Greetings, and welcome to the Clean Harbors Second Quarter 2023 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael McDonald, General Counsel. Thank you, sir. You may begin.

Thank you, Christine, and good morning, everyone. With me on today's call are our Co-Chief Executive Officers, Eric Gerstenberg; and Mike Battles; and our EVP and Chief Financial Officer, Eric Dugas, and SVP of Investor Relations, Jim Buckley. Slides for today's call are posted on our Investor Relations website, and we invite you to follow along. Matters been 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, August 2, 2023. Information on potential factors and risks that could affect our results is included in our SEC filings. The company undertakes no obligation to revise or publicly release the results of any revision to the statements made today other than through filings made concerning this reporting period. Today's discussion includes references to non-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. Let me turn the call over to Eric Gerstenberg to start, Eric?

Thanks, Michael. Good morning, everyone, and thank you for joining us. Turning to our Q2 financial results on Slide 3. Our second quarter performance underscores the strength of our Environmental Services segment where our adjusted EBITDA margin climbed by 140 basis points from a year ago. This is a highly resilient business that is supported by scarce permitted assets, a strong safety record, technical expertise, a highly trained workforce, close customer relationships and effective capital allocation. Q2 marked our ES segment seventh consecutive quarter of growth and profitability. Its performance partly offset the decline of our Safety-Kleen Sustainable Solutions segment, which experienced some headwinds resulting from the adverse conditions that continue to affect the base oil and lubricant markets. Before I review the segments in more detail, I'd like to highlight our Safety results as Safety is central to everything we do. After a record Q1 performance, we delivered a second quarter TRIR of $0.68 the best Q2 in our history, which keeps us on track to achieve our ambitious annual TRIR goal of 0.70. The record-breaking heat across much of the country posted a unique challenge in Q2 and continues to do so as we move through the third quarter because our team is often required to wear personal protective equipment, both outdoors and in plant, we are focused on monitoring temperature and hydration. To everyone on our team, we appreciate all the proactive steps you take to keep yourself and your colleagues safe. Turning to Environmental Services on Slide 4. Segment revenue increased 7%, the growth of our Services business was underpinned by pricing and volume initiatives. Each of the segments 4 business units posted year-over-year gains with Industrial Services and Safety-Kleen Environmental branch businesses leading the way. Industrial Services revenue grew by 11% on the heels of…

Thanks, Eric, and good morning, everyone. Let me echo Eric's comment about the great work of our team this quarter. We had a number of standout performers in our ES segment that helped us deliver overall results in line with our guidance for the 23rd consecutive quarter. That contingency is something that we personally take pride in. Moving to Slide 6. SKSS had another challenging quarter as the segment fell short of our profitability expectations. While we lowered our expectations on our last call, we do not anticipate the unusual absence of the Q2 seasonal pickup in demand and pricing this year. In fact, after a price decline in early April, posted prices fell again in June, which was the combination of a weak spot pricing environment all quarter long. While crude prices have risen more recently, they have not yet correlated to a rebound in base oil and lubricant pricing. On the top line, SKSS revenue dropped 15% based on weak pricing -- based on the weak pricing climate brought on by global market conditions compared to a year ago when scarcity of supply was customer primary concern in the wake of major market disruptions. In Q2 of last year, posted prices rose by $1 a gallon, whereas this year in Q2 posted prices fell by $0.50, with spot pricing exhibiting even deeper discounts. In 2022, customers were concerned about shortages and allegations. Conversely, this year, buyers have been able to patiently wait on the sidelines, destocking inventories and holding out for lower prices. As a result of these conditions, SKSS adjusted EBITDA decreased 45% with a year-over-year drop in margin as our year term -- as our near-term refining spreads have been compressed. While market conditions have remained unfavorable, the SKSS team has reacted quickly to counter the…

Thank you, Mike, and good morning, everyone. Turning to the income statement on Slide 9. As Eric and Mike outlined, Q2 was a strong quarter for us, with our ES segment again delivering exceptional results exhibiting continued profitable growth and exiting Q2 with significant momentum across many of our service businesses. Total revenues for the quarter increased $42 million with our ES segment growing $81 million to more than offset the lower top line figures for SKSS. Adjusted EBITDA was $287.5 million in line with the guidance we provided in May, but down from the $309.1 million we reported a year ago when we benefited from a much higher base oil pricing due to global supply disruptions. Our adjusted EBITDA margin was 20.6%, in line with our expectations. Gross margin was 32.2% reflecting our ability to offset inflation with appropriate price increases and cost savings while increasing productivity and realizing gains from operational efficiencies. SG&A expense as a percentage of revenue was 12% in Q2, consistent with our expectations. For the full year, we anticipate being in the low 12% range and essentially flat with 2022. The team continues to do a great job of offsetting inflation and wage pressures with cost mitigation strategies. Depreciation and amortization in Q2 increased slightly to $89.7 million again, consistent with our expectations given the addition of Thompson. For the full year 2023, we continue to anticipate depreciation and amortization in the range of $350 million to $360 million. Income from operations in Q2 was $189.8 million, largely driven by our strong performance in Environmental Services. Net income for the quarter was $115.8 million, resulting in a GAAP earnings per share figure of $2.13. Turning to the balance sheet highlights on Slide 10. Cash and short-term marketable securities at quarter end were $326.1 million,…

[Operator Instructions] Our first question comes from the line of Michael Hoffman with Stifel.

So you said all this in the call on your prepared remarks. I just want to make sure we emphasize it, all lines of business, not just technical services and not just incineration, saw growth in ES. And the pricing, is that spread across all of them as well? And or is it concentrated just in disposal?

Yes, Michael, this is Eric. Thank you for the question. Yes, the pricing is across all lines of business. We continue to push price for disposal, transportation, labor across all areas of our businesses and that continues to take effect.

Michael, going back, this is Mike to add on to what Eric said. If you think back a few years, it was incineration scarce. And so we get pricing bugs on pricing in our facilities, whether it be landfill, incineration, TSDS, what have you. What's happened over the past couple of years is that they've been a switch and that getting qualified safe compliant labor is also very tough, getting trucks and equipment also very difficult. And that's allowed us to drive price kind of beyond just incineration, beyond facilities. And you see that this quarter with a terrific results in the industrial side and the field termite that Eric mentioned in his prepared remarks.

And Historically, the turnaround business is a little stronger in the first half than the second half. Is there -- is that pattern holding? Or is it reversed and that's helping give you me that much more confidence about totally asked directionally.

It certainly gives us that confidence. But yes, the first half of the year was more turnaround than traditional. We had very strong turnarounds season for our industrial services. We expect that to continue, and it's really reflective in the numbers of that business.

Okay. And then, of course, everybody's got to ask this SKSS question, I won't be the first one, I'm sure. How do you give the market confidence on what you think the bottom is and when you think about that bottom, can -- is there enough data? I can't find it, to tell you whether there's a correction is done in the finished goods side of the market which is partly influencing this problem. There's just too much finished good out there and the blenders are going. We don't need to buy oil to blend to make finished goods?

Yes, Michael, this is Mike. I'll answer that question. At the end of the day, we feel that the business -- we did everything we could to kind of control the costs -- control costs, drive blended guidance, drive down PFO pricing to CFO pricing, and the plants ran really well. And we're executing on the strategy we talked about back in our Vision 2027 presentations back at the end of March. Was the bottom? Hard to say. Start -- I think that the midpoint of the business it starts with 2 over the short term. And if prices are increasing, it's in the mid to high 2s, if price is decreasing, it's in the high ones and the midpoint of our guide today is in the 190 range, and that's after 3-plus price decreases over the first half of the year. And I'm hopeful that with crude prices coming back a little bit over the past few weeks, we see base oil pricing increasing just as a modeling answer for the purposes of the back half of the year, we're assuming base oil prices remain flat. And so I'm hopeful given the most couple of weeks that I've heard around crude prices coming back, maybe there's a base oil price increase, which would certainly kind of help us kind of get back to the 2 numbers we talked about in [indiscernible].

Okay. And just so you alluded to midpoint SKSS 190, that puts ES at like 1.11 if you're landing at somewhere around 2.55 to 2.60 on corporate overhead. We did all that math.

And really to -- so we can have -- we're happy to answer questions about SKSS all day to your point, Michael, we probably will. But the ES business continues to do incredibly well. As Eric said in his prepared remarks, the incinerators had challenges in April and into May. Again, we still delivered 140 basis points of margin expansion in the ES business. And if you look at the guide and make an estimate for revenue, our margins in the back half of the year for the ES business will be 150 to 200 basis points better than prior year. And as such, we really are very bullish on that business, and excited about the future. And I want to make this point on the call is that we gave our Vision 2027, Eric and I sit in front of the -- sit in front of the investor community has talked about it. I'm more bullish about Vision 237 now than I was 90 days ago. And more importantly, our pipeline has not changed. Our pipeline still is stronger today than it was 90 days ago, which again, I'm really excited about.

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

Yes, just a little bit more math that last year, ES was 75%, right, of EBITDA pre-corporate expense and this year, it's going to be 85% or more. So I think I'll focus on the 85%. Can we start with that PFAS commentary, maybe you can level set for us how much PFAS remediation revenue you've seen year-to-date and what's in the 2023 guidance? And then can you kind of break up the PFAS opportunity into different chunks? Maybe you can talk about potential revenue just with DoD or the government, just different ways for us to wrap our heads around how big this could be for you over time?

Yes. No, this is Eric. I'll take that question. First, I'd say that our pipeline of PFAS opportunities continues to grow. I'm not going to put any exact revenue number on it, but we can tell you confidently that the number of opportunities we're seeing across the board is a large opportunity for us. And we have really total comprehensive solutions that we like to talk about. We're doing sampling. We're doing the analysis for our customers, we're able to provide remediation -- full remediation of sites and transportation and a full suite of disposal capabilities from treatment, treatment of groundwater, treatment of industrial water we can obviously provide landfill solutions with a closed-loop landfill of managing the [indiscernible]. And then finally, obviously, the incineration that we talked about. That's really phenomenal study that came out, great release by the DoD to lift the moratorium. So the opportunity for us continues to be there. And as regulations will continue to come into effect throughout the course of this year and into next year. We're optimistic. The team has seen a lot of opportunities from all of our customers in a number of different areas. And we think our total waste solution is unmatched in the industry, and it really continues to look like a good prospect for us.

I appreciate that. Hopefully, you can put some numbers around it over time, but that sounds a beat. You also made reference, I think -- yes, go ahead.

It's pretty small this year. As Eric said in the prepared remarks, the EPA has to kind of put more kind of guardrails as to how Clean is Clean. But it's a $40 million, $50 million opportunity this year. It's not a needle mover per se.

Appreciate that. And then you made reference to some of the IIJ funding starting to come through. That was, I think, $21 billion, right, of appropriated money for environmental remediation. So just how much of that do you think Clean Harbors potentially captures and kind of over what time frame? I mean, when we see some of the funding announcements already coming out of EPA. But I just want to understand how this impacts kind of the outlook for the year and maybe over a multiyear time frame.

Yes. No, I think that projection of the $20 billion of spending was over the course of 5 years, that a large part of that is go get for us to be able to perform the remediation services and be able to feed volume into our landfills and our incinerators depending on the characteristics. So a good chunk of that $20 billion, $21 billion is go get for us, go get for the industry, and we're well positioned with all of the assets and great infrastructure that we have to be able to participate in a substantial part of that.

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

Eric G. pricing incineration, it was awfully good. And if I'm not mistaken, it was on a really tough comp. So can you just talk about the outlook in terms of price and volume in that market? Because we have heard about some weakness in the Chem markets, the industrial markets aren't exactly the best. So maybe the backlog is smoothing that out, but can you just give us any color there?

Yes. That's right, Tyler. Our price and mix continues to be about 50-50. We have opportunity in the backlog of that generation that we built up throughout the second quarter to bring that into the third quarter and the fourth quarter as our incineration utilization improves. But we're continuing to see -- we're not seeing any slowing of chemical pricing or no [indiscernible] there. We're continue to be on the trend of increasing our pricing, taking advantage of the difficult to handle waste streams feeding a tremendous amount of volume into our incinerators of drums and direct burn streams. And we've also been leveraging our TSDF to handle a lot more volume and prep it for our incinerators. So that's helping us well. But price mix continues to be in that 50-50 area, and we continue to be bullish about it.

Okay. Perfect. And then it looks like ES margins were up. I think you guys called it out 140 basis points year-over-year. I mean, that's very solid, particularly given that you're now starting to lap tougher comps but if we were to take a walk and bridge that 140 basis points, what were the key drivers in there? Because I would assume that Thompson was actually dilutive to margins, but then maybe fuel was a good guide. Just any thoughts on kind of how you got there? And then was it more driven by pricing or cost control or a little bit of both?

Tyler, I'll start, and then I'm sure my colleagues here will add on. The 140 basis points was driven by a number of things. You're correct in your assumption about industrial, a little bit dilutive on that. But we have -- we're steadfast about driving price in every single one of our lines of business for labor, equipment materials and also taking costs out of the business. We're focused on that. As mentioned in our discussion earlier in the call, we have a target of $100 million of cost savings, and we're executing on that to continue to expand the margins. We're also in the process of putting in a new system that's going to help support our industrial services platform to squeeze more margin out of that business and get more billable hours on worksheets and get paid better for our services there. And all those things have cumulated together and what we saw in Q2, what we continue to see. And we continue to be, again, bullish on the outlook as we execute on the cost programs, execute on pricing, execute on efficiencies within our business, leverage our labor network, which I think is really powerful. The team has done a great job of sharing resources that industrial team from Thompson has played well into our core legacy industrial services to help support their work. So the sharing of assets, the sharing of people, both have all contributed to that increase.

And I think, just to add on to some of Eric's comments, this is Eric D. Again, I think you're right, Thompson, probably a little anti-dilutive to that. But if I think about the hydrochem acquisition that we did and continue to integrate that into the platform, I think this year, we're really seeing some better margins out of that business from a lot of the cost-cutting and labor management that Eric mentioned. So better use of internal folks rather than third parties. Reduction in rental costs that will continue to drive to the business. But certainly, that acquisition is proving to have been a good one for us at this point. And certainly, the synergies from that are contributing to the margin growth in ES as well.

Only thing I'd add. Eric said it well. The only thing I'd add is that the other thing that's happened is turnover is down direct labor turnover is down 200 basis points from the beginning of the year and 500 basis points year-over-year. And that investment we made in people, and in our organization, I think, is a material impact on our margin because those -- that turnover costs us a lot of money and that turnover coming down because the investments we made in benefits and people is starting to really pay some dividends, something we're really proud of.

And just my last one here. So I think you were at 26% in ES, and I get it, this is seasonally a strong quarter, but I think that was kind of the best since 2012 when you didn't have as much lower margin field and Industrial Service work. So if we were to " Kind of dream the dream." I mean why couldn't this business be a consistent 30% or a 30-plus percent margin business longer term?

Yes, Tyler. We're -- we think it can be. We're going to continue to execute on all the programs across our businesses with the market positions that we have in industrial and field and large and small customers with Safety-Kleen Environmental and Small and Clean Harbors on the large, will continue to execute and drive towards that 30%, and we see that in our path.

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

I'm wondering if we could. I wonder if you could just talk about the free cash flow cadence over the course of this year and how to think about conceptually '24. Obviously, an environment where equipment availability has been all over the map, et cetera. How should we think about the puts and takes around the free cash flow bridge '24 versus '23 outside of earnings and ultimately, any opportunities either from a timing standpoint or a free cash flow improvement standpoint '24 versus '23 compared to what we're seeing this year?

Yes, Jerry, it's Eric Dugas, I'll start here. And I think the first thing I would point out to is really strong free cash flow so far this year. We're nearly $50 million ahead of where we were last year despite some real headwinds with kind of cash taxes we paid on last year's profitable earnings. And also the increased CapEx that we pointed to, some of which or a lot of which is related to the Nebraska project. So really happy this year with where we are. I think we're well on our way to hitting the target for next year. When I think about 2024 in puts and takes, obviously, we'll have a little bit less, I think, being spent on the Kimball incinerator. So that's why we always like to talk about CapEx, excluding that number, but we continue to go up. But long term, I think we are kind of targeting that free cash flow conversion kind of in the low 40% range and above is when you look at our long-term targets. And really think with the business and the margin expansion we're seeing and many of the other long-term tailwinds that we've talked about today, that's kind of where we look to long term.

Okay. And separately, Safety-Kleen Sustainability Solutions had pretty good margin performance sequentially, good 2 points better than normal seasonality. It looks like that business might be bottoming and turning the corner just based on your performance there. Can you just talk about is that consistent with what you're seeing. I know you took down the outlook, but it feels like sequentially, things are stabilizing. And if that continues, EBITDA for the business should be up 3Q versus 2Q, I think.

Yes. I think that you're right, Jerry. We did make a large shift from PFO to CFO in the quarter, which had a dramatic impact on our profitability. And I think that really tested the team and their ability to drive that -- and still collect a record amount of gallons. So really kind of a great quarter by them. I'm hopeful that we're there. Certainly, as we talked about it earlier, the model as base oil prices stabilizing and if it raises that probably a good guide to us in the back half of the year.

And Mike, just given the complexity of transitioning from paying people to charging them. Was the exit rate significantly more positive than the full quarter average just because these types of initiatives, I think, take time to implement. Is that a fair characterization?

They absolutely did. They started with -- they started -- we started the quarter in a pay for oil, and we ended in the kind of mid-teens charge oil at the end of the quarter.

Our next question comes from the line of David Manthey with Baird.

The question on Industrial exposure. Has Clean Harbors disaggregated from trends in industrial end markets? And the reason I ask is you've got 2.5 years of decelerating ISM, it's been below 50 the PMI for the last 9 months now but yet you continue to see excellent trends today and into the second half in your ES business. Just thoughts on cyclicality of the business today versus what you had in the past?

Yes, Dave, this is Mike. I think that there are definitely -- I see your concern where market factors tend to go down. I think there's more complex waste streams coming into the network, which results in us being able to charge more and handle them. And so not all Industrial production is weighted equally. I would say that the advent of electric battery manufacturing and other types of complex chemicals around air conditioning and other sets of chemicals in the marketplace that are really driving kind of more complex waste into our network as such, being able to counterbalance Industrial production trends you may be seeing in the macro environment.

Yes. That's great to hear. And second, on the PFAS outlook, I guess the EPA is signaling that they may not mandate enforcement against passive receivers of PFAS. And it sounded like that's landfills and airports and municipal water systems and a lot of potential parties here. Are the enforceable situations and the self-policing that will go on in this industry, are those enough to realize the opportunity that you see in front of you today?

Yes. I'll answer that, Dave. Eric here. The the enforcement, putting that aside, what I think the opportunity is, is regardless of past enforcement, there is a treatment that needs to happen, treatment and remediation. So that's where the opportunity is. And they're going to have lower discharge standards for water treatment and industrial streams and groundwater streams. And obviously, the remediation of the sites is going to fuel material into our incinerators and into our landfills. So that's really where we see the opportunity.

[Operator Instructions] Our next question comes from the line of Tobey Sommer with Truist.

This is Jasper Bibb on for Tobey. Industrial Services revenue was up 11% with Thompson. Longer term, how do you address the pricing and margin outlook for that business as you continue to build your market share through there?

Yes, Josh. Eric here. We continue to drive price on a pretty set cadence with all of our customers in the Industrial business. And as mentioned earlier, we also have a new platform that we're rolling out to combine the systems for both in Thompson and the Industrial and those systems will really help us deliver electronic worksheets that allow us to capture any leakage that we might be able to see across the business. So that, combined with the efficiencies that we're realizing in the business by leveraging the combined headcount leveraging the rolling stock, the assets, the people together, working together is all contributing to the expansion, the margin expansion of that business and we'll continue. So we're bullish about increasing the margins as we go forward by combining the businesses and getting more stickier and cross-selling. There was a couple of new lines of business that we acquired through the Thompson acquisition that we're selling to our legacy HPC customers. So that's powerful as well. And that whole sales team from the Thompson Industrial Group also recognizes the environmental lines of business that we can cross-sell into the customers there. So all those things combined contribute to improving our margins and improving our growth and stickiness with those customers across the board.

That makes sense. And then with respect to the SKSS guide, just to clarify, I think you've now fully adjusted your charge for oil there to align with demand conditions or would you expect to have to continue metering out those charges based on what you saw in July pricing?

Yes, Josh, we -- I think we have set ourselves up for a decent back half of the year. We're assuming pricing stays in our model, in our guide, pricing stay solid, and our yield loan pricing stays the same. So we're not -- so then we'll adjust that yield on pricing like we did in the first half of the year. So I think we've done all the actions and we need to do, in my opinion, to kind of deliver on the numbers that are in front of us, assuming stable base oil price.

Got it. Last question for me on the DoD authorization of incineration for PFAS. Just on timing, do you have any sense of a time line for when federal RFPs for PFAS disposal contracts might materialize? Or is that, I guess, more dependent on what comes out from EPA?

We think, Josh, that we'll see that over the next year or 2, the opportunities with DoD. We're already working collectively with them in a number of different sites, a number of different opportunities, and we think that will continue to grow here.

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

Thank you. How does you date announcement effect conversations you may be having in the market with commercial customers, other government bodies?

Jim, I would say that there are -- there's a strong set of customers that were involved in manufacturing into some of these PFAS compounds that I think they know well that incineration thermal temperature incineration is really a preferred method here. And I think that resonates as well with the DoD, our experience and our interactions with chemical customers and DoD based on the concentration in DoD of the AFFF that has shown contamination. Thermal temperature, high temperature, reference incineration, it seems to be a preferred method there in those high concentrations. And so we think that's an opportunity for us. That's why we really go back in time. we wanted to prove out through our testing that our incinerators is a great technology to effectively with 69s to stray that contamination and we think that there is a good audience, a solid audience that recognizes that, that is the best disposal method for highly concentrated contamination.

I would add, Jim, that the DoD lifting the moratorium kind of validated our study. And so I really believe that what it means in the back half of the year in 2024, as Eric said in his prepared remarks, to put a finger on that. But it really just continues to substantiate kind of our long-term business model that incineration is a safe and effective way to handle these forever compounds.

Got it. Now that's why I was driving that. And just with -- I may have missed it. Did you provide the Thompson contribution in the quarter?

In the quarter, we didn't provide it it's mid-single-digit millions.

Got it. And just as we think about the second half of the year, on the ES side, you alluded to some of the benefits you're seeing some improvement in turnover. How much more of a tailwind is pricing going to be in the second half versus the first half? And then just related to that, on the cost side, have you seen some moderation at all in the other cost pressures in the business.

Yes, Jim, we've certainly seen moderation really on the salary side across the workforce that's moderating. Our pricing efforts will continue to outpace inflation. We continue to execute well on that. So we'll -- we have a comprehensive program across all of our business units to continue to drive price along with the efforts that as mentioned earlier on taking cost out of the business and continuing to get more efficient. So we will continue to execute on that plan.

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

Thanks, everyone, for joining us today. Management will be participating in a number of IR events in the coming months. We look forward to interacting with you further at some of those events. And please enjoy the rest of your summer.

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.