Q3 2020 Clean Harbors Inc Earnings Call

Ladies and gentlemen, thank you for standing by please continue to hold your conference will begin in approximately one to two minutes again. Please continue to hold your conference will begin momentarily.

[music].

Greetings and welcome to the clean harbors Inc. third quarter 2020 conference call.

At this time, all participants are in a listen only mode. It.

A brief question and answer session will follow the formal presentation.

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As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Michael Mcdonald General Counsel for clean Harbors, Inc. Thank you Mr. Mcdonald you may begin thank.

Thank you Christina and good morning, everyone with me on today's call are Chairman, President and Chief Executive Officer, Alan asked for Kim <unk>, Chief Financial Officer, Mike battles, and SVP of Investor Relations Jim Buckley.

For todays call are posted on our website at <unk>.

[music] 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 of 99.

Participants are cautioned not to place undue reliance on these statements, which reflect management's opinions only as of today November.

2020.

Information on potential factors and risks that could affect our actual results of operations is included she she filings. The company undertakes no obligation to revise or publicly release results of any revision to the statements made in today's call other than through.

Filings made concerning this reporting period in addition.

Today's discussion will include references to non-GAAP measures clean harbors believes that such information provides an additional measurement.

Historical comparison of its performance reconciliations of non-GAAP measures to the most directly comparable GAAP measures are available in today's news release on our website and in the appendix of todays presentation and I would like to turn the call over to our CEO Alan Mckim Alan Thanks.

Thanks, Michael Good morning, everyone and thank you for joining us.

Starting on slide three we delivered exceptional results in Q3, and I can't say enough about the efforts of our team and driving these outstanding performance.

Since the outside of the pandemic in March everyone from really the top levels of the organization to our frontline workers have excelled in response to this challenge it's truly been up a team effort.

At its core clean harbors is a crisis response company and we can still thrive in difficult environments like the one we have all faced over the past eight months and the resiliency of our organization on the versatility of our business model clearly were evident here in Q3.

Revenue was down year over year due to the unprecedented market conditions was up nearly 70 million on a sequential basis.

This growth was driven by an accelerated recovery in several core lines of business and our environmental services segment.

At the same time, we also saw a strong sequential pickup within safety Kleen.

Adjusted EBITDA of 161.2 million included 13.3 million in government programs, primarily from the revised.

She W West legislation in Canada.

The high level of EBITDA supported by controlled capital spending resulted in adjusted free cash flow of 123.5 million a quarterly record for the company.

Mike will review the Pinedale in more details in his remarks.

Turning to our segment results on slide four.

Hi, metal service revenues declined 10% from a year ago.

But were up 6% from Q2 as many of our service businesses bounced back from the early days of the pandemic.

Adjusted EBITDA grew 16%.

This increase was attributable to a bowl in part to our cost reduction efforts.

Activity improvements and a healthy mix of higher margin work.

The two government programs accounted for 10 million of adjusted EBITDA in this segment.

Revenue from our COVID-19, pecan work totaled $29 million and our team has now completed a total of more than 9000 COVID-19 responses.

No incineration utilization dipped to 80% due to the timing of turnarounds and they production like from some of our customers. We continue to execute on our strategy to capture high value waste streams across our network.

This resulted in an average price per pound increase of 5% from the year earlier period.

Landfill volumes declined 6%.

A strong base business, largely offset the lack of remediation and waste project opportunities.

Moving to slide five same.

Safety Kleen revenue was down 18% from a year ago, but up 17% sequentially due to the recovery in both the branch and the SK oil businesses.

The lifting of local restrictions across much of North America led to a sharp increase in vehicle miles driven generating hard lubricant demand.

The recovery in demand for base oil and new products enabled us to restart three of our refineries during Q3.

Given the declining market value of waste oil we made time excuse me, we maintained high charge for world Rage use for motor oil and increased our collection volumes to 50 million gallons that is 16% ahead of Q2.

Safety clients adjusted EBITDA declined 15%, mostly due to the lower revenue.

This decline was partly offset by our cost reduction initiatives as well as the government assistance programs that provided two and a half million dollars to this segment in Q3.

Parts washer services were up 10% in the quarter.

Which was promising given that we originally expected the S.K. branch business you'd be at 85% of normal levels in Q3.

Percentages, a blended products and direct volumes came in as expected, but at lower volumes overall.

Turning to capital allocation on slide six and.

In light of the pandemic our strategy has been more about capital preservation to ensure that we exit this global crisis well position for growth.

I know I am confident that we will.

Capex spend was extremely low in the quarter and we will continue to proceed with caution on every internal dollar spent.

That being said, we continue to invest in certain projects, particularly at our plants that we believe will generate a strong return.

In terms of M&A activity opportunities are available and we have been exercising patience. So as we believe that we can be more opportunistic going forward in light of the pandemic.

In terms of share repurchases and debt repayment, we are active on both fronts in Q3.

Looking ahead, we enter the final quarter of 2020 in great shape on.

On the sales side, we're working closely with customers to help drive a measurable recovery in many of our core businesses, our national footprint reputation for safety in a branch response capabilities have been competitive differentiators for us.

On the bottom line, a prudent cost actions and kept careful capital spending have helped us generate record margins and cash flow free cash flow in the past two quarters.

Our decontamination business that can <unk> continues to serve as a natural hedge against further slowdowns in other parts of our company.

Well then environmental services, we expect strong incineration utilization in Q4 based on the lower planned turnaround days and the availability of waste in the marketplace. We anticipate our offerings within industrial services and Tech services to close out the year on an upward trajectory.

Field services remains on track for a phenomenal year due to the cobot related revenues, which we expect to exceed $100 million.

[noise] within safety Kleen, we remain below normal demand levels, but we've seen a vast improvement for the lows of the April may timeframe.

We're continuing to monitor and manage the impacts of localized kobin outbreaks.

Obviously, new shelter in place mandates could derail our recovery on the safety Kleen branch business, but to date, we have seen nice steady recovery since both the U.S. and Canada reopened for.

For safety Kleen oil our primary refineries are all back online and base oil pricing is stable due to the supply conditions brought about by recent hurricanes along the Gulf Coast.

We continue to actively manage our charge for oil rates as we seek to further grow our collection volumes to supply our network.

So in conclusion, we are encouraged about our overall prospect as we enter the final quarter of 2020.

Our Q3 results confirmed the resiliency of this company. The team continues to outperform the aggressive targets that we set for ourselves and I'd like to take this opportunity to again publicly thank them for their efforts. Despite the economic uncertainties that all companies are facing in today's environment. We are confident that we have.

Put our company in the best position possible to succeed as we close out 2020.

So with that let me turn it over to Mike battles Mike.

Thank you Alan and good morning, everyone. Our company clearly delivered outstanding results this quarter.

I want to Echo Alan's remarks about the organization.

We have an outstanding team that is able to meet the needs of our customers during a crisis like been dynamic and in ways most companies cannot.

Not yet the decontamination work, where we are heading into locations that others have evacuated for safety reasons.

The fundamental DNA of clean harbors and how this company measures that the challenges we excel at generating new revenue streams meeting customer needs during times of disruption and improving operational efficiencies.

All while doing it safely under a rapidly evolving health protocols.

I said that open my remarks last quarter and they're worth repeating.

I couldn't be more proud of the way our organization had met the challenges of this pandemic head on.

Turning to slide eight in our income statement I.

Our third quarter results exceeded the expectations, we set when we resume guidance in August.

Revenues declined 13% year over year, but on a sequential basis was up nearly 70 billion.

Preparing for the possibility of a protracted downturn, we have continually we've continued to aggressively manage our cost structure.

These comprehensive efforts combined with assistance, we received from government programs, mostly Canada this quarter, resulting in a 310 basis point improvement in gross margins.

Adjusted EBITDA increased to 161.2 million from a year ago.

Excluding the government assistance adjusted EBITDA would have been 147.9 million down only 6% year over year, despite revenues being 13% lower.

Adjusted EBITDA margins of 20.7% was 310 basis points.

It was up 310 basis points from last year's third quarter, which speaks to the effectiveness of our actions we.

We have now improved adjusted EBITDA margins on a year over year basis for 11 consecutive quarters.

Given our lower revenue our X gene a total was down in the quarter, but outperform its also demonstrate the benefits of our cost reduction and productivity efforts, we lowered asked DNA by nearly 16 billion or 13% in Q3 of that total 2.8 million was related to the impact of cares and queues.

I would like to point out that these programs have been critical to support headcount levels higher than they would have otherwise bad both here and in Canada.

In the quarter, we saw the full impact of the series a productivity programs and cost actions, we initiated in Q2.

Our ability to rapidly flex down our structure and maintain expenses at a lower level, even as revenues were coming back was a key factor in our strong third quarter results.

For full year 2020, we are targeting S. DNA of approximately 14.5% of revenue continuing a positive trend that began several years ago.

Depreciation and amortization in Q3 was up slightly at 74.5 million for the full year, we continue to expect depreciation and amortization in the range of 285 to 295 million, which is slightly below last year.

Income from operations increased by 4%.

Like in the higher gross profit and our overall effectiveness at managing the business.

Earnings per share was nine cents in Q3 versus 55 cents, a year ago or 90 cents versus 76 cents on an adjusted basis.

Turning to slide nine we concluded in Q3 with that balance sheet in great shape cash.

Cash and short term marketable securities at September Thirtyth exceeded 530 million.

Our liquidity increased even though we paid back the remaining 75 million of funds. We had drawn on the revolver are the abundance of caution when the pandemic began.

Our payables receivable balance grew in the quarter, along with the business, but both categories remain well below last year levels and our collections team is doing an outstanding job keeping cash coming in the door.

Our debt obligations decreased to below 1.56 billion with the paydown of the revolver.

Leverage on a net debt basis now sits at 1.9 times for the trailing 12 months ended 931.

Which is our lowest level in nearly a decade.

Our weighted average cost of debt remains an attractive 4.2% with a healthy blend of fixed and variable debt.

Last week, we renewed our revolving credit facility with our lending group led by Bank of America, and we're grateful for their continued strong support we.

We put a new five year $400 million lending facility in place. We typically use this asset backed loan agreement only for letters of credit.

Turning to cash flows and slide 10 cash from operations in Q3.

Nearly flat with prior year at 143.9 million.

Capex net of disposals was down more than 6% to 20.4 million, reflecting our Cobra response plan to be extremely cautious prudent with our capital.

The result was record adjusted free cash flow in Q3 of 123.5 million, which is 35% of head up 2019.

For the year, we continue to target Capex net of disposals, excluding the purchase of our headquarters in the range of 155 to 175 million.

During the quarter, we stepped up our share repurchases as we bought back 400000 shares at an average price of just over $55 for a total buyback of 22.2 million in Q3.

Year to date, we have repurchased slightly above 700000 shares.

Of our authorized 600 million share repurchase program, we have 245 million remaining.

Moving to guidance on slide 11, given our performance and based on current market conditions, we are raising our 2020 guidance.

We now expect 2020 adjusted EBITDA in the range of 530 to 550 million.

While this guidance assumes continued low glide outbreaks of the virus.

It does not assume a national shelter in place order due to COVID-19.

This also this guidance also assumes $3 million to $5 million of government subsidy money in Q4.

Here's how our full year 2020 guidance translates from a segment perspective.

In environmental services, we expect adjusted EBITDA to grow in the low teens percentage above 2000, nineteens level of 446 million.

Growth and profitability within incineration contribute contributions from the expected 100 million plus decontamination work government assistance programs and a rebound in the majority of our services business and comprehensive cost measures are driving this positive result.

For safety Kleen, we anticipate adjusted EBITDA to decline in the high teens percentage from 2019 282 million.

We expect the branch business to remain below pre covered levels in Q4, but we are continuing to work to improve from Q2 levels as it Didnt Q3.

At the same time, we expect SK oil to continue its recovery from Q2, where we temporarily closed I re refineries.

We have continued to be successful and aggressively managing the financing of our me refining spread.

In our corporate segment, we expect negative adjusted EBITDA to be up a few percentage points from 2000, Nineteens 188 million.

Doing due to increases in four one k. contributions environmental liabilities severance and bad debt.

Mostly offset by lower incentive compensation and cost savings.

Based on our current EBITDA guidance and working capital assumptions, we now expect 2020 adjusted free cash flow in the range of 250 to 270 million we've.

We believe this puts us in an enviable enviable position to execute the cost allocation strategy that Alan outlined.

Just summary to summarize the company delivered an exceptional quarter, both operationally and financially.

We enter the last quarter of the year with fairly strong momentum across our facilities network, including I. refineries and within within the majority of our service businesses.

But for the most part the macro economic end markets, we serve continue to improve.

Chemical industrial production, which parts of it in Q2 began to resume in Q3.

As more parts of the economy have reopened in the U.S. and Canada vehicle miles driven has increased.

We see a steady march forward to close out the year, albeit with normal seasonality in some of our businesses.

We also continue to see some project and turnaround work pushed out until 2021 along.

Along with new opportunities such feedback actually benefit benefit us down the road.

But overall, we believe the short term and longer term trends within both our operating segments favor us.

We look forward to closing out 2020 on a strong note and we are well positioned as we head into 2021.

With that Christine Please open up the call for questions.

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One moment, please while we poll for questions.

Thank you. Our first question comes from the line of Noah Kaye with Oppenheimer. Please proceed with your question.

Hi, good morning, and thanks, so much for taking the questions first congratulations on these results are I think if you know you asked anybody on the sell side would you guys be able to do flat EBITDA year over year back in April.

Nobody was there.

That's another 100 million below the midpoint of your guide.

So so nice job really managing all aspects of the business and that really makes it a kind of a high class problem type of question, which is capital allocation I think you got a good start with round 245 million left I think on your share repurchase program and that that free cash.

Well, you're expecting to generate in the fourth quarter, I mean, not that feasible necessarily that you could basically exhaust that program and still exit the year at around 300 million cash balance, which is a traditional midpoint for you.

So just help us understand here you.

Where do you sit now and capital allocation why not be a bit more aggressive on the share buybacks. There's something out there that is really enticing you from an M&A perspective, it doesn't necessarily sound like that's the case and if not you know why not go get more aggressive on buybacks.

Sure I'll start maybe Mike can chime in I think when we.

When we think about.

We are from a capital standpoint there.

There are acquisition opportunities out there and we continue to be.

Aggressive and ER and looking at a lot of deals and that is something that we really would like to try to do with.

Strong balance sheet that we have and so I think that that clearly is important I think second is although we've cut back on capital spending quite a bit this year there are.

Number of projects that we're working on to expand our existing facilities expand our plants and so next year, we'll be spending more capital.

As we've gone through the engineering and permitting and what have you. So we don't really want to expand capacity and get a good return on our <unk>.

Our capital investments into our plants and this year. We also have some really nice projects that we put in and.

Within our incineration facilities to improve.

You know volumes as well as a de bottleneck I think personally I think where we've been the beneficiary of some of these government programs. You know we've been somewhat reluctant to be really aggressive on the stock buyback program quite frankly, and you know if it wasn't for those programs.

Then we would have had to deal with even more you know employee reductions and other additional cost savings. So you know I think thats held us back a little bit, but certainly next year, we could continue to look at stock buybacks as a as a.

Use of capital might I don't know if you have anything else you want to chime in on yeah. Noah. Thanks for your kind words up front and I actually kind of say if you would add to any of US here in the room back in April may where we would have landed I don't think anyone would have said flat to be why that's so we were we were kind of way that we drew on the revolver. We were looking at covenants me we were doing all the things.

And everyone else in the World was doing in it and it just worked out that given all that that that as I said in my prepared remarks, the DNA of the company.

Look for look for opportunities and we found one with the decontamination work in that that really helped us kind of bridge the gap hearing it and again, we're really proud of what kind of where we landed where we will land 2020, I think it puts us in a.

Alan said puts in a great spot in 2021.

On on a you know what Alan said 90 days ago, I think still rings true as you know we we did we did you know M&A has been slowed down because we're worried about conserving capital and I think we're on the backend to that now I think we feel pretty good about going into 2021, and I think there are targets out there and including all all four pillars, whether it'd be capex as Alan said, there's a lot of.

The bond like and good ideas out there, there's M&A opportunities and we were very aggressive in looking at that and the buybacks. We did do a fair a fairly large buyback in Q3 not at not at that you know the numbers that we could do but certainly certainly wants to put the stock and we will continue to do that.

That's helpful. Thanks, So much and raises my follow up question really off of Alan's comments, which as you know around potential access expansion of the incinerators you know I think the question here is really as you look at you know both the recovery dynamics you know from the initial trough.

And then again.

You know maybe longer term considerations around the captives and is there how is your appetite now you know to do so no meaningful expansions here. The incinerator network. We know it takes a couple of years you know for the permitting side and you know several years to construct.

Are you incrementally inclined to do that at this point.

Oh, Yeah, we certainly are we.

Because if we look back at our our third incinerator that we've built within the El Dorado facility. We're extremely pleased with the performance there and what the team has been able to do and continues to do there.

Well, we certainly see a lot more investment going in the chemical space here in the U.S. and particularly in the Gulf and so we're seeing more opportunities more waste streams and we're trying to.

Make sure that we're partnering with our customers to you know aligned with what they're going to be generating and be able to handle that in our plants and then we also have the unknown with p. faster and so you know we truly believe that as we move forward and the regulatory environment that you don't destroying those forever chemicals through incineration is really to be.

Yes.

Way of dealing with them and that might drive some additional need for capacity, but even if it if it is to be landfilled. If the landfill is an acceptable treatment method or through regulation them, we're certainly well positioned there as well with our landfills and and we can certainly build out more capacity, if we need to in our land.

We'll put more capital there too.

Yep, Okay. That's very helpful. Thanks, so much.

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

Yes. Thank you good morning, everyone and my first question is regarding the the IMO 2020, and Thats Kao you could you just talk about your thoughts as it relates to that opportunity. The question out there as just has this dissipated or has it been delayed and what are you.

Your thoughts on the eventuality of improved spread dynamics in S.K.L. stemming from the supply and demand imbalances in used motor oil relative to IMO 2020.

Yes, certainly David as you know in the very early beginnings of 2020, we saw you know.

Good thing playing out the way, we had hoped but but nothing since and Oh, you know the whole disruption that is taking place so because.

Because of the pandemic, particularly in the airline industry, where lets just say.

A huge decline in jet fuel.

Consumption and subsequently you know some of those fuels and diesels and other just becoming such a glut of and so we haven't seen it really materialize to the level that we would have hoped and I think it's going to take some time into 2021 as you know that part of the industry kind of comes back where maybe we.

You'll start seeing the the IMO 2020 impact that we had hoped for in both the you know marine diesel oil market and subsequently maybe in the basal market as well, but I think we're probably at least 12 months away from getting anything meaningful out of it.

Right it sounds like you're doing a pretty good job managing the spread in the interim.

Based on what you reported here today.

The second could you talk about these cost reduction and productivity efforts could you just at a high level outline what happened in the third quarter, and then give us an idea of what might be in the tank for fourth quarter and 2021.

Yeah, Dave I'll take that this is Mike good morning, the yeah, I'd say that you know we have different cost right. Some costs that come back I think in a post vaccinated world whether it be.

Some health care savings, we've experienced good you know incentive compensation, maybe some teeny come back over some period of time, but there are other costs, we've done with an outside transportation outside disposal temporary labor you know a labor utilized you know overtime and other things we've made it very well I don't think those and we took as Ed you talked about two got some heads here.

<unk> SGT World I don't think those come back and at the same level until revenue is really there and the businesses, there and and they may not come back ever and so I really do believe that in areas like and and leases in other areas. We've been had some material savings that again I don't believe kind of come back at the same levels in a in a post.

Vaccine World and so.

There's one bucket of cost that that probably does come back and there's a larger bucket I don't I don't think does and how much that affects our EBITDA margins going forward I think that I think that that's a real number there and is it is it 10 basis points in <unk> I don't know, but it certainly is a certainly is there. There's certainly a winner there that that that allowed us to do some things that we probably were probably need.

Do and puts us in a good spot in a post vaccine world.

All right sounds good all right. Thank you very much.

Our next question comes from the line of Michael Hoffman with Stifel. Please proceed with your question Hey, Thanks, Alan Mike and Jim.

Can you catch us up and remind us on what's in guidance for these government programs. So we have a sort of a total number to play with and then how do we think about what that comparability is next year, how much of that's for doesn't have to be repaid versus does.

Yeah, Michael So this is Mike and I'll I'll take a shot at it so on the piano. There's you know we'll end the year, we're at $36 million right now.

We'll get has as I said in my remarks, three to 5 million. So, let's say that gets to 40.

40 that does not get paid back that is that is that is a grant most of its Canada that is that is a wage subsidy and that is not reimbursed by that to us. The other part of that the other part of the equation now as part of that cares Act as most companies that have not been paying payroll taxes.

And that that number is about 11 $12 million of quarters, let's say through the last two quarters, which has only been applicable is about 24 million, but we'll end the year with $36 million of additional cash flows that will have to be we'd pay weve repaid 18 million and 2021, and 18 million and 2022, but so so there are two parts of this part of it is.

Is reimbursable, which is the payroll tax and part of it is not reimbursable, which is just a government grant.

<unk>, Canada, so given how strong free cash flow is why not pre pay back the cares Act and just take it off the table from a compare ability standpoint.

We think that we think that you know I sell side analysts and our investors are smart enough to digest for that and I think that it's I I'd, rather have the tax the interest free loan and invest that in our business.

Okay, and then if you took out.

D. Con work.

And then what we know about these the the Pinedale had positive impacts from the grants.

Our calculation as you still meaningfully improve margins. This isn't all about on the back of government programs and he got you yeah.

And so that's a part one of that and then how much of that do you get to retain on a permanent basis.

And that is that is that is the big question of how much of these cost saves you know do we kind of retain I think thats. A valid question. We have to go through a budget process to get through it as I said I said to one of the other cell sites that I think a meaningful amount <unk> states and just just to be clear with the turn of the calendar I don't get the decontamination what kind of goes away I do think that is a that is going to be with us for.

Quite a bit but it will be a 100 million to 2021, no I hope not frankly, but it will be a number there that that will be kind of a soft landing. If you will if you look at 2021.

You know like we have to go through the budgeting process. We had to go through all that and it is a challenge for us in all all the companies in the space, but how we think about 2021 could it really depends on you know.

When a vaccine is available to us.

So to that end some of that savings once things like incentive comp and bonus accruals have all those all caught up given that your guidance is almost on top of your original 2020 or better in some cases like the free cash flow.

As you know Michael we said, we set our targets at above the street numbers, we hold ourselves to a higher standard to get our full bonuses will there be some bonuses, yes, but not at the levels that they were in 2019.

And well below the original plan of 27, 21 accruals will be higher if everything stays the course, they ours, what I guess I'm trying to get out that's right. That's right, yes that will be at I'm hopeful that the headwind in 2021.

Yeah, it'd be a nice problem to have.

And then Alan the investments you were making this year on the capital how do we think about what the incremental EBITDA contribution from others Arent 21 and 22.

Yeah, you know I don't have a number here quantified to share with you, but I think as we continue to drive margin improvement and talk as well as we have about why we think of some of the things that we're doing to internalize third party disposal cost transportation to put in more processing at all.

Our facilities.

Which allows us to eliminate some of the double and in some cases, even triple handling of some of our drums, though that's why you're going to continue to see those margins approved but I can kind of quantify right at the moment here, we have to go through a budget process, Michael but the but be clear 11 straight quarters of year over year margin expansion that is done kind of well before called it.

While before incentive compensation went down and help you know went down those were things we were doing led by Alan and the team did tenant to improve efficiencies across the network.

And then on cash flow from ops at the midpoint of the revised numbers from Twoq to Threeq you, it's about $45 million, what's the split between a profit contribution and working capital.

HM.

[laughter] that that will happen.

[laughter] when I get the stumped Green light.

[laughter] I prepare a pretty a pretty robust for this call and you got me [laughter]. So Oh, one last one the always trying to buy Suez do you think they end up selling their U.S. business.

To help fund it well certainly we're looking at you know what what what is going on with that transaction and.

We're really not sure what the implications will be here in the in the U.S. a as you know we acquired the facility from she was and Oh, six and the El Dorado. So.

So they exited the of environmental business.

Back then and.

Maybe something like that might happen again, but we really don't know it would only be guessing at this point, okay, well nice job for really improving this business fundamentally as well as in participating in the recovery the economy.

Thanks, Michael.

Our next question comes from the line of Hamzah Mazari with Jefferies. Please proceed with your question.

Hey, good morning, Thank you.

Alan I was hoping you could maybe just touch on what you're hearing on on.

What what haven't you think it could go down I know clearly there's an election results that hasn't come out yet that may have an impact on your.

So any thoughts as to where that is stuck in the process.

And and maybe any any talks is how hard that Gordon packed European out long term.

Yes, certainly we really think you know that we need sort of a federal mandate here, we really need to.

Federal program and I I think when each stage starts taking on their own or initiatives I think it gets confusing sometimes and ER.

And we ended up dealing with things differently from state to state, which is not helpful. So.

If we do have a change in administration I think probably a we would see more aggressive full.

Focus on getting regulatory framework.

Framework put in place pretty fast and we do believe that incineration is the the <unk> at least for contaminated materials.

Groundwater on the other hand, you know, we do have treatment capabilities and we've been doing a lot of that kind of peak fast ground water recovery.

So I think we have all the tools in our toolbox I think what we really need is that regulatory framework.

Got it got it and and then just on on the landfill volume side, you had mentioned Blackhawk remediation.

Waste projects is there pent up demand there do you see did you sort of walk through what your pipeline looks like there and just outlook on the landfill volumes I.

Absolutely there's pent up all you know we have a lot of business that got pushed and subsequently has been pushed into 2021 a lot of it is really more to do with the pandemic I think is just you know.

You know moving people are you know, having you know whether it's a con consultants or government officials or other other folks to regulators being on these sites that need to overseas. Some of these larger projects that we end up working on that.

That's for all been disrupted and has delayed a number of projects. It. So I think there will be a built up demand for us and certainly our competitors I think in that area.

Got it and then just lastly, I'll turn it over maybe for Mike.

I know you touched on sort of costs coming back and certain costs, you know structurally not coming back, but Bert do you have a number around incremental margins for you guys as as you sit today over the next quarter or two quarters.

I know, it's tough to predict longer term, but what's the incremental margin today in your business.

Yeah. It comes out it's hard to kind of put a number on that depending on kind of where that what kind of revenue we get in and different waste streams have different margin contribution margin percentages, but back to my point, we've had 11 straight quarters of year over year margin expansion. We've tried to target 50 to 225 to 50 basis points of margin expansion a year I'm confident.

That will continue down that path in 2020 and beyond.

Got it. Thank you so much okay. Thank you.

Our next question comes from the line of Jeff Silber with BMO capital markets. Please proceed with your question.

Thanks, So much I had a couple of questions on the environmental services segment incineration utilization was down pretty significantly year over year, you talked about some production lag from the second quarter and some timing of turnarounds.

Where do you think that goes do you think threeq you with the bottom and when do you think we'll get back to kind of normalize levels. Obviously, assuming you don't add any capacity.

Hi, Jeff This is Mike I'll start now and feel free to jump in I I do think that the Q3 low utilization, we talked about that in the in the second quarter call that we had some slower slower demand and we saw that July it started to pick up we did have some more down days this quarter than in prior quarters that led to kind of a low utilization number.

And we need to find that I would say that our pipeline as we look at 2021 is better than it was this time last year and that that has to do with a win rates and timing and everything else it along with that but the but make no mistake. We're very bullish about 2021, and we feel like we're going to you know all this pent up demand as we said in an earlier question it.

Is there whether it be turnarounds, whether it be remediations and waste projects in there that a very healthy pipeline and I'm really confident that this will translate into incremental revenue in 2021 as the economy gets back to whatever normal looks like.

All right that's great to hear and then continuing just on the incineration side you know the average price per pound he had a nice increase.

Because of continued mixed improvement do you expect that to continue in the fourth quarter and any color on where you think prices are going next year would be helpful. Thanks.

Well we.

We certainly pause on our price you know.

In March and initiatives.

Around this area because of the the virus and certainly what we saw our customers dealing with.

Across the board customers were looking for a lower pricing or or some type of temporarily relief, while they were going through their their challenges and we've worked with a lot of customers in that regard and we hope that you know we will go back to where we were and then in 2021 begin the <unk>.

The process of improving pricing again through our pricing initiatives, because we do have to continue to make those capital investments and Oh, you know because I think customers, we've been working with them in regard to that so.

Oh, please just little bit of understanding that you know this was a really really tough year to try to do anything around price, but we think we can get back on track with that next year, yeah like like I'd like I'd like our peers have said, we're going to be kind of back on track with pricing and 2021 and the good news is that deferred revenue did grow in Q3 that does give us good indicator.

And for Q4.

Okay. That's really helpful. Thanks, so much.

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

Hey, good morning, guys I got it.

Hey, Mike can you put a finer point on incentive comp in the guide just how much is incentive comp help versus the 100% accrual again I'm just trying to get all the puts and takes here yeah, I'd say, it's a I'd say the $10 million to $12 million good Guy.

Okay. Okay. That's helpful and then Alan I'm, just curious so yeah.

And on the switch over to SK real quick if.

If I'm a local body shop do I pay you a monthly or annual subscription and you come due a prescribed service or is that done more on a requested basis. I guess my question is in Q3 did you get any extra boost from a rush of service as all of these body shops, a quick moves kinda reopened door.

Yeah. So two points I guess, one is we have about 800000 subscriptions with the safety kleen customer base. So each each service that we provide whether it's a parts washer or used motor oil effect or they are on a subscription plan and we may do a an eight week 12 week or 16.

Kind of things so it's a it's a it's an awesome business <unk> and since Weve acquired that in 2012.

Weve almost doubled the EBITDA margins in that business. So we believe that that.

We will continue to grow for US I think second yes, we saw a lot of AD hoc work or.

We did have some furloughs and that part of our business ER ER and so.

When the business started coming back on we've got in and David quite frankly, with some service requests and and so we played a little bit of catch up here.

Just because of the sheer disruption we were showing up at customer sites as part of our subscription service and end customers were close you know and so back in April and May everything you know, we had a redo all of our subscription plans and.

Fortunately, we were able to get those services back on track, but there was quite a bit of disruption with our customers in that area.

Okay. Okay. That's helpful. I appreciate that very helpful. At this point at this point, though what percent of the re refining capacity is online.

Well, we only have roughly.

So I think we only have one we refunded me that represents about 15 million gallons oak on West Coast, It's down.

So everything else is on line here. So we still should be about 150 million gallon or so level of of a baseball manufacturing okay.

Okay. Okay very helpful I'm going to switch back to yes, just real quick and this may be a bit of a silly question, but of the 9000 decontamination that you've done year to date are all of those basically sporadic in nature or do you have some customers who are saying Hey, we want you guys to come every weekend to do a deep clean again, I'm, just trying to kind of understand.

How recurring that line is.

Well, we have national contracts with a lot of companies that that really need a national response company that can handle locations all over North America, and so those those contracts their AD hoc like like you would expect you know, we get well when a when when needed and.

Every night, we see our nightly calls come in there could be 30 or 40 calls a a.

A day.

For those requests and sometimes it could be 100000 square foot warehouse or could be a a 5000 square foot office, but almost all of that business is coming from our national contracts that rely on us to do that across the board okay.

Okay. Okay. That's helpful. And then maybe my last one so Alan I'm just curious in your internal meetings are you hearing from any of your your folks just any pressure or expected pressure on the transportation side I mean, it feels that that market is tightening up it's going to be inflationary in 2021 and can you talk about how much you do.

And on transportation again.

Sure. So you know we have added quite a bit of additional drivers and expanded our fleet quite a bit and I think Mike might have commented that you know.

Our outside transportation has continuously come down.

And we've also been leveraging our rail so we have a very large rail.

Infrastructure that we own a and so we're expanding moving more of our waste products as as well as other products on rail.

I think next year, we will continue to internalize more transportation I think we're talking about hiring at least another 100 national transportation drivers. So a we don't feel the pressure on that because I think we are trying to do more and more to internalize that control our own destiny yeah.

Yeah, Yeah, no. That's that's very helpful. Okay, well. Thanks, guys. Thanks for the time, Okay. Good Todd.

As a reminder, if he would like to ask a question press star one on your telephone keypad.

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

Hi, good morning.

A couple of questions just as it relates to Ah, Yes business as you entered the quarter and then saw the way the business.

Really played out.

He surprises in terms of either somebody in markets, where geography as you know we saw we've seen PMI data improve just kind of curious from a macro level. What you saw in the quarter, maybe relative to your expectations going into it.

Yeah, Jim I'll take a shot at this now you can chime in if you need to the.

I'd say across the board it was better than we expected we did talk about some softness in the Q2 call with with kind of a kind of in the chemical space in our incinerators and that would be when it was down but overall you know that cross the board things were better than we expected I think thats driven by macro.

Factors in our performance and in our end markets along with the fact that the deacon where came in better than we expected and so all those things when you. When you look at kind of kind of where we were 90 days ago and kind of where we are today. It's it's it's all these things are I'm, just a little bit better than what we expected and the cost saves kind of continued to kind of roll on through which is and along with the gun.

The programs that we Didnt really think we're going to get much in Q3.

At the time, the Canadian government had finalized.

And then a a new wage subsidy program.

Got it and with respect to the.

The pause on pricing I'm wondering as you look out to next year.

How should we think about.

Some of this being layered in over the course of the year.

I I think it would be probably better to be conservative and not layer too much pricing increases and for for next year only because until we.

Gets more visibility here on Kobe, then and see where.

Where things go with the vaccine I I think we're just going to be really cautious in how we handle pricing with our customers at this point.

I think just want to point to make is that I mean, we've had a unprecedented number of hurricanes and weather related shutdowns. Both our customers have experienced that quite frankly, we had as well a number of our.

Facilities were impacted in the Gulf.

Due to the Hurricanes.

Somewhat helped us a little bit in chart two.

Some of the refineries.

Refineries being taken off online or or shutting down from refining capacity. So to some extent it helped us a little bit on our oil side of our business, but on a net basis I mean, we've seen a lot of customers suffer a lot of damage and weve been shutdown as well our safety Kleen business, particularly got impacted quite.

Quite significantly and we really didn't get a lot of response work out of that like we normally do.

And probably just one other point I just want to highlight you know when we when we did the bird flu back in 2015 timeframe that was a $350 million event for us here. So as much as we are.

Appreciative of the work, we're doing and that's really important work that we're doing for our customers. It's nowhere near the size and scale that we had when we were dealing with the other pandemic issue here in the past.

Got it thank you.

Thanks, Jim.

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

Okay, great. Thank you for joining us today and we.

We have participated in many virtual events in recent months and we'll continue that in the coming weeks, including the conference with Baird and BMO capital The New York Stock Exchange and Bank of America. So we look forward to connecting with many of you. There I hope that all of you and your families stay safe during the remainder of this pandemic. Thank.

Thank you.

This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.