Clean Harbors, Inc.

Greetings and welcome to the Clean Harbors Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to turn the floor over to your host, Michael McDonald, General Counsel for Clean Harbors. Sir, the floor is yours.

Thank you, Christina, and good morning, everyone. With me on today's call are our Co-Chief Executive Officers, Eric Gerstenberg and Mike Battles, our EVP and Chief Financial Officer, Eric Dukas, and SVP and Investor Relations, Jim Buckley. Slides for today's call are posted on our Investor Relations website, and we invite you to follow along. As we are discussing today that are not historical facts, are considered forward-looking statements within the Meaning of Private Security and Litigation Reform Act of 1995. Participants are cautioned not to place undue reliance on these statements, which reflect management's opinions, only as of today, October 30th, 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 will include references to non-GAAP measures. Clean Arms believes that such information provides an additional measurement and consistent historical comparison of its performance. Reconciliation of these measures to the most directly comparable GAAP measures are available in today's news release, on our website, and in the appendix of today's presentation. Let me turn the call over to Eric Gerstenberg to start. Eric? Thanks, Michael. Good morning, everyone, and thank you for joining us. As we typically do, we'll begin with safety. Our people work in some of the toughest environments, but we do so in the safest possible way every single day. We began Q3 with an internal awareness push to ensure that our employees continue to prioritize safety. Our total record of incident rate on a -to-day basis now stands at .69, which reflects our position as an industry leader in safety. We are continuing to focus on our comprehensive safety programs to send our 24,000 people home uninjured every day. That, above all else, represents the foundation of our company. Turning to our Q3 performance on slide three, our financial performance reflected solid -over-year growth in both segments, but overall was not quite as strong as we had expected, largely a result of less favorable pricing environment that affected SKSS. The ES segment saw healthy demand for both disposal and recycling services as we again experienced record volumes of containerized waste in the quarter and continued positive pricing momentum. Our field service business showed significant top line growth the second consecutive quarter, energized by our March acquisition of HEPA-Co. In industrial services, the scope and extent of our turnaround this fall was less than we originally anticipated, resulting in a weaker quarter for that part of our business. Within SKSS, revenue and profits were up from a year ago, but included softer than expected Q3 demand and pricing with more meaningful decline in September. Mike will discuss this in more detail and highlight the steps we are taking in this business. As expected, corporate costs were higher in the quarter as a result of acquisitions, insurance costs, and healthcare expense, hardly offset by cost reduction efforts in lower incentive compensation. Turning to slide four, adjusted EBITDA and the ES segment increased by 15% on a 13% increase in revenue, translating to a 40 basis point margin improvement. HEPA-Co accounted for half of the segment's 150 million revenue increase, with the remainder from organic growth driven by higher volume and pricing of our services. Q3 marked the 10th consecutive quarter of year over year improvement in this segment's adjusted EBITDA margin and its 12th consecutive quarter of year over year growth in adjusted EBITDA. Field services grew 68% on the top line, primarily reflecting the HEPA-Co acquisition. Higher network volumes and pricing drove an 8% increase in technical services revenue. Incineration utilization increased to 89% from 86%, underscoring the robust demand and strong backlog in our network. Average pricing in the incinerators rose 6% as we pushed through more volume. Safety claim environmental services has grown steadily in 2024, with revenue in this segment up 8% in Q3. Parts washer placements were up and services reached a quarter of a million mark, with other core branch offerings also performing very well. Turning to slide five, our new state of the art incinerator in Kibble, Nebraska is on track to begin accepting hazardous waste in November as we complete final inspections. I had the pleasure of visiting with our team at the facility last week. Building a 70,000 ton incinerator is a complex project and the team has done an outstanding job, completing the largest construction projects in Clean Harvest history on time. Kibble mirrors the highly successful incinerator we opened in Arkansas in 2017 and will facilitate a smoother flow through our network while addressing the market's need for more outlets for complex waste streams. At an industry level, the recovery of economy post COVID reshoring trends and the closure of captive incinerators such as 3M spotlighted the need for the increased capacity. The commercial launch, Kibble, will help to address the glaring need for capacity in North America as it scales up over the next 12 to 18 months. We are confident that our incinerators and our entire disposal network will benefit from today's favorable market dynamics and future outlook, whether that is additional reshoring, government spending on programs including the infrastructure bill, the CHIPS Act and the Inflation Reduction Act or upcoming regulations in areas like PFAS. Regarding PFAS, customers are seeking permanent solutions and assured destruction of these forever chemicals, whether in concentration form like AFFF firefighting foam or mixed in with contaminated soil, sludges or water. Clean Harvest offers commercially scalable options today that can provide a full solution for this emerging multi-billion dollar marketplace from testing and remediation to filtration and disposal, whether incineration or through landfill sequestration. In November, we will advance our next round of testing to meet the EPA's more stringent emission standards for PFAS incineration. Both the EPA and the DOD have committed to onsite participation at our incinerator during our scheduled testing. We are confident in the outcome of that testing. We believe the data will continue to support our previous testing results that clearly demonstrated that PFAS can be safely eliminated in our incinerators up to six nines of destruction efficiency. We are hopeful that our testing will help shape the regulatory framework expected to be issued next year by government agencies. With that, let me turn things over to Mike. Mike?

Thank you, Eric, and good morning, everyone. Turning to slide six, the SKSS segments on revenues increased 6% and EBITDA increased 32%. However, as Eric mentioned, the typical seasonal momentum we see in the summer months did not translate into improved demand and better base oil pricing in Q3. In particular, we saw softening demand in the market in September. Pricing significantly deteriorated as we closed out the quarter, and that has carried over into Q4. With this market backdrop, we ultimately missed our expectations in this segment, this quarter, by about 11 million. The acquisition of noble oil helped drive waste oil collections up 17%, 59 million gallons. Average collection costs was at a small -for-oil level in the quarter. We are balancing our feedstock with our re-refineries need with collecting oil at the best possible price. Our strategy for SKSS has been to minimize volatility through various initiatives, including selling more blended gallons, producing more Group 3, and capitalizing on our Castro partnership, and opportunities to differentiate our low carbon footprint products. In Q3, our blended volumes were 21% of our total volumes, consequentially from 19% of the total in Group 2. In Q2, our Group 3 program is moving forward, and we have selected our next re-refinery for full-time Group 3 production. As it relates to our multi-year closed-loop partnership, we're excited to support BP Castro in this program. We are confident that their sales and marketing prowess will advance the standing of more sustainable oil in large fleets. We remain optimistic about the potential of this partnership. Turning to capital allocation on slide seven, our strategy for the growth of the business remains driven by ROIC, and we are well positioned to execute it, given our cash balance, low leverage, and strong cash flow expected in Q4. We continue to look for areas to invest in this business directly, with the Kimball Incinerator being the best example of that. But we also see smaller expansion opportunities, like what we're doing in the Baltimore site, which we believe we can replicate at other locations in the coming years. On the M&A front, we are happy with the early returns of the HEPA-COL or NOBLE deals we completed this year. Our pipeline of acquisition candidates is robust, as we continue to evaluate numerous opportunities, both large and small. We are seeking acquisitions that bring permanent facilities or unique assets, drive margin improvement through economies of scale and synergies, and can increase cash flow conversion and ultimately generate the best shareholder returns. We also intend to pursue our buyback plan as we effectively have for the past decade. Entering the final quarter of Q4 was an overall healthy demand environment in North America and a positive outlook for our ES sector. Customers have come to rely on Clean Harbors for their environmental and industrial needs, and opportunities to continue to grow through favorable price dynamics, including reshoring, infrastructure spending, PFAS, and potential capped enclosures. On the service side, we remain enthusiastic about the potential for field service growth through the addition of HEPA-COL and its emergency response capabilities. We expect technical services and SK environmental businesses to continue to steadily grow and feed volumes into our network. With industrial services, we're taking actions in response to a weak fall turnaround season and expect to return to revenue growth in that business in 2025. Within SKSS, we will continue to focus on stabilizing this business, given the current demand environment for base oil and blended products. We're also taking steps to reduce our cost structure, including idling our California re-refinery here in Q4. We also plan to aggressively bring our collection costs down as we manage our re-refining spread in an uncertain pricing environment. Despite some market challenges related to base oil and refining customers, we expect to end 2024 with strong momentum across our network of disposal facilities and service offerings, giving us a positive trajectory for profitable growth in 2025. With that, let me turn it over to our CFL, Eric Dugas.

Thank you, Mike, and good morning, everyone. Turning to the income statement on slide nine, we delivered strong -over-year results this quarter, achieving healthy revenue and adjusted EBITDA growth, along with continued margin expansion. As Eric mentioned, we had some challenges in our industrial services business, but overall, demand trends for our core business lines continue to be strong. Within SKSS, we were disappointed that the promising Q2 we delivered did not carry over into Q3, as demand began to wane in the typical seasonal strength and summer pricing deteriorated, particularly late in the quarter. On the top line, similar to Q2, we achieved a good mix of organic and acquisition-related growth, as we grew total revenues by 12% for more than 160 million -over-year. Adjusted EBITDA of 302 million was up nearly 47 million from a year ago. Our adjusted EBITDA margin in the quarter was 19.7%, up 100 basis points -over-year, as margin improved in both operating segments. The continued margin expansion reflects the leverage in the business, given the higher revenues generated from our disposal network and SK branch. As we again received a record level of drum weight into our facilities, as well as the sizable growth in field services that Eric noted. SG&A expense as percentage of revenue was .6% in Q3, which is 90 basis points better than the year ago period. Combined with our revenue growth, the primary factors behind this improvement on a percentage basis were synergies from acquired businesses and lower incentive compensation. For full year 2024, we continue to anticipate our SG&A expense as a percentage of revenue to be in the mid 12% range. Depreciation and amortization in Q3 came in as expected at 100 million, up from a year ago due to acquisitions. For 2024, we continue to expect depreciation and amortization in the range of 395 to 405 million. Income from operations in Q3 was 192.3 million, up 25% from the prior year. Q3 net income increased 26% versus the prior year to 115.2 million, resulting in an earnings per share of $2.12. In the next few months, turning to slide 10 in the balance sheet, cash and short-term marketable securities at quarter end were 595 million, up 100 million from the end of Q2 and 44 million since the year began. Our receivable has increased by 28 million in Q3 sequentially from Q2 and after growing 186 million in the first half of the year, largely due to acquisitions. We had expected to cut into that balance in Q3 rather than increasing it, but the delayed transition of HEPA-Co onto our billing system added to our receivables balance. The HEPA-Co integration onto our billing platform is now complete. However, the transition and associated billing delays will impact the timing and extent of cash flows this year, 2024. Another item on our balance sheet I wanted to speak to is our buildup in inventories, particularly as it relates to SKSS. Since the start of the year, overall SKSS oil inventories have increased 31 million, with 10 million of the increase occurring in Q3. As demand has softened and volume sold are less than what was expected. Given this inventory growth and expectations looking forward, we made the decision to idle production on our California refinery as Mike referenced. We expect our inventory balance in this business to be reduced in the quarters ahead as we work off the excess levels currently on hand. We ended Q3 with just under 2.79 billion in debt. The increase you see on the slide since the beginning of the year reflects the 500 million in incremental term loan we issued to finance HEPA-Co and Noble acquisitions earlier this year. Our balance sheet remains very healthy. Our net debt to EBITDAO ratio was 2.1 times at quarter end, with no material debt amounts coming due until 2027. We also announced in mid-October that we repriced our term loan, which will result in approximately 2 million in annual interest savings going forward. Our overall interest rate at quarter end was 5.65%. Turning to cash flows on slide 11, net cash from operating activities in Q3 was 239 million, up 9% from prior year. CapEx, net of disposals, was 94.7 million, down from prior year and in line with our expectations. That number includes 20 million in Q3 spend on the new Kimball incinerator to complete its construction for commercial launch. Total -to-date spend now sits at just over 60 million for Kimball. For the quarter, adjusted free cash flow was 144.5 million, which was 30 million ahead of prior year, but fell short of our expectations due to working capital impacts related to the unveiled AR and increased inventory levels in SKFS that I mentioned a moment ago. For 2024, we continue to expect our net CapEx to be in the range of 400 to $430 million. This range includes the spend related to Kimball and 20 million for the purchase and expansion of the Baltimore facility. During Q3, we bought back 85,000 shares of stock at an average price of $236 a share for a total of $20 million, bringing our -to-date total to 30 million. Moving to slide 12, based on our Q3 results and market conditions, we are revising our 2024 adjusted EBITDA guidance to a midpoint of 1.11 billion, which represents a 10% increase from 2023. This guidance assumes approximately 40 million in contributions from HEPA-CO and approximately 5 million from Noble Oil. We now expect our full year 2024 adjusted EBITDA guidance to translate to our segments as follows. In environmental services, we now expect adjusted EBITDA in 2024 at the midpoint of our guidance to increase 13 to 15% from 2023. Most of our core ES businesses will close out a year strong with healthy volume growth. For SKSS, based on the current market conditions around lubricant and base oil demand corresponding pricing, we are now guiding full year 2024 adjusted EBITDA to decrease 12 to 14% from 2023 at the midpoint of our guidance. While we have some promising initiatives underway and are taking the actions that Mike highlighted, we expect a softer demand and pricing pressures we experienced in Q3 to continue into the seasonally weaker fourth quarter. Within corporate, at the midpoint of our guide, we expect negative adjusted EBITDA to be up 12 to 13% compared to 2023. The year over year increase in corporate primarily relates to costs related to the acquisitions and insurance costs. For 2024, we are lowering our adjusted free cash flow expectations for the year based primarily on two factors. The higher inventories we are carrying in our SKSS business and delayed timing of AR cash generation stemming from the integration of HEPAO into our billing system. In both instances, we are confident that these impacts are temporary and just a matter of timing. We estimate the impact of these issues and this year's cash flows to be worth approximately $70 million. And as a result, we are lowering our 2024 free cash flow range to $280 million to $320 million, or a midpoint of $300 million. In closing, the EF segment continues to experience positive market dynamics that drive waste into our network. And we are in the cusp of Kimball coming online. Our SK branch business is performing well, as is our field services business with the addition of HEPAO. While the fall turnaround season is limiting the growth in industrial services to close out this year, we believe we are well positioned in that business as the industry leader. For SKSS, we remain focused on stabilizing that business after another challenging year and having the right long-term strategy in place. Overall, 2024 will be a year of strong, profitable growth, and we are optimistic about our prospects for continued growth into 2025. And with that, Christine, please open the call up for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star keys. One moment please while we poll for questions. Thank you. Our first question comes from a line of Tyler Brown with Raymond James. Please proceed with your question.

Hey, good morning, guys. Hey, John. Let's just talk about Q3, the implied Q4 guide. I mean, both seem weaker, but it feels to me that the culprit here is really SKSS. I mean, it seems that the core ES business is actually tracking almost dead on with your expectations. SKSS is weaker. You have weakness in base oil markets. I mean, is that a basic fair characterization? Is the entire kind of guide cut, if you will, just basically on SKSS?

Yeah, Tyler, I'll start. This is Eric. Absolutely. What you just said is consistent with the way we looked at the quarter. The ES business across the board was very strong. Volumes into our network of containers, the needs from those customers, the SK environmental business continued to really meet our expectations and growth both from a margin and a volume standpoint. Our facilities network really did an awesome job of handling record volumes of containerized waste once again in our quarter. So that core business is really strong. Field services, just another great quarter that they put together, the addition of HEPA-Co working with our legacy field service branches, was just outstanding. And we managed to continue to manage some good projects. So that was great. I guess it was a little challenged as we talked about when you look at the industrial services group for the quarter. Really what happened is the turnarounds, we have the same number of turnarounds that we expected for the quarter and expect for the full second half of the year. However, the scope and size of those turnarounds were less, but that refinery market is challenged. The cracks spread down. They're cutting back and they really only wanted to do the work that they needed to do to continue to run and close out the year. On the SKSS side, as we all talked about in the script, that was really challenged by how base oil declined. And so we took some aggressive actions there on reducing the throughput of our refinery network by closing and reducing the throughput of Newark to make sure that we manage down our inventory, but also correct the pricing environment. And the team has engaged rapidly on changing our PFO, CFO to adjust to that. So we're really confident we're at the low there. The items that we're implementing across the board to manage the cost of that network and go forward, we're all engaged in doing that.

The only thing I would add, Tyler, is that you got it right. From where we were in July, nothing really changed. I mean, as Eric said, some parts of the ES business did better, some parts did a little worse, but the guy did the guy. Who wouldn't have changed it? That was just the answer. It really is isolated to SKSS.

Okay. So I'll ask a bigger picture question about SK. Do you really need to collect 69 million gallons, I guess? Wouldn't it just make sense to push harder to a CFO position, scare some volumes away, because right now you're effectively oversupplying your own needs and probably having to sell those into the RFO market. And then just big picture, though, do you think that the actions you're taking, you'll be kind of trending back towards that 200 million and 25 in SKSS? Is that a good way to think about it, or will it take longer than that?

Yeah, first on the collected gallons, you're dead on, Tyler. The actions that were taken is to aggressively push on our PFO, CFO model, and that will be at the risk of some of those gallons, and we understand that. And obviously by the reduced production through our newer refinery, that helps to readjust the network accordingly. So we're taking that action. As we go forward into 2025, we're still in the early parts of establishing budgets for our network. The 200 million, a little bit aggressive to think that we're going to be back at that number, but we're certainly taking aggressive actions to re-stabilize and grow our EBITDA from 2024 results into 2025.

Yeah, and let's all remember that the pricing decline that we saw happened late in the quarter, and so that's kind of where it is now. I agree with Eric and with your comments, Tyler, that we've got to get after that, but the pricing declines happen kind of late, and it does take time to kind of adjust the pricing, and we talked about that many times, and we're doing that as we speak. It just has to work its way through the system.

Okay, so there's a lot going on in SKSS, but there's a lot to this story. So I know you guys talked a little bit about 2025. I think you used the words positive trajectory into 2025, profitable growth, if I go back to Eric Dugas, I think. But as we start to sketch out 2025, can we talk at a high level, some of the key drivers there? It feels like we've got a decent backdrop in ES. You've got Kimball coming online. You should stabilize SKSS. Maybe turnarounds are up. PFAS is a tailwind. So I threw out some things, but can you guys give us any shape at all around 2025? Just any broad comments would be super helpful. Thank you, guys.

Yeah, Tyler, this is Mike, and I'll start. So obviously, as Eric said, we have to go through a formal kind of front-end budget process. And it was said in a couple of analyst reports kind of prior to the recording, and you read the reports, nothing has changed in the back half of the year that changes our positive view of the business and its growth trajectory. Assuming kind of no change in macro requirements, we expect to deliver -single-digit organic revenue growth in this business and adjusted dividend growth in the mid- to -single-digits, which is very consistent with what we said in our investor day presentations and other comments we've made publicly. So nothing changed there. And when you think about the breakout between kind of ES and SKSS, and Eric's trying to answer the question a minute ago, ES will probably be higher than that, and maybe SKSS, we've got to get that stabilized, and it'll probably be lower than that. And maybe corporate stays at the percentage of revenue flattish to kind of where it is today. And so all those things you mentioned, whether it be PFAS, whether it be the roll-over effects of some M&A, whether it be kind of the catalyst that we've seen in this environment, that's all very real and very consistent with what we've said publicly many times. Nothing has changed there. It really is. We really have to. And you see it in the refining space of all the companies we're announcing now. Oil pricing has been very, very incredible under incredible pressure. And that's putting us under pressure. We're a price-taker in that environment. We have to be faster than that. We will be faster than that. And adjust our input pricing on our UMO gallons to get that profitability up.

Okay, one last one real quick. But shouldn't cash flow in 25 be a really good story? Kimball drops off, Baltimore drops off, working capital gets better on AR and inventory work down?

I couldn't agree more. So you're going to have some natural things happening. You're going to have Kimball spend getting back down to normal levels, right? So that capex is going to go down. We're obviously going to grow the business, which is also very positive. But then the things that Eric Dukas mentioned around some of the billing challenges and unbills and some of the inventory challenges, they'll be a good catalyst whether we get them done in Q4 2024, they roll into 2025. We're going to get those fixed. We're working on it. We meet regularly on working those numbers down. And so that should also be a great catalyst into 2025. So I'm really bullish about cash flows. I mean, it's hard to budget if that's even harder to budget cash flows. We've got to see where we land here in 2024 before we get to that answer. But again, I feel good about it and continue to feel good about our cash flows. And maybe even a little better if there's a rollover of some of these working capital challenges Eric Dukas just mentioned. All

right. Thank you guys so much.

Thanks, Alex.

Thanks,

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

Thanks for taking the questions. I just want to proceed in a similar spirit to Tyler here and start with the fourth quarter. You know, if we think about ES kind of continuing to have a generally positive outlook, it looks like we've got about 40 bids margin expansion here in 3Q. Any reason why margins shouldn't be up year over year for 4Q? I mean, if the mix is generally favorable, will the softness in IS, we'd think you would get some decent operating leverage in 4Q.

We absolutely will, Noah. I mean, we had kind of year to date it was up 100 basis points of margin expansion if you look at kind of ES in total. So 40 is a bit of a misnomer because of the IS challenges that we just talked about. You know, I would say, though, that if you backed out some of the IS challenges that Eric Gerstaberg mentioned a minute ago, you know, the IS margins in Q3 would be up 100 basis points. So I think that's kind of a good story and I think that kind of continues into Q4.

Yeah, just one other point to add to that to know that as we've talked about, we're starting up Tymbal this quarter. So when that comes along, some startup costs, as you see from our deferred inventory, we still have a lot of inventory to work off, but we do have that as we move forward through the fourth quarter.

Yeah, and I think, you know, that flips over to SKSS that, you know, there's just a challenge you've got to work through here over the next quarter plus, and I'd love some comment around the timeframe to kind of work through this inventory. It sounds like the inventory is just going to be a little bit higher priced versus the market. So you should take a hit on margins in 4Q, but just, you know, kind of in your base case plan now, how long does it take to work through the excess inventory and kind of get margins in the segment right-sized?

Yeah, no, this is Eric Duguist. Good question. You know, I think when you look at the inventory in SKSS, as Eric Gerstaberg mentioned and Mike mentioned as well, we did make the decision to close down that California Rear Finery, and so that's going to help us right-size the inventory right there. It's probably going to take into 2025 to get it back down to the levels that we see demand at, but you're right, that is the unit cost that that plan is a bit higher than our overall network. So we'll see a little squeeze here in Q4 as we run that inventory through, but that should improve next year. So a lot of different reasons we did that move, but all should be, we should see benefits into 2025 there.

Okay, great. I'll stop there and yield the floor.

Thanks, Noah. Thanks, Noah.

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

Hey, guys. Good morning. First question in terms of our expectations, can you talk about that 200 million SKSS EBITDA? Where did that come from? You hit that in 21 and 22, but the run rate, you've only hit two quarters since then. And I think you made some comment about looking at your budgets and thinking about it. Is 200 just the wrong number for expectations in that space, even though with the Group 3 and some of the circular things you're doing, it seems like you're making headway there, but I'm just making sure that our expectations are right.

David, you're probably right in your observation. At the end of the year, taking the midpoint of our guide, we're about a 150 range of EBITDA. We're doing a lot of things, as you noticed, with Group 3, with more blended gallons, with the Castro partnership. We've got to go harder on UMO gallons. We have to really have to look at our cost structure as well. I think that's going to take time to get that profitability up. We're doing a lot of good things around trans-cost and other areas, but inflation is a bad guy there. We are a price taker in the marketplace, so that's something we just have to work our way through. I'm assuming in 2025 we get modestly better. That's a fair assumption, but modestly is the word I would underline there.

Okay. Then on the HEPA-Co, you mentioned the adjustment to the free cash flow guidance based on delayed AR collection. I'm assuming that was unplanned, given that it wasn't in your original guidance. Can you just walk us through that?

Sure, Dave. Really, it's an issue of timing. The integration into our billing system kicked off in the month of June. Obviously, there's a learning curve attached to that. What we began to see in the August timeframe, in the July, early August, was a lot of the billing that happened during the integration needed to be corrected. We needed to bring in some resources from other areas of the business to correct those. It's really just a delay in getting the bills out the door. In addition to that, last quarter we talked about some very large ER response jobs in the business that also add some complexity and probably add some timing into that. What I want to emphasize is, so the answer to your question, yes, it was kind of late to see. We didn't see it there in the last week of July. It began to come about in August. What I'm happy to say is, we were able to get a team on it fairly quickly. We're making traction today as we're fully integrated. We've got some experts across other areas of the business helping out the team get caught up. We totally expect to get this situation, the unbilled levels, correct as we move into 2025. But it is going to delay the cash generation associated with it. But at this time, I want to emphasize there's no bad debt risk or anything like that that we see here.

Just finally, a quick one. By my calculations, you still have over $500 million on the share repurchase. Do you have an exact number for us there?

I'm $25.25.

Okay, perfect. Thank you.

Thanks, Ed. Thank you.

Our next question comes to the line of Jerry Revich with Goldman Sachs. Please receive your question.

Hi, good morning. This is Adam Uvis on for Jerry today. Can you just update us on how your internal inflation is tracking and how are you thinking about incinerator and hazardous landfill pricing and what is a more normalized inflation environment?

Hey, it's Eric Duhas. So I'll take the

inflation question and I'll kick it over to Mike and Eric to talk about generally kind of pricing methodologies. But I think on the inflation side, obviously the biggest piece of our cost structure being labor, we're still continuing to see probably 3% to 4% inflationary labor there. A little more stubborn than what we'd like to see, but that's what we're seeing. And then across the rest of the P&L, I think we continue to see inflationary pressures on things like maintenance while maybe there's some other areas where it's softening. So I think that wage inflation is probably a pretty good proxy of the entire P&L, but probably

3% to 4% is a good number to work with and that's what we're kind of anticipating here for the next quarter. I'll turn to you for pricing. Yeah, and then Jerry, just to talk about incineration and landfill. Now we continue to have a very regimented program to drive price improvement across the network. As we just talked about on the incineration side, we were able to have 6% price increase across the board. We're going to continue to grow at those same single to high-digit rates across both landfill, incineration, drum pricing. Our disposal network continues to be robust as we talked about, so we fully expect that pricing to continue to hold.

And then with that in mind, how are you thinking about the early puts and takes on 2025 environmental services margin expansion? You should have continuous improvement in contract terms and pricing, but I think there's also some offsets from large discrete projects this year and M&A. So just putting together the puts and takes, can you help us think about that?

Yeah, you know, our long-term goal continues to be to get that ES business to the 30% range, and that's what we're going to drive towards. We'll continue to see margin expansion throughout 2025. We both have pricing initiatives, volume initiatives, but we also have cost initiatives. Start up a Kimbell and what we're going to be doing there will help us to get more efficient within our network as well. So all those will allow us to continue to expand on the EBITDA margin for our environmental services.

Yeah, there's no reason to think, Adam, that we won't continue to drive kind of margin expansion in that business. We're going to have a little bit of rollover from HEPCO for the three months we didn't own it. We're going to have the new incinerator that Eric spoke of. We're going to have – and we had a fair amount of EBITDA or good growth in EBITDA this year. That's based on good pricing and good leverage of our network, and that's going to continue in 2025. You know, one thing I would say is that when Eric talked about containerized waste being record levels, that is really – that provides a lot of leverage into this business because adding kind of one more drum to a network really is at a very high margin. So that really is – I see that as our secret to success here for the first, you know, first year even through the last couple of years, and that continues into 2024 and into 2025. That leverage and that ability to drive that incremental drum is

really a difference maker.

Great. Thanks so much.

Thanks,

Adam. Our

next question comes

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

Great. Thank you very much, and good morning, everybody. Larry? You follow up. Good morning. On the ES segment, obviously you discussed this a little bit, but just a little more clarification. So EBITDA margin was obviously up a little bit less than it's been the front half of the year. Was that specifically mostly just to the shortfall on the industrial piece? I mean, it does feel like you're making most of that up, but I know you really haven't – you basically just trim guidance by 100 bips with the high end in terms of growth. So, you know, that's sort of my first question.

Yeah, Larry, Eric here. You're right. The IS and kind of the slowdown and, you know, less scope turnarounds, that definitely drove the margins in IS down. As Mike alluded to, I think a few moments ago, you know, if you kind of estimate what the margins would be, if you kind of normalize IS, the rest of the business is close to triple digits or 100 basis points of margin improvement. So certainly IS was the major item there.

Gotcha. And on Kimball, I think you mentioned a little bit of startup costs in Q4. Could you just remind us sort of the ramp? I think you had sort of – not actual guidance, but you had sort of projected a 25 million – 25 to 30 million EBITDA in contribution in 2025. Is that kind of still in the ballpark? And how does it look as you go out to 26? Would you get – you know, would that continue to rise at a nice pace?

Larry, this is Eric Herstenberg. No, to clarify, the number that you just referred to was our expected tonnage throughput of the unit. We plan to manage through that unit about 30,000 tons next year. That's our target and EBITDA contribution there, probably in the 8 to 12 million dollar range.

Got it. So at peak it would be 25 to 30 million. That's a peak number, I guess, right? That's 70,000 capacity, plus or minus.

No, Larry. It would be over – as we continue to start up the incinerator and continue to leverage the capabilities there, over the next three years we will get to that production capacity of 45, 50, 55,000 tons plus.

Got it. Okay. And then on HEPACO, just outside of the integration on the billing platform, it feels like the business itself continues to run at or ahead of expectations. Any sort of change in the trajectory on the integration on the synergy side? I know you had kind of thrown out some numbers when you first made the acquisition. Is there any change there?

Sure, Larry. It's Eric. I'll take that one. The HEPACO acquisition so far has gone great. We're ahead of schedule on synergies, probably quicker to internalize some work, as we've talked about in the last couple of quarters. So the business really is kind of ahead of schedule. We've seen some larger jobs, as we've talked about in Q2, that kind of led into Q3 as well. So we've talked about the two businesses almost being hand in glove, and we continue to see that. They're working well together, and performance has been better. It's the integration of the unbilled that's probably the one sore spot. And as I said a moment ago, we're getting after that, and I totally expect that to be corrected. But other than that, kind of five stars so far.

Got it. And if I could just throw out a couple of housekeeping ones. On the lower corporate, mostly due to just lower incentive comp, I know you lowered that a little bit for the year and your guidance. Is that just the incentive compensation? Yes,

that's correct, Larry.

Got it. And lastly, just cutbacks. Is the Kimbell still about, I think you said 60 million year to date, Eric? Is that still in the 65 to 70 million run rate in Baltimore? Is it around 20? Is that about right? Yes, so

65 at Kimbell this year, and then at 20 for Baltimore.

Great. Thanks very much, guys. Appreciate it.

Thank you, Larry. Thanks, Larry.

Our next question comes from Jim Resheri with Needham. Please proceed with your question.

Thanks. Good morning. So I just want to go back to some of the commentary on the IS portion of the business. So the difficulty there, it's mainly in the refinery area, or are you seeing some other pockets of any kind of softer demand in other market sectors? And I wonder if you could just elaborate on some of the actions that you're taking in this part of the business.

Yeah, Jim, I'll start. So on the IS, it really was around the scope and extent of our refinery vertical that we're servicing. As I mentioned earlier, the number of turnarounds continued to be the same that we expected going into the second half of the year. And we still have turnarounds that obviously we've been working on through the start of Q4. In addition to that, some of those refineries just really held back on what the scope of the turnarounds, the length, the size, things that they originally planned, they held back on to manage their costs. So that's the real area that's been affected. Our strategy within industrial services is really to cross-sell into our other environmental customers and really leverage the chemical vertical that we service, customers such as 3M. That's a great example of a customer that we've gotten embedded with on the traditional T&D side, but we're getting embedded on the industrial side. So we're really focused on being a little bit less dependent on that turnaround season and that refineries and cross-selling across our traditional environmental customers. A lot of work being done there, the team's on it. Some of the specialty services that we've developed apply to those more complex industries such as chemical that we're really trying to diversify that portfolio.

And when you think about the actions we're taking, as Eric said, cross-sale is incredibly important, leveraging our other verticals that we serve with industrial services, but then also getting after pricing. As Eric Duguid mentioned, the labor rates are up kind of 3 to 4 percent. And so we need to kind of make sure that we are staying in front of that with our pricing structure and with our cost structure for industrial services. That certainly is a heavily labor intensive business. And so those types of wage inflation really put a lot of pressure on those margins. So getting after pricing in this business is critically important to our success.

Thank you. And you guys sound fairly positive about the opportunity as it relates to the PFAS situation. What kind of run rate is that business at right now? And is there any way to think about that business from where we sit today looking out to 25?

Yeah, Jim, Eric here. I'll take the first answer on that. As I rubbed, our pipeline across the board, as we talked about continuously, grows anywhere from 15 to 25 percent quarter to quarter. We are continuing to see robust demand. And what's really good to see is that even though there is not yet really solid regulatory environment about PFAS on the disposal side in particular and the levels, we still see an increasing demand. So customers are reacting as if there's already those regulatory parameters in place. And that's why our pipeline is growing. So in the last quarter here in Q3, we've had some nice PFAS opportunities projects into our incinerators, into our landfills, our remedial group on water treatment. It's really been across the board. And we're seeing samples now upfront for PFAS opportunities and getting embedded in that.

So really a good, strong, solid pipeline. And customers are interacting with us as if regulations are in place to manage whatever they're going to do the proper way into the future here. So we feel pretty solid about that.

OK. Thanks a lot.

Thanks, Jim.

Our

next question

comes from Brian Butler with Steeful. Please proceed with your question.

Hey, Brian. Can you hear us?

Mr. Butler, perhaps you have your line on mute.

Sorry. User error. My bad.

Thanks

for taking the question.

Hi, Brian. Hello. First one on SKSS. Was there a much larger discount that you were selling Group 2 versus spot prices? Because when I look at the spot prices, they're down, but not to the level that would warrant the impact that we saw in the third quarter. And I'm just curious if you're selling at a discount and if that's kind of changed over the last couple of quarters.

I would say that the market price versus the published price is completely disconnected. It is the market price, the spot price we are getting paid for that oil is completely disconnected from what you see in kind of published reports. And direction is going the same way, but certainly not at the same level. So that's what we really saw as we got through into September. And we really didn't, we were kind of putting it together as you see, you know, large refineries coming out with their results and how much pressure they're under. And that's putting a lot of pressure on the market place as kind of an oversupply of base oil. And so that's really kind of putting pressure both on our spot customers and our contracted customers are both kind of asking for discounts based on kind of the market prices they're seeing today. So it makes our job and your job much more difficult because it's not a good indicator to kind of point to, but that's what's happening.

Okay. And then when you look at the cast on the Group 3 opportunities, you know, when does that become a material contributor or have an impact? Is that really, you know, 2026 and it's going to take that long kind of ramp up or do we start to see something that we can actually measure sooner than that?

So I would say on the Group 3, we certainly see that benefit already today. We have one plant producing Group 3. Now we're using it internally for our own budget gallons. So that's really been, but that's been a good cost save. There's no way around that. That's been a positive to the business and opening up another one will continue down that path. You know, so I think that that's kind of very real under our control and we're seeing that benefit today. Not as much as we used to be because of pricing on Group 3, just like it is on Group 3 too. But certainly that's been a winner for us here in 2024 and into 2025. On Castrol, I think it's going to take time. As you know, the sales cycle is long on these types of fleets changing over. They have a very strong marketing team. They have a very strong sales team. We meet with them quite often and the Castrol team is very bullish about their ability to sell into this. We have some small wins already, but nothing really to kind of move the needle yet. But that's certainly going to help us as we look into 2025 and 2026. I don't think it's going to be a 2026, 2027 thing. I think we're going to see real positive momentum in 2025, no doubt.

Okay. And then maybe one last one just on PFAS. Do you have a -to-date kind of revenue number on where that is for 2024 and what that looks like, again, I guess, a year ago?

Yeah, Brian, we're trending probably around that -$90 million

run rate this year. So run rate for the full year? Run rate for the full year, that's correct. Yeah, I think we exit

the year at $100 million. I think that's kind of a fair estimate. And as you look into 2025, that's probably a fair estimate. It ran through the course of the year with the progress

we've made kind of quarter over quarter, year over year. Okay, great. Thanks for taking the question. Thanks,

Brian. Our next question comes from the line of Tim Natanners with Wolf Research. Please receive your question.

Yeah, hey, good morning. I just have two lingering questions related to base oil, if I could. So one is if you could please elaborate a little bit on the flip from pay for oil to charge for oil. I know you mentioned it doesn't flip on a dime, but how long does it take to do that? And is there any way to kind of speed up that process in light of changing market conditions? Thanks.

No, we appreciate your question, Tim. We were actually discussing that quite a bit as far as how fast we change. The challenge you have is this. Pricing moves on the base oil pricing immediately. Pricing gets announced and they kind of negotiate. Pricing is there, and that's the price we take. So I think on the charge for oil, pay for oil, use motor oil process, even if we change that that day, it takes six to eight weeks to work its way through the system. I go buy oil from Tim's auto body shop. Well, I got to ship it, I got to process it, and I ultimately got to sell it. So there's a natural lag there, and we're going faster. Lowering inventory helps, and being better, being more thoughtful about transporting oil helps. But we need to be fair. We need to be faster in that decision making and moving UMO pricing, whether it be PFO or CFO, quicker. But there is a natural lag there that's very difficult to get around. Just because oil is in our network as it works its way through and gets re-refined and back into base oil, and ultimately sold, there's a lag there that you can't get around.

Okay, that's helpful. Thanks. And then just the second part is on the California re-refinery. Makes sense to add all that one. I imagine it might be a higher cost facility being in California, but could you talk a little bit more about how long it might be down for? Are there any exit costs or other implications or remediation you need to do there to keep in mind?

No, really no additional costs. We really just titled the refinery from producing the base oil. So no additional costs there. Actually, it's a cost savings right throughout the fourth quarter as we move forward here. In long term, that really depends on market conditions, how they continue to look. But certainly for the next six months to a year, we plan to remain having that refinery idle.

And Jim, just so you know, from an environmental standpoint, we're still using the facility. We still use it as a distribution center. We have a kind of wastewater discharge. Other things we can still do at the site. The site still remains as an active site. It's not going to be re-refining using oil.

Got

it. Okay. Thanks again.

Thank you. As a reminder, if you would like to ask a question, press star one on your telephone keypad. Our next question comes from the line of Koby Solmer with Truist. Please receive with your question.

Thanks. I'll start with the re-refining. Is this an industry-wide overstocking problem? And could you describe what other industry players are doing? Are you alone in idling some capacity? Or are other market participants kind of working in that direction as well?

Yeah, Toby. This is Mike. And I'll start. So I don't know if you saw, but P-56 actually closed the re-refinery as a process of closing a refinery in California as well. So I think that the cost structure, as Tinda mentioned, is actually the highest of our network. So I think that you see that. I'm only reacting to what you see in the newspaper where the large refineries taking kind of all-time lows. I saw B.B. Gashel speaking of a company. It's all-time lows as far as profitability goes in their refining space. So that's actually the market dynamic that we're all facing. No other public company, re-refinery companies. So it's hard for me to speak to that. And I'm sure they're feeling the same pain.

With respect to Kimball and other new capacity coming to the market, what's the overall increase in North American capacity as we look into 2025?

Directionally going into 2025, I'm going to use 2026 based on just the timing of the units coming online. But Kimball, what we've talked about is 70,000 tons of practical capacity. So look at that. And then another unit coming online in Arkansas, probably in the 70,000 to 90,000 ton a year range. So think about it in that context, 140,000 to 160,000.

We're going to be at 12 percent in our capacity when it's fully operational. So that's the total inflow average.

Appreciate that. Last one for me, what does customer churn look like in ES or customer retention? You can take either angle you like. And how would you describe price sensitivity as the company seeks to raise price in exchange for value you provide?

Yeah, Toby, Eric here. So customer churn is very low. The demand for our services has been very high, and we think we've done a great job of actually growing our market share across the board. The receptiveness to pricing, it's sticking, as you see from our financial results, and we expect that to continue. Really robust demand, and I think the team out there, our field has done a great job of grabbing opportunities, closing on them quickly. We've had a great service network that's able to service customers. Really fast and get that waste into our network. And because of that, our ability to service them and our network of our disposal facilities, that allows us to give that great service but continue to command price improvement across

the

board.

Thank you.

Thank

you. Mr. Gerstenberg,

we have no further questions at this time. I would like to turn the floor back over to you for closing comments.

So thanks for joining us today, everyone. We'll be participating in several investor events in the coming week, including the Stifle event in Baltimore and the Barrett event in Chicago. We look forward to seeing some of you there. Please enjoy the rest of the day, and above all, please keep it safe out there.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.