Q1 2021 Clean Harbors Inc Earnings Call
Greetings and welcome to the clean Harbors, Inc. First quarter 2021 conference call.
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A brief question and answer session will follow the formal presentation.
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It is now my pleasure to introduce your host Michael Mcdonald General Counsel for clean Harbors, Inc. Thank you Mr. Mcdonald you may begin.
You Kristina and good morning, everyone with me on today's call are chairman, President and Chief Executive Officer, Alan S. Mckim, EVP, and Chief Financial Officer, Mike battles, and SVP of Investor Relations, Jim Buckley slides for today's call are posted on our website and we invite you to follow along.
Matters, we are discussing today that are not historical facts are considered forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
And there's been some cautioned not to place undue reliance on these statements, which reflect management's opinions only as of today, maybe for 2021 information on potential factors and risks that could affect our actual results of operations is included in our SEC filings.
The company undertakes no obligation to revise or publicly release the results of any revision to the statements made in today's call other than through filings made concerning this reporting period. And addition, today's discussion will include references to non-GAAP measures clean harbors believes that such information provides an additional measurement and consistent historical comparison of its performance.
Reconciliations of non-GAAP measures to the most directly comparable GAAP measures are available in today's news release on our website and in the appendix for today's presentation and now I'd like to turn the call over to our CEO Alan Mckim Alan.
Thanks, Michael and good morning, everyone and thanks for joining us today.
Starting on slide three.
Want to start today with a focus on safety, which is a key component of our corporate strategy and culture.
Theres nothing more and critical to the success of our company.
And making sure that every now and every employee goes home for their family got injured.
Safety is important not only for the well being of our workforce and the costs associated with industries and injuries and last time, what is a competitive differentiator and a critical selling point with our customers.
Can see on this slide the tremendous progress we have made as an organization over the past two decades.
Reducing our total recordable incident rate or <unk> by 74% since 2002.
It's a metric we take a lot of price.
As part of our continuous improvement approach to safety, we relaunched our highly successful safety starts with me live and $3 six five program this year.
The program really personalize the safety and for every employee.
And includes each employee's five personal reasons why they choose to be safe at work on the road and at home and we believe this relaunch will allow us to sustain the successful journey on safety.
Moving to slide for as we outlined in this morning's release, we have updated our reporting segments to better reflect the operations of the company today.
After a detailed planning process, we took a new approach to our safety Kleen organization that we believe will be beneficial to the company and our shareholders alike.
This approach is based on two critical changes first we consolidated the core environmental services of our safety Kleen branches into the legacy Environmental service sales and service regions.
We expect this change to strengthen our allocation of resources, whether that is people trucks or equipment. We also expect this to reduce third party spend and generate even greater cross selling opportunities across all of our environment and lines of business and it also enables efficiency gains and routing and network consolidation.
The second change we made was to combine all the pieces of our sustainable lubricants business.
Our newly formed safety Kleen sustainability solutions segment or S. K S. S consists of both sides of the spread we manage and our re refining business and.
It will be focused on providing the best most environmentally friendly and sustainable lubricant products to our customers.
Our collection and services for waste oil used oil filters waste antifreeze and other related items will all be tightly managed under a standalone organization.
And this should enable us to collect more used motor oil and supply our re refineries with the best available feedstock overall.
Overall, we believe this new structure better aligns the legacy safety Kleen operations within our company and will enable us to maximize the value of those assets.
Turning to our Q1 performance, we kicked off 2021 with a strong start as our results exceed exceeded our expectations. Our environmental services segment. After a difficult February due to the deep freeze and itself.
Rebounded with an outstanding March driven by greater volumes of high value waste streams, and the ongoing recovery and many of our service businesses.
Our newly formed <unk> segment delivered better than expected profitability due to ongoing base oil pricing gains driven by market conditions.
Adjusted EBITDA in Q1 was $129 5 million, which included $5 4 million and benefits from government assistance programs.
Our margin grew by an impressive 130 basis points to 16%, reflecting the benefits of our cost controls along with productivity and pricing initiatives.
We also generated strong adjusted free cash flow of more than $62 million.
Turning to our segment results beginning with environmental services on slide five.
Revenue was down year over year due to the lingering effects of the pandemic bolt on project work and certain service offerings as well and see effect of the February storm well.
But we closed Q1 with revenues on an upward trajectory.
Adjusted EBITDA was down 4% from a year ago, mostly due to the low revenue.
Even so our margins were up 70 basis points and this was driven by a combination of pricing cost savings revenue mix and for $5 million and government assistance Rev.
Revenue from our COVID-19, decon work totaled $28 million and Q1.
Which was higher than we anticipated.
We've now completed well over 17000 total COVID-19 responses since the program began a little over a year ago.
And Q1, and our incineration utilization dipped to 80% entirely due to the lost days in February at both our Deer Park and El Dorado incinerator as a result of the storm.
At the same time, we continue to gather a lot of high value waste streams and record number of drums, which pushed our average price up 8% from a year ago.
The adverse weather and strong volumes drove our deferred revenue for the highest level and our history and $83 2 million, providing us with a terrific backlog heading into Q2.
Landfill volumes were down 29% due to less projects, while average pricing rose, 24%, which helped offset a portion of that volume decline.
The pace of the parts washer services picked up nicely and the quarter growing 6% from Q4 to 235000 and services and <unk>.
Q1, we saw most of the safety Kleen, environmental and branch core offerings and the U S trending up from a year and as people begin driving more with the rollout of vaccines and S cases, non automotive service customers are also beginning to rebound.
Moving to slide six revenue for safety Kleen sustainable solutions was essentially flat with the prior year.
And as higher base oil pricing and charge for oil rates were offset by slightly lower volumes, particularly on the waste oil collection side on.
On a sequential basis SaaS revenue increased 19% from Q4.
And by stronger demand and higher pricing.
Adjusted EBITDA and this segment climbed 31% to go along with a 480 basis point margin improvement, which reflects the widening of our re refining spread.
Yes, and <unk> margin was driven higher by the productivity and cost initiatives, we implemented as part of our organizational changes over the past year.
Government programs accounted for $800000 of contribution in Q1 and this sector.
We used oil collections were modest at 47 million gallons.
Our percentages of blended products and direct volumes came in as expected in Q1 and consistent with the prior year.
Given the market environment, we prioritized opportunities to move larger volume so base oil at higher than normal margins.
Turning to slide seven.
Given our cash balance low leverage and 2021 cash flow, we remain in excellent position from a capital allocation standpoint.
We expect to focus on internal growth capital and our plants and all of the assets that will generate the best returns.
Our M&A pipeline is robust and as the U S emerges from the pandemic.
We see more acquisition candidates are coming to market.
We intend to be active on this front.
We also will continue to share with our share repurchase program as we believe our stock represents a great value at the current levels.
Our focus in recent years has been on increasing our return on invested capital.
Our adjusted ROIC, she has more than doubled since 2016.
Every year since then we've grown our annual EBITDA, while also acquiring companies that support our core businesses and pruning our portfolio by divesting some energy related assets are.
Our adjusted ROIC see today exceeds our cost of capital.
In summary, we are excited about our prospects for this year, we see a promising environment and it's North America reopens from the pandemic.
We believe both our segments have favorable outlooks for the remainder of the year.
Within environmental services, we began Q2 with a substantial backlog of waste at our plants and significant waste stream and opportunities for us to pursue.
We would expect our incinerators and landfills T S DFS and the other permanent disposal and recycling facilities.
And to deliver strong performance and.
And 2021 and.
And the quarters ahead, we also expect many of our service offerings, including industrial and technical and field services, along with the SK environmental branches to grow from last year.
Given our Q1 results, we now expect $30 million to $40 million and COVID-19 related revenues for the full year 2020 one.
Within <unk>, we intend to capitalize on the positive market conditions, particularly as demand and the base oil market returns to more normalized levels.
We expect our re refining production levels to remain strong over the next several quarters and we will continue to actively manage our spread.
We intend to grow our used motor oil gallons collected in the months ahead, and conjunction with the ongoing vaccine rollout and the pent up and travel.
Travel demand.
Overall, we expect a year of profitable growth in 2020, one generating healthy free cash flow to support our capital allocation strategy.
And so with that let me turn it over to Mike battles Spike.
Thank you Alan and good morning, everyone turning to our income statement on slide nine as Alan detailed we'd be we began 2021 with the same upward trajectory. We saw in the back half of 2020. In fact, we concluded the quarter with the best margin performance in our history in terms of both revenue and adjusted EBITDA.
Our Q1 adjusted EBITDA results exceeded the guidance and provided in our last call as expected revenue declined 6% year over year, but was up sharply in March versus the same month last year.
Adjusted EBITDA grew 3% to $129 5 million.
We recorded our 13th consecutive quarter of year over year margin improvement.
Our cost reduction programs and productivity initiatives and mix of revenue combined with $5 4 million of government program assistance.
And and 130 basis points improvement and gross margin.
If you back out the government moneys, our EBITDA margin improved a healthy 60 basis points.
SG&A costs declined year over year, and the quarter, reflecting a lower revenue and were flat on a margin basis.
<unk> cost control measures for the first for the full year using the midpoint of our guidance range, we would expect SG&A to be up and absolute dollars from the prior year and essentially flat on a percentage basis.
Depreciation and amortization in Q1 declined to $72 2 million in line with our expectations.
For 2020, one we continue to anticipate depreciation and amortization in the range of $280 million to $290 million.
Income from operations increased by 12%, reflecting our cost controls and revenue mix and the quarter.
Turning to slide 10.
Alan sheet remains in excellent shape cash and short term marketable securities at March 31 were $570 7 million flat with year end and up more than 76 million for the same quarter a year ago.
Our debt was 1.56 billion at quarter end with leverage on a net debt basis at one eight times.
Our weighted average cost of debt is four 2% with no debt maturities until 2024.
Our strong balance sheet puts and an enviable position to execute on our growth strategy.
Turning to cash flows and slide 11 cash from operations and Q1 was extremely strong at $103 million.
What are the drivers behind this performance was improved working capital management from stronger accounts receivable collections and lower AP expenditures driven by cost initiatives.
Capex net of disposals was down year over year at $40 7 million.
It was slightly below our expectation mainly due to timing of some projects.
The result of these two items along with some other smaller factors was a record Q1 adjusted free cash flow of $62 3 million.
For 2020, one we continued to expect net capex and the range of $185 million to $205 million, which is higher than 2020.
During the quarter, we bought back 300000 shares and a total cost of $26 5 million.
Of our 600 million authorization, we now just wait and we now have just over $180 million remaining we remain committed to our repurchase program.
Moving to slide 12.
And our strong Q1 results and current market conditions.
We are raising our 2021 guidance.
We now expect adjusted EBITDA and the range of $560 million to $600 million with a midpoint of $580 million.
Looking at guidance from a quarterly perspective, we.
We expect Q2, adjusted EBITDA to be 15% to 20% above prior year levels based on the positive momentum, we are experiencing and our business and the pandemic related slowdown in Q2 a year ago.
At the midpoint of that range, our adjusted EBITDA would be six per cent higher and Q2 of 2019.
Here's how our full year 2021, adjusted EBITDA guidance translates to a new segments.
And environmental services, we expect adjusted EBITDA to decline and the mid single digits on a percentage basis from 2020.
We expect to benefit from the growth and profitability with and incineration, a rebound and the SK branches and other service businesses and our comprehensive cost measures.
However, these benefits will not offset the decline and high margin decontamination work and more significantly the large contribution from government assistance programs in 2020 that totaled $35 6 million in this segment.
For safety Kleen sustainability solutions, we anticipate adjusted EBITDA to increase and the range of 50 to 60 per cent from 2020 we.
We expect our refinery our re refinery business to have an outstanding year and spread we manage in that business is extremely wide due to supply driven price increases and base oil and blended products.
As miles driven and lubricant demand rises and the second half of this year, we expect that spread should begin to normalize.
At the same time, however, our ability to collect more waste oil and cross sell our other products to those same customers should increase decent.
These improvements in the S. K S. S segment in 2020, one will more than offset the $3 7 million and government assistance that S. K S. S received in 2020.
And our corporate segment, we now expect negative adjusted EBITDA to be up low to mid single digits from 2020 due to higher incentive comp.
For 2020, one our adjusted EBITDA guidance now assumes receiving a total of $7 million to $9 million of government program assistance, primarily from Canada.
Based on our current EBITDA guidance and working capital assumptions, we now expect <unk> 2021 adjusted free cash flow and the range of $230 million to $270 million or a midpoint of $250 million.
Turning to slide 13, as we emerge from the pandemic and start a new hearing 'twenty 'twenty. One we thought it would be a good time to formalize some longer term targets for the company.
We review long term strategic plans and five year outlooks with the board on an annual basis, we'd like to share some of those longer term objectives with you today based on our current view of opportunities within our markets.
First we expect our organic growth each year to be one to two percentage points better than the U S. GDP.
Second we expect to improve our adjusted EBITDA margins between 30% to 50 basis points annually, excluding extraordinary items, such as government assistance programs.
Third we are targeting more than $300 million of adjusted free cash flow by 2025.
This five year outlook excludes any future acquisitions or divestitures and is based on current market conditions.
In closing we're off to a great start to the year.
We see a clear path to continued positive momentum throughout through the remainder of 2021 and also see macro trends that should support further profitable growth and the years ahead.
We're excited about the bright future of clean harbors, both near and long term.
With that Christine Please open up the call for questions.
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One moment, please while we poll for questions.
Okay.
Okay.
Okay.
Thank you. Our first question comes from the line of Noah Kaye with Oppenheimer. Please proceed with your question.
Good morning, everyone and thanks for taking the questions and and you guys really nice job and execution this quarter all of them.
Thanks, Thank you.
Maybe we'd just start with the quarter I had outlook you know the guide for EBITDA 15 to 20 per cent.
Microphone them has taken and I think last year, you had a lot of government benefits.
And the second quarter of 2020, maybe more than 20 million and it sounds like it might get a little bit of government and this quarter, but basically if I just do apples to apples I mean and back out the government money. It really sounds like Youre more like 30 to 35 per cent and my thinking about that right. Yeah. That's that's a good way to think about it I mean really Q2 last year was.
<unk>.
As you know, we had $23 million of government assistance and Q2 and so to.
And to get kind of an apples to apples basis. It really is quite a good growth and look at Q2 last year and everything was shut down low I mean, this time last year, we pulled guidance we draw on the revolver I mean, it was price a smoke by itself its not surprising were up that much.
Yeah. So I mean, your comp to <unk> 19 news and some ways, maybe more illustrative I guess you know what what can you call out in terms of.
The major bridging items that are reducing that are that are translating to them for profitability is it you know just structurally lower opex or is it you know some of the pricing initiatives and it's.
Spread.
And if you kind of compare this business to pre pandemic you know what.
And what's improved really yeah, I know that's why we put it in the prepared remarks, a comment on 2019, because that's really kind of Q2 of 2020 was kind of a crazy comp but to your point, though if as we said last year and were sitting around here like January and February kind of pre pandemic, Alan and Jim and I and others were talking about you know what a good you were going.
And how spreads were widening how the plants are running well I mean, it really was kind of all systems go and then the pandemic hit and everything and kind of went sideways and we all reacted I think we I think the management team did a great job of working their way through the pandemic, but this is in my mind and I was talking to some of the guys yesterday about it just feels like like it was kind of pre pandemic.
Last year, where all the things that were going real well last year I kind of back online whether it be high volume waste streams into all the things you just mentioned Noah.
Highlight and waste streams, and dry plant and the spread being wide cost controls being maintained our ability to drive price and other parts of our business and parts washers and other areas.
Really was a lot of good things are going our way pre pandemic pandemic and everything went sideways and now we're back online and that's how I feel about it and that's why we added that and I do think that's all the reason you just mentioned plus.
Got it.
And I can sneak one more and for for Alan and I did see there was some some M&A spending and the quarter first could you touch a little bit on what you bought and then you know you'll see you sound pretty optimistic on the pipeline just give us some color on the kind of assets. You you are maybe seeing coming to market or you know areas.
And where you see opportunity to really complement the existing portfolio.
Sure well I think for both segments of our business have great opportunity to grow through acquisition and we've been looking at.
Potential acquisitions on on both sides and.
I would be very disappointed if you didn't see us do a deal or two.
Substance this year because we are we've we've certainly been I think patients. We certainly you had to go for the pandemic and they've made it very difficult to do a normal you know M&A deal.
The way that we typically would do it for my own due diligence and integration standpoint, but we're we're optimistic we did a small tuck in down and the golf as part of our safety Kleen business, but I do think there are opportunities really on both sides to to grow our business and.
And we're pretty excited about some of the things that we're seeing and out there now.
Alright, we're looking forward for that thank you for the questions guys.
Our next question comes from the line of Tyler Brown with Raymond James. Please proceed with your question.
Hey, good morning, guys Hey.
Hey, Alan and I, just wanted to come back and make sure I have it on the re org. So going forward. So branch work like part washers and that's gonna get folded into Es and then it's basically waste oil collection and re refining that's kind of the crux of the new S. K S. S is that right.
Yeah, essentially there are a lot of lives for business that go along with that we actually moved the SK environmental under clean harbors.
And the second quarter of last year, and I think what we know now that we've you know basically eliminated that segment and created this new SaaS says I think it now gives us clear visibility on the remaining.
Sort of pieces that we that we moved out of our safety Kleen, which is all of the used motor oil collection and the industrial oil the waste antifreeze recycling side of our business are the.
And the sale of all of our re refined products.
It's all sort of all tightly managed.
Under one group and but I would tell you that I believe.
The record drum volumes that we're seeing on the environmental side of our business, we're very much driven by our penetration for the small quantity generator side of the business through the merger of our safety Kleen Environmental Lynch and Clinton and clean harbors environmental So I think a good a great story. There was one of the reasons why preferred is 82 million.
We're just very very busy and bringing in new customers and new waste streams.
Okay. That's helpful and then Mike and maybe you gave it somewhere and maybe even in the prepared remarks, but what was the new segment EBITDA in 2020 for the full year you have that yes. We are around 830, we filed the 8-K and.
And I tie that has all the recast the numbers by quarter for 2020 and for the full year 2019.
Safety Kleen and sustainability solutions for 'twenty, and 'twenty was $83 2 million that would be and okay.
Okay, Yeah, I'll check out that 8-K, okay, perfect and then so Mike I kind of want to just kind of come back and make sure I've got I've got it here. So you you raised guidance for the full year by call. It 15 million, which is which is great. But if you take Q1 actual and the Q2 implied guidance and subtract that from the full year.
Point I mean, it appears that you are guiding for less EBITDA in the second half than the first half and that would be wildly outside of normal seasonality I totally get being conservative but is there something that is giving you a lot of caution in the back half. It just frankly, it doesn't sound like it I'm just trying to.
Trying to work that out in my mind, Yeah. Yeah. Tyler. So are you you know I've been doing this for five years now and we try to make sure we hit meet or exceed our guidance expectations.
The pandemic is a big unknown.
And normally we don't even raise guidance in Q1 as you know and so the fact, we did that is it should be comforting to the day.
We feel we're going to hit that number and I'm I'm hopeful that we come back in 90 days and say, we're going to raise it again, but I don't know that and we don't know about Pandemics and we don't know about you know kind of the rollout across the world and we have a we have a pretty widespread and the SK and the S. K sustainability segment and is that going to continue and for how long and there's a lot of open questions around that so.
So that's that's where we are and we talked about it with Alan and the leadership team and with the board and that's where we land.
Okay, Alright, that's helpful. And then my last one I appreciate very much the five year target very helpful. But I am curious for little bit about through the assumptions and there, particularly around free cash. So I think you just guided to call. It $2 50 of free cash flow you're at the midpoint and 21, you you say youre looking for $300 million.
Yes, you do use the word exceed but lets just say 300 million in for years, but that implies less and a 5% CAGR and maybe capex is pointing to rise and I'm not sure and kind of curious about what's in there for that but it just doesn't feel like there's a lot of free cash flow leverage embedded in there given that it appears and again.
This is my own math gymnastics, but call it slightly half maybe of your longer term EBITDA growth is going to come from margin. So I would expect that would flow through pretty well for free cash flow, but just any broad thoughts there that would be helpful. Yeah. No you got it right that was pretty good pretty good quick math for you.
Yeah, we are going to probably grow capex as we grow revenue I think that's it makes sense as we try to replace our equipment.
And I think as we said is more than 300, right. We said as I said in my prepared remarks, I think we're going to be better than that but again I want to give numbers that I and we feel good about and that's why we landed yeah I'm not going to dial in and it's gonna be 333, 20 to 323 I mean, it's just it's more than 300, we feel good about that we're hopeful that we do much better and that I think we will if you look at our pads and we certainly are.
So that's where we landed.
Okay. So not a finer point just more of a broad statement. Okay awesome. Thank you got so much.
Got it.
Our next question comes from the line of David Manthey with Baird. Please proceed with your question.
Hey, good morning, guys Hi, David.
First off on the on the re Org is there physical changes to the branch operations and.
Clearly the oil collection business as a tanker truck I was under the impression that things like oil filters certainly were and that was collected on a box truck and those those boxes also might transport the parts washers and I'm just trying to understand functionally at the branch level are there changes to the.
And the operations there.
Well, we we haven't oil recycling group here that has about 19000 bins and at customer sites that are basically gather.
And oil filters as part of that service that we do on both automotive and heavy industry.
And so that moved over to the sustainability as well, we do so periodically pick up drums of oil filters as part of SK environmental.
Which is part of their containerized waste service offering.
But it's a small percentage compared to those services that we do it for those 19000 customers.
I think for overall.
When you look at bps structure will probably show this and the second quarter.
Earnings release, we'll kind of articulate where all the locations are and all the different assets, but we have substantial terminals our rail facilities.
You know service locations that are all standalone.
Bulks and product service organization that are throughout the U S and Canada.
And there are still some.
And <unk>.
Interactions with the SK branch business, the environmental branch business, because there may be a.
A small number of branches and still have storage facilities at them, but for the most part this is all standalone and it.
It really allows our environmental S.
K environmental business to really focus on containerized waste Vac services.
We're adding probably 30 more vac trucks and that business, we have several hundred and we have 600 overall companywide, but just in that division and then.
A lot of our parts washer.
Services, both our custom company owned assets as well as our customer owned assets. You know there are about 200000 of those so we really think they can now focus on those lines of business and and and really help growth those are now with and and and as part of this we actually added about 100 salespeople.
So we expect to really accelerate that.
The growth and our business and and I think coming out of this pandemic like Mike says you know, there's still uncertainty, particularly in Canada, Alberta, and Ontario was really hurt and which is part of why we're getting government assistance as you know, but Canada.
And we in Alberta, and Ontario, you know really been shut down and really.
Those businesses are really been hurt and this we think those will come back soon.
But time will tell.
Okay and you.
You touched on it a bit Alan in terms of what you expect to derive from this change.
Couple of questions is there a change in leadership for any of these organizations and then.
As far as I think you said you expect stronger growth because of the focus is there any targeted cost savings or EBITDA benefit from this change that you'd like to talk about.
Well I think you know.
You are going to have.
And obviously.
And.
Our focus.
<unk> focus on.
Let's say the 600 used motor oil trucks that we have out there, which we are growing we put a refurbishment facility and up and Elgin, Illinois, and and we're actually.
And building out 35, new trucks, a year now to support this business, we expect to continue to expand our our fleet, but also to.
Create more dense and and Robert dense markets out there and and I think youre going to see just a natural improvement and our margins because of that that focus and I think also the closed loop offering that we've been talking.
Talking about here on the call.
Bundling our services together offering those customers both the collection of all of these different types of.
Waste materials as well as the perched.
Purchase of all of our re refined products like our waste you know like our antifreeze like our oils our blended products.
A hydraulic oil so I think that offering is going to be well received and I think that the.
The the overall consumer really is I think more going to be looking for that.
Cycling and and sustainability message that I think youre going to start seeing more and more come out of our company here.
Mm Hmm, okay. Thank you.
Okay.
And it.
Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.
Yes, hi, good morning, everyone.
Right.
I'm wondering if you could talk about the margin improvement targets that you folks have laid out in a bit more granularity can you talk about how much of that is pricing and I'm sure you've got operating efficiencies dialed in as well maybe just step through the.
One or two most significant areas for improved efficiencies for.
From here relative to that margin bridge. Thanks.
Gerry This is Mike.
I would say that you know when we did this analysis we did it.
And at a pretty high level, we didn't go back and look at kind of what is SK SaaS versus yes, and and how we get there, but we did do is they'll look at where we were in the past three or four years and if you go back to 2017 and start I mean, the math kind of hangs together and so that's we felt pretty good about that both on the bolt on that the margin on the revenue and on the.
Our cash flows and so I thought that was a pretty good trend to kind of to kind of rely upon going forward all of the things, though that that that we have been doing over the past few years working on price you know taking costs out and.
13th straight consecutive quarters, we have year over year margin growth I mean this is this we know how to manage our margin and manage our cost structure and and that and we've proven that in our history and so there's no reason to think that we can't continue how much of that specifically is price versus vs regulation versus new opportunities I mean, that's all that's all kind of stuff we're working on that.
And we work on every day.
And you know you you folks obviously have a pretty.
Pretty clean balance sheet and and strong.
Strong free cash flow out and I'm wondering how you folks are thinking about potential for larger scale M&A.
Earlier in this economic cycle, how active is the pipeline and if any.
Any updated thoughts on you.
What would be a reasonable fit beyond bolt ons for your business.
Yeah, I think our last deal a large large deal which was I think about $1 billion free that we did when we acquired and safety Kleen back in 2012 that was that was probably the most sizeable deal that we did most recently, but there are deals.
Available like that.
That we are seeing and looking at obviously, where we seem to be and more competition with other private equity companies, where some of these are sponsored back and and so sometimes we see private equity just so on and off the private equity again, and that's that's been discouraging a little bit because we think that's for strategic buyer we we.
For a lot more and can get a lot more synergies and quite frankly.
But we do see opportunities and that size and we are looking at those deals.
Okay, Perfect day, and and lastly, you know and nice to see a really strong incinerator a S. P. You know I'm wondering as utilization rates come back online for you folks and what does that mean for mix and can you sustain that level of pricing gains.
As we head into <unk>.
Yeah, we're really trying to drive further.
Capacity.
We made our approximate $10 million.
Our capital and investment into a rec and I plant over the last two years and that came online this past month.
And so we hope to gain another 6000 tons.
This year and hopefully additional tonnage for next year and through that investment and.
And so adding new technology, Debottlenecking and even looking at further expansion.
And it's something that we are doing we do see growth from the captive markets, we're seeing a new volumes coming in.
And and we were implementing.
Implementing and 8% price increase.
For pretty much for all of our incineration business and.
And I think customers are receptive to that because last year, we didn't really raise any prices. In fact, we gave a lot of concessions on pricing last year too a lot of large corporations and and so we're going back now and getting those concessions removed and and driving price improvements to improve our margin. So those are.
Some of the things we're doing.
And I appreciate the discussion thank you.
Okay.
Yeah.
Our next question comes from the line of Michael Hoffman with Stifel. Please proceed with your question.
Thanks for taking the questions Mike.
Mike if I can dig into a couple of your assumptions.
And the the up three to five per cent and corporate overhead that's on the 175 million, that's shows and corporate overhead and the and the revised EBITDA segment EBITDA calculation. That's that's what I'm multiplying that three to five against yes, Sir and.
And then in 2020 one.
Are we assuming working capital is neither a not a benefit or neutral and it's either a youth.
Flat flat, Okay, and then on the five year.
My esteemed colleagues observations alone I mean, if your two to three per cent is GDP and you wanted to do better and that that's sort of a for on the top.
And to get 40 basis points, you do sort of 5% growth and EBITDA.
Which then and.
Capital spending is doing something silly, then you're at 6% compounding on free cash flow and the and the assumptions for the $300 million. So I guess the big question is are we going to stay at six to six 5% of revenues as capex as part of that underlying assumption and so we're gonna grow capex as revenue growth outside of any events, we had new incinerators are beyond that growth cash.
<unk>.
I would say three hundreds are floor and we go from there.
That's what you're looking for well and I'm. So you've I mean as a percentage of revenue as Capex has been trending at around 665%. That's right. So so that holds the E G and grow revenue as much as you want I'm still going to have a six to six five per cent of that is the underlying capex, that's what I'm trying to get at.
Yeah, I think that's fair okay.
And Alright, and then the last thing for my side is in the current year assumptions.
What is the presumption about getting back to a pre COVID-19 on sort of the pieces like and technical service or industrial service or the industrial adjusted.
New version of S. K E. What's the what are the underlying assumptions about pre COVID-19.
And recovery.
So as you know Michael the Tech service business, Didnt really suffer and it actually had a pretty good year kind of top line kind of for the full year and it was and it was it was flat here in Q1 and I think that's just going to continue as Alan said, we have a large backlog of work to do and we're going to get after that and the plants and I think that's gonna be a kind of tech service kind of continues to do well.
And field service, we had a great year in 2020, because of the pandemic and because of the decon work that we did that and as we said on the call that we see that for a long way down we did about 28 million here in Q1 of Decon work, but we said $30 million to $40 million for the year because as we see here sit here and may that that number has gone down to a trickle and so.
Which is actually a good thing frankly for everyone's sitting in the room here and we're happy that that speaks to a broader societal issue that's that seems to be turning it into a into a win so the last thing I'd say is that you know on the on the SK oil side I mean, that's all that's all.
And that's always decimated the S. K S S business with decimated and Q2, and Q3 and and I think that's going to come back here in 2021.
Okay.
That's very helpful.
Thank you Michael.
Our next question comes from the line of Hamzah Mazar with Jefferies. Please proceed with your question.
Hi, This is Joe mazzoli filling in for Hamzah could you just give us an update on the T cells opportunity and what you're hearing from the regulators there.
Yeah, Alan and I would stay and why don't you are where the P fast opportunity talk little bit about that yeah. Absolutely I think this administration, obviously is going to be driving we believe this issue and and coming up with a final conclusion on how to address this and the and the.
Environment and so.
We continue to watch and.
See what is.
It's happening in Washington, and and certainly from a technology standpoint, most of our focus has been on groundwater treatment at this stage.
And.
And then.
And that as these regulations develop will be able to drive some substantial volumes into our plants when when this gets underway.
And it's still a lot of questions a lot of Q&A, but not a ton of volume you know people ask me a lot of questions a lot of lunch and learns and.
We are at this juncture.
Great. Thank you and then for my follow up could you just remind us how many captive incinerators are out there and the marketplace today and what Youre seeing in terms of closures is there any catalysts that accelerates those closures or any comments on the pace picking up for slowing down. Thanks.
Sure. There was a there was certainly well over 101 time on and over the past 15 20 years, we're now down to about 55.
Of those 55, a number of them.
You know our.
Large rotary kiln type and sooner it is rather than industrial fueled and facilities or.
Liquids only facilities, but.
We continue to see a reduction and captives.
Companies looking at outsourcing and realizing maybe that's not there you.
You know there are a core competency of running incinerators and so we've we've been you know for the last 15 20 years talking to their captors routinely and and certainly and part of.
The reasoning for the new incinerator that we built and El Dorado was a result of anticipated new volumes coming in because of the closures and we're taking a hard look right now and whether we need more capacity because we think.
Capex will continue to strength.
Got it thank you.
Our next question comes from the line of Jim Ricchiuti with Needham and company. Please proceed with your question.
I just wanted to go back to the.
Good morning, guys D. S. K S. S. A reorder does that you talked to and cost savings and I'm wondering does that have.
Does that play and at all to the change in guidance or is that something that you're thinking about longer term for it from the standpoint of the EBITDA benefits.
Jim This is Mike.
And that hasn't that hasn't played out what what has played into the guidance raise is obviously the big results as good results. We had here in Q1, and the spreads being wider and the S. K O U S cash that business as well as as well as you know the kind of high volume waste streams and better than expected decontamination work. So all of those things played out and I think that the cost actions, we took last year Jim.
Whether it be kind of lowering our head count and lowering our rentals consolidating consolidated sites working at overtime working on rental and rental assets. All the good things. We did last year are all paying dividends here in Q1, and we're seeing it and as such that we felt comfortable to raise guidance.
And just with respect to Q1, obviously earlier in the quarter and February you. You you had the issues that were going on and the Gulf, but it sounded like.
You really exited at a pretty strong level. So net net I mean was it.
And you know how how disruptive was it to the quarter it sounds like it.
Maybe not a wash, but it sounds like you you ended fairly strong and it came back fairly strong and is that the right way to think about yes, Jamie It was interesting because you know as we gave guidance on the 24th of February the embedded and the winter event. Once told me that was the 13th to the 17th So we knew as we gave guidance for Q1.
And the.
The weather impact and we just had a good sense of what the weather impact was going to be and our plants and landfills and other areas. So certainly we were impacted by in that area. You know what what we didn't experience as we didn't expect is that the spread and that those and our plants were down so where other competitors and the refinery space and as such that that increased the price base.
Oil and quite a bit over the past quarter and we're the beneficiary of that and so that was probably an upside surprise that that kind of counterbalanced any lost business because the plants being down.
As we said in their prepared remarks, we had a great March and and the question was is that just a rebound or a bad February and as we're looking here in April we're going to have a good April two and so I really feel like it's not that really wasn't just to catch up a bad February that was more like the trends and I really go in the right way.
Yeah, and maybe to that point, Mike Yeah, We're just hearing about.
Rising commodity prices increased prices and you for resins and yeah.
And I'm just wondering as you look at say the petrochemical vertical and just what you're seeing broadly in the market.
And how significant or is are you seeing a is this pickup and industrial activity playing into the business outlook.
Yeah, it's been great the pipeline and looks really strong and we're really bullish about Q2 and the rest of the year versus 'twenty 'twenty of course being <unk> versus 'twenty 2019, as Alan said in his and his comments on our question and answer does that you know.
Customers are receptive to pricing has begun and a lot and.
And they've been receptive to that pricing.
And our peers, we all see inflation, that's here and we're feeling that but the customers have been receptive for price increases and and we've been working through those.
Okay. Thanks, a lot.
Yeah.
Our next question comes from the line of Jeff Silber with BMO capital markets. Please proceed with your question.
Thank you so much and wanted to go back to your five year financial targets I know the adjusted free cash flow target is a new target, but can you remind us on the top line growth and margin expansion targets, how that might have compared to prior long term targets.
We go back and look went back and looked to our five year model for the past for five years and they've all been about about this type of trajectory.
To answer your question, Jeff I think that we've kind of held onto this and history over the past for five years has kind of spoken to that so I think that we've been able that we get measured on these longer term targets and our incentive compensation plans and we've been able to pay those out which has been great because we've been and relate these targets.
Okay, that's great.
Follow up question I know the infrastructure plan that was rolled out in Washington, and you know a couple of weeks ago. It's still just a plan who knows what eventually will happen, but is there anything in there that if it does pass.
Might be beneficial for your business.
I think certainly when the government starts putting money out to do some of these major projects that we tend to see remediation opportunities contaminated soils and other you know sort of related cleanup work that gets let it part of as part of those infrastructure spending so we would look at that.
It is a positive thing.
Okay fantastic. Thanks, so much.
And as a reminder, if you would like to ask a question press star one on your telephone keypad and our.
Next question comes from the line of Alexander Leach with Bamberg. Please proceed with your question.
Good morning, guys. Congrats from me on the call for them in terms of the margin expansion you guys saw and S. K how much of that is it sustainable meaning.
And I know there was some shortfalls and supply leading into the year, which I believe is partly why you saw some favorable pricing do you expect any of that margin benefit to reverse through the year, It's a supply normalizes, a little volume increases offset.
And my thinking about this correctly.
And what are the moving parts there.
We're conservative and in our thinking about our spread management, but one thing. We would say is you know when we first went into 2020.
There was certainly a big opportunity and we thought because I'm old and.
And what that was going to do to the recycled fuel oil market and.
It's really difficult right now to kind of.
Pinpoint exactly why but the recycled fuel oil market, which is basically the market that we compete and or sell products into versus our re refinery business.
It has not really.
From a pricing standpoint, and margin standpoint, and has not really done well at all and and there's really a lack of outlets for a lot of this oil.
And otherwise in the past might have gone to a bunker fuel, we don't know how much of the jet fuel market.
Impacted that side of the business as well a lot of kerosene and coming out of the fact that aviation and so much under pressure. So theres a lot of moving parts that we see this year and where we're sort of being conservative and got to where we think the the spread will be.
By the end of this year, but we are feel.
Sealing that I'm always certainly having some impact on the outlet.
Hum.
Materials and the bunker market.
Okay.
Okay, great and and I'm, sorry, if I missed my Q&A on it.
And my line cut out slightly can you talk a bit about potential future inflation and how it could impact the business.
And then how it would specifically impact apartments sepsis versus safety Kleen.
And what is offsetting incinerator pricing power and <unk> had and and how will it impact and refining spread and and S. K.
Yes, so you know.
So first of all Alexandra and I think that we've had 13 straight quarters of year over year margin expansion. So I'd like to say that we know how to manage our margins and we've done a good job with that.
Through the pandemic before the pandemic and we made some hard decisions on cost last year, and we're glad we did cost actions and SG&A, whether it be headcount location gross margin and site consolidation overtime management, and everything and paying dividends now and so the extension that you said that fuel is going up and we have fuel surcharges just cover off on that so I feel like that the plan has been and.
With pricing and other areas and there was <unk>.
<unk> of that and we've been able to manage inflation pretty well.
Okay, great. Thanks, guys.
We have reached the end of the question and answer session I would now like to turn the call back over to Mr. Mckim for closing comments.
Okay. Thanks for joining us today, our Investor Relations calendar remains very active in the coming months and so we look forward to connecting with many of you there and we hope you all have a safe day and thank you.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.