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spk09: Greetings, and welcome to the Clean Harbor's fourth quarter and full year 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael McDowell, General Counsel. Thank you, sir. You may begin.
spk05: Thank you, Christine, and good morning, everyone. With me on today's call are our co-chief executive officers, Eric Gerstenberg and Mike Battles, and our EVP and chief financial officer, Eric Dugas, and SVP of Investor Relations, Jim Buckley. Slides for today's call are posted on our Investor Relations website, and we invite you to follow along. Matters we 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 caution not to place undue reliance on these statements, which reflect management's opinions only as of today, February 21, 2024. Information on potential factors and risks that could affect our results is included in our SEC filings. The company undertakes no obligation to revise or publicly release the results of any revision to the statements made today other than through filings made concerning this reporting period. Today's discussion includes references to non-GAAP measures. Clean Harbors believes that such information provides an additional measurement and consistent historical comparison of its performance. Reconciliations of these measures to the most directly comparable 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 Gerstenberg to start. Eric? Thanks, Michael. Good morning, everyone, and thank you for joining us. Our full year and fourth quarter 2023 performance underscores the role of long-term growth engine for Clean Harbors. The strong core we have built through organic initiatives and strategic M&A continues to strengthen our sustainable business model with unique competitive advantages. These advantages include a portfolio difficult to replicate assets, a diverse customer base, high-value services anchored by strong pricing, as well as an outstanding and highly skilled workforce. As our ES results throughout to drive increased efficiencies in areas such as labor, transportation, and logistics, while capturing meaningful acquisition synergies as we advance our Vision 2027 strategy. Before discussing the quarter, I want to take a moment to recognize the valuable contributions and substantial efforts of our entire team in delivering a terrific 2023. To our employees, thank you for everything you do to make Clean Harbor successful. Turning to Q4 performance on slide three, That concluded an exceptional 2023 for this segment, where we increased our annual adjusted EBITDA margin by 160 basis points. All of our ES businesses, technical services, safety, clean, environmental, industrial services, and field services delivered growth in Q4 as demand for our highly trained workforce and unique asset base continues to be strong. The market pricing improvements we saw in October faded as the quarter progressed. Volume sold was a positive metric, an increase significantly from Q4 in 2022, as the team worked hard to continue to grow its sales pipeline, especially with our blended and value-added products, to offset weaker pricing. Mike will provide more detail on SKSS in his remarks. As we often do, I want to highlight our remarkable safety results. the team delivered a Q4 TRIR of 0.51, which resulted in a full year of 2023 rate of 0.63, the best safety performance in our history and far exceeding our annual goal. We can't say enough about the great work the organization continues to do around safety and how meaningful it is to all of our stakeholders. Turning to environmental services on slide four, increased disposal volumes, solid pricing, and the addition of the Thompson Industrial, while EBITDA increased 16%, resulting in margin expansion of 190 basis points from the fourth quarter of 2022. In the quarter, as it has all year, our safety, clean environmental services business led the way with 11% top-line growth. Containerized waste services continued its strong growth trajectory, into our network. Technical services revenue rose 5%, led by pricing and greater year-over-year volumes into our incinerators, landfills, and our TSDS. Q4 incineration utilization was 85% versus 84% a year ago. Average incineration pricing was up 7% in the quarter due to a favorable mix of pricing initiatives, and for the year, incineration pricing was up 9%. For 2023, Utilization was 84% as we conducted substantial repair work, including winterization at our southern plants due to the deep freezes of the past several years. We continue to see a consistent flow of remediation and waste projects in the quarter, which helped drive a 24% increase in Q4 landfill volumes, with the average pricing up 3%. For the year, landfill volumes and average price were both up 10%, In addition, we have seen the pipeline for our unique total PFAS solution continue to grow. We believe we're the only company that can provide a fully integrated end-to-end solution to the market, which includes commercially scalable destruction. Despite no large-scale emergency response events, field service revenue was up 3% in Q4 through better cross-selling and leverage of our organization. Industrial services revenue grew 8% in the addition of Thompson Industrial. As I mentioned a moment ago, overall ES segment EBITDA was up an impressive 16% to Q4, more than double our revenue growth of 7% as we leveraged our facilities, fixed assets, and workforce. For the full year, the ES margin rose 160 basis points to 24.4%. We enhanced our margins, not only from pricing, 2024, we will continue to seek innovative ways to apply AI analytics and greater automation to our business. For example, we are enhancing our proprietary wind system to minimize revenue leakage, eliminate or lower rental costs, apply more sophisticated pricing strategies, and pursue sales opportunities more rapidly. Before turning it over to Mike, Please turn to slide five for an overview of our recently announced HEPCO acquisition. We believe that HEPCO will be a terrific addition to the company and contribute to considerable shareholder value in the coming years. It is a 400 million all cash transaction that we currently expect to close in the first half of this year. HEPCO operates across 40 locations, 17 states, and on an adjusted basis generated about 270 million in revenue It is an attractive deal that we expect will generate approximately $20 million in synergies after its full year of operation, which would equate to a 7.1 times multiple. The acquisition of HEPCO gives us access to additional markets and new customers, as well as enhanced capabilities around railway and transportation responses. We look forward to adding it. that they will benefit from our deep knowledge of field service business, greater scale, and career opportunities. Mike, Eric, and I visited with their team right after we announced the deal, and we see a very strong cultural fit that should lead to a seamless integration. With that, let me turn things over to Mike to discuss SKSS and capital allocation. Mike.
spk14: Thanks, Eric, and good morning. Turning to SKSS on slide six, after a promising start in October, following a September price increase, base oil and blended pricing began to shift the other way and grew more challenging as we moved through the quarter. As a result, SKSS revenue was 7% lower year-over-year in the quarter. The weakness in base oil and blended pricing was partially offset by greater volumes sold of both base and blended oil, as well as a shift to charge-for-oil versus a pay-for-oil average a year ago for our waste oil collection services. SKSS adjusted dividend declined 14% in Q4, entirely related to the more narrow spread compared to last year and the pricing slowdown we experienced over the course of the quarter. Despite the lower year-over-year revenue, we maintained a healthy adjusted dividend margin of 21.7%. To feed our refineries, we collected 53 million gallons of waste oil in the quarter. The team worked diligently to secure gallons at the best possible price while ensuring our plants had the feedstock they needed. As we've highlighted previously, one of our strategies for reducing the volatility of this business is to grow our blended volumes. Not only does blended oil generate more emitter dollars than base oil, it tends to be more stable because we're selling branded products such as motor oil and hydraulic fluid. In Q4, blended volumes increased by more than 60%. We intend to continue to focus on opportunities to sell a larger percentage of branded products going forward. Blended product sales accounted for 23 percent of volume sold in Q4, up from 17 percent a year ago. We recognize that this business has faced challenges in 2023 as the market continues to adjust after an extraordinary 2022 and after a series of price declines and destocking by customers throughout much of 2023. Going forward, our strategy for SKSS will continue to center on affecting those areas within our control including the price we charge for the collection of used motor oil, labor and transportation costs, and re-refining production rates. We will continue to focus on the expansion of our blended products, such as motor oil and hydraulic fluids. In 2024, we intend to increase sales of our blended volumes through both direct and wholesale channels. We are also moving ahead with our promising group-free program we outlined on our last earnings call. We expect to launch this initiative in Q2. Turn to slide seven in our capital allocation strategy. At our investor day last March, we shared our five-year strategy, Vision 2027, which outlined our plan to grow both organically and through acquisition. The foundation of that strategy is to drive margin improvement each year through economies of scale on a highly leverageable network of permanent facilities, unique assets, and trained personnel. This will continue to lead to increasing cash flow generation and value creation for our shareholders. On the M&A front, we evaluated a number of transactions during the quarter, culminating in the HEPCO agreement we announced earlier this month. We continue to see a healthy flow of potential candidates for both offering segments and will remain very active on the M&A front as we execute our Vision 2027. In terms of growth capex, the largest internal investment in our history is our new Kimmel, Nebraska incinerator, which is on track to open commercially later this year. We expect the original design and build to cost $180 to $185 million. Based on our ongoing conversation with customers about Kimball and in response to their future plans, we have elected to add several enhancements to the facility at an aggregate cost of approximately $15 million. These enhancements, due by demand, will include more direct burn bays and additional specialized lines designed to handle certain types of high hazardous materials. These additions will enable that site to handle and process even more high-margin materials and containerized waste. We still anticipate that the new incinerator will commence operations late this year. To that end, we do expect to incur some non-recurring startup costs related to Kimball this year. Since they're one time in nature, we likely will adjust them out of our reported EBITDA. Difficult to estimate the exact amount today, as it partly depends on our official launch date, but we know it will be several million dollars. We will report on that as we get closer to our commercial launch. We are also planning a second sizable capital project this year. It relates to our Baltimore site. We recently purchased a large parcel of land next to our existing plant, and we intend to invest and upgrade that property with an eye toward consolidation of our branch service offerings, adding more recycling capabilities for our network, and creating a production line for containerized manufacturing servicing our entire network. The total cost of the real estate and site upgrades we intend to make will total approximately $20 million. We expect to ramp up activities at that location over the course of this year. I'll let Eric Dugan speak to our debt structure and leverage, but I'd like to conclude by emphasizing that we continue to be bullish on our growth prospects for our ES segment. We entered 2024 with considerable momentum in this segment. We expect the favorable market conditions, whether reshoring, infrastructure spend, or regulatory trends, to continue to support our profitable growth plan for 2024. Our backlog and dialogue with customers gives us confidence about demand this year. Our project pipeline is strong. Our pricing strategies are working. Industrial services is coming off a record year, and we expect that business to continue to grow. and field services will greatly benefit from the addition of HEPCO once that closes. After a challenging 2023, we see SKSS returning to growth and profitability in 2024, with market pricing appearing to have stabilized following a decline toward the end of last year, as well as a host of growth projects I outlined earlier. We have much to be excited about in both environmental services and SKSS. With that, let me turn the call over to our CFO, Eric Dukas. Thank you.
spk15: Thanks, Mike, and good morning, everyone. Turning to the income statement on slide nine, as Eric and Mike outlined, the environmental services segment posted strong Q4 results to finish off a record year. Revenues across our service lines in ES were up from the prior year, and the demand picture for our environmental service offerings remained strong. The profitable growth in our ES segment this quarter more than offset the decline in SKSS. the entire company. Adjusted EBITDA was in line with our expectations at $254.9 million and up more than $30 million from Q4 a year ago. Our adjusted EBITDA margin in the quarter was 19%, up 150 basis points, and driven by improvements in the ES margin that Eric Gersenberg outlined earlier. Gross margin in the quarter was 31%, an increase of 70 basis points from a year ago. For the year, our gross margin was 30.7%. As we move into 2024, we are focused on executing several initiatives to drive greater productivity improvements and operational efficiencies, which we expect will continue to drive margin expansion. SG&A expense as a percentage of revenue was 12.4% in Q4, which is 80 basis points better than the prior year's quarter. For the full year, we also landed at 12.4%, as we remain focused on managing SG&A headcount and offsetting wage and other inflationary pressures. For 2024, we anticipate our SG&A expense as a percentage of revenue to be at a similar or slightly lower level. Depreciation and amortization in Q4 came in at 98.3 million. For the full year, our depreciation and amortization was 365.8 million, up from 2022 which reflects the Thompson acquisition and incremental amortization resulting from increased landfill volumes in 2023. For 2024, we expect depreciation and amortization in the range of $300 to $390 million. Income from operations in Q4 was $147.3 million, up 16% from the prior year. For the full year, income Net income for the quarter was $98.3 million, resulting in earnings per share of $1.81. For full year 2023, our EPS was $6.95 per share. Turning to the balance sheet highlights on slide 10, cash and short-term marketable securities at quarter end were $551 million, up more than $130 million from September. Our balance sheet remains in great shape. We ended 2023 with total debt of EBITDA ratio of 1.9 times and having no significant debt amounts coming due until 2027. Our overall weighted average pre-tax cost of debt at year-end was 5.3%. In December, we successfully completed an amendment to our term loan that lowered our borrowing rate by 25 basis points and representing annualized interest rate savings of nearly $2.5 million. In connection with the HEPCO transaction, deal financing. Clean Harbors will continue to responsibly manage our leveraged position and overall capital structure with an eye toward creating the highest overall return for shareholders over the long term and maintaining flexibility to ensure that we can respond when acquisition opportunities arise. Turning to cash flows on slide 11, cash provided from operations in Q4 was $278.9 million. including Kimball, that accounted for $25.4 million for our Q4 of CapEx. In the quarter, adjusted free cash flow was a record at $173 million. For the full year 2023, net CapEx totaled $412.7 million, in line with our expectations. The Kimball incinerator accounted for $82.6 million of the full year's spend. For the year, adjusted free cash flow $321.9 million, up 11% from 2023. If you add back the Kimball spend, excuse me, up 11% from 2022, if you add back the Kimball spend to that total, we would have exceeded $400 million of adjusted free cash flow. For 2024, we expect our net cap X to be in the range of $390 to $420 million. constructions, including the plan enhancements and approximately $20 million for the expansion of the Baltimore facility, which Mike discussed earlier. During Q4, we bought back approximately 211,000 shares of stock at a total cost of $33.2 million, or an average price of $157 a share. For the full year, In December, our board authorized a $500 million expansion of our repurchase plan. We currently have $554 million of authorized and available repurchases under this program. Moving to slide 12, based on our Q4 and 2023 results, along with current market conditions for both of our operating segments, we expect 2024 adjusted EBITDA in the range of $1.05 billion $1.11 billion, with a midpoint of $1.08 billion. This guidance assumes no contribution from HEPA Co. Once we conclude the regulatory process and close on this transaction, we will update our guidance accordingly. Looking at our annual guidance from a quarterly perspective, we are expecting Q1 adjusted EBITDA growth of 2-3%, with our ES segment performance offsetting current market conditions in SKSS and higher corporate costs. Similar to 2023, some severe weather in January this year impacted our disposal networks, some branch locations, and customers. Despite these challenges, we still expect to deliver a strong quarter of profitable growth in the ES segments in Q1. For full year 2024, adjusted EBITDA guidance will translate to our reporting segments as follows. Environmental services, from full year 2023. Demand for all of our service businesses remains consistently strong. In addition, demand for our disposal and recycling facilities continues to enable us to execute on our pricing strategies, capture more volumes, and drive a more favorable mix into our network. For SKSS, we expect full year 2024 adjusted EBITDA at the midpoint of our guide to increase 6% to 8% from 2023. With the challenging year we had in 2023 and the continued uncertainty around global commodity markets, we are assuming some pricing pressures continue in our forecasting of this segment. Given some of the promising initiatives we have underway, such as our Group 3 project and increasing blended sales, we expect to hear substantial progress in this segment and toward greater long-term stability. In our corporate segment, at the midpoint of our guide, we expect negative adjusted EBITDA to be up 3% to 5% this year from 2023. This reflects a full year of Thompson industrial costs and rising expenses in areas such as insurance and wages and benefits, partly offset by our wide range of cost savings initiatives. For adjusted free cash flow, our expectations for 2024 is for a range of $340,000 to $400 million, or a midpoint of $370 million. As mentioned earlier around CapEx plans, we have some internal growth investments we are planning this year, starting with the approximately $65 million to complete the Kimball construction, as well as the $20 million for the Baltimore expansion. If you add back the Kimball and Baltimore spend, the midpoint of our adjusted free cash flow guidance would be more than $450 million, or over $40 In conclusion, Q4 was a great finish to a record year in our ES segment. Trends coming into 2024 in this segment remain favorable. We continue to see substantial demand across our network, not just within our incinerators, but our TSDFs, landfills, and recycling operations as well. We ended the year with steady volumes and a healthy backlog. Our positive facilities outlook is further supported by an encouraging level of interest across all of our services businesses. Within SKSS, the market appears to be stabilizing as we approach the summer driving season. Overall, we expect to generate profitable growth in both operating segments in 2024 and continue to execute against our Vision 2027 goals. With that, operator, please open the call for questions.
spk09: I'm sorry, gentlemen, my mouse was stuck. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your lines in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Noah Kay with Oppenheimer. Please proceed with your question.
spk03: All right, good morning. Thanks for taking the questions. Looking at 1Q24 specifically, I would love to understand a little bit better the segment expectations. I know historically the company doesn't guide, but given the comments around weather and, of course, the swing that we saw in SKSS this past quarter, I would just love to understand a little bit more and put any finer point on what your expectations are for each of those segments.
spk15: Eric Dugas here. I'll take that one. As we just communicated, we see Q1 2% to 3% greater than last year. When you break that down by segment, obviously the momentum we're seeing in the environmental services segment, we continue to expect that in 2024. As I mentioned in my prepared comments, we did still have some weather challenges in the quarter as we did last year, but I With SKSS, we entered 2023 last year still on the strong tailwinds of 2022. So Q1, as we look at SKSS for Q1 of 2024, down below last year, but should pick up as we move throughout the year.
spk03: Yeah, I'm leery of doing math on the call, but yeah, that gets me to a pretty steep drop in SKSS year over year, as you're suggesting. And so the thought is that as we get into the balance of the year on SKSS, maybe you can talk through the Group 3 initiative, the blended bonds, and kind of what the self-help looks like this year for SKSS. As I recall, you also had some production issues in the third quarter, and lapping those should support as well. But maybe just help us understand some of the drivers to get to that 6% to 8% EBITDA growth.
spk15: on some of the prepared comments you shared. But, yeah, no, obviously a little bit of a steep decline in Q1, as I mentioned. As the year rolls out, as we said, you know, the Group 3 project does come in kind of in the summertime frame. When you kind of look at the cadence for the full year, you know, we kind of see Q2 and the SKSS business, you know, getting towards that flattish point on a year-over-year basis. And then as we move into Q3, you know, Q3 last year in SKSS is really where we saw that big drop And so as we feel as we move into Q3, assuming prices remain where they are today, we should have a good year-over-year comp there. The last point I'd make before I let Mike add on is just from a blended sales perspective. Great momentum kind of in Q4 from a blended sales perspective. We'll continue to drive those initiatives in 2024, and I think that'll really help as we move into the summer driving season and latter half of that season. Mike, anything to add?
spk14: Yeah, yeah. Good morning, Noah. So one thing I'd say on this is that, you know, what was a surprise to us in Q4 and really kind of all year, and we put this in the guide, is a bit of a, you know, kind of a discount, spot discount to Motiva posted, Group 2 posted pricing. And that discount's always, you know, it's always there, but it was seen very, very wide in Q4. And so the growth rates as we go into 2021 the growth rate, we're not assuming that kind of recovers anytime soon. And so when you look at kind of Q1 year over year, you know, it is, as Eric said, you know, a high teens, low 20 type of decline. And so that kind of puts us a little behind the curve as far as getting to some growth for the year. We still want to grow, as I said in my remarks, you know, mid to high single digits for the year, but that Q1 is still going to be a drag. And so You know, we see it picking up recently, and that's great. But, you know, we're just going to start with a bit of some headwinds going into the year. And on the group three, you know, that's been great. The pilot's been running. We're setting the plants up to run. That's a $3 million to $4 million winner in 2024. That's going to be great over some time horizon. But, you know, 2024, it's pretty modest. The plants are running well. They have recovered quite a bit. But, you know, January was still tough on those plans as they were for the incinerators, as Eric Gerstenberg said in his remarks.
spk03: Great. If I could sneak in one more question about, you know, the 80% of the business that's, you know, growing high single digits, entering one queue. You mentioned PFAS.
spk14: 87%? Just over on the same page. Okay.
spk03: Thank you for the precision. The commentary in the call mentioned PFAS, the total PFAS solution, and I think it was even in the release as well. Can you maybe just mention for us what the PFAS-related revenues were in 2023 and what you're thinking 2024 could be and how contingent that is on EPA action?
spk05: Yeah, Noah, this is Eric Gerstenberg. I'll take that one. Our overall revenues in 2023 was in the range of $50 to $70 million. And our pipeline, it went out that our pipeline continues to grow across our business with opportunities from customers, trying to leverage everything that we can offer. And as we've said in the past, offering our total PFAS solutions is really around how we can provide SAM as well as contaminated soils, how we can leverage our remediation team, how we can do drinking water and industrial water, and then provide really that overall commercially offering disposal through our landfills and our incinerators. So it's really the pipeline has grown probably about 20 to 25 percent And as things, as talk continues out there. So a lot of continued opportunity there for our network.
spk14: We've talked a lot about PFAS. One last thing, though. We've talked a lot about PFAS over the past few years. And obviously people have been waiting for it. And we're actually starting to see it now. And Eric's observation is about trying to provide a full PFAS solution, which is as far as end disposal, which is scalable and ready today. You know, we're really excited about that. And as Eric said, you know, that pipeline is very strong going into 2024. So, you know, more to come on that. I think that there's a lot of good things we've been talking about for a number of years that are starting to materialize, clearly.
spk03: I'm looking forward to that. I'll turn it over.
spk04: Thank you.
spk09: Thanks, Tom. Our next question comes from the line of Tyler Brown with Raymond James. Please proceed with your question.
spk13: Hey, good morning, guys. Hi, Tyler. Good morning. Good morning. Hey, first off, just congratulations on the TRIR numbers. I know those are very important to you and obviously your employees, and I get that a safer workplace is very important for a variety of reasons, but Eric, is there any financial implications of a more consistent, call it safety record? Is there any kind of impact on go-forward accruals at all, or is that not the case?
spk05: Yeah, no, certainly as we continue to lower our TRIR and formed safely across the organization, reducing risk and our insurance costs are evident as well. You know, we focus a lot as well on our transportation compliance and how we reduce incidents across our network. So overall, there is, as time continues to progress and we continue to drive our safety and transportation compliance across the network, there is financial improvement that comes along with that.
spk14: Yeah, Todd, the only thing I'd add to that is Eric's absolutely right, but the challenge is those costs have gone up. So although we've had less incidents and less injuries, the cost per is growing at a pretty healthy clip. And so that's been a cost kind of in our financial statements for the past few years, and it will be in 2024 as well.
spk13: Yeah, we've seen a lot of inflation insurance on the transportation side. We can talk about that at another time. But Eric, just a question on the EBITDA bridge for 24. So can we just talk about some of the puts and takes? It goes a little bit back to Noah's question, too. But I think at the midpoint, you're looking for a $65 to $70 million increase. But won't just simply the Q3 incinerator and refinery issues not recurring be something like $25 million of that $65, plus you've got the Base 3 initiative, I know we had really, really tough weather back in 23. I know there's some here in 24. But just talk about the puts and takes. It feels like maybe something's working against you that I'm not totally seeing, or are you just being conservative?
spk15: Thanks, Tyler. Good questions. You're spot on with some of the things you noted last year. I do think as we lay the guidance out, there is a little bit of conservative baked in. We're seeing very strong demand. We're continuing to see that, but we are recognizing that there's a little uncertainty out there from an overall macroeconomic perspective, and we're trying to be a little bit conservative and recognize that in our guidance. I think when you talk about Q3 in particular and some of the challenges we saw last year from the plant disruptions, first I would say that the plants are up and running well. But we do have in the coming year here, we're going to continue to make some investments, some winterization type projects that we did last year as well and that are paying off for us right now. There's also some other incremental projects, kind of some one in five year type turnarounds that we have planned for next year. And so we do have to kind of build that in and that helps to kind of offset some of the uptick from the things that you mentioned. But You know, when you look at the ES segment next year, we're going to continue, I think, to have strong organic growth. I think that's a big piece of the guidance going forward. That's going to be on the tails of continued strong pricing initiatives and, you know, some of the efficiencies and things on the cost side that we're driving that I mentioned in my comments. You'll have a few more months of Thompson. And really, I think, you know, you will see some improvements from more time in the incinerators and facilities overall. I guess the last thing I mentioned just on the ES side is going back to the volumes. We're continuing to see really good volumes that don't necessarily need to go through our incineration network. So the safety clean branch business, tremendous revenue growth there this year. You'll see it in our financials. But a lot of that waste we can handle outside the incinerators through our TSDFs or other means. So plenty of room for growth there. So those are some of the big areas in ES. SKSS, obviously, if you do the math, a rather modest growth profile next year, 6%, 7%. Really, that's growing based upon increased blended volumes. We do have the Group 3, and then some better running in some of the facilities, especially in the back half of the year. So those are the two segments. And then corporate, really kind of inflationary pressures as the business grows. So hopefully that provides a little more color for you, Tyler.
spk13: Yeah, no, that's very helpful. Lots of pieces there. Just my last one here on the HEPCO deal. Can you just talk a little more about the $20 million of synergies? I guess, did they direct much waste into your technical assets, or is that an opportunity? Again, just kind of any more color on the $20 million, how quickly that comes.
spk05: Sure, Tyler. This is Eric Gerstenberg. I'll help answer that. One of the big opportunities that we see with HEPCO is a national emergency response call center that they leveraged their branches on the East Coast, but also provides us for an opportunity to leverage Clean Harbors branches on the West Coast of the U.S. So that is a large opportunity that we can penetrate our existing field service branches through the customers that they manage emergency responses for. So that's a big opportunity. They're also in areas that we haven't had a lot of growth in, like rail, some of the rail customers that they have and transportation that they have. So large opportunities to grow our businesses there and be able to leverage our people and equipment and their people and equipment and branches that they have that are in locations, geographical locations that we are not. So really a great team there, just an excellent fit. Really excited about a few meetings that we've had with their team and really excited about the complement and synergies that they will have to our network.
spk13: Perfect. Sounds like a really good talk, Ian. Thank you.
spk04: Thanks, Catherine.
spk09: Our next question comes from the line of Toby Sommer with Truist. Please proceed with your question.
spk10: Hey, good morning, guys. This is Jasper Viv on for Toby. Looks like the incinerator and landfill price both accelerated year over year versus the third quarter. Is there anything that drove that beyond mix? And how are you thinking about the ability to hold disposal price in the 24 as, I guess, inflation more broadly seems to be coming down?
spk15: I'll take that one, Jasper. Just in terms of the much stronger utilization, probably a better mix than Q4 drove that year over year for quarter to quarter. I think when you look into 2024, as I mentioned earlier, on the pricing front, given the demand, given the discussion of your question there.
spk10: No, you covered both of them. I just wanted to ask another one on the PAPACO acquisition. It seems like a fairly large asset for the field services space. Could you characterize for us how fragmented is that market today and how you might be thinking about the potential for revenue synergies there with additional consolidation?
spk05: Yeah, Toby, this is Eric. I'll I'll take that one. So tremendous opportunities there with their revenue base, as we said. They did about $270 million of revenue. A lot of it was with customers that we did not have deep penetration with. They have branch locations that we are not. Overall, the field service market is pretty large, over $3 to $4 billion market that we that we have opportunity to grow in.
spk10: Got it. Just to clarify, last one, are some of the weather items that you talked about hitting the OneCube guide for SKSS, or is that more of an environmental services impact? Thanks.
spk05: Yeah, I would say that's more environmental services related. The deep freeze that we had in January did impact some of our collections as well as our plant operations there. As we've talked about before, we did do a substantial investment in 2023 in winterizing one of our incineration trains down in El Dorado, Arkansas. We still have another one to do this year, so that one was impacted along with some of our deer park facilities. So it's largely environmental services.
spk10: Okay, got it. Thanks for taking questions.
spk09: Our next question comes from the line of Jerry Ravitch, Goldman Sachs. Please proceed with your question.
spk01: Yes, Todd. Good morning, everyone.
spk04: Good morning.
spk01: Hi. In my research, I'm wondering if you just expand on the margin outlook for this year and the margin expansion that you're targeting. Can you just talk about what proportion of that is driven by improved contract terms versus under underlying pricing and the other moving pieces if you wouldn't mind fleshing that out please Jerry this is Eric I'll start our margin expansion is really driven by a number of things the obviously we drove pricing to make sure that we're offsetting inflation we also have
spk05: across that network. Really, in long-haul transportation, most of our long-haul transportation is all internalized currently. That's been a big impact to our margin improvements for routing waste and managing it through our network. When you look at the overall improvement in margins year-over-year, we continue to have a longer-term aspirational goal of getting to that management of our facilities, how to leverage our relationships with our customers even better to manage all of their collective waste streams, we think we can get there.
spk01: Got it. And then can I ask you on the safety clean business, you know, obviously we had some softer pricing over the course of the quarter, but you still put up, you know, really attractive margins this year at the top of the cycle. Can you just talk about taking a step back in addition to IMO 2020, just a competitive structure improvement that you've seen in this market that's driving such attractive economics at a point in the cycle where obviously base oil pricing is not terribly attractive?
spk14: Yeah, Gary, this is Mike. You know, I think that the – I'm glad you brought that point up. I think that, you know, a billion-dollar business or a $900 million business that is at, you know, 21% margins is a pretty good business that throws off a fair amount of gas flows, and I think it's very, very creative to our business. So, you know, although we're down a bit from where we thought we were going to be, I still think it's a very attractive, and I think I really want to make sure the team understands that they did an excellent job of managing everything that they could control. There was, as I said earlier, a huge, you know, disconnect between the pricing of Group 2 base oil and the spot market that's out there. So I do think that the team did a nice job of kind of managing what they could manage, get, you know, go hard on charge for oil, drive gallons into our re-refinery, and the re-refinery has produced high-quality basin blended oil. I think if you look at 2024, you know, the blended oil has been a good story, and we continue to drive that. We're up 6%. These are pretty small numbers, from 17% to 24%, but still a meaningful difference as far as our profitability. And I think as you go into 2024, we continue to grow that blended oil business, and I do think that's going to be a good growth driver for us, as well as the Group 3, as we talked about before, as well as, you know, solving some of our production problems that we had in 2023.
spk01: And it sounds like the industry is acting appropriately in terms of charging for collections based on your prior comments. Is that right, Mike?
spk14: Yeah, it's always a battle. You know, it's always a battle to go and fight for that business and try to win that business. But we do think we've been able to drive that type of – drive from a PFO to a CFO is hard to do. I think the team did a good job doing just that and without losing material money.
spk04: Thank you.
spk09: Our next question comes from the line of Jim Rashudi with Needham. Please proceed with your question.
spk06: Thank you. Good morning. Mike, maybe just to follow up on that last point, do you have a target in mind that you'd like to see blended represent of the business looking out through 24th?
spk14: Yeah, I think that's a good question, Jim. I think that we talked a long time ago about switching the business around. It's going to be a grind. I don't think in our guide we have it improving modestly. We don't have it going to 50-50. It's 24% in Q4. We have it growing modestly through the course of the year. I don't know if it's that target in mind. I do think the two things we're trying to do is get more blended oil and get more oil under contract versus spot pricing. And both of those things will help drive the stability of that business going forward because it doesn't move as as fast as baseball does. I don't have a set goal over a time horizon, but certainly growth in that will help stabilize that business and drive more profitability into SKSS.
spk06: Got it. How much conservatism is built in, do you think, on the Group 3? I mean, it sounds like you're assuming some modest contribution in 24. Presumably that starts to scale going into 25.
spk14: Yeah, I think that's a reasonable number. I think, you know, $3 million to $4 million, which I talked about earlier, I don't think that's a crazy answer. I do think it takes, you know, we have to do a lot of routing, a lot of routing software to ensure we're getting the right gallons and making sure we're filling our plants without causing a ton of transportation costs to make the math work. And so I do think that's a reasonable expectation for 2020. But I don't think it's overly conservative or overly aggressive.
spk06: Okay, and just one follow-up just on Hibako. I realize the acquisition hasn't closed yet, but I wonder – When you talk about additional markets that this gets you into, deeper into customers you don't get into as actively as the rest of the business, or is it geographic? And how predictable is this business? If you can give us some color on that. Sure, Jim.
spk05: This is Eric. I'll take that one again. So the... When we look at the overlay of their branch network, as mentioned earlier, they have about 40 different branch locations. And about 25 of those branch locations are in geographies that we currently don't have field service branches. So a nice match there. Additionally, the one key market that they've been into our platform and provide large-scale emergency response field services, as well as what we've already provided, which is the disposal services, so a nice network there. They also have done an excellent job of penetrating small emergency response work within transportation providers nationally, even up in Canada. They've used a our organization grow and work together.
spk14: You know, the thing I'd add to that, Jim, is that you think emergency response is pretty lumpy, but it's actually not lumpy. They do, you know, many, many small-scale emergency responses every day, just like we do, frankly. And so that is a pretty stable business. Obviously, I can't tell when the next bill is going to happen, but I know there's going to be a lot to happen. And so, you know, when we give out the guidance for 2024, we didn't assume, you know, kind of a large-scale you know, a multimillion-dollar type of project. We never do. If those things happen, those are upside to the model historically. And so whether that be the avian flu for us, whether that be the BP oil spill, those are kind of upside to any model. We don't budget or guide assuming those types of large-scale responses. These are just normal one-rate type of work that happen kind of every day that both the clean harvest business and the ethical business do. So although it sounds a little lumpy, it isn't that lumpy. Got it.
spk04: Thanks for that. Thank you. Thank you.
spk09: Our next question comes from the line of David Manthe with Baird. Please proceed with your question.
spk12: Thank you. Good morning, everyone. The first question is a general one on your end market. So looking at the verticals over the past several years, chems and refining are up, manufacturing is down. Maybe you could talk about current business conditions and what your expectations are for 24. And then in that important KEMS vertical, is incrementally lower natural gas better? Like is $1.50 better than $2.50, or is just low in general low enough?
spk05: Yeah, Dave, I'll start, and I'm sure the others will add in. But certainly lower natural gas helps. It helps continue to facilitate more onshoring because the chemical manufacturing, manufacturing in general, can help reduce their costs and it makes it even better for them to continue to onshore. Across all the verticals that we manage, and it's quite extensive as you know, we have not seen any slowdown. Even though we have a little bit of a trepid outlook to the industrial production slowing, The chemical vertical, the refinery business, the manufacturing that we've seen, the onshoring continues, pipeline continues to be growing in every one of our business units supported by all those different verticals. So strength there across the board that we see. The chemical business, as we mentioned in our script, we've added additional capital investment in Kimball. That's really around that chemical industry and how that's been growing. and how it's spurred off additional waste streams. Our relationships with our customers have continued to grow more solid as they want to make sure that for all of their growth that they have reliable disposal capabilities, disposal assets, and secured capacity.
spk04: So that's all working together well with what our plan has been here.
spk12: Okay, not to belabor this point, but I'm wondering in terms of the natural gas, like in the short term, is there some linearity or are you just talking in general? Like, you know, if it's in a range of $1.50 to $3.50, that's low enough to get people to change behaviors on a long-term basis. I'm just wondering with natural gas down here, does that give you a tailwind over the next three to six months or is it not that? Is it more of a secular long-term relationship?
spk05: I think we view it, Dave, more as a long-term.
spk12: Yeah, okay. Okay, and then the second question, I think it was Eric Dugas that noted you've got a couple of once-in-five-year turnarounds coming up, and in light of that and just in light of the coming year, is there any indication you can give us on what your planned downtime schedule might look like? Obviously, subject to change every year, but If we were to think about when some of these chunkier projects are going to happen, when should we think about those?
spk15: Yeah, Dave, I'll start, and then Aaron Gerstenberg will probably add a little color as needed. But, you know, I did mention a couple of projects. Overall, I think year over year, when you look at our downtime right now, we're forecasting a pretty flat downtime pattern. In terms of the large projects that I noted, I think right now we're looking at Q2 is when it's scheduled – Eric, I don't know if you want to add to that.
spk05: Yeah, Dave, we have a pretty extensive project that we have to do down at our Houston incinerator. And that project, it actually is going to be eight years that we're going to be doing it. It's redoing our back-end wastewater treatment system, which supports both the incineration train. So we look to do that. We're going to be starting that project in early Q2. The team has done an awesome job of planning it out, and we have a good plan in place there. And so we'll be executing on that in second quarter and getting that behind us, along with some additional air pollution control and winterization projects.
spk12: Thanks, guys.
spk04: Thank you. Thanks, Dave. Thanks, Dave.
spk09: Our next question comes from the line of Michael Hoffman with Stiefel. Please proceed with your question.
spk07: Good morning, everyone. Thanks for taking the questions. Hi, Michael. Hi, Mike. How are you? Eric, Eric. uh, Jim, you're somewhere there in the background. I know you are, um, the seasonal turnaround business. How do I compare that year over year, that two and a half billion dollars or $2 billion of revenues before HEPA co, you know, sort of a billion four is industrial maintenance services and cleaning and 600 million is field services. How do I think about that billion four? What's that activity look like?
spk05: We actually, uh, ThinkMichael, I look at this year as a stronger industrial turnaround plan up in Canada. A lot of their turnarounds didn't happen in 2023, so we have a really strong pipeline up in Canada. U.S. overall, pretty well flat, although we're seeing some early momentum here as we go into March of in our industrial business.
spk07: Okay. And then when I think about field services, correct me if I'm wrong, and about $100 million is remediation stuff, but the rest of it is this response to lots of little things. How does the HEPCO business look like-to-like? Is that going to be a response to lots of little things? That's sort of the same thing. It's just a lot of small little $5,000, $10,000 type of cleanups, and they happen year in and year out.
spk05: Yeah, Michael, that $600 million is independent of our remediation work that we do. Remediation is above and beyond that $600 million. It is a lot of continuous emergency response, small in scale. We didn't have a large-scale emergency response event, as you know, in 2023. So it's routine services. We support a wealth of utilities throughout the country. Utilities can be – the work there can be driven by weather events And so continued growth there as things get more and more turbulent with weather across the country.
spk14: Yeah, the only thing I'd add to that, Michael, is that, you know, HEPCO, very similar. We met, as Eric mentioned, we met with the team a couple times now, and the business is very similar to kind of our business. They do have, as Eric noted in his prepared remarks, a good focus on rail and transportation and response services. That's an area where we think we can really leverage and drive going forward. But I think that it is a – I think it's very similar as far as the day-to-day, small spill on the side of the road, off we go.
spk07: Okay. Switching gears, SKSS, where are you in recovering the spread? I get if base soil prices move sharp and quick, there's a lag to getting the spread corrected. But where are we in the recovering of the spread where you can adjust the front end so now you've got the spread back in line?
spk14: We're working to that end. I think that we're guiding in Q1, as we got a question earlier about Q1 guide for SKSS, that we're in the middle of doing that kind of as we speak. And I think that gets back to normal as you look at kind of Q2 and the rest of the year. Okay.
spk07: And then what's interest expense supposed to be in 2024?
spk04: $120-ish. Give me one second to find that number exactly, Michael.
spk07: While that's happening, did I do my math correctly on the run here? Midpoint of guidance, SKSS, would be 185. Segment ES would be 1170. And corporate overhead is about $275 million.
spk04: You're definitely in the ballpark of that.
spk14: Okay. The midpoint is 115 to 120 on interest expense there. Yeah. All right.
spk15: Really just kind of the rollover of some higher interest rates.
spk07: Yep. It's leading that higher company. And then, not to belabor this, but shouldn't we think about SKSS more about dollars of profit versus a margin because it's a spread business?
spk14: Totally agree with that. Michael, I think that it's just, you know, we always, you know, that struggled all year, and I think that that harm is still pretty good. That's why we made the observation.
spk07: Okay. I just want to make sure I'm not trying to chase revenues as much as I'm trying to chase the quality of the operating leverage. Well, that's right.
spk04: That's correct.
spk07: All right, great. Thank you.
spk09: Our next question comes from the line of William Griffin with UBS. Please proceed with your question.
spk02: Good morning. I appreciate you squeezing me in here. My first one, sorry if I missed it, but what are you assuming in the guide for 2024 for the new incinerator? And then what do you think that could be at the full run rate, just given the enhancements you've discussed here?
spk15: Yeah, sure. I'll take that one. This is Eric Dugas. So in our guide, as we said, we expect to start the plant up in late Q4. In the guide, there's really minimal kind of EBITDA given the expectations. One thing we did talk about in Mike's prepared comments is the fact that we will have some drag for startup costs and things of that nature here in Q4, really depending upon the timing, or excuse me, in 2024. depending on the timing of hiring folks and the ultimate kind of startup of the plant. So we'll talk about those going forward. Certainly don't expect them to be more than, you know, 10 million, probably 10 million or less when we talk about those things. And like I said, we'll talk about it going forward. As you roll out the new incinerator and you think about long-term, you know, we would expect, and I think we stated this before, you know, the plant will be able to generate roughly $40 million of EBITDA when it's fully turned on based upon today's rate. Again, this year, kind of minimal. Next year, we expect to ramp up, Eric, maybe 25,000 to 30,000 tons, so probably halfway there, and then have the thing be at full capacity kind of in 2025 at that run rate I just mentioned. Tell them 2025, 2026 to be at capacity of 50,000 to 60,000 tons.
spk02: Okay, got it. So that $40 million still holds, just even with the additional investments you discussed?
spk04: Yeah. Yeah.
spk02: Got it.
spk04: If it full approves it, it full approves it.
spk02: On the Group 3 initiative here, how are you thinking about that? Is it potential margin expansion opportunity or – incremental EBITDA? And I know you talked about, I think, three to four million here in 2024, but obviously as that ramps, just curious what you see as the opportunity there. And then how are you seeing competition for the higher quality UMO that you'll need to feed that plant?
spk14: Yeah, William, I'll answer that. You know, group three is, it doesn't take a lot additional effort to collect higher quality UMO. The plant runs as it always does. There's no incremental investment needed. It's really more of a technology and ensuring that we get the right UMO gallons to fill our plant. There is some competition for that. There's always competition for higher quality UMO. I don't think that's going to be a gate to our growth. We do think that Group 3 does provide anywhere from $1 to $2 of incremental profit as we look at this business going out. How this ramps is really kind of up to us in getting, it's kind of a self-help, using a self-side terminology I've heard before, that is trying to get those plants kind of segregated. Because once you start a plant in group three, you really can't start going back and forth. It takes a huge amount of cleanup work to kind of get that plant kind of up and running to run group three. And once you start group three, you really can't stop it. So we want to make sure that our systems and processes work well before we start expanding that. So that's going to take some time. That's going to take some time. But the gallons are there. We certainly have the plants that can do it. We know how to do it. We've done some pilots, as we talked about back in the pre-recall. They've worked well. We've just got to systematize it better because we just can't do it in a pilot forever. So that's going to be 2023's exercise. 2024's exercise, excuse me, is going to be to really systematize it so that we can make sure we're consistently collecting the right gallons to keep the plants running, to keep the plant in New Hampshire and as we go forward other plants to to produce Group 3?
spk05: I think just to add to that, William, just overall this year we look to convert anywhere from 4 to 6 million gallons of UMO into good quality Group 3. Over the long term, we've really identified about 20 to 25 million gallons of our current collections that can be segregated properly, managed properly through the right refinery material and produce at Group 3.
spk02: Great, appreciate all the commentary. Talk to you guys later.
spk04: Thanks, Will. Thanks, Wendy.
spk09: Thank you. Our final question comes from the line of John Mazzoni with Wells Fargo. Please proceed with your question.
spk11: Good morning. I'll save for a really quick one. Just in terms of the kind of AI analytics and technology, could you talk about what we're in and kind of – opposed from just proprietary, say, wind systems or other types of, like, monitoring, is there a longer-term Internet of Things opportunity? And, again, if this is kind of early days, it would be just helpful just to frame kind of what you're looking at and what the kind of evolving landscape could be. Thank you.
spk04: Yeah, John, I'll start.
spk14: This is Mike. You know, I'm glad you asked the question. I think that You know, AI, we've done a lot over the past few years. We've done a fair amount of robotic process automation, whether that be invoices, whether that be billing, whether that be vendor management. You know, and now we're using it around profiling, around programming. I mean, I do see it in and of things coming, but I think we're getting a lot of benefit already today around, you know, RPA and then ultimately into AI. Have we done, you know, generative AI and done all that? I think we're still working on that. But I do think that the organization is in front of the curve, not behind the curve, around our adoption of RPA and AI. And I'm really excited. Given the size of the company and the scale of the company and the need to kind of get there, we have to stay in front of that. And we continue to make substantive investments in IT and in AI to drive that type of growth going forward.
spk11: Great call. Thank you.
spk09: Thank you. Mr. Gerstenberg, I would now like to turn the floor back over to you for closing comments.
spk05: Thanks for joining us today. Management will be participating in several upcoming IR events this quarter, starting with the J.P. Morgan High Yield Conference next week and then the Raymond James Conference the following week. We look forward to seeing some of you at these and some of the upcoming subsequent events after that. Thank you.
spk09: Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
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