide in 2023. So that 500 basis points seems very reasonable, including buying, you know, businesses like HPC and Thompson, which had lower evident margins going into it, and we're really proud about how we've been able to improve those margins there. So when you think about kind of, you know, the investor day presentation we did back in late March, you know, I'm really much more excited about the growth in the environmental services business as we go into 2024, given all the factors I just mentioned. good margin expansion, the good EBITDA growth, and the backlog at the end of the year of a sales pipeline that's even better than when we started the year in.

Yeah, Kobe, just to build on that a little bit more, as Mike articulated, our revenue and EBITDA and margin expansion in our EF business throughout the course of the year since our investor day has really exceeded our expectations. And we continue to see growth there. Our pipeline, as mentioned earlier by Mike, our pipeline continues to be growing in all areas of our ES business. I'd also say, though, that when we started the year on the investor day, the SKSS business, we've been always really looking at that business. It's a strong business. It produces a great ROIC. It's been a challenging year there. As we've gotten through the year, as we go into fourth quarter, we're Our team has done an outstanding job of switching from a pay-for-oil scenario to a charge-for-oil as we exit Q3. We anticipate a strong fourth quarter, and that bodes well as we go into the 2024 and years to come to meet and exceed our SKSS. And the tidbit that we talked about, about Group 3. We're ahead of schedule producing group three or doing that pilot program than where we expected to be back in the investor day. So there is – and we have some cost opportunities and some plant expansions there as well. So we're bullish about that business as well. It's a nice margin business. It's stabilizing as we're exiting this year. And we feel strong about how it will perform in 2024. Thank you.

Thanks, Toby. Our next question comes from the line of John Windham with UBS. Please proceed with your question.

Great. Hey, thanks for taking the questions. Just a quick point of clarification. Did you say the safety clean plants were back to normal operations as of October 1st or at some point in the fourth quarter?

October 1st. We're going to have a really good October.

All right. Great. Thank you. Thank you for that. And maybe just the other question. I'd be really interested to hear how you're thinking about the higher interest rate environment. I would think there's a bit of asymmetric pain in the market, less on you and more on some of your potential M&A targets, and if you think that's an opportunity to get better valuations maybe over the next year on some potential M&A.

Yeah, John. We think that the increase in interest rates is a positive opportunity. We think it can bode well. As Mike mentioned in his script, we have a strong M&A pipeline. We're going to continue to be opportunistic for both sides of the business. And we think it bodes well for us. It presents us with more opportunity.

And, John, just Eric chiming in here, I think I'd be remiss if I didn't mention, you know, our balance sheet right now is very strong. I mentioned in my prepared remarks kind of our debt to keep it out leverage ratio at about two times. as it's been in a decade. So not only do we think we have a great debt portfolio, maybe we're at a little bit of an advantage, as you mentioned, toward competitors, but we really think we're in a good spot to be able to be aggressive if we need to be.

Great. Thanks.

Thanks, John. Thanks, John.

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

I'm crossing my fingers here. Can you hear me clearly?

Oh, first time on the call, Noah?

You know, it feels like it. Thanks for taking the questions. And I want to start with a very basic one. So the turnaround at Eldo, that was pulled from 4Q into 3Q, right? And so if that was an 8 to 9 million hit, basic question, why doesn't that just roll over to 4Q? Why does it actually impact the full-year outlook?

Yeah, we do see improvement there as we go into Q4. Some of it will come back, but some of it also, Noah, quite frankly, is kind of like an airline seat. You don't get it back as readily as you would like.

Yeah, so some of that was just kicked out. Is that a fair assessment, some of the ways that you hope to internalize was kicked out of the network? Yeah. And I think that relates to the deferred revenue question, right?

Yeah, some of that was. demand, more at our customer sites than within our network. As I said earlier, our incineration drum count, our deferred inventory of incineration drums went up. So it'll take us some time to work that down as we go through fourth quarter and into 2024, thus building a new plant. But there is a backlog that continues to exist, probably grew a little at customer sites. of demand there that we will work through with them.

And we also want to make sure, Noah, that we meet Q4 expectations. I would say that there's probably a little bit of services baked into that number. You know, you come to the conclusion, you just flip-flop it, and why do you change the number? The answer is we want to start a new streak.

Appreciate that. And then, you know, Mike, you had put out some good data points around the improving labor situation. I want to ask Is that going on industry wide? Are industry wide labor constraints at all easing? Is there sort of a freeing up of capacity to serve? Because certainly that has been a boon to pricing in the space. And I just want to make sure that as we think about the setup for industrial services and field services in particular into next year, that those sort of Favorable constraints to your pricing and market share aren't abating.

Yeah, no, I'd love to say it's all us. It's all us. We did it ourselves. But I think that trending-wise, people are definitely coming down. But people are still a scarce asset. Make no mistake, we're replacing kind of temporary labor and things like that, which has helped our margins in industrial services. And so I think that voluntary turnover coming down, we're really proud of that. We've made a lot of investments in that. I think the industry is coming down a little bit, but make no mistake, we're using our people as an offset for temporary labor, and that's being able to drive margin improvement. I don't know if you want to add anything to that.

Yeah, I definitely think, Noah, across the board, we're ahead of our peers in reducing our level of turnover, strengthening our employee base, the quality of our employees, how we've been hiring, how we've been attracting employees. Retaining them, the team has just done a nice job across the business in reducing turnover. There are so many initiatives that we've been deploying across our employee base to reduce those. And I think we're ahead. Our efforts are ahead.

That's good. And I guess just to close the circle, that should give you runway for continued margin expansion in those lines of business, right? I mean, whatever the macro, you know, does right now, you know, it's going to affect that. But even if it's sort of a low-growth, you know, industrial production environment, you've got some internal levers here that are going to continue to carry over.

Yeah, I'd cite an example of that. In some of our field services businesses, And that comes with margin improvement and better service to our customers. And better safety and a lot of other things, too.

All right. Thanks very much.

Thank you. Thanks, Neil.

Our final question is from Michael Hoffman with Stiefel. Please proceed with your question.

Hey, thanks for the follow-up. Ted Tech got an $800 million award to do some PFAS work. Is there a, and that's all engineering related, so is there a possibility you've got a role in that? And then on the PFAS issue, we need the drinking water final rule in December, but we still need the circular ruling in February as well to get those two things behind us before we really break the dam open here on the PFAS side.

Fair to say, Michael, first commenting on the TetraTrack. There was multiple awards that went out, and to really change out the AFFF to another non-PFOS-related material. We certainly, our team, was well ahead of that announcement, aligning ourselves with those awardees to be able to work with them directly to provide solutions for the proper disposal prove out. And also on the circle, yeah, we need that to really happen for us, as mentioned earlier, get that definition completed here, hopefully with what's going on in Washington and some of the turbulence that doesn't get delayed again. But we really need those standards out there in the marketplace.

Okay. And then, Mike Battles, on the blending, when you say 25 million gallons, that's taking the direct from 8%, which would be something like $12 million, so doubling the blending or the direct number when you say 25%.

It's kind of a different answer. When I talk about Group 3, we're going to use some of that in our own production next year, but ultimately we see Group 3 being sold as a base oil to third parties. When we talk about that growth to a much higher number, that's – The 2024 item is more of a cost-saver for us. Instead of buying third-party, you know, Group 3 oil to supplement our basal to make blended lubricants, we're going to use our own stuff, which is a cost-saver in probably the first half of 2024. And as we ramp that up in the back half, I think there's going to be something to sell.

Yeah, Michael, just to add on that, when you think about that 25 million gallon number of Group 3 lubricants, that we'll be making and looking to achieve as the goal that Michael articulated, that's selling material that we're currently selling at a Group 2 rate and converting it to a Group 3. So 25 million gallons less as a goal of Group 2 sales, but selling that as a Group 3 product. That's how you should think of that.

Got it. All right. So I conflated two different topics then. What's the possible – Well, how much higher can the percent of direct blending go? If it's 8% today, can it be 20?

This has been a challenge for us for a number of years. We continue to work with some large fleets to drive more blended gallons through the closed-loop model. I hate to say that we're close on some, but we always continue to work through that and drive that type of growth.

Our performance over the last couple of months has been improving. As we've shown in consecutive quarters, our direct blended oil sales has improved quarter over quarter, and the team's really done a nice job of continuing to ramp that up, and the success seems better as we go through each month of the year.

Okay. And then on Kimball, you all had given us how to layer in the capital spending, so we did 45% and 22%. Originally, we're going to do 90 this year, so we're 85. But you're pulling forward the opening date, so should we use a 55 for next year?

I think it's closer to 45, Michael.

45, okay. And then the last question on corporate overhead, I mean, is there another way to think about it? Is it somewhere between 4.8% and 5% of revenues is sort of where your corporate overhead is going to land on a sort of recurring basis? Yeah. Okay.

Yeah. Our goal would be below 5. Our goal would be below 5, and we're trying to work to that answer.

Okay, great. Thanks for taking the extra questions. Thank you.

We've reached the end of the question and answer session. Mr. Gerstenberg, I would now like to turn the floor back over to you for closing comments.

Thanks, all of you, for joining us today. Management will be participating in several YR events this quarter, starting with the Barrett Industrial Conference next week in Chicago, and we very much look forward to seeing some of you at those events.

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. you Thank you. Bye. Greetings, and welcome to Clean Harbor's third 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. To ask a question today, please press star 1 on your telephone keypad. You may press star 2 to remove yourself from the queue. 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 our co-chief executive officers, Eric Christopher 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 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 under-reliance on these statements, which reflect management's opinions only as of today, November 1, 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-GAP measures. Clean Harvest believes that such information provides an additional measurement, consistent historical comparison of its performance. Reconciliations of these measures to the most directly comparable GAP measures are available in today's news release, on our website, and in the appendix of today's presentation. Let me turn the call over to Eric Rosenberg to start. Eric. Thanks, Michael. Good morning, everyone, and thank you for joining us. Turning to our Q3 financial performance on slide three, our environmental services segment delivered its eighth consecutive quarter of profitable growth in Q3, and we expanded our margins by 120 basis points. While we experienced some planned challenges in the quarter, demand remains high for those scare skilled workforce continues to be highly utilized and in demand from customers. Our SKS segment faced some production challenges at our re-refineries in the back half of the quarter that led to lower than expected sales volumes and profitability. While volumes were off, pricing significantly improved in late Q3. With our aggressive shift to a higher charge for oil throughout Q3, we cycled through our higher priced inventory and we have returned to full production in our plans to start Q4 All of this will enable us to end the year strong in SKSS. Mike will discuss more of this in his prepared remarks. Given some of the challenges arising in both operating segments, we fell short of our financial expectations in Q3. About half of the Q3 miss was related to environmental services segment, and the other half was related to SKSS. We will get more into the details in a moment, but we believe our Q3 shortfall is unrelated to demand or market conditions. We believe the outlook for both segments continues to be strong. Before turning to the segment detail, I want to highlight our outstanding safety results. Safety forms a backbone of our reputation and our relationship with our customers. In Q3, the team battled through record-breaking summer heat and other adverse weather conditions to deliver a quarterly TRIR of 0.62, the best Q3 in our history, which keeps us on track to achieve our ambitious annual TRIR goals To everyone on our team listening today, thanks for all you do and keep everyone safe and allow our colleagues to go home uninjured every day. Turning to environmental services on slide four, segment revenue increased 6% due to growth of our services businesses, higher disposal revenue, and the addition of Thompson Industrial. Overall, growth was underpinned by a mix of pricing and volume initiatives in the various business units. In Q3, our safety, clean environmental services business led the way with 14% top-line growth, extending its already outstanding 2023. Parts wash services were up from prior year, reflecting the expansion of FBA's customer base for its core offerings. Field service revenue was up 3% in the quarter, despite no large-scale emergency response events and a limited number of medium-sized projects. Technical services rose slightly year-over-year. and lower fuel recovery revenue this year versus last, when diesel prices hit $7 a gallon. While our facility's revenue grew in Q3, we expected a stronger performance, but we were impacted by the additional maintenance days, particularly in late September. Overall, our plants have been running extremely hard since the pandemic, with a high mix of highly complex waste streams and significant volumes of containerized waste. During the quarter, we had to pull forward a planned Q4 turnaround at our Eldorado facility to September to improve performance, which cost us approximately $8 million to $9 million of aggregate EBITDA between repairs and lost revenue. We also made some needed preemptive repairs and other critical investments at other locations that yielded about $3 million in additional costs than originally expected. We have been doing considerable repair work this year at our southern suburbs, winter of 2021 and other small freeze earlier this year. Given these events, incinerator utilization came in below our Q3 expectations at 86%, flat with the prior year. Average incineration pricing was up 3% in the quarter due to continued pricing initiatives offset by limitations on processing our backlog of containerized incineration waste in the quarter, mainly related to our plant turnarounds. We view this mixed shift as temporary, sites and within the marketplace remains at extremely high levels, which will drive more favorable mix in the coming quarters. Landfill volume in the quarter was up 19% as we won several large projects, including one in western Canada. Base business and landfills also remains healthy. Industrial services grew 5% in the quarter as we expanded our presence in the southeast and into some select verticals, such as the steel industry through the Thompson acquisitions. The team is focused on capturing significant cost synergies through Thompson and our second full year of owning HPC to improve margins in this business. Our results throughout 2023 reflect our success in those efforts. Turning to overall segment profitability, adjusted EBITDA growth was 11%, far outpacing revenue as we leveraged our network and vital fixed assets. The productivity and efficiency initiatives we have ongoing in both our plants and our service branches are having a positive impact on margins. We are taking out costs to counter inflation, but we are also exploring ways to apply data analytics, AI, and robotic process automation to make profitability gains as we grow the business in the coming years. In Q3, we saw our ES margins top 25% with solid growth, and we see the opportunity to increase our longer-term ES margins to 30% or higher. Before handing it off to Mike, let me provide an update on the construction of our Kimball incinerator on slide five. The $180 million project is proceeding extremely well. I recently traveled out to the facility and met with Nebraska Governor Jim Pillen, whose administration has been very supportive of this project and the jobs it will bring to the western part of his state. Governor Pillen and the other elected officials signed the final steel beam in early October. When I visited the site, I was impressed by how well all the key components of the plan are coming together. Our team is doing a terrific job keeping us on track and on budget. As you can see on the slide, the rotary kiln is now in place, as is the central steel structure of the plan itself. In the coming months, we will be moving forward rapidly with construction. Our initial goal when we launched this project was to have the facility targeting the new kiln start date to be prior to the year end 2024. We are all excited to ship this incinerator into commercial operation given the demand we continue to see in the marketplace along with what we expect readily absorbed by the marketplace. With that, let me turn things over to Mike to discuss SKSS and the capital allocation. Mike.

Thanks, Derek, and good morning. We're all excited to see Kimball come online as rapidly as possible. It will be a big win for the company and our stakeholders. Moving to SKSS on slide six, this segment underperformed this quarter, but we're seeing much better days here in Q4. On the top line, Q3 SKSS revenue declined 21%, primarily due to lower base oil pricing versus a year ago, when supply scarcity drove pricing to record levels. We entered Q3 on a downward trend in pricing, with posted pricing dropping 60 cents in Q2, including a June reduction that impacted us in the first part of Q3. Subsequently, prices stabilized in mid-August, followed by a second price increase in September. Given the rising pricing environment, some of which did not take effect until October, we're off to a good start in Q4, selling base oil in October at favorable pricing. Looking at year-over-year profitability after our record Q3 adjusted EBITDA a year ago, lower pricing in this year's third quarter put pressure on our adjusted EBITDA and margins. In terms of expectations, the biggest factor to our miss in this segment was interruptions to expected production at several of our A3 refineries, including a delayed restart of our California facility. These disruptions had the dual impact of higher than expected plant costs, as well as lower volumes of base oil and other products for us to sell. In fact, in September, we sold more than 4 million gallons less of base oil than we had forecasted when we spoke to you in early August. These repairs and costs were all completed in Q3, And since then, our plants have run extremely well, including our California facility. As most of you know, we actively manage the re-refining spread in this business. As we've outlined on previous calls, base oil pricing was on a downward trajectory for much of the year until recently. In response to market conditions, the SKSS team has been hypervigilant in addressing the spread compression we saw in the first three quarters. We have continued to collect the volumes we need for our plants at the best pricing possible to stabilize that spread. In Q2, we shifted from a pay-for-oil or PFO approach to a charge-for-oil model. In Q3, we raised that average CFO even further while collecting 59 million gallons. As we look ahead to the fourth quarter, we see both ends of our re-refining spread improvement. We consumed our higher-priced inventory in Q3 and will benefit from lower-cost inventory being sold in Q4. In addition, the two price increases we saw in the back half of Q3 will also benefit us in Q4, as we tend to sell greater volumes in the quarter. Blended products is another area where we see incremental sales momentum. This value-added set of products is derived from processing our base oil into finished lubricant, such as motor oil or hydraulic fluids. Blended product sales accounted for 21% of the total output of our plants in Q3. That's up from 17% a year ago and 19% in Q2 as we continue to win customers in this area. Our direct volumes, which represent our closed-loop approach, were at 8% in Q3, up from 7% in Q2. Our goal remains to increase our blended volumes not only this year, but on a go-forward basis with both direct and wholesale channels. Overall, it's been a challenging year for SKSS. The team has managed well through the pricing turbulence. We are on track for record collections at favorable CFO levels, and we'll deliver record annual volume produced in our plants despite the Q3 upsets. A strong Q4 will enable us to conclude Q3 and enter Q4 on a positive note in this segment. Even within a weak Q3, we expect this segment to still deliver on adjusted bidder margin north of 20% this year. It remains a strong cash flow generator and a high ROIC business for us. One of the ways we intend to probably grow SKSX in the coming years is to upgrade some of our Group 2 output into Group 3 product. We're excited to share today that we recently concluded a successful scaled pilot project to make Group 3 oil at one of our plants. We are confident that we will meet the required industry specifications sell it into the marketplace. The value of qualified Group 3 base oil versus Group 2 varies over time, but more recently, it typically carries a premium of $1 to $2 per gallon. Throughout 2024, we intend to scale up the project and initially produce a few million gallons of Group 3 oil at one of our locations. We will then bring that successful program to some other facilities in the coming years to extract even more value from existing assets. Turning to slide seven in our capital allocation strategy, nothing that happened in Q3 changes our perspective on the Vision 2027 strategy that we laid out at our investor day in March. We expect to grow both organically and through acquisition. Given the highly leverageable network of assets and people, we have seen the positive margin improvement that as economies of scale provide for both cost synergies and cross-selling. So whether it's pursuing the next Kimball-like internal project or accretive acquisitions, we have multiple avenues for growth. We continue to assess opportunities to invest in CapEx to drive organic growth. On the M&A front, we evaluated a number of candidates in Q3 and, as always, remain highly selective. We continue to see a healthy flow of potential transactions for both operating segments. Eric Dugas will cover our balance sheet in more detail, but I wanted to highlight that we are very well positioned to be opportunistic with respect to potential M&A. At year end, we expect to be at our lowest leverage point in more than a decade. To summarize, while our Q3 results did not meet your expectations, we view the factors behind our performance as short-term in nature. We expect our ES segment to continue to deliver profitable growth and margin improvement in the coming quarters. We see high demand for our services nearly across the board, with customers valuing our breadth of offerings and strong service and safety record. We expect each of our four businesses within the ES segment to achieve profitable growth in 2023. Our backlog of waste positions us to close out the year on an upward trajectory, The plans are running great, and the project pipeline within the ES segment also remains healthy as spending on reshoring, government infrastructure, and regulatory-driven cleanups continue. Within SKSS, we remain focused on controlling costs across the business, particularly on the collection side, while still ensuring sufficient supply to maximize output at our re-refineries. Given where base oil and lubricant markets are today, We expect to post a large sequential increase in profitability in Q4 and enter 2024 with positive momentum in this business. With that, let me turn it over to our CFO, Eric Dukas.

Thank you, Mike, and good morning, everyone. Turning to the income statement on slide 9, as Eric and Mike outlined, Q3 was a challenging quarter for us compared to expectations, particularly on the plant side. But the overall demand picture remains strong. our EF segment continued to achieve profitable revenue growth, which essentially offset the year-over-year top-line decline in SKFS that was driven by lower base oil pricing and resulted in Q3 revenues that were essentially flat with a year ago. As Eric Gerstenberg outlined at the start of the call, adjusted EBITDA came in below our expectations at $255 million, compared with the $308.6 million in Q3 last year. Our adjusted EBITDA margin in the quarter was 18.7%. Gross margin in the quarter was 30.9%, lower than Q3 of last year due to large year-over-year decline in SKSS. While ES gross margin was up 190 basis points to 33.2% as we offset inflation and wage pressures with appropriate price increases and realized cost savings. we remain focused on increasing productivity and operational efficiencies along with pricing initiatives within ES to continue to drive margin expansion. SG&A expense as a percentage of revenue was 12.5% in Q3 due to higher IT investments and related professional fees. For the full year, we now anticipate being in the mid-12% range. Overall, the team has done a good job managing SG&A headcount while battling inflation and wage pressures. Depreciation and amortization in Q3 increased to 93 million, consistent with our expectations and reflecting the Thompson acquisition completed earlier this year. For 2023, we continue to anticipate depreciation and amortization in the range of 350 to 360 million. Income from operations in Q3 was $154.4 million, down from prior year, as expected, given lower overall profitability. Net income for the quarter was $91.3 million, resulting in earnings per share of $1.68. Turning to the balance sheet highlights on slide 10, cash and short-term marketable securities at quarter end were $420 million, up approximately $94 million from June. And looking at our debt portfolio, we remain very comfortable with where we sit today. We ended this past quarter with debt of 2.3 billion and with no currently outstanding amounts coming due until 2027. Leverage on a net debt to EBITDA basis as of September 30th remained at approximately two times and our weighted average fixed rates. Starting cash flows on slide 11, cash provided from operations in Q3 was $220.1 million. CapEx net of disposals was $105.4 million in the quarter, up from prior year due to the Kimball project, which accounted for $22 million of our Q3 CapEx. In the quarter, adjusted free cash flow For 2023, we continue to expect our net CapEx to be in the range of $400 to $420 million. Full year spend on the Kimball incinerator is now expected to be approximately $85 million. In addition to that project, we continue to see opportunities to invest in other areas of the business, including equipment and our transportation fleet. These investments will minimize third-party rental spending as well as maintenance costs by replacing older equipment and foster growth through those added resources. We also are continuing to invest in our plants, including winterization projects at our incinerators down south. During Q3, we bought back more than 58,000 shares of stock at a total cost of $10 million. Approximately $85 million remains on our existing buyback program. Moving to slide 12. Based on our Q3 results and current market conditions for both our operating segments, we are revising our 2023 adjusted EBITDA guidance to a range of $1.005 billion to $1.025 billion, with a midpoint of $1.015 billion. Looking at our annual guidance from a quarterly perspective, we expect Q4 adjusted EBITDA For full year 2023, adjusted EBITDA guidance will translate to our operating segments as follows. In environmental services, we now expect adjusted EBITDA at the midpoint of our guidance to increase nearly 15% in the full year of 2022. With the Q3 plant challenges behind us, we expect higher production levels in Q4 as demand for our services continues to be robust. For SKSS, we now expect full year 2023 adjusted EBITDA at the midpoint of our guidance to decrease in the 40% range due to lower base oil pricing this year versus last. With the recent uplift in base oil pricing that Mike referenced, we expect to see a sequential increase in Q4 from Q3 that should allow us to close out the year strong. Our corporate segment at the midpoint of our guide we now expect negative adjusted EBITDA to be up approximately 9% this year from 2022. This reflects areas such as increasing insurance costs and salaries and benefits, as well as impacts of the Thompson acquisition. In light of the reduction in adjusted EBITDA, we are also revising our adjusted free cash flow expectation for 2023. We now expect free cash flow to be within the range of $300 to $330 million, or a midpoint of $315 million. Let me remind everyone that this year's free cash flow guidance includes approximately $85 million for the Kimbell Incinerator project. If you add that spend back, the midpoint of our adjusted free cash flow guidance would be about $400 million, or approximately 40% of our current adjusted EBITDA midpoint expectation. In conclusion, I want to echo some of the thoughts that both Mike and Eric shared. While we reported results below our expectations, nothing that has occurred in the quarter has changed our view of Clean Harbor's multi-year growth prospects. Despite the plant challenges in the quarter, our ES segment delivered top-line growth and leveraged that to achieve meaningful margin expansion and increase EBITDA. In our SKSS segment, our re-refineries are all back running well again. and our California Refinery is back online. We expect a good Q4, enabling us to exit 23 with positive momentum. Looking ahead, we remain enthusiastic about our growth prospects in both segments. Our sales and project pipelines remain healthy. And finally, while I appreciate the fact that analysts and investors want to ask about our expectations for 2024, consistent with our historical practices, We are not providing guidance at this time as we have a budgeting process that we need to complete first. I will say that there is nothing in our 2023 performance or in the market today that leads us to meaningfully deviate from the 2024 expectations that we assumed in our Vision 2027 organic growth model that we introduced back in March. And as Mike mentioned, we also intend to remain opportunistic on the acquisition front to complement our organic growth. With that, Christine, please open up the call for questions.

Thank you. We will now be conducting a question and answer session. In order to ask a question today, 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, you may need to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Tyler Brown with Raymond James. Please proceed with your question.

Hey, good morning. Good morning.

Hey, so I just want to kind of make sure I have it. So I know that you didn't give specific Q3 guidance, but you obviously had a number implied in your prior midpoint. So can you just kind of walk us through the delta of call it this 255 versus maybe the two, I'm going to say 285-ish that was likely in that prior guidance. So basically, how does that $30 million break down? Was it 8 to 9 million from Arkansas, 3 million from some other incinerators, and then the rest was SKSS? Is that a good way to break it down, or just any help there would be helpful?

Yeah, sure, Tyler. This is Mike, and I'll answer the question. So the way it broke down from what we said 90 days ago was about 12 million of the MIS was in the environmental services segment. As Eric mentioned in his prepared remarks, it centered around pulling the turnaround forward along with some other challenges, some preemptive things we did to other plants. About $13 million of the MIS is in the SKSS segment, and that had the double impact of a plant going down late in the quarter, as well as additional costs to get it back online, as well as a lost revenue from not being able to sell that much oil in Q4. And as I said in my remarks, we were down 4 million gallons in the month of September, which was a surprise to us. The last piece was, you know, corporate costs. Last piece found it was corporate costs of about 5 million. There were some one-off projects we did that cost more than we expected in the quarter, as well as insurance costs.

And then on SKSS, what exactly happened? Was it a mechanical issue? Was it a chemistry problem? I'm just curious.

Yeah, Tyler, this is Eric. Just to clarify that within SKSS, we were starting up. We didn't have an accelerated turnaround come forward from Q4 into Q3. In SKSS, what we were doing is we were restarting our California-based plant coming online for base oil. We started that plant up earlier in the year. We were making VGO, and as we progressed through Q3... As we progressed into Q3, we anticipated being online for base oil and generating base oil and selling that volume. Actually, we brought it online delayed in the quarter at the tail end of Q3, which was the effect there, along with some other minor production issues at some of the other plants. But the core issue in our SKSS segment was bringing on rating base load.

Okay, that's very helpful. On the Group 3 pilot program, I think, Mike, you said it would be a few million gallons in 24, but how big do you think that could be over the next few years? It seems like a dollar or two uplift is a pretty big deal, and was that contemplated in that Vision 2027?

Tyler, so, yeah, we did envision having some Group 3 base oil in the Vision 2027. It's kind of how we get to, you know, back to 2022 levels, how we get back to 300 million plus. You know, Group 3 base oil was certainly part of that. You know, we think that gets up to, you know, depending on how we do it and how many plants we can roll it out to. It was a very successful pilot. It could be 25 million gallons or greater. And so I'm of the view over the next couple, three years, that that becomes part of our process. And we're really excited about that pilot. and we're going to make a lot of that base oil in 2024. We're going to probably use it more internally to make blended oil ourselves, but there'll be some to sell in the marketplace, and we're excited about that.

Okay, good. My last one here, I know there will probably be some talk about demand. It sounds like demand's pretty good, but did the auto industry disruptions impact you at all, noticeably, in Q3?

Yeah, Tyler, Eric answering here. We did have some effect of the auto strikes, but supporters, suppliers to the auto industry have, they were off in Q3. But we see that coming back as we get into Q4 here.

Yeah, okay. Just curious there. Okay, I'll turn it over. Thank you. Okay, got it.

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

Hey, good morning. Your date reminds me of an old John Wayne movie when he got asked, off day or day off? Good morning. Good morning, Michael.

Good morning.

So when I look at, just to get the numbers right, I mean, the simple math is you land on ES at around $1.89 billion, $1.90 billion. SKSS at a billion or 185 million, you've got two 59 of corporate overhead. There's your midpoint, your guidance. Is that, that's the neighborhood we should be in, right?

I mean, at this maybe a little lighter in, uh, in SKSS and maybe a little higher in ES, but I think directly you're right.

Okay. So that puts this, if I'm a little lighter, I'm in a 56, 57 million kind of quarter pace. You can't annualize it because one Q is a little weaker. But if I did sort of a three times that plus the one Q, that puts us in the low 200s for next year. And I know you're not doing guidance, but we all have the model, and it would be silly for us to be sitting out there with something stupid.

Yeah, Mike, I think, as I said in my remarks, we can't give kind of full-year guidance, but I think you're kind of within the area code of what we're thinking there.

And then... Back to, you know, if you have just normal plant activity, utilization rates, normal maintenance cycles, you know, again, we're sitting here looking at, you know, something that's like 7%, 8% segment EBITDA growth in the ES business. That's not an unrealistic way to think about it as well.

Yeah, no, that makes sense to us. And just to ground people in, you know, for the year, if we hit the midpoint, For environmental services, if we hit the midpoint of our guide we gave this morning, for the year, for 2023, it'll be 9% revenue growth, 15% dividend growth, and 150 basis points of margin expansion in 2022. So to think for a moment that 6%, 7%, or whatever number you were talking about, Michael, about dividend growth into 2023, that's Since 2024, excuse me. That doesn't seem crazy for me.

Okay.

Yeah, and just to reiterate one other final point, each quarter this year, as you know, Michael, our performance in the ES segment has outpaced our expectations. And we continue to have margin expansion throughout the course of the year to back up what Mike was saying. So very strong outlook in ES continues.

So one of the things, and I'm going to oversimplify this, and it's not that Clean Harbors was never doing pricing, but I think that the industrial waste industry has adopted a pricing mantra coming out of hyperinflation that is different than history. What comfort can you give us all that that discipline didn't get tarnished historically? in 3Q or going into 4Q and is sustainable. You can manage an overall price-cost spread, and therefore it's a component of organic growth and operating leverage going into 24.

Yeah, Michael, it's Eric Dugas.

I'll take this one and then allow Eric and Mike to kind of chime in. But, you know, pricing continues to be a strategic initiative of ours. In Q3 here, for the reasons we've discussed, you know, we did have the plant challenges. We did have a small... mixed change for some of the streams that we didn't see come through that are coming back through in October here. But, you know, I would think going forward, pricing will continue to remain quite strong. And just to kind of provide a little color, in more recent times, you know, we're seeing kind of early returns in October here where the volumes are extremely strong. The drone volumes are at kind of an annual high here, and really that just gives us some good evidence that going forward, pricing momentum remains.

All right. Go ahead, Eric. Sorry.

Thanks, Michael. Just to add, we're going to successfully hit our target this year of over $200 million of price increases to really curb what's been happening with inflation across the business and expand our margins. As we go into next year, we fully anticipate that we'll hit a goal north of $150 million and That's going to be tempered a little based on inflation coming down a little bit, but we continue to be very regimented on our approach of making sure our price improvement helps us to expand in margins, but also continues to accelerate past our increasing costs.

Yeah, Michael, and one last point that both those points are really sound from Eric and Eric, but what allows us to get that price is that the sales pipeline remains very strong, and I want to make sure that people on the call understand understand that, that our sales pipeline, as we go into Q3, it was actually higher than Q2, and the highest it's been all year. So when you think about, and pipelines are just that. They're sales pipelines. Sometimes they don't materialize. But make no mistake that we feel good about going, allowing us to get that price is the pipeline that allows us to kind of continue to drive that price.

Okay. And then this is a nuanced question, Eric, to your guests. In the revised EBITDA buildup, you know, you have about a $16 million dip at the midpoint in net income, but you only have a $10 million in cash flow from operations. So is there a working capital savings that's been captured to help keep the free cash at that midpoint of 315?

Yeah, I think that's right, Michael. We are seeing some good improvement here on the working capital side.

And just looking at kind of trends and how it plays out into Q4, you know, that's exactly kind of how we were thinking about it.

And you'll be able to hold on to that going into next year. This isn't a timing issue. This is structural.

Correct. Okay. Free cash flow next year continues to look pretty strong.

Okay. Thank you for the questions.

Thank you, Michael. All right, Michael.

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

Hi. Good morning, everyone. I have a question.

Should we read anything into the fact that deferred revenues took down a bit sequentially despite the lower than expected utilization? And then if you can talk about the price mix and the backlog, I think you might have mentioned it, but is the value sitting there higher than what you incinerated this quarter?

Yeah, David, this is Eric. I'll take that. Yeah, we did have a slight tick down in the deferred inventory. However, based on that pull forward of our turnaround, our incineration drum deferred inventory actually went up throughout the quarter. So, we continue to have significant drum inventory to work off as we proceed through the fourth quarter and into 2024. So, that really makes up the substantial part of the difference there.

And, David, I'm not sure if you're asking about price Price and mix. So pricing in incineration was kind of low single digits. Three, I think, was the number. But really, that's pricing up eight or nine, and mix kind of bringing it back down to three. And so that's really what's happening here. So the pricing that we talked about with Michael and other investors, that remains very strong going into 2024.

Got it. And then second, on a mid-80s incinerator utilization you've been reporting lately, at times in the past that used to be consistently 90% plus. Is utilization going to be lower on a secular basis today for some reason, or is that extra, say, 5% of future opportunity?

Yeah, Dave, I'll take that. This is Eric. Our incineration utilization each quarter of this year improved. Our low point was the first quarter where we were dealing with some of those freeze issues. Our expected annual utilization would be in the high 80s on an annual basis. This year we'll come in at that 85%, 86%, 87% on an annual basis. The reason that incineration utilization runs in that area is because of our focus on really managing significant amount of drums and high-value direct burn waste streams. such as the things that are out there as PFAS opportunities or the project business coming from Superfund sites. That's where we would leverage that incinerator utilization into those very high 80s and into the low 90s area.

And just to clarify for some investors that, you know, we have a 70,000-ton incinerator in Eldorado, Arkansas. A down day is a lot of production. We don't assume any... any days in that calculation so that when we say kind of high 80s, that's assuming a normal amount of down days. And so that's really the, I want to make sure people understand, we'll never get to 100% because there will be, we take those plans down twice a year for maintenance, and so those are part of the calculation of utilization.

Yep, thanks very much, guys.

All right, Dave. Thanks, Dave.

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

Yes, hi. Good morning, everyone. And Mike, I'm looking forward to starting a new streak here starting today. It's been quite a run. I was wondering who was going to bring it.

Okay.

Can I ask on Kimball, nice to hear that the plant is coming online nicely. Can you update us on how quickly you expect to ramp up the earnings power of that plant over what time horizon? Can you hit the type of numbers we were talking about at the analyst day now that we're coming closer to that date?

Yeah, Jerry, Eric here. As we go into the tail end of 2024, we'll begin to bring online and process through many of the backlog of drums. As we go into 2025, we'd expect that we'd be in that 20,000 to 40,000 ton range, feeding through that unit as we go forward and ramp up from there. Our expected overall operational utilization should be in that 50,000 to 55,000 tons over the course of two to three years.

That's a quick start. Okay, great. And then in terms of just to expand on the group three economics, can you just say more, if you don't mind, what's the capex per gallon, just to expand on that opportunity set? And I don't know if you're willing to venture an estimate on, you know, looking across your footprint, you know, where do you think the facilities have enough space and capability set to roll out if you do decide to roll it out across the portfolio in SKSS?

Yeah, Jerry, so I'll start on this. This is Mike. So I'd say that, you know, the capex required is not a ton of capex to kind of drive through. It's really getting a high-quality base oil high-quality used motor oil to derive that group three quality. So that's the challenge, right? So you want to try to make sure you're capturing high-quality group three oil and getting it into our plants and allowing it to run kind of uninterrupted. So you can't mix group two and group three. It gets contaminated, so you've got to be very careful on that. So it's really a lot of process change and maybe some other things like that. I'm not sure it's going to be a huge capex item. I don't know, Eric, if you want to add anything to that.

No, I think that's fair, Mike. I think we have some minor changes to do. We have capacity that we've set aside at a few of our smaller plants to be able to properly aggregate and run those units dedicated to making it Group 3.

And we'll be rolling that out as we go through 2024 and into 2025. So, Jerry, I don't think it's going to be a huge cost item to get to that answer.

But I do think it's going to be a great bridge.

As we try to bridge back to the $300 million, I think that's going to be a great bridge to kind of get us there.

And can I ask the blue sky scenario? You know, how many gallons can we produce? What's our best sense?

Yeah, we said on that, we got asked that earlier, 25 million gallons we thought would be a good goal. trying to get to that answer. That's going to take some work, but I think that's a really reasonable goal.

Across the footprint. Okay. Thank you. Yep. All right, Jerry.

Our next question comes from the line of Noah Kay with Oppenheimer. Please proceed with your question. Mr. K, you need to disconnect the other line. We're getting an echo.

All right. You need to disconnect the other line. Why don't we move on, Christine, and we'll come back to Noah. Okay. Our next question comes from the line of James Rashudi with Needham. Please proceed with your question.

Hi. Good morning. Apologies. I joined the call a little bit late. You may have covered this. Did you say what Thompson added and whether you're on track with your expectations for full-year adjusted EBITDA in 2023 for this business?

Yeah. This is Eric Dugas speaking. We were on track to add an increment of about $12 million with the budget

kind of what we're trending towards in the year.

Got it. And a follow-up question for me is just I wonder if you can give us an update on some of the initiatives you have with respect to PFAS.

Yeah, James, this is Eric. I'll take that. We continue to really focus on our total solutions portfolio for PFAS. We've implemented successfully with our field crews being able to perform sampling. We perform analysis within our lab network. We're bringing that online to help our customers get a baseline understanding of their PFAS contamination levels. We've seen our pipeline continue to grow around not only drinking water, industrial waters, as well as remediation events. And through our network, we continue to believe, along with our incineration testing that we've accomplished, that we've shown that incineration destruction, high temperature, retro thermal incineration through our units is really the preferred method. And we've communicated that throughout our customer network. And so our total solutions of sampling, analysis, drinking water, industrial water, remediation, transportation, disposal, leveraging our incineration network, our landfills, and our water treatment plants continues to be a real successful outlook for us as our pipeline grows.

any change in your expectations with respect to this as you look out over the next year? And, again, I know you're not giving guidance for 24, but just a small part of your business, I'm just wondering if this is moving perhaps more slowly or, you know, if you're seeing the traction with your customers with respect to this.

Yeah, I would say, James, you know, there's still much to come with the regulatory parameters to be laid out, but I would tell you that our pipeline has grown. and that we continue to be optimistic as we go into 2024 about how leveraging our total solutions for all of our customer base, which is quite diverse, as you know, will really yield rewards for us across the network. Got it. Thank you.

Hey, Jim, just to interject and make sure I was clear with the answer on Thompson. The $12 million incrementally, that's what we were kind of forecasting in the ES services segment. There's obviously also some incremental kind of corporate-related costs of $2 million to $3 million there. So you're looking at, you know, a $9 million kind of all-in number from Thompson this year.

Got it. Thank you. Thanks for clarifying that. Appreciate it.

And the Thompson team, I know they're listening on the call. They're actually doing a great job. The innovation is going very well. We're really pleased with the early days in the Thompson acquisition, so we're really excited about it.

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

Great. Good morning, guys. Thanks for taking the questions. Most of mine have been answered. I do have a couple. Hey, Mike. I am looking forward to the new scoreboard going up in the office, too. I guess just a follow-up on the PFAS you mentioned, sort of waiting for some regulatory stuff to come down. Can you give us sort of a high level from where we stand today? What can we look for? I guess it would probably be more towards the end of this year or maybe in 2024 on the regulatory front in terms of milestones to kind of look for.

Really standards we're looking for, Larry, around remediation and what contamination in industrial and particularly contaminated soils that would set a baseline to get activity to begin to remediate down to those standards. That's what we're looking for.

And timeline, is that the 2024 event?

Yeah, we would hope that in 2024 we would see some strong movement towards those standards being set.

So the regulatory EPA said December, but they said August earlier, so it's been moved a couple of times. So at this point, probably we wouldn't want to draw a line to say it, but what we've heard is kind of mid-December, but I heard mid-August a few months ago.

Right. I think I heard in late December too, and lastly, so I thought maybe that might push into 24, but even so, hopefully within the next six months or something, we get something at least, right? Yes. Some more clarity at least. Right. Okay. And then just a follow-up, just on the incinerated business, and obviously you mentioned we're still kind of running in a capacity constraint environment. Can you just kind of give us sort of the state of the union there? I know I think Veolia had a little more capacity this year. I don't know if other small guys are putting through some throughput improvements. But, you know, kind of where we stand there, it sounds like you guys are confident that your increased volumes will be filled pretty quickly. Just kind of what gives us that confidence. And I think you mentioned some potentially more closing captives there. If you can give us some of your update on that front, that would be great.

Yeah, Larry, a few items there. First, I'd like to clear up that Veolia has not been able to bring on an earlier capacity this year. So they're the same timeline we are. In fact, it might be a little bit longer than what we're anticipating. Our pipeline working with our CAPTIS continues to be strong. The overall industry capacity continues to be very challenged. This is why we're investing in Kimball, why Veolia is investing. We think that capacity, even with the coming on of both the plants, capacity will be tight, will continue to be tight in the years to come. The captive relationships that we have are outstanding. Everybody who has a captive is also a customer of ours, and we continue to work closely with them as they change their waste stream mix to be able to make sure that we are making adjustments with our plants today.

Okay, good enough. Great. Thank you again. Appreciate the call. Thanks, Larry.

Our next question comes from the line of Toby Somer with Truist. Please proceed with your question.

Thanks. I wanted to start out and maybe you could dig into and speak to what the right level of sort of ongoing corporate cost growth there should be of You mentioned insurance a couple times. Maybe you could disaggregate some of the influences in the reported quarter year over year and then help us understand an expectation for a trajectory over time going forward.

Yeah, sure, Toby. It's Eric. I'll take that one. So when you think about kind of the year-over-year growth that we saw, obviously still seeing inflationary pressures on wages, and things, obviously I think all companies are seeing that and we're seeing as well. So you see some increases there. You also see some increases from investments that we're making in several of our technology platforms. So those are probably the two largest year over year. Going back to salary and wages, I think the team has done a great job kind of keeping corporate headcount very flattish throughout the year absent the Thompson acquisition. So that's how we would kind of bridge the year over year. I think as you go forward, We're certainly trying to keep corporate costs, you know, at a flat percentage of overall revenue, I think kind of below that 5% range. And then year over year, you know, every year we target, you know, $100 million worth of cost savings initiatives. Many of those are in the corporate area. We'll continue to target those. But, you know, we usually target, you know, a 3% to 4% year over year growth rate on those.

And just to be fair, Toby, we continue to make investments in our people. continue to drive, to absorb health care costs of our employees, which has helped drive turnover down almost 40% down from the 2000, voluntary turnover down 35, 40% down from the 2022 highs. And that really is a testament to us continuing to make investments in our people, not just through better base wages, but better benefits, better opportunities, better career opportunities. And I really think we're seeing the benefit of that. As Eric talked about, the safety stats that you talked about and how proud we are of those. I think that has a direct relationship to us lowering voluntary turnover because we know in the first six months, first year, a person's employment, that's when injuries happen. So we're really proud of that. It's not free to add these additional costs to our employees. We're really proud of what we're doing there.

Thanks. So we're, I don't know, plus or minus seven months post getting together for Investor Day in Chicago area. What do you feel more comfortable about at this point over the time period you outlined? Is it the organic revenue growth or the margin expansion?

So, Toby, it's interesting. So when we started the year, just to level set people, we had environmental services guide. They took the midpoint of our guide, but we said back in March, we said it would be a little over $1 billion. And where we ended, if you take the midpoint of our guide, is almost $1.1 billion. So that's up $80, $90 million, depending on what Matthew used, from when we started the year to when we end the year. That really bodes well for 2024. That's $4 billion of the $5 billion comes from the ES businesses. So that type of dividend growth, and margin expansion, the 150 basis points I mentioned earlier, is something that we're really excited about. Because I think that, as Eric said in his remarks, trying to get to 30% is a good goal for us in the ES business. And you say, well, we're at 24, 25%, and is it really possible to get to 30 from there? And the answer is, if you look at for the last five years, we did improve almost exactly 500 basis points from 2018 to the midpoint of our guide in 2023. So that 500 basis points seems very reasonable, including buying, you know, businesses like HPC and Thompson, which have lower evident margins going into it, and we're really proud about how we've been able to improve those margins there. So when you think about kind of, you know, the investor day presentation we did back in late March, you know, I'm really much more excited about the growth in the environmental services business as we go into 2024, given all the factors I just mentioned. good margin expansion, the good EBITDA growth, and the backlog at the end of the year of a failed pipeline that's even better than when we started the year in.

Yeah, Kobe, just to build on that a little bit more, as Mike articulated, our revenue and EBITDA and margin expansion in our EF business throughout the course of the year since our investor day has really exceeded our expectations. And we continue to see growth there. Our pipeline, as mentioned earlier by Mike, our pipeline continues to be growing in all areas of our ES business. I'd also say, though, that when we started the year on the investor day, the SKSS business, we've been always really looking at that business. It's a strong business. It produces a great ROIC. It's been a challenging year there. As we've gotten through the year, as we go into fourth quarter, we're Our team has done an outstanding job of switching from a pay-for-oil scenario to a charge-for-oil as we exit Q3. We anticipate a strong fourth quarter, and that bodes well as we go into the 2024 and years to come to meet and exceed our SKSS. And the tidbit that we talked about, about Group 3. We're ahead of schedule producing group three or doing that pilot program than where we expected to be back in the investor day. And we have some cost opportunities and some plant expansions there as well. So we're bullish about that business as well. It's a nice margin business. It's stabilizing as we're exiting this year. And we feel strong about how it will perform in 2024. Thank you.

Thanks, Toby. Our next question comes from the line of John Windham with UBS. Please proceed with your question.

Great. Hey, thanks for taking the questions. Just a quick point of clarification. Did you say the safety clean plants were back to normal operations as of October 1st or at some point in the fourth quarter?

October 1st. We're going to have a really good October.

All right. Great. Thank you. Thank you for that. And maybe just the other question. I'd be really interested to hear how you're thinking about the higher interest rate environment. I would think there's a bit of asymmetric pain in the market, less on you and more on some of your potential M&A targets, and if you think that's an opportunity to get better valuations maybe over the next year on some potential M&A.

Yeah, John. We think that the increase in interest rates is positive. We think it can bode well. As Mike mentioned in his script, we have a strong M&A pipeline. We're going to continue to be opportunistic for both sides of the business. And we think it bodes well for us. It presents us with more opportunity.

And, John, just Eric chiming in here, I think I'd be remiss if I didn't mention, you know, our balance sheet right now is very strong. I mentioned in my prepared remarks kind of our debt to keep it out leverage ratio at about two times. It's actually going to end up, if Q4 plays out like we think it will, it's been in a decade. So not only do we think we have a great debt portfolio, maybe we're at a little bit of an advantage, as you mentioned, toward competitors, but we really think we're in a good spot to be able to be aggressive if we need to be.

Great. Thanks.

Thanks, John.

Thanks, John.

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

Okay, I'm crossing my fingers here. Can you hear me clearly?

Oh, first time on the call, Noah?

You know, it feels like it. Thanks for taking the questions. And I want to start with a very basic one. So the turnaround at Eldo, that was pulled from 4Q into 3Q, right? And so if that was an 8 to 9 million hit, I mean, basic question, why doesn't that just roll over to 4Q? Why does it actually impact the full-year outlook?

Yeah, we do see improvement there as we go into Q4. Some of it will come back, but some of it also, Noah, quite frankly, is kind of like an airline seat. You don't get it back as readily as you would like.

Yeah, so some of that was just kicked out. Is that a fair assessment, some of the ways that you hope to internalize was kicked out of the network? Yeah. And I think that relates to the deferred revenue question, right?

Yeah, some of that was. look at it that there's going to continue to be pent-up demand more at our customer sites than within our network. As I said earlier, our incineration drum count, our deferred inventory of incineration drums went up. So it'll take us some time to work that down as we go through fourth quarter and into 2024, thus building a new plant. But we did, there is a backlog that continues to exist, probably grew a little at we will work through with them.

And we also want to make sure, Noah, that we meet Q4 expectations. I would say that there's probably a little bit of services baked into that number. You come to the conclusion you just flip-flop it, and why do you change the number? The answer is we want to start a new streak.

Appreciate that. And then, Mike, you had put out some good data points around the improving labor situation. I want to ask Is that going on industry-wide? Are industry-wide labor constraints at all easing? Is there sort of a freeing up of capacity to serve? Because certainly that has been a boon to pricing in the space. And I just want to make sure that as we think about the setup for industrial services and field services in particular into next year, that those sort of favorable constraints to your pricing and market share aren't abating?

Yeah, no, I'd love to say it's all us. It's all us. We did it ourselves. But I think that trending-wise, people are definitely coming down. But people are still a scarce asset. Make no mistake, we're replacing kind of temporary labor and things like that, which has helped our margins in industrial services. And so I think that voluntary turnover coming down, we're really proud of that. We've made a lot of investments in that. I think the industry is coming down a little bit, but make no mistake, we're using our people as an offset for temporary labor, and that's being able to drive margin improvement. Do you want to add anything to that?

Yeah, I definitely think, Noah, across the board, we're ahead of our peers in reducing our level of turnover, strengthening our employee base, the quality of our employees, how we've been hiring, how we've been attracting employees, retaining them. The team has just done a nice job across the business in reducing turnover. There are so many initiatives that we've been deploying across our employee base to reduce those. And I think we're ahead. Our efforts are ahead.

That's good. And I guess just to close the circle, that should give you runway for continued margin expansion in those lines of business, right? I mean, whatever the macro, you know, does right now, you know, it's going to affect that. But even if it's sort of a low growth, you know, industrial production environment, you've got some internal levers here that are going to continue to carry over.

Yeah, I'd cite an example of that. In some of our field services businesses, we had some subcontracting that we were doing to help us with some projects. We really had a concerted effort to eliminate that subcontracting, reduce it with our own employees, and that comes with margin improvement and better service to our customers. And better safety and a lot of other things, too.

All right. Thanks very much.

Thank you. Thanks, Noah.

Our final question is a is from Michael Hoffman with Stifel. Please proceed with your question.

Hey, thanks for the follow-up. Tetra Tech got an $800 million award to do some PFAS work. Is there a, and that's all engineering related, so is there a possibility you've got a role in that? And then on the PFAS issue, we need the drinking water final rule in December, but we still need the circular ruling in February as well. to get those two things behind us before we really break the dam open here on the PFAS side.

Fair to say, Michael, first commenting on the TetraTrack. There was multiple awards that went out, and to really change out the AFFF to another non-PFAS-related material. We certainly, our team was well ahead of that announcement, aligning ourselves with those awardees to be able to... work with them directly to provide solutions for the proper disposal of that AFFF. So nice opportunity for us to continue to prove out. And also on the CERC, well, yeah, we need that to really happen for us, as mentioned earlier, get that definition completed here, hopefully with what's going on in Washington and some of the turbulence that doesn't get delayed again. But we really need those standards out there in the marketplace.

Okay. And then, Mike Battles, on the blending, when you say 25 million gallons, that's taking the direct from 8%, which would be something like 12 million, so doubling the blending or the direct number when you say 25.

It's kind of a different answer. When I talk about Group 3, we're going to use some of that in our own production next year, but ultimately we see Group 3 being sold as a base oil to third parties. We talked about that growth to a much higher number. That's That's – the 2024 item is more of a cost save for us. Instead of buying third-party, you know, Group 3 oil to supplement our basal to make blended lubricants, we're going to use our own stuff, which is a cost saver in probably the first half of 2024. And as we ramp that up in the back half, I think there's going to be something to sell.

All right.

Yeah, Michael, just to add on that, when you think about that 25 million gallon number of Group 3 lubricants, that we'll be making and looking to achieve as the goal that Michael articulated, that's selling material that we're currently selling at a Group 2 rate and converting it to a Group 3. So 25 million gallons less as a goal of Group 2 sales, but selling that as a Group 3 product. That's how you should think of that.

Got it. All right. So I conflated two different topics then. What's the possible... Well, how much higher can the percent of direct blending go? If it's 8% today, can it be 20?

This has been a challenge for us for a number of years. We continue to work with some large fleets to drive more blended gallons through the closed-loop model. I hate to say that we're close on some, but we always continue to work through that and drive that type of growth.

Our performance over the last couple of months has been improving. As we've shown in consecutive quarters, our direct blended oil sales has improved quarter over quarter, and the team's really done a nice job of continuing to ramp that up, and the success seems better as we go through each month of the year.

Okay. And then on Kimball, you all had given us how to layer in the capital spending, so we did 45% and 22%. Originally, we're going to do 90 this year, so we're 85. But you're pulling forward the opening date, so should we use a 55 for next year?

I think it's closer to 45, Michael.

45, okay. And then the last question on corporate overhead, I mean, is there another way to think about it? Is it somewhere between 4.8% and 5% of revenues is sort of where your corporate overhead is going to land on a sort of recurring basis? Yeah. Okay.

Yeah. Our goal would be below 5. Our goal would be below 5, and we're trying to work to that answer.

Okay, great. Thanks for taking the extra questions. Thank you.

We've reached the end of the question and answer session. Mr. Gerstenberg, I would now like to turn the floor back over to you for closing comments.

Thanks, all of you, for joining us today. Management will be participating in several YR events this quarter, starting with the Barrett Industrial Conference next week in Chicago, and we very much look forward to seeing some of you at those events.

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.