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.