Clean Harbors, Inc. (CLH) Q1 2022 Earnings Report, Transcript and Summary

Greetings, and welcome to the Clean Harbors, Inc. First Quarter 2022 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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Michael McDonald, General Counsel for Clean Harbors, Inc. Thank you, sir. You may begin.

Thank you, Christine, 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; President and Chief Operating Officer, Eric Gerstenberg; and SVP of Investor Relations, Jim Buckley. Slides for today's call are posted on our website. 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 4th, 2022. Information on potential facts -- 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. 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 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. With that, I'd like to turn the call over to our CEO, Alan McKim. Alan?

Thanks, Michael. Good morning, everyone, and thank you for joining us. I'd like to start today's call with a topic I'm passionate about and that’s safety. It's our priority here as we focus across the organization, our number one core value. Having had the privilege of being in the seat for more than 40 years, I've always envisioned that by continuing to integrate safety into our culture that we could show continuous improvement and really generate an annual total recordable incident rate of under one with our true goal of being zero incidents. We took a significant step toward that milestone in Q1, concluding the quarter with a TRIR of 0.97. When you look at the waste industry, that level of safety would far exceed anything that our peers are delivering. And I want to express my appreciation to our entire team for looking out for one another, and more importantly, practicing our core safety philosophy of Safety Starts with Me: Live It 365. That mindset is critical in order for us to achieve our goal of a sub-10 TRIR for this year. Turning to our Q1 financial results on slide three. We exceeded our Q1 guidance as both segments performed ahead of expectations. Our results were consistent with the past several quarters, with strong demand across our key lines of business, driving healthy topline growth. And what has historically been a seasonally weakest quarter, margins came in at a solid 15.4%. Outside of the first quarter of 2021, this quarter was our best Q1 margin performance since we purchased Safety Kleen in 2012. Despite supply, and inflationary challenges the team executed well, implementing comprehensive pricing program, supported by costs control initiatives. A couple of metrics that are not on the slide, but I wanted to mention this morning are hiring and turnover. On the hiring side, our recruiting team has done an excellent job, attracting new talent and expanding our workforce, given all the demand for our services. In Q1, we added a significant number of billable employees and expect to extend that hiring momentum in the coming quarters. The opportunity to work for a sustainability-focused company that protects the environment has really been a strong selling point for our recruiting team. Over the past several years, we've made substantial investment in our workforce. These have included offering additional benefits, absorbing healthcare cost increases, increasing compensation, and promoting more employees from within. These investments have resulted in a decreased voluntary turnover. After a brief uptick in the second half of 2021, voluntary turnover has since receded to pre-pandemic 2019 levels. Clean Harbors is a place where many people have built and are continuing to build successful career. With more now than 6,000 of our employees having been with us over 10 years, and of those even 1,500 have been here more than 25 years. That creates a lot of stability across our business and a wealth of institutional knowledge that enables us to train the next generation of leaders here. Turning to our segments starting on slide four. Environmental Service revenue grew 45% in Q1, this increase reflected the HPC acquisition in late 2021 and healthy organic growth, driven by customer demand and increased pricing. While we're still in the early innings of integrating HPC, after just one full quarter we're already beginning to benefit their broad capabilities, particularly as we've moved into the spring turnaround season. The potential to capture synergies and to cross-sell our products and services is quite extensive. During the quarter the pace of activity in our services business quickened considerably, resulting in strong organic growth. Revenue in our legacy industrial service business, if you exclude HPC, grew 24%. Likewise, our base business and field services, not including HPC and the decontamination work in both the periods, increased 28% driven by cross-selling and a steady flow of small to medium Emergency Response jobs. Safety Kleen Environmental also continued a positive momentum, increasing 9% from a year ago. Looking at the ES segment profitability, adjusted EBITDA climbed 31% in Q1 on strong revenue and pricing coupled with costs control initiatives. As expected, segment margin was down year-over-year. This is primarily attributable to a tough comp with Q1 of 2021, which included both the government assistance and a higher level of COVID emergency response work, as well as the fact that we have yet to fully integrate the HPC business. Environmental Service margins should improve as we move through the year, and we would expect the incremental benefits of our pricing, cost reductions, and synergy initiatives -- excuse me, to more than offset the impact of inflation. Within our disposal network, incineration utilization improved to 85% from 80% in Q1 a year ago. Average incineration pricing was up 2% from a year ago based on mix in the quarter, which included some project volumes. So, if you use a market basket approach, our average price was up 7%. A pickup in projects also enabled us to increase the tonnage into our landfills by 14%. The head of our remediation team recently commented that the first half of this year is already the strongest that we've seen in the last five years. Revenue from COVID decontamination work totaled approximately $9 million in Q1. That amount was greater than we anticipated, but down substantially from $28 million in Q1 a year ago. We did not expect much more COVID work here in 2022. Parts washer services were flat with a year ago, while most Safety Kleen brand's core offerings, including containerized waste pickup and VAC services grew at a very strong pace. Moving to slide five. Revenue in our SKSS segment was up 44% through a combination of healthy production levels at our plants and higher base and blended product pricing, backed by overall market demand. Adjusted EBITDA rose by more than $20 million or 64%. We continue to capitalize on market conditions to maximize our re-refining spread through product pricing gains and effective management of our collection costs. Waste oil collection volumes were up again, growing 13% to 53 million gallons and had a PFO lower than Q4 as we had to address some inflationary pressures in that business. Our percentage of blended products and direct volumes came in as expected in the quarter, given the ongoing additive shortages in the market and the profitability that we're generating in our base oil. Turning to slide six. I wanted to touch on a handful of growth initiatives that we have underway. This is an exciting time at Clean Harbors, given all the demand we're seeing, we're really laying out the foundation for our momentum to continue in the years ahead. We have invested in a number of areas, such as expanding our inside sales team, supporting our Safety Kleen Environmental business, we are already seeing a lower customer churn. We are bringing HPC into the fold, we've launched a renewed focus on cross-selling. For example, at a top industrial service customer in the chemical industry we leverage the HPC relationship to secure a greater share of industrial cleaning, specialty services, and waste disposal work at one of their sites. And in Canada, we parleyed HPC's custom tooling technology to convert a customer from performing a turnaround at their plant every three years to really making it more of an annual event and our technology-based solution created a more efficient and expedited process for the customer, overall shortening the shutdown period. From a branding perspective, we've combined the hydrochem PSC name with our legacy Clean Harbors Industrial Services brand to create HPC industrial whose logo you can see on the slide. We will officially be rolling out this new branding in all our contracts and legal entities on July 1st. We're confident that by combining our industrial services organizations under one brand will simplify our service and communications to our industrial service customers. Finally, when we look at the incineration market, capacity is scarce. We are bringing 70,000 tons of additional capacity online in early '25, which is attractive to companies that are weighing whether to shut down their captive incinerators. Turning to slide seven. We continue evaluate opportunities to execute on elements of our capital allocation strategy. Internal investments are being prioritized around expanding throughput in our network, whether in disposal, recycling, or re-refining. Certainly with the Kimball incinerator being our most substantial long-term investment that remains on schedule, we're also adding considerable amount of landfill cell capacity this year. On the M&A front, we continue to look at several bolt-on acquisition candidates that could support growth for one or both of our two operating segments. So, let me conclude by reiterating what our numbers over the past few quarters have proven. That demand has never been stronger. Within our disposal network, we have a healthy backlog of volume and a strong sales pipeline, particularly within waste projects. Underlying trends such as US infrastructure spending, chemical manufacturing and re-shoring of multiple industries are providing encouraging backdrop for our entire environmental segment. Within SKSS, the demand environment for our sustainable products remains very strong, supported by global supply dynamics and the rise in value of our re-refined base oil. We will continually carefully manage the front end of our re-refining spread, achieve greater transportation efficiencies using rail and really target market specific pricing that help counter those rising costs that we see. Across the organization, we are confident that we have pricing and cost reduction strategies in place to offset inflation in 2022. We have a uniformity of our systems and processes that enables us to respond quickly to market conditions. And we have an industry-leading team that is second to none. And we have instilled a culture of accountability and continuous improvement here at Clean Harbors, and that drives our results. So, as I look out over the remainder of '22 and beyond, the market conditions are highly favorable across all our core lines of business and we continue to expect Clean Harbors to deliver strong profitable growth and a robust free cash flow this year. So, with that, let me turn it over to Mike Battles. Mike?

Thank you, Alan, and good morning, everyone. I just want to mention that I have a bit of a cold this morning, so apologize in advance. Let's start with our income statement on slide nine. Revenue increased 45% in the first quarter, driven by the addition of HPC, which we closed on in October, and healthy organic growth in our legacy businesses. Topline growth excluding HPC was 22%. Adjusted EBITDA was 39% higher than a year ago, coming in at $180.3 million. SG&A expense on a percentage basis improved by 220 basis points from a year ago to 12.9%, primarily due to our effective cost controls and reduction efforts, along with leveraging the HPC revenue. We're starting to see some of the early synergy benefits from the acquisition in these numbers. In addition, we benefited from the $3 million break fee related to the proposed Vertex acquisition that we collected in the quarter. For the full year, we now expect SG&A expense as a percentage of revenue to be around 13%, which is a significant improvement over 2021 levels. Depreciation and amortization in Q1 increased to $84.3 million, primarily related to the addition of the HPC assets. For 2022, we continue to anticipate depreciation and amortization in the range of $330 million to $340 million. Income from operations in Q1 increased by 71%, reflecting revenue growth, as well as our efforts to better manage and price our re-refining spreads. Turning to the balance sheet on slide 10. Cash and short-term marketable securities at quarter-end were $415 million. The decline from year-end was expected and reflects typical Q1 seasonality and incentive compensation that was paid out in March for the terrific 2021 financial results. We ended the quarter with debt of just over $2.5 billion. Leverage on a net debt trailing 12-months EBITDA basis was approximately 3 times. Based on the midpoint of our new 2022 EBITDA and free cash flow guidance, we expect to reduce our leverage to approximately 2.2 times at year-end. Our weighted average cost of debt is 4.46% with about 70% of our debt at fixed rates. While the market finally saw its first rate hike in two years in March, we believe we are well positioned even in a rising interest rate environment. Turning to cash flows on slide 11. Cash from operations in Q1 was a negative $38.6 million, which was largely expected. CapEx net of disposals was $69 million, up approximately 70% from a year ago as we added HPC and began to ramp-up the spend on our new Kimball incinerator. That investment in Nebraska accounted for approximately $5 million in Q1. And we still expect that to be in the range of $40 million to -- $40 million to $45 million for the full year. Adjusted free cash flow in Q1 was a negative $107.6 million due to the high CapEx, incentive comp, working capital, and timing of some items including an extra payroll period versus a year ago. For 2022, we continue to expect our net CapEx to be in the range of $310 million to $330 million, reflecting the Kimball spend, the full year impact of HPC, and above average landfill expansion year, and inflationary costs for supplies and vehicles. During Q1, we bought back just over 41,000 shares of stock at a total cost of $3.7 million. We have $152 million remaining under our existing buyback program. Moving to slide 12. Based on our first year -- first quarter results and current market conditions for both our operating segments, we are raising our 2022 adjusted EBITDA guidance to a range of $800 million to $830 million with a midpoint of $815 million. Looking at our guidance from a quarterly perspective, we expect Q2 adjusted EBITDA to be 25% to 30% higher than what we posted in Q2 of 2021 due to HPC, higher profitability in the SKSS segment, and continued strong demand in the ES segment. Here's our revised full-year 2022 adjusted EBITDA guidance translates to our three segments. In Environmental Services, we now expect adjusted EBITDA at the midpoint of our guidance to increase in the mid-20s on a percentage basis from full year 2021. HPC pricing strategies, volume growth in our core lines of business, and multiple cost mitigation initiatives, we believe will more than offset the inflation, the lower decon revenue, and lack of pandemic assistance versus 2021. As a point of reference, this segment received government assistance of $10.2 million in 2021 and assumes none this year. For SKSS, we now anticipate full-year adjusted EBITDA at the midpoint of our guidance to decline mid-single digits from its impressive 2021 results. Given where we are today in the current market conditions, our original assumptions that this segment would produce significantly less adjusted EBITDA than in 2021, no longer seem realistic. Our revised guidance assumes that our re-refining spread starts to narrow in the third quarter and more in the fourth quarter compared with a year ago, with the first half of this year exceeding 2021. But as we sit here in early May, that spread is not narrowed -- that has not started to narrow at all yet. This segment received government assistance of $1.4 million in 2021 and assumes none this year. In our corporate segment, at the midpoint of our guidance, we continue to expect a negative adjusted EBITDA to be up around 5% from 2021, largely due to the addition of the -- of a full year of HPC corporate costs and wage inflation, offsetted by a lower severance and integration expense compared with a year ago along with the Vertex payments. Based on our Q1 free cash flow results and working capital assumptions, we continue to expect 2022 adjusted free cash flow in the range of $250 million to $290 million or a midpoint of $270 million. I'd like to remind everyone that those numbers include the substantial investment in our Kimball facility of $40 million to $45 million. Let me conclude by echoing Alan's comments on the current demand environment for our company, which we expect will support strong profitable growth throughout the remainder of the year. On our Q4 call, I highlighted the fact that we are an amazingly resilient company which is something that I believe is under-appreciated about Clean Harbors. What I've seen as CFO in the past six years is that, we have worked extremely hard to instill consistency across all elements of our organization. That focus has fostered greater predictability in our results, that enables us to invest prudently, make informed strategic decisions around M&A, and generate stronger shareholder returns over both the short-term and long term. I'm personally very bullish about 2022 as both our operating segments had decidedly favorable outlooks. With that, Christine, please open up the call for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of David Manthey with Baird. Please proceed with your question.

Thank you. Good morning, everyone.

Good morning.

First of all, thinking about your key verticals like chemical manufacturing, refining, and so forth, the cyclical components of your business, how are you thinking about those in the coming year here as the US economy and the global economy, if it slows as is generally expected?

Yeah, David. I'll take a shot at this. The -- and Alan can chime in, or Eric can chime in. The market demand continues to be very strong. We have some waste streams given our increase in deferred revenue are out a few months now to try to get an open slot for incineration. Kind of all lines of business are kind of back beyond 2019 levels. So it's hard for me to comment on macro factors, but certainly what we see is very strong demand across all verticals.

Okay, thank you. And second, Alan, thanks for the update on the personnel and labor situation. But if you had to gauge it one to ten, one being really bad ten being completely fine, where do you stand today? And maybe if you could address the financial impact on your cost stack of using outside service providers versus what you'll see when you can ultimately internalize those functions?

Yeah. Thanks, David. So, we're probably at a seven -- seven and eight in regard to staffing levels that we would like to have. So, we are seeing increased costs, both with temporary labor as well as subcontracting. We enjoy some really strong relationships with our subs and certainly that does pressure our margins when we do sub. But I would say we're probably in that range and I think that we saw a nice improvement in the first quarter. Eric, you might want to touch on the gains that we've seen?

Yeah. We've really flattened out our turnover from an increased turnover in 2021, we've rebounded back and we've been able to decrease our turnover, while adding substantial labor billable workforce throughout the Q1 as we finish the year, and we continue to have momentum in Q2. And we're really seeing that across all of our services for our customers. But as Alan mentioned, we continue to have a reliance on subcontracted and temp workers to help us to get us through this demand.

Got it. Thanks, guys.

Yeah.

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

Hi. This is Adam on for Jerry today. Thanks for taking my question. In Industrial and Field Services, could you update us on how much market share you have today in these businesses? And how you're thinking about potential for further consolidation in this space?

Sure, I'll take a shot. I think it's a pretty fragmented industry. As you know, there’s a lot of small regional players in both Industrial and Field Services. And then, there’s certainly some of the more larger national players, both in the US and Canada, quite frankly. And so I don't probably have a number to share with you about what that percentage is, what the market share would be. But we certainly have a leadership position in some of the emergency response capabilities that we offer. We are the go-to company very much when there is a major event or -- and we're probably handling 6,000 to 7,000 emergencies a year. So that's something that we -- I think I would say that we are the market leader in. And certainly on the industrial side with our capacity and capabilities on turnaround work, I think we have by far a more equipment and personnel to do those kinds of services. What do you think, Eric?

Absolutely. And I'd also just add with the larger customers that have multiple sites and industrial as well as in Field Service, larger players that like utilities that cover large geographies, we have a very strong presence with all those customers.

Yeah.

Thanks. That's helpful. And I’m wondering when you expect the mix of blended products in your Safety Kleen segment to begin to normalize? And once that normalizes, how should we be thinking about the impact on margins?

So we -- there is still a hydrogen -- excuse me, an additive problem and a hydrogen problem. So, our volumes were constrained somewhat in the first quarter because of the hydrogen and we think by the middle of May, our hope is that, that will come back and so we'll see much stronger volumes even than the ones that we've seen in April and here in early May. On the Additive front, we're hoping by the end of this year, there has been a significant disruption in additive suppliers and many of our products that have all been approved have got their million-mile approval, so to speak. We just can't shift different additive packages in and out of these products that we have approved. So, we've been very much constrained on that and I would say, probably moving into next year you'll start seeing that become a growth area for us again.

Great. Thanks so much.

Okay.

Our next question comes from the line of Tyler Brown with Raymond James. Please proceed with your question.

Hey, good morning, guys. Can you all hear me?

Yes.

Okay. My headphone is a little bit muted this morning. But hey, Mike, I just want to ask a little bit about the EBITDA guidance. So, I think you'd be at the midpoint of Q1, call it, by $9 million, you guided to Q2 EBITDA looks to be, I don't know, $20 million to $30 million above the street. And I realize this through to certainly not your guidance budget. But my point is, is it feels like the $35 million guide raise at the midpoint is simply on a better Q1 and a better Q2. So, one, am I in the right ballpark there? And two, does it just feel like there is some conservatism in the back half year, maybe you are just kind of wait and see kind of how things play out?

Yes. Tyler, that's accurate, because you just don't know. You don't know and there's a lot of factors that can go a lot of different ways. We're hopeful that our internal forecasts are higher than what we have guided today and that's consistent with what we've been doing over the past few years.

Okay. Okay. That's helpful. Thanks for that. And then, I think, yes, margins were down about 100 basis points year-over-year in Q1. I know there is a ton of noise, you got HPC, government funds, decon, inflation, et cetera. But if you kind of parsed it all out, did the core margins improve year-over-year? And are you still expecting those margins in that segment to be flattish for the full year?

Yeah, Tyler. So a couple of things. So first of all, when you look at Q1 ES margins, which were down 200 basis points on a year-over-year on a reported basis, if you back out the decontamination work and higher margins on that business, the government money in HPC as we can estimate it for an apples-to-apples comparison, our margins are either flat to up a bit. Let's say legacy ES, which is really a testament to the pricing and the cost controls we put in place and something we're really proud of. And if you lookout for the rest of the year, Q2 will still be down versus prior year. Q3 will be flattish, and Q4 I think will be up quite a bit year-over-year. And so, I think when you look at the full year for ES margins for 2022 versus 2021, that'll be flattish to 2021, which is great.

Okay. Okay. Yeah, that's helpful. And then Alan, I think last quarter you talked about increasing the cadence on pricing. And if that requires you to walk away from some business and so be it. But I'm just curious how some of those broader pricing discussions have gone?

Yeah. We have been meeting regularly every week across the business and looking at all of our major pricing and the pricing initiatives and we certainly have walked away from some of our lowest margin business where we weren't able to get the kind of price increase we needed. And in this market with the labor constraints, equipment constraints, and really the lack of capacity that we have available in some of our waste disposal parts of our business, it's the right thing for us to do. And so, I think that's why, to Mike's point, I think we made up a lot of margin from the benefits that we had in first quarter and in a really high-cost inflationary environment that we're operating in, particularly when you look at diesel today at -- on the street being over $6 a gallon. And so, we've been very aggressive and really driving pricing initiatives and we'll continue to do that as inflation continues to work its way through the company.

Right, right. Just my last one. I thought the commentary on safety about the tier ratio of [spot 97] (ph) was interesting, but I just want to make sure I understood the messaging there. Was that -- you highlighting that that was like a best ever safety performance for a quarter or is that just that we're kind of getting to our near-term goal around one? Or just can you talk a little bit more about that and some of the benefits financially, culturally that you see with obviously a really strong safety record?

Yeah, I think if you look at the trends over the last ten years, we've seen a continuous improvement with safety. Not -- last year was an anomaly we thought because of COVID and seeing safety now under one is really -- we've been under one before, but I think what was important coming out of the first quarter when you're coming out of the winter season, it's typically when we don't see a safety number like that. But our overall goal this year is one that's set from the management team and particularly right across the whole organization. And that would be at a phenomenal number for 20,000 people that are working in all sorts of difficult environments and very dangerous work that we do. So, we just wanted to make a point that it's great for our employees to be safe, it's also economically it's very good as well from a workman's comp and insurance standpoint, it is a phenomenal improvement if you look at it over the past 10 years.

Okay. Yeah, that's helpful. And, sorry, just squeeze one quick one. Just on the landfill cell capacity this year, is that a material piece of the CapEx profile? Is that a multi-year spend? Or is that something that falls off in '23, '24?

It's something -- this is Eric. This is -- that will be something that will fall off in '23, '24. We have a higher spend this year, because in multiple sites we have landfill expansion that we're doing based on fill rates.

Okay. All right. Thank you. I'll turn it over. Thanks.

Our next question comes from the line of Jim Ricchiuti with Needham. Please proceed with your question.

Hi, thanks, good morning. I was hoping you might shed a little bit more light on the cost reduction strategies you alluded to. And just particularly in light of the cost pressures, the wage inflation, and obviously the significantly higher transportation costs, which I'm sure you're incurring. I mean, what can you say about what you're doing on the cost side? How meaningful is it in terms of offsetting some of these pressures?

Hey, Jim. This is Mike. I mean, cost containment is everything we do here. It's part of our core. We look at cost of consolidating sites, internalizing maintenance, leveraging our footprint, selling, looking at unprofitable branches, and if they need to be closed, closing them. I mean, we are constantly looking at ways to drive cost out of the business. Low performing individuals and especially in SG&A we look hard at that, we were constantly trying to make sure that we are -- you just can't price your way to glory here, we have to -- it's a mix of cost containment and maybe that's just keeping the costs flat. Because we know inflationary pressures are putting pressure on certain -- on almost all the items -- all line items in our P&L. So really it's just part of our mantra and nothing changes here at Clean Harbors, even in an inflationary environment.

Yeah. I think I'd just add. Every year for 15 years, we have a number of strategic initiatives around driving costs and improvement other business, whether it's new technology investments or it's leveraging, as Mike mentioned, our footprint where 750 locations today. Leveraging rail in our whole rail infrastructure for example. So I think, as Mike mentioned, those initiatives are something that each and every year we do to drive costs out of the business.

Got it. And, yeah, you talked about momentum in the Industrial Services business going into the spring turnaround season. I'm wondering what you're seeing both legacy -- in the legacy business and HPC? I mean you gave us some color on that. And Mike, just quickly, I may have missed it, but did you actually say what HPC contributed in revenue in the quarter? I may have missed it.

Yeah. The revenue in the quarter is about $184 million.

Thank you. And again, just this momentum that you're seeing going into the turnaround season, is that -- are you seeing some benefit from the combined company just cross selling, or is this just healthy conditions in both the legacy business and the HPC business that you brought on?

It's a combination of both. We've certainly been able to leverage our cross-sell with the HPC business, their automation technology into our past legacy Clean Harbors' industrial clients and we've seen a very robust demand going into the second quarter from industrial turnarounds. And so, we're really leveraging the combined workforce and taking that opportunity with us.

Got it. I'll jump back in the queue. Thank you.

Thanks, Jim.

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

Good morning. Thank you for taking the questions. Sorry about your cold, Mike. So, I'd like to dig a little deeper on the fundamentals of business. In ES, when we think of the volumes in the traditional treatment storage disposal side, what was the trend with landfill liquids and incineration, and have you seen a peak?

Yeah, Michael, it's demand continues to be robust and increasing. We came out of March with our strongest volumes ever, and strong liquid demand for incineration, strong direct burn, strong container volumes, and as mentioned earlier by both Michael and Alan, the project services robust demand there into our landfills, so it's strong trends across all verticals as mentioned before as well.

Okay. And then in Industrial and Field Services, I think what I'm hearing is that, HPC aside as an incremental add, the customer demand is returning some sense of normal maintenance cycles. Is that an accurate observation?

Yeah, I think that's an accurate observation, Michael, it is.

And that's a pretty significant statement itself since it's been disrupted for two years?

Yes.

Okay.

I would say, Michael, though that with the price of crude and particularly with diesel that there are going to be some companies in the refining side to be pushing to try to maximize what's going on right now in the marketplace, because there's such a huge shortage of both base oil, and diesel oil, jet fuel. And so there is somewhat of a -- a little bit of conservative fear in regard to whether those plants will actually come down with the market the way it is.

Yeah, well, the refining margins have been this good in probably a decade?

Right.

Michael, just not to put too finer point on it. Industrial Services, within Q1 without HPC is up 28%. And so that is -- that speaks to the recovery that we're seeing kind of across the board in Industrial Services.

Okay. That's a big statement. And then when -- as Safety Kleen was a standalone company, I remember one of the things you always have to watch as you get gasoline over $4. Consumer stop driving that lengthens the parts washer service cycle. We touched $5, in some place it was high as $9, but anyway touched $5. So what are you seeing in the parts washer service cycles as you exited 1Q?

We've looked at that because, obviously, that was a concern. Service cycles haven't really changed. They have been hanging around the same nine weeks for the past four, five years. And if you look at even Q1, nothing has changed in that area.

So that might argue, because we think there is a theory now that maybe the old $4 threshold is now $5 before we start driving, that would seem to support that?

I think in our waste still volume clearly, we're seeing the heavy demand and our volumes are up and we expect to collect well over 230 million gallons this year, so I would say that we are not seeing that kind of reduction at all.

Okay. So then I was going to switch gears to SKSS. I wanted to make sure I heard the question or comment correct? So on the front end, you were actually were able to reduce what you're paying for oil sequentially and I'm assuming that's over and above anything having to do with IMO 2020 at this point. Despite that, crude oil prices are as high as they are. What allowed you to do that?

I think we had a good message to our customers of both those rising costs that we were incurring ourselves to be able to provide the service and because there are a lot of cost increases in transportation and rail, which is an important factor in moving around a lot of the products that we have to move. And quite frankly, I think customers realize that. And so, we have given some of that back in the first quarter and certainly will hear in the second quarter too because of the strength in the market out there. So we're trying to work with our customers both good and bad times. And -- but I do believe that compared to where we would have been 10 years ago to today, I think we're doing a really good job of managing the spread in the business.

Okay. And then on the back end, forget that they're additive and hydrogen issues that are impacting blending and the like, but is the demand for a sustainable gallon narrowing the discount you used to have to take for posted prices?

Certainly is, I think that we are clearly able to get more of a market price today than we ever have. And I think Greg Linnington and the team here have really done a nice job of creating value for our products and we'll be coming out with some new marketing initiatives here in the coming weeks and months here that we think will really expand our visibility to our customers with the whole messaging of being a green product.

And then do you have a feel for how much the poster price would need to correct and there's two influence here, Supply demand is out of balance because of Russia now and we're at a really high oil price. But if oil prices come in and the world absorbs Russia, what happens to the poster prices, what are your thoughts about that?

I think it's far out right now based on what we see with diesel and jet fuel, and with the demand on base oil. Base oil demand is really strong and I think it's back to the issue that we're seeing that cars -- cars are out in the road. I think we have not yet seen a big slowdown and even with diesel at $6 a gallon, up here in the Northeast. So, I think it's going to be a while [indiscernible] Michael.

Okay. And then I get that there is limits on being able to meet the demand. What is the level of demand now on blended if we really are now in the sustainable commitments by various companies?

I think over the next five years if we could get to $25 million on the direct blended that would be a good target for us to go at. We were at about $12.9 million, $13 million right now. So I think that would be a good number to kind of write down.

Okay. And then, Mike, free cash flow doesn't change in 2022 despite the raised guidance. I'm assuming you're at a use of cash as working capital and AR is up in response to the sales and that's the issue?

Yeah, Michael. If you look at March revenue versus February revenue, it's up $90 million and if you look at March revenue versus prior year, it's up $140 million and both those things kind of put pressure on our -- the AR buckets are all current and as such that is a cash flow bad guy. And the other thing that happened is that, we had an extra pay period, just the way the timing of how the quarter ended, we earn extra pay period of about $20 million, $22 million in Q1 versus last year and that also puts some pressure on that. So -- but I feel like given the new guidance and even with that working cap as a whole, we are in a bit. I think we're fine from where we are going to land for the year.

So there is an opportunity that you might be able to collect your money a little bit faster and then that's the upside to the free cash flow?

That's right, that's right. And the EBITDA guide is up and that should translate into faster collections.

Okay. And then Alan, I don't know how to ask this question without sounding gratuitous, but I've always thought you were really good at seeing where the puck was going in this industry. What do you think this place -- this business looks like given US ecology being bought and what's going on, what does it look like in three to five years?

Well, I think, environmental regulations infrastructure, I think are all going to drive more volume. And I think we're in for a good run. I think we've seen a continuation of customers looking at alternatives to running their own waste treatment plants, whether it's a water treatment or an incineration facility. So I really feel like we're going to see more outsourcing. We see more outsourcing on the industrial and tech services side. So our presence on our customer sites is growing and many of our employee show up every day at these large chemical plants and refineries and pharmaceutical locations, I think that is a demand shift that's happening. So I don't know, I think overall unless there is some significant great recession that we have a really good market in front of us right now.

Okay. Thank you very much.

Yeah. Thanks, Mike.

Thanks, Mike.

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

Thanks for taking the questions. Just trying to think about CapEx, good and bad headwind, tailwinds for '23 versus '22. You mentioned that landfill self-constructions have probably come down. I wonder if it's possible to roughly dimension that? And then obviously Kimball stepping up is going to be a little bit of a headwind. So, obviously, you're not going to be giving '23 guidance today. But just wondering how to think about those fairly known pieces?

Yeah. So I would say that on the landfill volume, landfill cell construction is probably $10 million to $15 million of incremental spend in 2022. And on the Kimball construction, that's going to ramp up in 2023. That's going to -- if it's $40 million to $45 million here in 2022 it is going to be in the 80s in 2023, because that's when a bulk of the actual construction of the Kimball is happening. So those are some of the easy puts and takes that we know of, obviously the business will be bigger, will generate more operating cash flow in that area.

Yeah, that makes sense. Thanks. And then just to go back to pricing in incinerator. So obviously utilization began to trend better over the balance of 2021, so you won't necessarily have that mix headwind perhaps or at least not the same extent. How should we think about pricing trajectory using your expectations? And if you can disaggregate price versus mix effects as we go forward from the balance of the year?

Yeah, so I certainly can speak to Q1. So when you look at kind of ES business and you look at it organically, taking out HPC and you can do the math on that, it's about 17% kind of organic growth. And I would break that down between half of that price and half of that volume, mix of pretty small number. The volume is pretty much in Field, Industrial and SK brand business doing -- kind of getting back to 2019 levels. The pricing is across the board, primarily in the tech service business where we're going to have the most disposal usage. I'm not sure of that. And going forward it's kind of hard to say. I see here when you think about pricing in the SKSS business, I mean, obviously, the spread narrowing here today and tough to tell exactly when.

Okay, very helpful. Thank you.

Our next question comes from the line of Zane Karimi with DA Davidson. Please proceed with your question.

Hey, good morning, guys, and thank you for taking my questions. First off on SKSS. They had another strong quarter. But can you elaborate on what change occurred from a waste oil collection standpoint that helped improve the margins year-over-year? And to what degree the effective management, the questions persist or expense from the current level?

So it's certainly the volumes are up in the first quarter over a year ago quarter. And I think our price management in that first quarter was well effective dealing with the inflationary costs that we were experiencing in our labor costs in our transportation cost to service those customers. And certainly in the second quarter here and moving back into the third quarter, we'll be giving some of that back reflective in our guidance, because we are seeing a stronger price per gallon for our base oil. And so I think those are a couple of the factors really impacted that, Mike, I’m not sure if you want to add anything?

Yes, Zane. I think that if you look at Q1 over Q1, the spread didn't really start to widen in our business until Q2 of last year. So, Q1 was still a relatively easy comp versus Q1 of last year. It really was in Q2 where the spread starting to expand and then expanded kind of all year. So that's helping us a bit here when you look at kind of 2022.

Thank you. And on the incinerator front, I believe, Alan, you mentioned earlier that bring down the incremental 70,000 tons of capacity by 2025, when looking at other incinerator peers there'll be getting the way the benefits of staying open versus shutting down, but can you elaborate on the opportunity? For Clean Harbors [indiscernible] a TAM pricing or servicing standpoint?

I would say that over the past several years we've seen captives which at one time were over 100 captive incinerators now down to about 50, maybe even a little bit less than that. And still a number of them that are operating are getting old in age and certainly they need to meet the new MAC standards in some cases if they want to do any capital investment. So we're anticipating a continuation of that trend from 100 down to 50 and then continuing to go down. And that's why the timing of Kimball we think is important to be able to not only take the growth in the market that's happening because of onshoring and just the overall growth in the chemical industry, but also because of reduction in captives.

Okay. Thank you. I'll jump back into the queue there.

Okay. Thanks, Zane.

Our next question comes from the line of Alexander Leach with Berenberg. Please proceed with your question.

Hi guys, thanks for taking my question. You talked a bit about the front end and back end of the re-refining spread, but was there any sort of quantifiable benefit from IMO 2020 limiting outlets now that we should pause the COVID-related noise?

Clearly there is a strong market for collections out there that we -- we're going into this year with the best inventory position we've been in a long time and that's typically you see an inventory build-up in the fall and then you burned down a lot of that, or basically process a lot of that inventory, but we are very strong inventory wise. So we would envision to expand our recycled fuel oil sales program this year because of the excess material that we have, particularly on the industrial side, not necessarily on the used motor oil side. And I think all of that speaks to what's happened with IMO. I think the use of low sulfur oil, moving a lot of the ships to a 0.5% sulfur. I think that's definitely had an impact on the market in a favorable way for us.

Okay, great. And just on driver attrition in the quarter, it seems like the wide industry has really been accelerating pay for drivers in Q1, but as you mentioned in your prepared remarks, monthly turnover has fallen. So why is retention improved despite such a hiring market recently to drive this specifically?

Eric, would you like to comment on that?

Yeah, we certainly implemented many programs across all of our drivers to do a better job of retaining them. Our equipment certainly and pay increases across the board, better pay programs, being able to leverage those better and multiple driver committees that we've had and just making it a better sustainable place to work for drivers across the board.

And I think our net driver headcount is up quite a bit here after the first quarter. So although we continue to have a large number of openings, I think that really is going to support more of our growth and internalization rather than the subcontracting because our subcontracting for transportation continues to be very, very high. But I think that Eric and the team have done a nice job of having a net increase in overall driver headcount going into the second quarter.

Okay, great, thanks.

Yeah.

[Operator Instructions]. Our next question is a follow-up question from Jim Ricchiuti with Needham. Please proceed with your question.

In the past you've talked about some opportunities related to PE SaaS and I'm just curious, do you still see anything on the horizon near term or is there things in that area just seem to be getting pushed a little more to the right?.

We continue to see our overall pipeline continue to grow about DFAST opportunities remediation type, but it's still an overall small part of what we're looking at. Still need regulation change to accelerate that, but we do see a growing pipeline.

And just with respect to -- obviously you're seeing with the revision to EBITDA, you'll be paying down debt. The net leverage is going to look a little better by year-end. You talked about M&A. What -- as you think about bolt-on type acquisitions, I wonder is there an opportunity to do anything more meaningful? And what types of even bolt-ons in both businesses would you be looking at in this environment?

Yeah, I'll take a shot at it. So I think there is of a pretty steady pipeline of opportunities that Brian Weaver who heads up our M&A area here is seeing. And it really encompasses all the different lines of business that we're in. And so we continue to vet out those and try to be mindful of what we're trying to accomplish in regard to adding capacity, disposal capacity in our environmental business, how do we kind of leverage our scale? How do we get more capacity to process our oil because as we continue to grow volumes? We're looking at maybe acquisition but also making internal investments to process more of the oil ourselves and expanding our plants. And so, because we're in so many different lines of business under those two segments, I think that we just see an awful lot of opportunity out there. And so we're trying to be selective and make sure that we kind of achieve the goals that we want within each of those two businesses.

Got it. Thank you.

We have no further questions at this time. Mr. McKim, I would now like to turn the floor back over to you for closing comments.

Thanks, Christina. Thank you for joining us today. The team will be out at the Waste Expo next week and participating in the Stifel Investor Summit on Monday. And so, we'll also have a number of conferences in early June. So we look forward to sharing our story with you at those events. Have a great safe day. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.