Greetings and welcome to the Clean Harbors First Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder this conference is being recorded. I'd now like to turn the conference over to your host Michael McDonald General Counsel for Clean Harbors. Thank you, you may begin.

Thank you, Matt, and good morning everyone. With me on today's call are Chairman, President and Chief Executive Officer Alan S. McKim; EVP and Chief Financial Officer Mike Battles; and SVP of Investor Relations, Jim Buckley. Slides for today's call are posted on our website and we invite you to follow along. Matters we are discussing today that are not historical facts are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Participants are cautioned not to place undue reliance on these statements, which reflect management's opinions only as of today, May 1, 2019. Information on potential factors and risks that could affect our actual results of operations 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 in today's call other than through filings made concerning this reporting period. In addition today's discussion will include references to non-GAAP measures. Clean Harbors believes that such information provides an additional measurement and consistent historical comparison of its performance. Reconciliations of non-GAAP measures to the most directly comparable GAAP measures are available in today's news release on our website and the appendix of today's presentation. And now I'd like to turn the call over to our CEO Alan McKim. Alan?

Well, thanks Michael. Good morning everyone and thank you for joining us. Starting on Slide 3, we opened 2019 with a strong Q1 performance posting a 4% increase in revenue and a 15% increase in EBITDA driven by our Environmental Services segment. The quarter also included a few items both positive and negative that netted out to a benefit of approximately $3 million to $4 million of adjusted EBITDA. In mid March a chemical storage facility that our Deer Park incineration location caught fire, thankfully no one was injured and our location sustained no damage -- no structural damage. But our facility was shutdown for the better part of two weeks due to both the response to the fire as well as air quality concerns. During that time our team did a terrific job of responding to our customers' needs and rerouting all critical waste, while slowly ramping Deer Park back up again. However, we estimate this shutdown and the additional transportation cost, cost us at least $3.5 million in EBITDA in Q1. Another challenge we faced in Q1 was in our Safety-Kleen Oil business. We entered 2019 with crude oil market facing considerably uncertainty after a late year crash in price of - close to $30 a barrel in less than three months. That environment created a lot of pressure on both the pricing and demand for our base oil. Crude pricing began to recover as the quarter progressed but we got off to a really slow start. This was compounded by extreme cold temperatures, followed by the subsequent flooding that hit the Midwest which affected transportation and production at our E Chicago and our Breslau, Ontario plants. We are dealing with frozen waterways and rail lines which limited our ability to barge or rail our product followed later…

Thank you, Alan, and good morning everyone. I'm getting over a bit of a cold here, so I apologize in advance if I sound a bit scratchy this morning. Turning to Slide 9, our income statement, we started off 2019 in a positive direction with profitable growth in Q1. We increased revenue by $31 million in the quarter, while growing adjusted EBITDA by more than $13 million, an incremental flow-through of more than 40%. As Alan mentioned, there were puts and takes in the quarter which netted out to about $3 million to $4 million of adjusted EBITDA. While the net result of these items was a benefit in the quarter, the primary drivers of the baseline growth for pricing initiatives, operating efficiencies and strong results in multiple lines of business. Underscoring that point, the 60 basis point improvement in Q1 gross margins reflect favorable business mix, pricing initiatives and improved asset utilization. Normalizing for the onetimers, gross margin would have been up 160 basis points year-over-year. Q1 SG&A expenses were down both in absolute dollars and in percentage terms. This decrease represents reflects the legal settlement and the reserve receivables we recovered in the quarter. Normalizing for these onetimers, SG&A expenses would've been up in absolute dollars. That said using the midpoint of our guidance range for full year 2019 we still expect SG&A to be down slightly in absolute dollars. Depreciation and amortization in the quarter was up $0.5 million which is entirely due to the effect of the Veolia assets acquired in late February of last year. For 2019 we continue to expect depreciation and amortization in a range of $285 million to $295 million which is below prior year as some existing assets become fully depreciated. Income from operations for the quarter more than doubled to…

Great. Thank you.[Operator Instructions] Our first question here is from Hamzah Mazari from Macquarie Group. Please go ahead.

Hey, Good Morning. I was hoping if you could touch on how we should think about your market share in hazardous waste. Do you look at incinerator capacity or revenue as a percent of the market? Any thoughts on your market share where it stands today relative to history. And then along those lines, do you view sort of the pricing environment in this space as much stronger versus history as well?

Sure. Maybe I'll start by saying this about 750,000 to 800,000 tons of commercial incineration capacity, not including the captives. The captives are somewhat equal to that. They were over, you know, significantly higher than that, maybe five, six years ago. But as we've seen with some of the chemical companies consolidating, we have seen some continuous shutdown of the captives. So they would probably be equal to that number, maybe even a little bit less. And we have a little over 500,000 tons capacity, Hamzah, hopefully. I think from a pricing standpoint I think we - because of the continuous investment in the MACT technology and the expansion of our plant in El Dorado, I think, you know, we've been providing some very good capacity particularly for some of the chemical streams out there that are new that are being produced. And I think customers have recognized the amount of investment, and therefore, the pricing that we've been able to achieve I think has been, you know, pretty well received at this point.

Great. And then just on IMO 2020, I know you said sort of no significant update there. But maybe just if you could help us think about, you know, the mechanics in terms of how it could impact your business. You know, how should we think about, it's clearly potentially a positive, but just in terms of mechanics, what should we be looking at in terms of milestones, data points, anything to gauge, how that will impact your P&L? Thank you.

Sure. From everything that we see there is about 50 billion to 55 billion gallons of bunker oil, high-sulfur 3%-plus sulfur bunker oil that's going to be displaced with low-sulphur oil for the majority of those ships. So a certain percentage of ships that are installing scrubbers and will continue to be able to run the high-sulfur material. But what we see is a shift in demand for low-sulfur marine diesel oil. And obviously there's a lot of varieties of that types of marine diesel. But in general, you know, BGL, we think it is going to move more into that low-sulfur market. It's going to drive demand. It's going to probably impact pricing on that. And it's probably going to either lower the manufacturing of base oil or certainly increase the pricing of base oil. And then subsequently with the bunker oil market going long with the significant decline in demand, the value of the recycled fuel oil that is not currently being rerefined out there should go down, and the outlets should be quite limited for that low-sulfur oil. So we kind of see it at least at a 30,000 foot level, Hamzah, you know the long market on the supply side and a much stronger market on the base oil side for both pricing and a hopefully volumes.

Great. Thank you

Our next question is from Tyler Brown from Raymond James. Please go ahead.

Hey, Mike real quick. The four items that you mentioned on Slide three is it safe to assume that none of those that items were contemplated in the prior guidance?

The polar- the freeze-out we had in Chicago and that was certainly part of the number. Both the polar vortex and the legal settlement were both contemplated which netted to a very small number.

Okay. That's helpful.

They both happened in January.

Okay. That's helpful. And then Alan you mentioned the litigation, the reserve reversal, those were in ES, and I may have missed this, but basically the good guys were specifically in G&A but the bad guys were in cost of ops. Is that right?

That's right, Tyler. I'll take that. so, if you were going to take the one-timers, say that's about $8 million and that would've run through cost of goods sold. And the settlement of the receivables and the settlement of the litigation both ran through SG&A.

Okay. Perfect. And on the incinerator side, so I know the chemical plant fire didn't impact your plan physically or at least I don't think it did. But do you get any sort of business interruption insurance on something like that? Or is that just a risk of doing business?

We're self-insured probably for the first 10 days, but we have presented a claim. And we certainly you know are early into the phase of collection on that claim. And we certainly hope to continue to help our neighbor get back up on their feet and handle some of the disposal as they need. We did provide some support on the cleanup. So it was a tough situation for our neighbor there, but we're pretty much self-insured for that first 10 days.

Okay. That's helpful. And then but big picture you've completed all your turnarounds or at least you've taken a lot of downtime here early on. Would you expect that incinerator utilization to get back into the call it high 80s low 90s for the remainder of the year?

We'd like to think so. Unfortunately, even Deer Park had just come out of a major turnaround before the catastrophic fire. So Deer Park really was down quite a bit in the first quarter. Our deferred revenue increased about $6 million so we have generated more of a bigger backlog now of waste because we were down, so and quite frankly our volumes are strong. So we would anticipate the team to catch up here and deliver real strong performance rest of the year.

Okay. And then maybe my last one maybe going back to IMO and admittedly I'm far from a refining guy. But from what we can tell, it sounds like there's some building concerns that there won't be adequate supply of diesel or stuff that looks like diesel to really fill all that marine demand. And some of those VGOs are probably going to get diverted into the pool of marine fuel which I guess would add VGO demand and presumably increase the price. Is that kind of the crux at least as it relates to VGO? Are you hearing any of that specifically?

That is it. And we have not -- we've obviously been watching the price of diesel, and you know, we have a obviously an opportunity but also a concern because we use a lot of fuel. We are a large carrier and we really need to cover ourselves with our fuel surcharge. And so we're really playing close attention to that pricing, and it has been going up. And not just because crude oil is going up, but we think that the demand and a drawer on that inventory has been also impacted. So, you know, as the months continue here I think we're going to really watch that very, very closely and somewhat be opportunistic with what we are doing with our products.

Okay. And if I follow the logic, the key to all of that is because the preponderance of base lube is basically derived from a hydro-treated VGO. Is that correct? And presumably the refiners would want to maintain a spread on their base oil, so the whole idea is rising VGO would increase base oil prices?

Yes. That's our theory or they would be redirected to manufacturing of low-sulfur diesel.

Okay. Very good. Thank you…

And you say you're not a refinery guy.

Yes. I'm far from it far from it, Mike.

And just so you know Tyler that our guidance as we've adjusted it does not contemplate any IMO 2020 since, so we really don't have any .

Okay. All right. Thanks.

The next question is from Noah Kaye of Oppenheimer. Please go ahead.

Thanks very much for taking the questions. So just parsing, you know, the updated guidance, is it accurate to say that kind of organic growth outlook and other considerations for the rest of the year haven't really changed much that you're mostly just incorporating, you know, kind of the one times and the results of 1Q. Or is there something in the outlook that's changing for you a little bit?

No. That's fair to say. You know, that we've talked to you 60 days ago. Things looked kind of as expected. We did have- we are the beneficiary of some one timers. We thought it was appropriate given that our forecast and where we are in the process to update our guidance by a bit.

Okay, great. And then Mike sorry to make you keep talking with scratchy voice, but the corporate expense that $7 million year-over-year jump in 1Q, I'm not sure I caught in the comments where do we attribute that to? Is this like higher comp stock performance? What drove the growth?

Yes. So what happens was with our forecast coming up. It did result in kind of higher stock compensation Q1 over Q1 accrual this year as well as incentive compensation being up a bit. Also as we said in the prepared remarks, you know 401k is higher, benefits are higher, salary is up a bit. You know, those are kind of market movers and some of our cost-saving initiatives happened a little later in the year.

Got it. And then just to kind of go back to the prior question. I mean you had obviously some volume shortfall because of Deer Park. You still beat on EBITDA, and I think we all see kind of the mix and pricing success story. So is pricing maybe even surprising you a little bit to the upside here? If we continue to see this robust price growth based on kind of strength of industrial activity in coming quarters, I would think that would bias toward perhaps the upside of guidance. Are you expecting any kind of deceleration in price growth?

We put in a initiative last year to really look at pricing and overall margins across the entire portfolio of the business, and we have regularly been meeting weekly on that for a good year now. And I think you're seeing the results of a lot of hard work and teamwork by the sales organization and by the operating folks working together. And so I think you're seeing margin improvements because a lot of that hard work last year and that's going to start flowing through this year. As you remember, we took significant price reductions particularly in Western Canada, but with many of our oil-related customers across our different lines of business and we've really been going back to many of those customers that we provided significant discounts to and really been pushing that pricing back up to a more normalized level.

Great. If I can just sneak one in further. You know, no comments in the prepared remarks on PFAS this quarter; what do you make of the kind of proposed draft regulations from EPA? And how are you thinking about this as a potential driver in ES?

Yes. Sure. So Noah kind of early days obviously excited about that opportunity given kind of where it is and kind of everywhere, but kind of until it gets, you know, hazardous designation, it really is not going to be a huge number for us. We certainly get a lot of asked questions about it. We have a lot of material on it. We certainly are working on it. It's not a huge number in 2019, but we're hopeful that as we look forward to 2020 and beyond that becomes a bigger and bigger part of our business. I don't know Alan you want to add anything?

I would say that our treatment units are pretty much fully utilized. And so we may invest more capital into those treatment units to expand our capabilities, and our sales pipeline for that type of opportunity hasn't been improving. So, you know, we're optimistic at this point of about it, but it's early.

Yes. No the early focus is really on cleaning up drinking water, and that's where as Hazam said our units that are relating to that are all booked up. But its when it becomes a decision point of what to do with it, and are you required to kind of get rid of it and is incineration the answer, which is where we're thinking of maybe going at some point, but we're just not there yet.

Yes. Makes sense. Thank you so much.

One point I want to mention. So we in my prepared remarks I said we bought back shares at $56 a share, we bought it back at $55 a share; you know, I just want to clarify that.

The next question is from David Manthey from Robert W. Baird. Please go ahead.

Hey, Good Morning, everyone. My first question along the lines of the pricing trends that you've been seeing. Trying to understand how sustainable this is. And beyond El Do, have you made another changes to your incineration network to allow you to target these higher value waste streams? Or is it just that there is more higher coordinated waste streams available or are there other factors at play? I'm just trying to understand the sustainability of the favorable price trends you've seen lately in the incineration.

So we have expanded our Deer Park plant, a third kiln down there. We have expanded what we can handle there. We have got permanent approval to handle some other more difficult waste streams to treat than we had because we are at capacity there. So I think the team across the network continues to look at ways of de-bottlenecking and adding more capacity. Our Canadian incinerator had a really strong first quarter, handling some very unique waste streams from some of our US-based customers. And so I would say that the investments that we made last year in our incineration facility particularly in preparation of our feeds is really starting to pay off for us as well.

Okay. And you mentioned the acquisition of small oil collection business. Just maybe if you could talk about potential M&A there. And then just broadly about the competitive landscape, are you seeing changes in the demand for waste oil volumes relative to the competitive environment?

Nothing un-ordinary just yet. Our reservoir rerefinery increased its permanent capacity by 10 million gallons. And so drawing more material from Eastern Canada as well as from the Northeast of has been an initiative of ours, and so the acquisition in upper state New York that we made was very much in line with us to maximize the volume into our Breslau Refinery, and I think we're in pretty good shape now with positioning that plant in this market. I think overall though used motor oil volumes I think much impacted by a lot of the weather-related things that we touched about earlier and we think that's going to get much better in the second and third quarter. So seasonally it'll improve quite a bit for us.

Okay, got it. Thank you very much.

Thanks.

Thanks, Dave.

The next question is from Michael Hoffman from Stifel. Please go ahead.

Hi. Thank you for taking the questions. The 2Q EBITDA, you did have a very good quarter last year but it seems the level of improvements still is muted relative to the strength in price and volume and improving mix. So I'm trying to feel through a little bit of what else might be going on in 2Q ‘19 versus 2018?.

Michael, so if you remember Western Canada had kind of a turnaround season that they've never had before. And so they really did hit it out of the park in multiple fronts and had what they would say themselves as a record quarter. So everything, it's all green lights. We feel good about kind of where we are. But at the same time that and we don't anticipate that type of a turnaround season in Q1 of 2019 in Western Canada. And as such, you know, the goodness is offset by, kind of say, the badness in that part of the world. And if you read the papers in Canada, Canada still continues to struggle, I mean, that's the fact as far as some of the challenges they face with political, with the pipeline and weather and so forth. And also I think that there are some oil prices increases that were in 2018 that would have kind of helped to save the S.K. oil business. You know, we've are still again here '19 but that's just going to keep it flat.

Okay. And when I think about the one-timers just so I am clear, what is the dollar impact to gross margin? What was the dollar impact to SG&A? What was the dollar impact to taxes, just so I understand what the--?

Yes. $8 million to COGS about $11.5 million to SG&A and so the net effect of that is $3 million to $4 million and tax effect of that was 27%.

Okay.

All domestic.

Got it. All domestic. Okay great, that helps. And then the down year-over-year in segment profits and Safety-Kleen I'm assuming that's all Kleen Performance Products given the disruptions and what have you so much of that you think you get back because of the demands there, and we are walking into a tighter supply environment for whatever reasons whether IMO started having some impacts or it's just seasonal outages but supply is tight, demand is good?

Yes. So, Michael, I would say the Q1 challenge to be faced in the S.K. oil business were, you know, kind of weather-related, and you know base oil pricing being very low, we had our barge frozen both at earlier in the year and then flooding prevented us from moving barges down the Mississippi River, and so as such, it really was kind of a slew of challenges that the team faced but they worked their way through. So I feel like those are all in the rearview mirror and with base oil pricing increasing we believe they still could hit their budget. We really do and that comes back and it really and the team seems, you know, we gave them every chance in the world to kind of walk back numbers and they said "No, this is all temporary, we are fine."

Okay, so you should get it back is what I'm hearing?

Yeah, I think we get back…

Okay.

We had our internal budget number and I think that the team is still very confident. We are confident. We feel like the plants, the refineries, the rerefineries continues to run very well, and as Alan said, the permit to the expansions and the acquisition of a company in New York State is going to allow us to kind a drive incremental profitability into that business.

Okay. And then can you frame, I know, you never give this in pennies per gallons or what have you, but can you frame the trend comparatively of what the spread looks like going into 2Q may be coming out of 1Q and 2Q relative to a year ago and also sequentially. Have you seen a widening because you were able to improve CFO and now base oil's rising?

Yes, so I'd say that. I'd say in Q1, you know, obviously the spread was contracted a bit. If you use a 100 as your number, it's down 7% or 6% and I'd say that kind of gets back plus in Q2 given the price increases we saw late March and early April as well as you know our ability to drive kind of CFO, So I think that margin kind of -- that spread kind of comes back to normal levels with Q2 last year being a great spread in quarter. You know, I think that we get all that back and be flat.

Okay. And then you paid your bills really fast in the quarter, any particular reason why you're paying your bills so fast?

So at the end of the year, we did have the opportunity to where -- where at Christmas and where New Year's spell in our pay cycles to hold to, you know, to not have pay runs there, so that was a big win. You know that actually happened again at the end of the year as well as incentive compensation. It was a $36 million number. So that kind of came out which was not unexpected.

Okay. And then lastly for me, in the prepared remarks, I think Alan may have said that parts washer units or services were down; seasonally that happens but it was down more than you would've thought it would've been down? And what do you reading into why that down?

You know, I think it's probably more seasonal and we monitored that weekly and our parts washer services have been growing again, number of machine placements is growing. So now we have sort of the other problem of needing to manufacture faster than we had forecasted. So the team's done a good job of reversing some of the trends that took place over the last six months and got growth in those machines.

Okay, perfect. Thanks.

All right,

Thank you. This concludes the question-and-answer session. I'd like to turn the floor back to management for any closing comments.

Okay. Thanks for joining us today. In the next week, we are participating in multiple investor events including the Macquarie conference in Boston tomorrow, the Stifel Investor Summit in Las Vegas on Monday, and the Oppenheimer conference in New York next Wednesday. So hopefully we'll see many of you at these and other investor events. So thanks for joining us today.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.