Greetings, and welcome to Clean Harbors Third 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, Christy, and good morning, everyone. With me on today's call are our Co-Chief Executive Officers, Eric Gerstenberg and Mike Battles; and our EVP and Chief Financial Officer, Eric Dugas; and SVP of Investor Relations, Jim Buckley. Slides for today's call are posted on our Investor Relations website, and we invite you to follow along. Matters we are discussing today that are not historical facts are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Participants are cautioned not to place undue reliance on these statements, which reflect management's opinions only as of today, November 1, 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 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 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 Q3 financial performance on Slide 3. Our Environmental Services segment delivered its eighth consecutive quarter of profitable growth in Q3, and we expanded our margins by 120 basis points. While we experienced some planned challenges in the quarter, demand remains high for those scarce assets that support our disposal and recycling services. Within our services businesses, our trained and skilled workforce continues to be highly utilized and in demand from customers. Our SKSS segment faced some production challenges at our re-refineries in the back half of the quarter that led to lower-than-expected sales volumes and profitability. While volumes were off, pricing significantly improved in late Q3, with our aggressive shift to a higher charge for oil throughout Q3, we cycled through our higher-priced inventory, and we have returned to full production in our plans to start Q4. All of this will enable us to end the year strong in SKSS. Mike will discuss more of this in his prepared remarks. Given some of the challenges arising in both operating segments, we fell short of our financial expectations in Q3. About half of the Q3 miss was related to Environmental Services segment and the other half was related to SKSS. We will get more into the details in each in a moment, but we believe our Q3 shortfall is unrelated to demand or market conditions. We believe the outlook for both segments continues to be strong. Before turning to the segment detail, I want to highlight our outstanding safety results. Safety forms the backbone of our reputation and our relationship with our customers. In Q3, the team battled through record-breaking summer heat and other adverse weather conditions to deliver a quarterly TRIR of 0.62, the best Q3…

Thanks, Eric, and good morning. We're all excited to see Kimball come online as rapidly as possible. It will be a big win for the company and our stakeholders. Moving to SKSS on Slide 6. This segment underperformed this quarter, but we're seeing much better days here in Q4. On the top line, Q3 SKSS revenue declined 21%, primarily due to lower base oil pricing versus a year ago when supply and scarcity drove pricing to record levels. We entered Q3 in a downward trend in pricing with posted pricing dropping $0.60 in Q2, including a June reduction that impacted us in the first part of Q3. Subsequently, prices stabilized in mid-August, followed by a second price increase in September. Given the rising pricing environment, some of which did not take effect until October, we're off to a good start in Q4 selling base oil in October at favorable pricing. Looking at year-over-year profitability, after our record Q3 adjusted EBITDA a year ago, lower pricing in this year's third quarter put pressure on our adjusted EBITDA and margins. In terms of expectations, the biggest factor to our miss in this segment was interruptions to expected production at several of our 8 re-refineries, including a delayed restart of our California facility. These reductions had the dual impact of higher-than-expected plant costs as well as lower volume of base oil and other products for us to sell. In fact, in September, we sold more than 4 million gallons less of base oil than we had forecasted when we spoke to you in early August. These repairs and costs were all completed in Q3 and said that our plants have run extremely well, including our California facility. As most of you know, we actively manage the re-refining spread in this business. As we've…

Thank you, Mike, and good morning, everyone. Turning to the income statement on Slide 9. As Eric and Mike outlined, Q3 was a challenging quarter for us compared to expectations, particularly on the plant side, but the overall demand picture remains strong. Our ES segment continued to achieve profitable revenue growth, which essentially offset the year-over-year top line decline in SKSS that was driven by lower base oil pricing and resulted in Q3 revenues that were essentially flat with a year ago. As Eric Gerstenberg outlined at the start of the call, adjusted EBITDA came in below our expectations at $255 million, compared with the $308.6 million in Q3 last year. Our adjusted EBITDA margin in the quarter was 18.7%. Gross margin in the quarter was 30.9%, lower than Q3 of last year, due to large year-over-year decline in SKSS. While ES gross margin was up 190 basis points to 33.2% as we offset inflation and wage pressures with appropriate pricing increases and realized cost savings. We remain focused on increasing productivity and operational efficiencies, along with pricing initiatives within ES, to continue to drive margin expansion. SG&A expense as a percentage of revenue was 12.5% in Q3 due to higher IT investments and related professional fees. For the full year, we now anticipate being in the mid-12% range. Overall, the team has done a good job managing SG&A headcount while battling inflation and wage pressures. Depreciation and amortization in Q3 increased to $93 million, consistent with our expectations and reflecting the Thompson acquisition completed earlier this year. For 2023, we continue to anticipate depreciation and amortization in the range of $350 million to $360 million. Income from operations in Q3 was $154.4 million, down from prior year as expected, given lower overall profitability. Net income for the quarter was…

[Operator Instructions] Our first question comes from the line of Tyler Brown with Raymond James.

So I want to kind of make sure I have it. So I know that you didn't give specific Q3 guidance, but you obviously had a number implied in your prior midpoint. So can you guys kind of walk us through the delta of, call it, this $255 million versus maybe the 2 -- I'm going to say, $285-ish million, it was likely in that prior guidance. So basically, how does that $30 million breakdown? Was it $8 million to $9 million from Arkansas, $3 million from some other incinerators and then the rest was SKSS, is that a good way to break it down? Or just any help there would be helpful.

Yes. Sure, Tyler. This is Mike, and I'll answer the question. So the way it broke down from what we said 90 days ago was about $12 million of the miss was in the Environmental Services segment. As Eric mentioned in his prepared remarks, is centered around pulling the turnaround forward around -- along with some other challenges, some preemptive things we did at the other plants. About $13 million of the miss is in the SKSS segment, and that has a double impact of a plant going down late in the quarter as well as -- so that's additional cost to get it back online as well as a lost revenue from not being able to sell that much oil in Q4. And as I said in my remarks, we were down 4 million gallons in the month of September, which was a surprise to us. The last piece was corporate costs -- last piece, Tyler, was corporate costs of about $5 million. There was some one-off projects we did that cost us more than we expected in the quarter as well as insurance costs.

And then on SKSS, what exactly happened? Was it a mechanical issue? Was it a chemistry problem? I'm just curious.

Yes, Tyler, this is Eric. Just to clarify that within SKSS, we were starting up. We didn't have an accelerated turnaround come forward from Q4 into Q3. And SKSS, what we were doing is we were restarting our California-based plant coming online for base oil. We started that plant up earlier in the year. We were making VGO. And as we progress through Q3 -- as we progressed into Q3, we anticipate being online for base oil and generating base oil and selling that volume. Actually, we brought it online delayed in the quarter at the tail end of Q3, which was the effect there. Along with some other minor production issues at some of the other plants. But the core issue in our SKSS segment was bringing on the California refinery later than we expected generating base oil.

Okay. Okay. That's very helpful. On the Group III pilot program, I think, Mike, you said it would be a few million gallons in '24, but how big do you think that could be over the next few years? Seems like $1 or $2 uplift is a pretty big deal. And was that contemplated in that Vision 2027?

Tyler, so yes, we did envision having some Group III base oil in the Vision 2027 is kind of how we get back to 2022 levels, how we get back to $300 million plus. Group III base oil was certainly part of that. We think that gets up to -- depending on how we do it and how many plants we can roll it out to. It was a very successful pilot. It could be 25 million gallons or greater. And so I'm of the view over the next couple of 3 years, that becomes part of our process, and we are really excited about that pilot, and we're going to make a lot of that base oil in 2024. We're going probably use it more internally to make blended oil ourselves, but there will be something to sell in the marketplace, and we're excited about that.

Okay. Good. And my last one here. I know there'll probably be some talk about demand. It sounds like demand is pretty good. But did the auto industry disruptions impact you at all noticeably in Q3?

Yes, Tyler. Eric answering here. We did have some effect of the auto strikes, both in our industrial services business and some of the waste streams that some of the supporters, suppliers to the auto industry have. They were off in Q3. But we see that coming back as we get into Q4 here.

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

Your day reminds me of an old John Wayne movie, when we got asked off day or day off. So when I look at -- just to get the numbers right, I mean, the simple math is you land on ES at around $1.89 billion, $1.90 billion, SKSS set $185 million. You got $259 million of corporate overhead. There's your midpoint of your guidance. Is that -- to Mike, that's the neighborhood we should be in, right? I mean that's this...

Yes. Yes, maybe a little lighter in SKSS and maybe a little higher in ES, but I think directionally, you're right.

Okay. So that puts us -- if I'm a little lighter, I'm in a $56 million, $57 million kind of quarter pace. You can't annualize it because 1Q is a little weaker. But if I did a sort of 3x that plus the 1Q, that puts us in the low $200s million for next year. I know you're not doing guidance, but we all have the model, and it would be silly for us to be sent out there with something stupid.

Yes. Mike, I think as I said in my remarks, we can't give kind of full year guidance, but I think you're kind of within the area code of what we're thinking there.

And then back to, if you have just normal plant activity, utilization rates, normal maintenance cycles, again, we're sitting here looking at something that's like 7%, 8% segment EBITDA growth in the ES business, that's not an unrealistic way to think about it as well.

Yes. No, that makes sense to us. And just to ground people in the -- for the year, if we hit the midpoint for Environmental Services, if we hit the midpoint of our guide we gave this morning for the year, for 2023, it will be 9% revenue growth, 15% EBITDA growth and 150 basis points of margin expansion in 2022. So to think for a moment that 6%, 7% or whatever number you were talking about, Michael, about EBITDA growth into 2023 -- 2024, excuse me, that doesn't seem crazy for me.

Yes. And just to reiterate one other final point. Each quarter this year, as you know, Michael, our performance in the ES segment has outpaced our expectations. And we continue to have margin expansion throughout the course of the year to back up what Mike was saying. So very strong outlook in ES continues.

So one of the things -- and I'm going to oversimplify this, and it's not that Clean Harbors was never been pricing. But I think that the industrial waste industry has adopted a pricing mantra coming out of hyperinflation that is different than history. What comfort can you give us all that discipline can -- it didn't get tarnished in 3Q or going into 4Q and is in case is sustainable. You can manage an overall price cost spread, and therefore, it's a component of organic growth and operating leverage going into '24.

Yes, Michael, it's Eric Dugas. I'll take this one and then I'll allow Eric and Mike to kind of chime in. But pricing continues to be a strategic initiative of ours. In Q3 here for the reasons we've discussed, we did have the plant challenges. We did have a small mix change for some of the streams that we didn't see come through that are coming back through in October here. But I would think going forward pricing will continue to remain quite strong. And just to kind of provide a little color in more recent times, we're seeing kind of early returns in October here where the volumes are extremely strong. The trend volumes are at kind of an annual high here. And really, that just gives us some good evidence that going forward, pricing momentum remains.

Thanks, Michael. Just to add, we're going to successfully hit our target this year of over $200 million of price increases to really occur of what's been happening with inflation across the business and expand our margins. As we go into next year, we fully anticipate that we'll hit a goal north of $150 million. And that's going to be tempered a little based on inflation coming down a little bit. But we have -- we continue to be very regimented on our approach of making sure our price improvement helps us to expand in margins, but also continues to accelerate past our increase in costs.

Yes, Michael. And one last point that both of those points are really sound from Eric and Eric, but the -- what allows us to get that price is that the sales pipeline remains very strong. And I want to make sure that people on the call understand that, that our sales pipeline as we go into Q3, it was actually higher than Q2 and the higher has been all year. So when you think about -- in pipeline, they're just at their sales pipeline. Sometimes they don't materialize. But make no mistake that we feel good about going -- allowing us to get that price is the pipeline that allows us to kind of continue to drive that price.

Okay. And then this is a nuanced question, Eric Dugas. In the revised EBITDA buildup, you have about a $16 million dip at the midpoint in net income, but you only have a $10 million in cash flow from operations. So is there a working capital savings that's been captured to help keep the free cash at that midpoint of $315 million?

Yes, I think that's right, Michael. We are seeing some good improvement here on the working capital side and just looking at kind of trends and how it plays out in Q4. That's exactly kind of how we're thinking about it.

And you'll keep -- you'll be able to hold on to that going to next year. This isn't a timing issue. This is structural.

Correct. Free cash flow next year continues to look pretty strong.

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

First question, should you read anything into the fact that deferred revenues ticked down a bit sequentially despite the lower-than-expected utilization. And then if you could talk about the price mix and the backlog, I think you might have mentioned it, but is the value sitting there higher than what you incinerated this quarter?

Yes, David, this is Eric. I'll take that. Yes, we did have a slight tick down in the deferred inventory. However, based on that pull forward of our turnaround, our incineration drum deferred inventory actually went up throughout the quarter. So we continue to have significant drum inventory to work off as we proceed through the fourth quarter and into 2024. So that really makes up the substantial part of the difference there.

And Dave, I'm not sure if you're asking about price of mix. So pricing in incineration was low single digits, 3%, I think, was the number. But really, that's pricing up 8% or 9% and mix kind of bringing it back down to 3%. And so that's really what's happening here. So the pricing that we talked about with Michael and other investors, that remains very strong going into 2024.

Got it. And then second, on a mid-80s incinerator utilization you've been reporting lately, at the time in the past, that used to be consistently 90% plus. Is utilization going to be lower on a secular basis today for some reason? Or is that extra, say, 5% of future opportunity?

Yes, Dave, I'll take that. This is Eric. Our incineration utilization each quarter of this year, our low point was the first quarter where we were dealing with some of those freeze issues. Our expected annual utilization would be in the high 80s on an annual basis. This year, we'll come in at that 85%, 86%, 87% on an annual basis. . The reason that incineration utilization runs in that area is because of our focus on really managing significant amount of drums and high-value direct burn waste stream, which puts it in that midpoint. As we look at project business, other things that would add on to the utilization, such as the things that are out there, as PFOS opportunities are up for the project business coming from super fund sites. That's where we would leverage that incinerator utilization into those very high 80s and into the low 90s area.

And just to clarify for some investors that we have a 70,000 ton incinerator in El Dorado, Arkansas. A down day is a lot of production. We don’t assume any days in that calculation. So that when we say kind of high 80s, that’s assuming a normal amount kind of down days. And so that’s really the – I want to make sure people understand that we’ll never get to 100% because there will be – we take those plants down twice a year, and for maintenance. And so those are part of the calculation of utilization.

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

Mike, going forward you starting a new streak here starting today. It's been quite a run.

I was wondering who was going to bring it.

Can I ask on Kimball, nice to hear that the plant is coming online nicely. Can you update us on how quickly you expect to ramp up the earnings power of that plant over what time horizon? Can you hit the type of numbers we were talking about at the Analyst Day now that we're coming closer to that date?

Yes. Jerry, Eric here. As we go into the tail end of 2024, we'll begin to bring online and process through many of the backlog of drums. As we go into 2025, we'd expect that we'd be in that 20,000 to 40,000 tons range, beating through that unit as we go forward and ramp up from there. Our expected overall operational utilization should be in that 50,000 to 55,000 tons over the course of 2 to 3 years.

That's a quick start. Okay. Great. And then in terms of just to expand on the Group III economics. Can you just say more, if you don't mind, what's the CapEx per gallon, just to expand on that opportunity set? And I don't know if you're willing to venture an estimate on looking across your footprint. Where do you think the facilities have an out space and capability set to roll out if you do decide to roll it out across the portfolio in SKSS?

Yes, Jerry. So I'll start on this, this is Mike. So I'd say that the CapEx required is not a ton of CapEx to kind of drive Group III. It's really getting a high-quality base oil, high-quality used motor oil to derive that Group III quality. So that's the challenge, right? So you want to try to make sure you're capturing high-quality Group III oil and getting it into our plant and allowing it to run and uninterrupted. So you can't mix Group II with Group III, it gets contaminated, so you've got to be very careful on that. So it's really a lot of process change and a lot -- maybe some other things like that. I'm not sure it's going to be a huge CapEx item. I don't know, Eric, you want to add anything to that?

No, I think that's fair, Mike. I think we have some minor changes to do. We have capacity that we've set aside a few of our smaller plants to be able to properly aggregate and run those units dedicated to making it Group III. And we'll be rolling that out as we go through 2024 and into 2025.

So Jerry, I don't think it's going to be a huge cost item to get to that answer, but I do think it's going to be a great bridge as we try to bridge back to the $300 million. I think that's going to be a great bridge to kind of get us there.

And can I ask the blue-sky scenario, how many gallons can we produce, what's our best sense?

Yes. We said on that. We got asked that earlier, 25 million gallons we thought would be a good goal to try to get to that answer. That's going to take some work, but that's a very reasonable goal.

Across the footprint. Okay.

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

[indiscernible].

Mr. Kaye, you need to disconnect the other line, you were getting an echo.

All right. I’ll [indiscernible].

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

Apologies, I joined the call a little bit late. You may have covered this. Did you say what Thompson added and whether you're on track with your expectations for full year adjusted EBITDA in '23 for this business?

Yes. We were -- this is Eric Dugas speaking. We were on track for -- to add an incremental about $12 million was the budget we had, a target for Thompson in total, and that's kind of what we're trending towards in the year.

Got it. And a follow-up question for me is just I wonder if you can give us an update on some of the initiatives you have with respect to PFAS.

Yes, James, this is Eric. I'll take that. We continue to really focus on our total solutions portfolio for PFAS. We've implemented successfully with our field crews being able to perform sampling. We perform analysis within our lab network. We're bringing that online to help our customers get a baseline understanding of their PFAS contamination levels. We've seen our pipeline continue to grow around not only drinking water, industrial waters as well as remediation events. And through our network, we continue to believe along with our incineration testing that we've accomplished that we've shown that incineration destruction, high-temperature, rectal thermal and incineration through our units is really the preferred method, and we've communicated that throughout our customer network. And so our total solutions of sampling, analysis, drinking water, industrial water, remediation, transportation, disposal, leveraging our incineration network, our landfills and our water treatment plants, continues to be a real successful outlook for us as our pipeline grows.

Any change in your expectations with respect to this as you look out over the next year? And again, I know you're not giving guidance for '24, but just a small part of your business. I'm just wondering if this is moving perhaps more slowly or if you're seeing the traction with your customers with respect to [indiscernible].

Yes. I would say, James, there's still much to come with the regulatory parameters to be laid out, but I would tell you that our pipeline has grown. And that -- we continue to be optimistic as we go into 2024 about how leveraging our total solutions for all of our customer base, which is quite diverse, as you know, will really yield rewards for us across the network.

Jim, just to -- Eric, just to interject and make sure I was clear with the answer on Thompson. The $12 million incremental EBITDA, that's what we're kind of forecasting in the ES Services segment, there's obviously also some incremental kind of corporate-related costs of $2 million to $3 million there. So you're looking at a $9 million kind of all-in number from Thompson this year.

And the Thompson team, I know they’re listening on the call, we’re actually doing a great job. The innovation is going very well. We’re really pleased with the early days in the Thompson acquisition. So we’re really excited by it.

Our next question comes from the line of Larry Solow with CJS Securities.

Most of my questions have answered. I do have a couple. Mike, I am looking forward to the new scoreboard going up in the office too. Just a couple -- I guess just a follow-up on the PFAS you mentioned sort of waiting for some regulatory stuff to come down. What -- can you give us sort of a high level from where we stand today? What can we look for, I guess, it'd probably be more towards the end of this year or maybe in '24 on the regulatory front in terms of milestones to kind of look for?

Really standards we're looking for, Larry, around remediation and what contamination in industrial and particularly contaminated soils that would set a baseline to get activity to begin to remediate down to those standards. That's what we're looking for.

Any time line on that, that's -- is that a -- that's a 2024 event?

Yes. We would hope that in 2024, we would see some strong movement towards those standards being set.

So the regulatory EPA in December, but they said August earlier. So it's been moved couple of point. So they are [indiscernible] probably we wouldn't want to draw lines to stand, but what we've heard is kind of mid-December, but I heard mid-August a few months ago.

Right. I think I heard late December too, and last, so I thought maybe that might push into '24, but even so, hopefully, within the next 6 months or something, we get something, at least, right, some more clarity on it. Right. Okay. And then just a follow-up just on incinerated business. And obviously, you mentioned we're still kind of running a capacity-constrained environment. Can you just kind of give us sort of a state of the union there? What -- I know I think Veolia had a little more capacity this year. I don't know if the other small guys are putting through some throughput improvements, but kind of where we stand there. It sounds like you guys are confident that you'll have -- that your increased volume will be filled pretty quickly. Just kind of what gives us that confidence? And I think you mentioned some potentially more closing captives there? If you can give us some of your update on that front, that would be great.

Yes, Larry, a few items there. First, I'd like to clear up that Veolia has not been able to bring on early capacity this year. So that they're the same time line we are, in fact, it might be a little bit longer than what we're anticipating. Our pipeline working with our captive continues to be strong. The overall industry capacity continues to be very challenged, as this is why we're investing in Kimball, while Veolia is investing. We think that capacity even with the coming on of both the plants, capacity will be tight, will continue to be tight in the years to come. The captive relationships that we have are outstanding. They are -- everybody who has a captive is also a customer of ours, and we continue to work closely with them as they change their waste stream mix to be able to make sure that we are making adjustments with our plants to be able to support whatever captive closures may come.

Our next question comes from the line of Tobey Sommer with Truist.

I wanted to start and maybe you could dig into and speak to what the right level of sort of ongoing corporate call growth there should be, you mentioned insurance a couple of times, maybe you could disaggregate some of the influences in the reported quarter year-over-year. And then help us understand an expectation for a trajectory over time going forward.

Yes. Sure, Tobey. It's Eric. I'll take that one. So when you think about kind of the year-over-year growth that we saw, obviously, still seeing inflationary pressures on wages. And things -- obviously, I think all companies are seeing that and we're seeing it as well. So you see some increases there. You also see some increases from investments that we're making in several of our technology platforms. So those are probably the 2 largest year-over-year. Going back to salary and wages. I think the team has done a great job kind of keeping corporate headcount very flattish throughout the year, absent the Thompson acquisition. So that's how it would kind of bridge the year-over-year. I think as you go forward, we're certainly trying to keep corporate costs as a percentage of overall revenue, I think kind of below that 5% range. And then year-over-year, every year, we target $100 million worth of cost savings initiatives. Many of those are in the corporate area. We'll continue to target those. But we usually target a 3% to 4% year-over-year growth rate on those.

And just to be fair, Tobey, we continue to make investments in our people. We continue to drive -- to absorb health care costs of our employees, which has helped drive turnover down -- almost 40% down from the 2000 -- voluntary turnover down, 35%, 40% down from the 2022 highs. And that really is a testament to us continuing to make investments in our people not just through better base wages, better benefits, better opportunities, better career opportunities. And I really think we're seeing the benefit of that. As Eric talked about the safety stats, they talked about and how proud we have those and then has a direct relationship to us lowering voluntary turnover because we know in the first 6 months, first year, first deployment, that's what injuries having. So we're really proud of that. It's not free to add these additional costs to our employees are really proud of what we're doing there.

So we're, I don't know, plus or minus 7 months post get together for Investor Day in Chicago area. What do you feel more comfortable about at this point over the time period you outlined? Is it the organic revenue growth or the margin expansion?

So Tobey, it's interesting. So when we started the year, just to get -- just to level set people. We had Environmental Services guided at the midpoint of our guide, what we said back in March, we said it'd be a little over $1 billion. And where we ended, if you take the midpoint of our guide, is almost $1.1 billion. So that's up $80 million, $90 million, depending on what Math use year-over -- from where we started the year to end the end of the year, that really bodes well for 2024. That is $4 billion up to $5 billion comes from the ES businesses. So that type of EBITDA growth, we're hopeful -- and margin expansion, 150 basis points I mentioned earlier, is something that we're really, really excited about. Because I think that, as Eric said in his remarks, I'm trying to get to 30% is a good goal for us in ES. And you say, well, we're at -- we'll end the year at 24%, 25%. And is it really possible to get the 30% from there. And the answer is, if you look at for the last 5 years, we did improve almost exactly 500 basis points from 2018 to the midpoint of our guide in 2023. So that 500-basis point seems very reasonable, including buying businesses like HPC and Thompson, which had lower EBITDA margins going into it, and we're really proud about how we've been able to improve those are there. So when you think about kind of the Investor Day presentation we did back in late March, I'm really much more excited about the growth in the Environmental Services business as we go into 2024, given all the factors I just mentioned. The good margin expansion, the good EBITDA growth and the backlog at the end of the year of a sales pipeline that's even better than when we started the year.

Yes. Tobey, just to build on that a little bit more, as Mike articulated, our revenue and EBITDA and margin expansion in our ES business throughout the course of the year since our Investor Day has really exceeded our expectations. And we continue to see growth there. We – our pipeline, as mentioned earlier by Mike, our pipeline continues to be growing in all areas of our ES business. I’d also say, though, that when we started the year on the Investor Day, the SKSS business, we’ve been always really looking at that business. It’s a strong business. It produces a great ROIC. It's been a challenging year there as we've gotten through the year as we go Into fourth quarter, where our team has done an outstanding job of switching from a pay-for-oil scenario to a charge for oil as we exit Q3. We anticipate a strong fourth quarter and that bodes well as we go into the 2024 and years to come to meet and exceed our SKSS. And the tidbit that we talked about, about Group III. We’re ahead of schedule, producing Group III or doing that pilot program than where we expected to be back in the Investor Day. So there is – and we have some cost opportunities and some plant expansions there as well. So we’re bullish about that business as well. It’s a nice margin business. It’s stabilizing as we’re exiting this year. And we’re – we feel strong about how it will perform in 2024.

Our next question comes from the line of Jon Windham with UBS.

Just a quick point of clarification. Did you say the Safety-Kleen plants were back to normal operations as of October 1 or at some point in the fourth quarter?

October 1. We've been not enrolling. We're going to have a really good October, Jon.

All right. Great. And maybe just the other question, I'd be really interested to hear how you're thinking about the higher interest rate environment. I would think there's a bit of asymmetric pain in the market, less on you and more on some of your potential M&A targets. And if you think that's an opportunity to get better valuations maybe over the next year on some potential M&A?

Yes, Jon. We think that the increase in iterates is a positive opportunity for us as we look at acquisitions and opportunities. We think it can bode well. We -- as Mike mentioned in his script, we have a strong M&A pipeline. We're going to continue to be opportunistic for both sides of the business, and we think it bodes well for us. It presents us with more opportunity.

And Jon, just Eric chime in here. I think I’d be remiss if I didn’t mention our balance sheet right now is very strong. I mentioned in my prepared remarks, kind of our debt-to-EBITDA leverage ratio is about 2x. It’s actually – it’s going to end up as we – if Q4 plays out like we think it will, the strongest it’s been in a decade. So not only do we think we have a great debt portfolio, maybe we’re at a little bit of an advantage, as you mentioned, to our competitors, but we really think we’re in a good spot to be able to be aggressive if we need to be.

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

Okay. I'm crossing my fingers here. Can you hear me clearly?

No.

First time on the call, Noah?

It feels like it. And I want to start with a very basic one. So the turnaround at El Do, that was pulled from 4Q into 3Q, right? And so if that was an $8 million to $9 million hit, I mean basic question, why doesn't that just roll over to 4Q? Why does it actually impact the full year outlook?

Yes. We do see improvement there as we go into Q4. Some of it will come back, but some of it also, Noah, quite frankly, is kind of like an airline seat, you don't get it back as readily as you would like.

Yes. So some of that was just kicked out. Is that a fair assessment, some of the ways that you hope to internalize was kicked out of the network? Or is -- and I think that relates to the deferred revenue question, right?

Yes. So some of that, I guess, you would look at it, that will -- there's going to continue to be pent-up demand more at our customer sites that within our network. As I said earlier, our incineration drum count, our deferred inventory of incineration drums went up. So it will take us some time to work that down as we go through fourth quarter and into 2024, building a new plant. But we did -- there is a backlog that continues to exist, probably grow a little at customer sites. So that we failed to be able to service as much as we would have liked in Q3. So there's some additional pent-up demand there that will work through with them.

And we also want to make sure, Noah, that we meet Q4 expectations. I would say that there's probably a little bit of services baked into that number. You come to the conclusion, you just flip flop it why you change the number. The answer is we want to starting new street.

Appreciate that. And then, Mike, you had put out some good data points around the improving labor situation. I want to ask, is that going on industry-wide? Are industry-wide labor constraints at all easing? Is there sort of a freeing up of capacity to serve because certainly, that has been a boon to pricing in the space. And I just want to make sure that as we think about the setup for industrial services and field services, in particular, into next year, that those sort of favorable constraints to your pricing and market share aren't abating?

Yes. No, I'd love to say it's all us. It's all us. We did it ourselves, but I think that trending why people are definitely, definitely coming down. People are still scarce asset, makes them -- we're replacing kind of temporary labor and things like that, which has helped our margins in Industrial Services. And so I think that voluntary turnover coming down, we're really proud of that. We've made a lot of investments in that. I think the industry is coming down a little bit. But make no mistake, we're using our people to an offset for temporary labor and that's being able to drive margin improvement. Eric, you want to add anything to that?

Yes, I definitely think, Noah, across the board, we're ahead of our peers in reducing our level of turnover, strengthening our employee base, the quality of our employees, how we've been hiring, how we've been attracting, retaining them. It's -- the team has just done a nice job across the business in reducing turnover. A number of -- there are so many initiatives that we've been deploying across our employee base to reduce those. And I think we're ahead. Our efforts are ahead of what -- how the industry, I think, is performing based on our efforts. And it shows up of how we've been able to better service our customers and not have as much backlog in a number of different areas. And we've heard that from our customers. So that's good.

And I guess just to close the circle, that should give you runway for continued margin expansion in those lines of business, right? I mean, whatever the macro does right now is going to affect that. But even if it's sort of a low-growth industrial production environment, you've got some internal levers here that are going to continue to carry over?

Yes. I'd fight an example of that in our -- in some of our Field Services businesses, we had some subcontracting that we were doing to help us with some projects. We really had a concerted effort to eliminate that subcontract and reduce it with our own employees, and that comes with margin improvement and better service to our customers. So, yes.

And better safety and a lot of other things, too.

Our final question is from Michael Hoffman with Stifel.

Tetra Tech got an $800 million award to do some PFAS work. Is there a -- and that's all engineering related. So is there a possibility you've got a role in that? And then on the PFAS issue, we need the drinking water final role in December, but we still need the circle ruling in February as well to get those two things behind us before we really break the dam open here on the PFAS side.

Fair to say, Michael, first commenting on the Tetra Tech. There was multiple awards that went out and to really change out the AFFF to another non-PFAS related material. We -- certainly, our team was well ahead of that announcement, aligning ourselves with those awards to be able to work with them directly to provide solutions for the proper disposal of that AFFF. So a nice opportunity for us to continue to improve prove out. And also on the circle, yes, we need that to really happen for us, as mentioned earlier, to get that definition completed here, hopefully, with what's going on in Washington and some of the turbulence that doesn't get delayed again. But we really need those standards out there in the marketplace.

Okay. And then Mike Battles, on the blending, when you say 25 million gallons, that's taking the direct from 8%, which would be something like $12 million, so doubling the blending or the direct number, when you say 25...

It's a different -- it's kind of a different answer. When I talk about Group III, we're going to use some of that in our own production next year, but ultimately, we see Group III being sold as base oil to third parties. When we talk about that growth to a much higher number. That's -- the 2024 item is more of a cost save for us instead of buying third-party Group III oil to supplement our base oil to make to make blended lubricants. We're going to use their own stuff, which is a cost saver in probably the first half of 2024. And as we ramp that up in the back half, I think there's going to be some to sell.

Yes, Michael, just to add on that, when you think about that 25 million gallon number of Group III that we'll be making and looking to achieve as the goal that Michael articulated, that's selling material that we're currently selling at a Group II rate and converting it to a group III. So 25 million gallons less of the goal of Group II sales but selling that as a Group III product. That's how you should think of that.

Got it. All right. So I conflated two different topics then. What's the possible -- how much higher can the percent of direct blending go? If it's 8% today, can it be 20%?

This has been a challenge for us. Mike, this has been a challenge for us for a number of years. We continue to work with some large fleets to drive more blended gallons to direct and through the closed-loop model. I hate to say that we're close on some, but we always continue to work through that and drive that type of growth.

Our performance over the last couple of months has been improving as we've shown in consecutive quarters, our direct blended oil sales has improved quarter-over-quarter. And there, the team has really done a nice job of continuing to ramp that up and the success seems better as we go through each month of the year.

Okay. And then on Kimball, you all had given us how to layer in the capital spending. So we did $45 million in '22. Originally, we going to do $90 million this year, so we're $85 million, but you're pulling forward the opening date. So should we us $55 million for next year?

I think it's closer to $45 million, Michael.

$45 million. Okay. And then the last question on corporate overhead. I mean, is the other way to think about it is it's somewhere between 4.8% and 5% of revenues, is sort of where your corporate overhead is going to land on a sort of recurring basis.

Yes. Yes. Our goal will be below 5%. Our goal will be below 5% as we kind of – and we’re trying to work to that answer.

We've reached the end of the question-and-answer session. Mr. Gerstenberg, I would now like to turn the floor back over to you for closing comments.

Thanks all of you for joining us today. Management will be participating in several IR events this quarter, starting with the Baird Industrial Conference next week in Chicago, and we very much look forward to seeing some of you at those events.

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.