Q1 2020 Earnings Call
Greetings and welcome to the clean harbors Inc. first quarter 2020 conference call.
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It is now my pleasure to introduce your host Michael Macdonald General Counsel for clean Harbors, Inc. Thank you Mr. Mcdonald you may begin.
Thank you Christine and good morning, everyone with me on today's call, our Chairman President and Chief Executive Officer, I want to spur Kim SVP, and Chief Financial Officer, Mike battles, and SVP of Investor Relations, Jim Buckley slides for today's call are posted on our website and we invite you to follow on.
[noise] matters, we're discussing today that are not historical facts are considered forward looking statements within the meaning of the private Securities Litigation Reform Act 1995 participants caution not to place undue reliance on these statements, which reflects management's opinions only as of today.
20 night Twentytwenty information on potential factors and risks that could affect our actual results of operations is included in RCC filings. The company undertakes no obligation to revise it publicly released the results of any revision to the statements made in today's call other than through filings made concerning this reporting period.
In addition, today's discussion will include references to non-GAAP measures clean harbors believes that such information plots and additional measurement and consistent historical comparison of its performance reconciliations of non-GAAP measure 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 now.
I'd like to turn the call over to our CEO Alan Mckim Alan.
Thanks, Michael Good morning, everyone. Thank you for joining us.
Starting on slide three.
Before discussing our Q1 results I'd like to address the Corona virus pandemic and how we're responding to it.
Obviously, the outbreak has created a healthcare crisis in college economic disruption around the globe.
I hope that all of you and your families are staying safe.
You're a clean harbors safety of our employees as part of our culture and the top priority during this pandemic.
As an essential services provider with teams on the front lines of the Cobot 19 crisis, we have instituted rigorous safety protocols and work closely with suppliers to make certain we have the necessary equipment to protect our employees.
During the crisis, our workforce has remained in the field and at our plants supporting our customers needs across North America.
Like to acknowledge their hard work and dedication.
The workforce representing critical administrative functions has supported our field teams from home.
And the strength of our systems has allowed that transition to be virtually seamless.
Overall, the pandemic had limited impacts on our Q1 performance.
But its effects worsens towards the end of the quarter with the commencement of more shelter in place orders in the U.S. in Canada.
We expect the virus to impede our business in the second quarter, particularly within safety Kleen.
In addition to limited driving and business activity across North America safety Kleen also had been affected by the sharp downturn and the value of base oil.
In short we're faced with some difficult near term market conditions, and we are making taking significant actions in response, let me touch on some of those actions.
Starting with alignment of our cost structure with the demand environment, we are right sizing our workforce furloughs in other reductions.
And implemented a non billable hiring and wage freeze and weve restricted all travel.
We're also going back to many of our vendors and suppliers to negotiate for savings or improve payment terms.
In addition, we temporarily shut it nearly half of our re refining capacity to reflect the current demand for base oil as well as the likelihood of less available used motor oil in Q2 and beyond.
From a liquidity perspective, we drew down $150 million on our revolver to strengthen our balance sheet in the event the crisis worsens.
We have reset our net capex spend plans for 2020.
And we've lowered our expected spend by more than 50 million to preserve capital and support our free cash flow for the year.
As noted in this morning's earnings release, given the current market uncertainty where withdrawing our annual guidance for 2020 that said I believe our strong balance sheet leaves us well positioned to succeed.
Turning to Q1 financials on slide four revenues rose, 10% from a year ago as both operating segments recorded solid growth.
At the same time, our adjusted EBITDA increased to a record 122.6 million driven by our mix of high value waste streams and high utilization augmented by projects and emergency response work.
Our adjusted EBITDA margin increased 130 basis points to 14.3%.
Looking at our segment results beginning on slide five.
Environmental services revenue grew 11%.
By contributions from our facilities not work in field services group and aided by warmer weather nearly all quarter.
Adjusted EBITDA growth of 22% was driven by business mix disposal volumes and emergency response revenue.
Merged response work totaled 21 million, representing Cobot 19, recon work and a cleanup of a chemical plant far.
Our disposal facilities are impressive volumes this quarter as incinerator utilization increased to 86% and landfill tonnage grew 39%.
Our average price per pound for incineration in Q1 was up 11%.
Reflecting the record level of high margin direct burn streams that we gathered.
Overall, another terrific quarter for our environmental service segment.
Moving to slide six.
Safety Kleen revenue was up 8% primarily by growth in the SK oil business.
Adjusted EBITDA and margin improved on lower SK oil transportation costs.
In higher we refining production compared with a year ago when volumes were disrupted by frozen Berbers and flooding.
Well then the SK branch business core services performed well well parts washer services were flat with the prior year waste oil collection was up slightly to 55 million gallons.
Hundred products accounted for 25% of volume in the quarter and our direct volume was 7%.
The first quarter began with positive signs, but I know 2020 was going to enable us to expand our refining spread it's high sulfur fuel values had fallen and base oil prices were up in early January.
<unk> the old shock sparked by the global outbreak of the Corona virus. I went 2020 has largely been sidelined and basal is falling by a dollar a gallon.
We entered Q2 with significant pressure on our re refining spread and in this environment the value of used motor oil is on a charge for oil state.
In response to the current market conditions, we have significantly raised I tried to oil program.
Driving in the U.S. and Canada needs to normalize before our spread and lubricant demand can rebound.
And we see conditions, when we see conditions improve we'll consider reopening our closed three refineries.
Turning to slide seven.
Given the current environment, our capital allocation strategy as critical whatsoever.
I mentioned earlier, we are reducing our plan net capex by more than $50 million.
We divested two businesses in Western Canada during the first quarter as we continued to steadily shrink our direct exposure to energy.
Since we began executing our divestiture program several years ago, we've sold seven businesses for approximately 120 million in proceeds.
In terms of M&A, we're not likely to be active near term.
Long term, we believe will emerge from this market downturn stronger both financially and operationally than some of our peers, which will allow us to be opportunistic.
For our buyback program, we will likely hold off until we are certain that's a domestic economy is on a clear path to recovery.
In addition, we'll look to repay the $150 million on the revolver as soon as this crisis shows signs of nearing an end.
Looking ahead to our segments, although we've seen some cancellations and project delays to the cobot 19.
We expect our environmental service segment to whether the current downturn well.
We expect our can decontamination work and growing volumes of infection waste to help offset what would certainly be a larger decline.
Well, then safety Kleen, we expect both our branch business and our SK oil to be had fairly hard, particularly here in Q2 as stay at home orders greatly reduce vehicle travel and generate less used motor oil.
Our SK branch business should rebound shelter in place mandates are lifted.
And low gasoline prices encourage a rebound in driving.
And SK oil re refining spread has contracted with the drop in crude and we've aggressively increase our charge for oil pricing, but volumes are off and near term demand for base oil has fallen.
In summary, our Q1 results demonstrated the strength of our business model.
The value of our assets and our frontline role in emergency response, our market leadership financial liquidity and positive free cash flow will enable us to navigate this global crisis and with that let me turn it over to Mike battles Mike.
Thank you Alan and good morning, everyone. Let me Echo Alans comments about the outstanding work of our team and everyone on the front lines of the crisis during the unprecedented events, we've experienced and Jeff a few weeks and if we all have a deeper appreciation for the professionals, especially healthcare workers, who put themselves that risk every day to help.
Doesn't need.
Turning to slide nine in our income statement as out indicated we delivered record first quarter results.
Revenue grew nearly 78 million well adjusted EBITDA grew by nearly 21 million.
This reflects the next a business we achieved in the quarter project work and and favorable weather.
Our gross profit perspective, we shot a sharp increase in both absolute dollars and on a percentage basis due to higher higher utilization pricing and a favorable comp with prior year.
Our gross margin increased by 160 basis points from your from year ago.
<unk> expenses were up 14.5 million in the quarter due to the higher revenue and Besancenot employees and some one time expenses from last year onetime items from last year.
As we move forward, we're focusing much of our cost reduction efforts in this area to bring expenses in line with that revenue.
Appreciate it and amortization in Q1 was down slightly to 47.5 million.
We completed two small bolt on acquisitions in 2019.
Well also divesting several businesses.
For 2020, we expect depreciation and amortization in the range of 285 to 295 million, which is a little lower than last year.
Income from operations increased 92% to 45.5 million first quarter record, reflecting the combination of I revenue growth and improved gross profit.
On a GAAP basis, EPS was 21 cents in Q1 versus a two cents a year ago.
Adjusted EPS was 28 cents.
Turning to the balance sheet slide 10, as Alan mentioned, we drew 150 million on our revolver during the first quarter, which increased our cash and short term marketable securities at 494.3 million at quarter end.
We saw reasonable collections late in March, which led to a healthy cash balance.
Our strong liquidity position further protects our company and adds financial flexibility should we need it.
Our balance sheet remains in good shape.
Right and long term debt obligations at quarter end rose to 1.7 billion, reflecting the drawdown on our revolver.
Our weighted average cost of debt is now 4.3% with a healthy mix of fixed and variable debt.
Leverage on a net debt bases with 2.2 times for the trailing 12 months ended March 31st.
Looking at our most recent cash balance from yesterday, our cash remains essentially flat and where we ended Q1. The team has done a nice job maintaining its focus on collections and managing our spend.
Turning to cash flows on slide 11 cash from operations. The Q1 was up slightly at 30 to 33.7 million.
Capex net of disposals and the purchase of our headquarters, let's 59.9 million up from a year ago, resulting in adjusted free cash flow in the quarter of the negative 26.2 million, which is consistent with prior year and our expectations.
For the year, we're now targeting Capex net of disposals and purchase ever headquarters in a range of 140 to 160 million.
During the quarter, we repurchased approximately 300000, she has the best Dot and average price of $57.41 a share for a total of 17.3 million.
As Alan mentioned, we will be cautious in our opposed to buybacks until we see evidence that markets well into their recovery stage.
As Alan also noted.
Given the uncertain market environment, we would we are withdrawing our 2020 guidance. We're hopeful we'll be able to reinstate guidance without Q2 earnings announcement provided market that's stabilized.
In summary, Q1 was the strong quarter highlighted by several financial records, including adjusted EBITDA.
We're not for covert 19, our Q1 results would have positioned us well the fourth straight year of profitable growth.
We have taken significant actions in response to the pandemic and I prepared to take additional steps in the event of a prolonged recovery.
I focused on things, we can control carefully including carefully managing costs and pursuing new waste streams to feed our landfills and incinerators.
With that Christine Please open up the call for questions.
Thank you we will now be conducting a question and answer session.
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Thank you. Our first question comes from a line of Tyler Brown with Raymond James. Please proceed with your question.
Hey, good morning, guys.
Morning attack, Hey, Mike just real quick can you parse the 21 million of revenue. They came from the chemical plant in the de Con work just how much from each.
Yep or it is about 10 million for the de can work together and about 11 million for that chemical spill chemical fire Oh, Okay and would you expect both of those to continue in Q2 or is the chemical plant clean up largely complete.
The chemical plant is essentially complete the de kind of work will continue into Q2 and beyond yeah, Yeah, Okay and then.
You know Alan I know these are just unprecedented times, but in the SK branch business I mean, how should we think about revenues there.
Versus the 50% drop in gas station pump volumes that I think were seen here in April I mean is that are really good KP I'd be watching for the S.K. branch sales I assume that that correlates very high with vehicle miles driven.
No I think as you know a lot of the safety Kleen safety Kleen businesses, a subscription base business, where we outperform you know these repetitive services and we're seeing about a 25, 30% turn away.
Because of the.
The closures and so I think that would probably be a good number to think about in the second quarter or for the safety Kleen branch side of the business.
Okay, and then quickly on the SK oil side. So I don't if I recall back in 15, you guys talked about having a two month lag on your you'll note inventory and that precipitous drop in base oil prices are that person precipitous drops make it really difficult to managed to spread the as you kind of flush out those inventories out of the system.
So I mean, if we coupled together the shuttering of half the capacity it seems like you're going to have an inventory lag issue.
Is it reasonable to assume the SK oil that piece of SK loses money in Q2.
Based on my Old model I think you lost money in Queen performance back in Q1 15.
That's not our expectation right now that you know our forecast and or at least our discussion certainly is that it would be making money in the second quarter or as a result of all the effort that we're putting in on both.
The the front end collection side.
As well as all obviously going back to our suppliers on on our additive side and somebody other costs are going to that business. So, but we're not expecting lose money in SK on the second quarter.
Okay. That's extremely good to hear and then maybe my last one Mike was there an incentive comp accrual in the quarter and if so what percent of normal.
Yeah, I tie there it was about a 7 million dollar advantage versus our I've kind of our forecast. So that is in a in the 122 for the quarter, There's probably a 7 million dollar reversal of a run rate based in some most of the Dynegy now some of that's in Cogs.
Depending on the person involved.
Because they'll targets are much lower.
Yeah. Okay alright. Thank you appreciate it one point I want to mentioned before we take another call is that a in the script I read a depreciation for Q1 was down slightly it sounds like to 74.5 million I Miss spoken and said that set around number just flat.
Our next question comes from the line of Noah Kaye with Oppenheimer. Please proceed with your question.
Thanks, and thank you Mike for that DNA clarification that.
Can we talk little bit about the pipeline for the base, that's nice isn't the or in the release you know your large quantity generators generally not really getting a bunch of a slow down yet the talk little bit about.
The trends that you are seeing now kind of here at the end of April.
What are you seeing from Petrochem customers from chemicals customers generally you know how much of a.
Volume reduction are you seeing from bad how are you thinking about kind of price mix trends in the second quarter. So far.
Yeah. So you know we know this is Mike I'll start now feel free to jump in you know the or what were seeing a tierpoint know is that where were waste and we had a healthy backlog kind of going into the Q1 and we exited the quarter was still a very healthy backlog you know that.
Incinerators are running very well and the large quantity generators. You know continue yeah I. We're seeing so are we seeing signs of a slowdown we absolutely are but as I see here today, you know I think that the plants still I've got a running well a with a healthy backlog of waste streams and and you know many things that we deal with in the large.
Quanta generated whether it be chemical manufacturing Petrochem, a agriculture, we're still seeing agrochemical still seeing a lot of that waste streams coming into the network. So.
I'm hopeful that that incinerators kind of continue do well here and it kind of Kevin yes for a bit through Q2 and beyond.
Predominantly I would say the industries that support automotive are the ones that we've seen impact from a volume standpoint, absolutely but for the most part our volumes have been pretty good and like you say our backlog is still strong.
Yep Yep. That's helpful. And then if I could just follow up on the prior question around that <unk> de Cod work I think you said in prepared remarks, unless I misheard that you know that will help offset or or question you know men softness elsewhere.
Thank you talked too much about on the industrial services side of the business, but.
We're just understand generally what your expectations are based off of kind of current orders and and no request for information on how big do you think.
The decontamination work has the potential to be this year from a revenue perspective are we talking you know another avian flu or are we talking something much less than that it can be dimension enough for us all but.
Yeah, I I don't think it would certainly be at that level, we've done about 2500 or so de converts at this point. So in some of them is significant and some are small.
You know probably in a $50 million range would probably be a good.
Estimate right now and and what we'd be thinking, but but clearly a the the amount of demand has been significant we've certainly not being able to me all the demands, but but you know we have shifted quite a bit of our workforce.
We brought people out of the seats clean business, we brought people out of our industrial services business.
Bring them over into our emergency response teams and help or you know complement the field services organization. So that that's worked quite well and continues on as we speak.
No one one add one add to that point. So I think that's a fair estimate $50 million is good as anything but really it does depend on you know kind of a level of of where the economy goes in where this virus goes right and so we I think we have is pretty decent line of sight to that number for 2020, but who knows is this may become a line of business for a long term.
At the time, right and so and we're treating it like that so we certainly have first as I think about you know kind of Q1 and maybe even Q2, it's more like an E. R type of event, but I think going forward, perhaps it becomes a longer term longer term line of business, because frankly, it's probably going to be easier for awhile.
Sure that's rehab and maybe just to clarify then.
I mean, I've heard word all said, but.
I think about you know this relative to you know maybe some softness in industrial and Pat Industrial downturns, obviously, that's like industrial services business was was pretty hard hit its 50 million kind of enough.
To offset delays or weakness do you think in industrial services or is that sort of a net negative in your view, you think about industrial and field.
Yeah, No I'll start here, so I think that as Alan said in his remarks, you know I think that the you know when I think he asked the segment.
I think there's going to be softness and invite and industrial services as as turnarounds get pushed out and I think that this is going to help out is it going to counterbalance all that it remains to be seen right because in the fall when the turnaround schedule lets say everything's fine I'm, making that up who really knows there's going to be a higher turnaround activity in the fall it maybe larger.
So we may get some of that bad it's kind of hard to see it's kind of hard to say right now right and so and so I think in the short term I think the de kind of work that Allen's matching and I'd be really busy hearing you do well offset some of the softness in the business and maybe it maybe it's okay, but it's tough to say long term.
Appreciate that alternative.
Thank you.
Our next question comes from a line of Brian Maguire with Goldman Sachs. Please proceed with your question.
Hey, good morning, everyone hope everyone is doing well, okay, and all your families or are safe and healthy you too Brian.
A couple of questions one on sticking on safety Kleen I know the the SK oil business I think you used to talk about any good year at my Q1 hundred million.
In in EBITDA Bad years, 70, yeah catastrophic year, maybe 50 60.
I I don't imagine you ever contemplated the kind of environment were necessarily in right now I'm just wondering if if I know you're not giving guidance per se, but do those sort of rough.
Guide post still apply here or do you think where maybe just in your uncharted territory.
Uncharted territory, Brian I would say that I'd say that theory was predicated on on us being able to sell everything we made and that was always predicated on the fact that we could we could sell everything we had and there was a spot market for that somewhere in the world and as you well know and everyone well knows that add tanks oil is there's a glut of oil.
And so that is putting us into unprecedented territory. That's probably the reason why we had to withdraw guidance because we just don't know what that number is going to be but it seems like that old the old theories, we'll come back again someday, but those old the old hypotheses that we used to share it used to be they true for years and years and years I, probably not true and 2020.
Yes, that's totally makes sense on that I, just thinking on that it's just wondering thinking about twoq here with the amount of downtime you'll take in SK oil yeah, I actually think about the fixed cost absorption on that maybe bucketing. It you could talk about just how cogs or.
Blacks in a in a down volume environment like this how much of the cost are fixed it would be stuck with them. I think he said that you think it'll still be a breakeven or something that profitable. So that that helps guide posted a little bit, but just thinking about the knicks it fixed versus variable cost in that business.
Yeah. So what we've done is as Alan said in the end the call we have shuttered a about half our capacity and so that's really predicated on demand coming back a that's really helped us from a fixed cost perspective, there's been some furloughs associated with that so that has helped us a bit. We also are looking at kind of every cost and with the lower cost.
Our oil the additives that we blend with our base motor oil on air and to make to make blended oil is gone down quite a bit as well and so all that's going to be kind of in this do and what the exact percentages in the SK oil business between fixed and variable and I don't have that economy, but that's directly but what I'm, what I'm, saying.
Okay. Just last one for me. This is maybe more of a longer term question I guess some of it depends on how quickly we recover here, but yeah, the price and mix in installations benefited a lot over the last couple of years from some of the higher value waste streams I think a lot of those have been tied to.
The pet Chem projects that have come on in the last thing obviously a lot of those are predicated on the U.S. being advantaged from a cost point of view, Nat gas and Ngls versus well below prices you know oil where it is today. It seems like it's taken that advantage away. Obviously the plants are still there they haven't gone away, but there are a bit.
Ready to be like competitive globally might be then impaired or for that for the time being just wondered if that is part of your thinking or if you're seeing any kind of already signs that the backlog in those can't pet Chem waste streams started into dry up or you know signs that the backlog might be shifting back towards or some lower value a waste streams.
You know I think I've director, our direct burn business continues to be very strong and we actually have quite a backlog and that space that continues today. So.
I would say that our competitors as well as ourselves our I think very strong from a volume and utilization standpoint.
We know that there are several captives.
That are shutting down for an extended period of time or some of those are the result of the cobot 19, a where their manufacturing may be impacted and therefore it ultimately it makes sense, but then the shut that capacity down and go to a instead of having you know sort of a 25, 30% operating utilization.
So we are getting more business from former captive operations out there and that's something that we hope will continue.
We've had some ongoing discussions with some of our customers who have kept the plants or whether that would be a.
Three to six month kind of project or whether that might be something permanent but as we as we've said you know for the last several years part of part of our expansion of our Eldoled plant was because in anticipation of an increase in volume with a lot of the the chemical manufacturing expansion due to low price and natural gas and.
We think that model is still intact, even a regardless of where crude oil is today.
Alright, thanks, very much good luck in the quarter.
Thank you thanks, Brian.
Our next question comes from the line of David Manthey with Baird. Please proceed with your question.
Hey, good morning, everyone plenty of.
Yeah. Good morning on the E S strengths.
Is there any possibility that you're you're starting to see or that you may see in future quarters, a pull forward of customer turnarounds because of the economic cause so customers taking the opportunity of.
Low demand to take their facilities down which could actually lead to.
A surgeon volumes for you, but then again, maybe a more lackluster turnaround season in the fall is that something you're hearing about possibility.
We were not David I think I think they're concerned that we here and in some somewhat the reason why people are delaying turnaround is of the fear of bring you know 500 or a thousand contractors from you know all over the country into their plants and the potential of having you know a significant.
Outbreak in the middle of ER, So a turnaround, which which would be catastrophic as you know if you've got halfway through one of these.
Turnarounds at one of these major refineries for example, then and then the couldn't get a completed so it's really I think more of the delays from what we're hearing it's just a concerned about a virus rather than you know the business environment.
Okay. That's that's good to hear thanks for that and I'm Super Fun Cleanups. This decides are allowing delays for projects that are that don't produce imminent danger. If you see any impact there yet on the field services business and could there be.
Drag on the project work and landfill volumes through the second half it that situation continues.
Yes, we definitely saw our early in the and then the and the beginning of the quarter, the second quarter or a number of projects get pushed out to this to the the third quarter or even to the fourth quarter, So you're absolutely right.
If there's some discretion and again I would say, it's as much to do with the concerned with the virus than it is.
Or anything you know getting into one of these projects mobilizing a lot of people from across the country into you know somebody's projects I think and just getting kind of halfway into it and then having sort of a a problem with a with a a virus outbreak as more of the concern rather than spending other dollars and Dave just to add to that we've we've had.
Had a couple of customers say, they don't want people from certain states coming to their location. So that's been a challenge for us from a staffing perspective on some of the projects that are going on.
Got it Okay and last quick one here al you mentioned aggressively adjusting your charge for oil.
Is that referring to an increased greater than the 70 cents that you announced in March or not.
I'm not sure if I heard the first part of the question.
Well in your model log I think you mentioned aggressively adjusting charge for oil prices and I'm just wondering relative to the 70 cents you announced in early March is aggressively greater than 70 or up to 70.
[laughter] well.
Again, we're modifying some of our.
Our contracts as well because as we look at both W.P.I. and or some of the base oil indexes that we use you know those contracts that we have allow us to a significantly change you know, how we how we price those products or or a price those customers on.
On the incoming waste oil side, so we're certainly working.
Both the ends and communicating those challenges to our customers out there we did have a second.
Increase to appoint a that was put in place the end of April and that will be going out between the first and 15th of May. So we definitely are communicating with our customers to let them know you know sort of the real challenges obviously, when you see crude oil trade trading at $11 a barrel.
You see diesel and gas at historical lows most of the customers that were servicing the automotive customers. They certainly are seeing at the gas pump price and so a they've been working with us and we continue to really manage the spread there as best we can.
Thank you all the best guys. Okay. Thanks, David.
Our next question comes from the line of Michael Hoffman with Stifel. Please proceed with your question.
Hi, Thank you all for taking this and again wish everybody that's being safe.
Alan and Mike on the emergency response, when you look back to the avian flu if I remember correctly. There was about 170 million was tied to that but it was let's say U.S.D.A. So was okay margin, but not wow I'm, assuming this margins much better because you're doing it with private companies.
Michael This is this is Mike it was it was 300 million for the avian flu not 170, but the ER.
To answer your question and the margins are pretty good I, certainly we had kinda what I'd say first mover advantage, we did get out in front of this pretty quickly and mobilize the teams as they look here in kinda that current bids were seeing margins have softened a bit because there's more people kind of getting into getting into it and seeing that the value there.
So I think we did have some I think we had some pretty good margins early on I'm, assuming they're going to soften a bit as we get into get into Q2 in Q3.
But there are definitely better than the corporate margin.
Absolutely, yes, Okay, and then when we think about looking at.
Data that's telegraphing. This this opportunity in incineration your Unbilled receivables I can you talk us through how we should read through what that's telling us.
Yeah, Unbilled receivables there just projects that are in or are in the middle of but other larger project can sometimes they ended the ended the month.
And we haven't we can't Bill until the actual the project is complete and that rolls into the next month and so that's it's in my mind that simply a timing item Michael I wouldn't read much further into that.
Okay. So it looks like a good number so I was thinking maybe that helps me support though why incineration is going to stay fall.
I mean, the answer is that deferred revenue is still pretty high and as as Alan said in his remarks that end up the pipeline going into it is that it's still pretty strong here in April yeah. I think okay. When you look we think about deferred revenue Michael it's only down a couple of million from the end of 2019 and that is typically both the back.
Log in waste disposal as well as of the parts washer services.
For safety Kleen, because there and they're in a.
And the reserve basis as well, so I think I think that number that deferred number is sort of.
Number to go back yes, considering.
What we're talking about yes, the other things like we're getting we're getting some infected infectious waste as well right. So that's also kind of coming in coming online here in.
In April.
Right and then or we had a position to talk about what kind of dollars on cost have been affected so far I mean, I remember on a call. We did together about one month ago 35 million of incentive comp was in the budget. There is 20 million of T. any.
And then if you've done some furloughing or shuttering capacity I mean, it sounds like these numbers are adding up to 70 $80 million potential offsets and then you deal with.
The lack of activity as you know the counter to that are we that's the right way to think about yeah. Michael So I'll start now feel free to jump into where to incentive comp you're right maybe of the of the 35 million maybe 30, if it comes back in <unk> that the reason much vacation TD is down quite a bit and when you went shelter in place laws I removed.
We'll be do justice and trying to get back to travel and that teeny number probably stays stays pretty low for the rest of a rest of the year when thinking about furloughs and other actions that we're taking and we're in the middle of that right now and I hate this kind of speculate as to what that ultimate number will be I think what's going to happen is that we're going to try to adjust our cost structure to the lower revenue and we're going to be.
Yeah, we're trying to be very smart about that and and Michael as you know you've been following us for years and years, where where cost conscious organization. We're in industrial services business, we manage our margin tight and we'll take aggressive actions when needed and we're hopeful that would be actually we're taking will be will be sufficient and if they're not will continue to do it so its unfortunate.
That that has to come to be but that's where we are.
Okay.
And then based on the kind of made earlier, but you Alan you expect SK owed to be profitable into Q, that's going to probably would be your worst quarter. Therefore, it's reasonable to conclude you'll be profitable for the year I got it it's going to be a low number but that you expect SK ought to be profitable for the year based on the actions you're taking okay. Yes.
Yes, okay.
And that free cash flow has been a key focus of the company does depth, which you've got the capital spending sort of starting at 225 less than 25 for the headquarters and pull out the 50 69, there's your 141 since they.
We're going to end up with a pretty decent free cash flow number Jew Allen.
Yeah, Michael I would say that you know the two things that are happening in the cash flows that are going to be you know offsetting the lower earnings right well be that will be the lower capex as Alan mentioned as well as you know the cares that does provide for you know payroll tax withheld and I'm sure. Your other companies are doing the same thing.
No. We don't have to submit in 2020, you know our component of employee or attacks and that freight for a big U.S. company with a lot of U.S. employees, that's actually a pretty material number that's probably going to be at 30 plus million dollar a winner optimal capital spent standpoint in 2020, I don't get too excited because that needs to be paid in 22.
Anyone and 2020 do you pay back, but certainly in the short term from liquidity standpoint to help companies like ours make sure that you know it's lower for longer we can still do well you know that that that payroll tax provision will be a a cash flow winner for us here and a hearing here in 2020.
I think obviously I was just <unk> just to add to that point, though you know we realized a lot of customers are hurting out there a lot of our customers are and you know and tough shape and so.
You know, where we're really focusing on receivables are making sure that we are getting our ability to do a faster. That's one of the reason why unbilled actually went down about 5 million in the quarter. Yeah work, we're doing everything we tend to really stay as tight as we kind of on our on our receivables Dsos not you know has not improved were roughly around.
80 days and.
So that's it that's a top focus of us to make sure that we get our cash in the door absolutely.
And that leads me my last one and then thank you bad debt allowance is how are we thinking about that in the context of historic trends Yep. So normally Michael we have you know as 89 million on a on a normal year. You know a Q1 was a little higher because we are concerned about some of our small quantity generators in the some of the small.
Automotive shops, and there and their long term.
Capital structure, whether they can withstand this but we feel we did raise it up a little bit I'm not sure. What the number is gonna be it's probably going to be.
It won't be double it won't be double that are normal run rate will be a little higher sure sure and so in Q1, we tried to cover off on some of that so I bad debt expense normally runs two two and a half million a a quarter, whereas you know four and a half here in Q1.
Okay. Thank you so much thanks, Michael to Michael.
Our next question comes from a line of Larry Solow CJS Securities. Please proceed with your question.
Great. Good morning, guys. Good to hear your voice isn't a echoed the well wishes.
Same here that you are absolutely just a few follow ups.
If I may I'm, not so on the yeah clean upside on margin sound like out in the well the clean up sound like there north of the corporate <unk>, maybe somewhere in that swine flu agents want we range.
But maybe the opportunity is less than that.
How did the reasons or you know or because it seems like we're still somewhat early an opportunity for clean ups I would imagine right. So yeah. So silly I'm glad to hear your voice as well you know we have just competitive rates and what those rates are are you know we bought I rather not give those that we battle every day with other companies that are out there in our space.
And I think we offer kind of very competitive rates.
All right and then on the furloughs and.
I know you know too early to quantify but it sounds like it certainly bias towards the S.K. side or are you can significantly bias towards the up 'cause side is that is that fair to say.
Not necessarily I'd say that it's a it's across all three pieces of our business both the S.K. side, a corporate section and environmental services.
Okay, and Capex any particular projects is it more growth projects I assume that are that are being pushed out a little bit any anymore color on what you sort of oh spanning are delaying yeah down mentioned, we are we took off about half of our we refining capacity.
So there was some capex there that they had invested we also and the business with lower revenue needs less vehicles, and so we had some vehicle upgrades and new trucks were going to put online and we slowed those down and so my view on that if there's a recovery in the back half a year, we feel we come back and the ended June and we think that things are looking a little better maybe goes a little.
Higher, but I think that I think for now I think thats, the right and prudent thing to do and out and as you know Larry we give out capex numbers, we hit those capex numbers. So he was really good about man managing that's been a and we'd look at it every week.
Right, Okay on environmental services or the high level question, obviously at the coming into this year like your business.
Well positioned at the same it doesn't really years and clearly the Q1 performance demonstrates that very strong backlog how about you know this co that.
Runs for a couple quarter in another quarter, or where you know full blown out and normally slowly come back is there a scenario where some of your customers or are you know begin to operate at much lower utilization. So they give off much lower waste volumes.
Your backlog starts to.
Good morning through that we could actually see a a lower a much lower later.
Latter part of the or even at the 21, even if coded sorting.
Somewhat under control.
[noise] I think particularly in the environmental side were a lot of customers have to move waste. Every 90 days you know we will continue to see the services performed for the majority of those customers. They they've been open a lot of a lot of our environmental services customers have an open your our utilities, our refineries or chemical companies.
Pharmaceuticals are we in the businesses that have really been more shuttered that impact us is on the safety kleen side than although that also brings in a other containerized waste volumes would be less coming in from safety Kleen a into that clean harbors disposal network, you know that cws waste.
But but overall you know just based on generation cycles, and and the need to move waste. Every 90 days you know we anticipate that continue to do a C volumes coming out of our customers. Although maybe if they are doing less there'll be a you know a less volumes down the road here, but.
We've been really pleased and listening to our our operating teams report in you know how much are customers have stayed in business. During this shutdown a were all the states are so basically been and a shutdown mode.
Right right.
Okay. How about just last couple of just on the price of oil obviously, the precipitous drop.
I'm not a beneficiary to S.K. in the short term, but in a in a vacuum just on the environmental side.
God I suppose that's at the net benefit you know much greater drop in cost for you.
Okay.
Yeah, we have a fuel surcharge, we haven't so as oil prices go up we can charge for the and charter customers little more so it's not necessarily you know obviously lower fuel prices do will spur a lot of maybe further investment in the U.S., but that's not that doesn't necessarily mean that short term winter what.
Okay, and then I'm all 20, Twond, obviously still early in the game there too.
The shipping industry on there obviously you know some significant stress yeah. There are a possibility that that you know look the restrictions or regulations on that at lax or even several years.
I don't believe so I don't think we've heard any rumors or at all on on on that being particularly being a UN.
Sponsored you know initiative. So we just you know we saw it coming in in January like I mentioned in my notes, but just no no no visibility right now Larry.
Okay I appreciate it got thank you okay fat.
Our next question comes from a line of Hamzah Mazari with Jefferies. Please proceed with your question.
Hey, Good morning, Hope you guys are safe and healthy the <unk> first question is just around.
If you could give us a april trends a larger companies I've been talking up our have been pulling guidance for talking about what they're seeing in April.
In environmental services and on safety Kleen, just just how April compares to Q1 on March or however, you want to answer that question.
Sure homes I'll start now in feel free to jump in I, just well just yeah, we had a great kind of pricing quarter for Q1, we had you know 11% on price in Q1, and I think that that would really kind of mid to high value waste streams that we had a in our network and continue to do well that that has continued through.
What we see as you know as of yesterday and as I mentioned in my call Hamzah, you know our cash balance I was flat to two quarter end, where kind of where same where it was last year and April versus March and so again that I'm really pleased with cash collections as Alan mentioned were consult a concern about receivables and our ability to collect those receivable, especially from.
Our smaller company generators and the fact that cash collections have been I've been stabilize has been it has been a ER and still still decent is still as such a great answer for us it from a from a strong from us from the strength of the balance sheet Standpoints is really positive news on the S.K. side, you know we've seen a as Alan mentioned, you know a 30% turn away that's.
What's happening and oil prices and the impact on that on our ability to both collect and to sell oil in the in the SK business has been has been impacted dramatically as Alan mentioned.
Great and then you don't you had mentioned the environmental services business.
You know all clarity is performing very well good could you maybe talk about Howard did in the last downturn and how that business is different today.
Yeah, I think that the are you know the in the in the environmental services business right. You know what happened back in 2008 910 in <unk> industrial services really struggled.
That business is a big part of yes, but the margins there much lower we used to have margins in that in the mid teens now and you're in the single digits. So if that business where to slow down and it will slow down in Q2 with a lack of turnarounds.
Don't think it's going to have as much of a material impact on earnings as it did kinda lets say back in the day. The Tech service business continued to do well and that business. You know that's slowed down a bit some pricing pressures, but that can do to do well yeah. I think field service you know, there's going to get a huge benefit from on the deacon work and that's going to do well here in Q2.
Hi, good Great and then just last question I'll turn it over.
Coming out of this when we come up the other side.
Where where do we sort of stand on the closed loop strategy, just any update there coming out of this.
Great. Thank you.
Yeah. We continue to you know build out our network or E commerce platform to support our closed loop or yeah, we are continuously.
Broad customer acceptance or to a that initiative and we'll we'll continue to drive that initiative, but but certainly a that's been.
Disrupted here during this US you know closure. So we'll we'll we'll see how Ah customers do coming back as as a the state start opening up.
Great. Thank you okay. Okay hamzah.
As a reminder, if he would like to ask a question press star one on your telephone keypad. If you are using speaker phone you may need to pick up their hands.
Yes, the sarkies.
Our next question comes really Jim maturity with Needham. Please proceed with your question.
Hi, Thank you.
Sure.
M&A.
Sounds like things are on hold right now, but I'm wondering how you're thinking about maybe the funnel of opportunities as we start to come out of this do you anticipate any potential changes out there in terms of what what might be available to you.
I I would think that you know there are companies out there that have heavily leveraged till we see some.
Competitors, you know at a five six times leverage and not knowing where their.
New EBITDA numbers are going to come out you know that there may be some opportunities for us to a look at both some smaller or larger deals where where.
You know we might be a good partner with them. We certainly had passed on a lot of transactions.
Over the last couple of years as you know because of the leverage that a lot of PE firms were putting on some of our competitors and the prices that were paying but maybe that world is going to change. We just don't know a until till things settle out here over the next two or three months.
Got it and.
Question on the yesterday I'm wondering if it or if theres anything was there anything unusual in that number that maybe you haven't talked about that you should you can call out.
From the quarter anything.
We need to be mindful of Yep, Yeah. Ken. This is Mike So last year. If you recall, we had about 10 million.
Well over 10 million of kind of onetime let's say good guys. If you will we got a settlement of a lawsuit for about five and a half million and then we sold some receivables that had previously been fully reserved for about 5 million in so both those items came into which we talked about they're not they're not secret we talked about last year and so when you look at a year over year S.
DNA increase of 14, and a half million about 10 of that attended a half of that is due to these kind of onetime items. If we talked about in the call last year.
Got it thank you.
Our next question comes from the line of Scott Levine with Bloomberg. Please proceed with your question.
Hey, good morning, guys.
Good morning got [noise].
So I was hoping to elaborate a little bit or you can elaborate a little bit I'm not the cleaning and disinfecting work that you're talking about can you give us a sense of what some of maybe those types of mandates are those kind of leanings of commercial facilities that type of activity and if you're willing to maybe discuss with them.
Margins. So you guys expect to earn on that are already locked out it was kind of comparable to either segment or corporation, you just little bit more color regarding your type of activity there.
Yeah, Scott I'll start and so you know our our de Con work is really kind of three different areas, where we you know we can either disinfect, we can decontaminate and then we just Bose I could call. It the de three D. Three system and so you know again, we're really proud of that and depend on what you want to answer your question what do we do we do it all anything from larger arena.
Does to small to small office office buildings and so it depends on what you want and how fast you want it and what level of clean do you want to get to it right and so there's a difference between just someone wiping down demand males versus bringing in a team in wood with the five isn't really doing it and are very detailed level. It depends on what level it but just to build has been.
Well, maybe doing a lighter lighter touch it building has had some people who have been sick, maybe do a heavier touch and that's something we just offer in them and again I don't want to talk about margins. We I mentioned that an earlier question I think we debate competitive margins are in the space I think that we do we we are nationally recognized im really proud of what we do there I really think it's great that arent.
Please as Alan said had been able to take people keeping a busy in other parts of the business had been maybe a little slower and getting engaged and making sure we're doing it safely and compliance with laws and getting really part of that.
Fair enough and to clarify you said 50 million in rather you potentially for the year is a decent bogey to think about yeah. I mean, if you asked me to pick a number on the I can do that you really I really it really is completely dependent upon you know the level of infection, what happens when how fast because the companys <unk> the economy.
Start ramping back up again shelter in place laws get reversed infection rates I mean, it's it's there's so many variables out there to kind of put a number on I mean, I'm happy to try to take shot at it.
That's fine, but anything beyond that is so difficult to do at this time.
Fair enough one last one for you we have seen some decent sized consolidation activity within the space generally with the the harsco. He saw deal and some of the activity with US ecology do you expect any like changes in the competitive landscape over the next.
A year or two years Navy opportunities to gain share just any other thoughts around around the general landscape from an industry standpoint.
I think the consolidation is good for the industry I mean, certainly.
Having having a stronger competitors rational competitors I always found is really good for the business and so from that standpoint, when you look at how much money is being paid for those acquisitions that you mentioned you know they got to get a return on that investment and so our our hope and expectation.
Would be is that they're gonna be rational and ER and that's going to be good for them for the for the industry.
Got it great. Thanks, guys.
Okay is that.
We have no further questions at this time I would now like to turn the floor back over to management for closing comments.
Alright, thanks for joining us today, we are participating in several virtual investor conferences in the coming weeks and we look forward to connecting with many of you then we hope you all stay safe out there.
Thanks for.
Joining us.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation have a wonderful day.
[noise].