Q2 2021 Clean Harbors Inc Earnings Call
Greetings and welcome to the clean Harbors, Inc. Second quarter 2021 conference call.
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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.
Thank you Christina and good morning, everyone with me on today's call of 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 of posted on our website and we invite you to follow along.
The 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.
Adjustments are cautioned not to place undue reliance on these statements.
Which reflect management's opinions only as of today August 4th 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.
In addition, today's discussion will include references to non-GAAP measures. The 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 of today's presentation.
And now I'd like to turn the call over to our CEO Alan Mckim Alan Thanks.
Thanks, Michael and thanks, everyone for joining us lots of exciting information of share with you. This morning.
Starting with safety first our safety results are behind plan as we continue to experience minor of safety incidences of round slips trips and falls.
We certainly doubling down our efforts to meet our safety targets. This year, Inc.
The <unk> initiating several safety stand downs across our entire network.
I'm optimistic that we can reverse this trend.
Turning to outstanding Q2 performance on slide 3.
This quarter was a good example of what we can deliver when all of our core lines of business are on the upward trajectory.
Particularly our disposal network.
In addition, the spread we manage in our re refining business should widening widening due to the favorable market conditions.
Because of the quarter concluded with 2 terrific months, our results far exceeded the guidance we gave in the early may.
Environmental services rebounded from the impacts of the Q1 deep freeze in the Gulf.
And we saw strong volumes in the quarter.
Safety Kleen sustainability sustainability solutions delivered far better than expected profitability.
Do the multiple base oil pricing gains driven by supply the conditions in the market.
And the overall management of our used motor oil the base oil spread.
Adjusted EBITDA in Q2 was a record of $187.8 million.
The 36% from a year ago.
Our margins increased 80 basis points to 23 per cent.
Reflecting the benefits of pricing initiatives and cost reduction efforts of <unk>.
Adjusted free cash flow was the strong at $114.6 million.
Turning to our segments, beginning with environmental services on slide 4.
Revenues grew 18% on growth in disposal volumes and strong industrial services activity.
We benefited from a favorable comparison with Q2 of last year, when the pandemic lockdowns impacted the overall economy.
Industrial services performed particularly well.
Posting revenue growth of more than 50 per cent as.
As a backlog of deferred maintenance projects began to come to market.
Adjusted EBITDA in this segment was flat year over year due to the high level of government assistance and high margin Covid decontamination work in Q2 of last year.
These factors were offset by higher revenue cost savings and favorable mix.
Government assistance programs totaled $4.4 million in the quarter.
Down from $19.7 million in Q2, a year ago.
Incineration utilization was 87%.
With the prior year, but up nice leave from 80% in Q1, which was affected by weather related shutdowns that disrupted 6 of our 9 incinerators.
Mix of waste along with pricing initiatives pushed our average price up 5% from a year ago.
We entered Q2 with deferred revenue at the highest level in our history.
And waste volumes in the quarter remained robust as we continue to recover from the unplanned Q1 shutdowns.
Landfill volumes rose, 13% in the quarter as we finally saw increased activity within our project pipeline.
And we also benefited from a 10% jump in the average pricing.
Covid Decon revenue in Q2 was $11 million with most of that coming in the early in the quarter the.
That work has slowed to a trickle in recent weeks and were currently assuming very little contribution in the back half of the year.
Conversely, we're seeing a good lift in our base field services work.
The pace of parts washer services continue to pick up as we hit 240000 services for the first time since the pandemic began.
Moving to slide 5 S. K S S revenue more than doubled.
This reflected much higher base oil and blended pricing as.
As well as greater volumes than the year ago, when we temporarily suspended some production at our re refineries.
On a sequential basis S. K S as revenue increased more than 30% from Q1 fueled.
Fueled by strong demand for our base oil.
Adjusted EBITDA climbed by nearly $55 million year over year, while margin sort of more than 31.31 per cent to more than 31% excuse me, reflecting the widening of our re refining spread.
And the return to more normal production levels.
S. K S. S margin also was driven higher by the productivity and cost initiatives that we implemented as part of our organizational changes over this past year.
We used oil collections continue to ramp up nicely during the quarter coming in at 57 million gallons compared with 43 million gallons a year ago.
47 million gallons in Q1.
Our percentages of blended products indirect volumes came in as expected.
And given the market environment, including the additive shortages.
We continue to prioritize opportunities to move our large volumes of base oil at least in the short term at higher than normal margins.
While the outsized returns we saw from S. K S. S. In Q2 are not inaccurate barometer for how we expect this business to perform long term the.
The segment's first half performance. This year of further supports our decision to separate the business out from SK environmental.
That move enabled us to manage the spread much more tightly than we would have had it remained as part of the branch network a.
A stronger focus and a more active management and all aspects of our oil collection was precisely the rationale behind that decision.
That goal dovetails perfectly with our pending vertex acquisition.
Texas has been a strong outlet the third party oil, particularly industrial was which can be used in the manufacture of buy mode Twenty-twenty compliant marine diesel oil.
Through its Louisiana plant vertex as an important supplier to the M D O market in the Gulf region.
That broadens the scope of our business to include the generators of industrial fuels tank bottoms and other waste oil fuels that meet the M D oil requirements, but don't necessarily fit well with our current base oil plants the.
The vertex network will support our growth and our field services and our industrial services business in the years ahead.
Turning to slide 6 and a separate release. This morning, we announced the signing of a definitive agreement to acquire hydro <unk> PSC in an all cash deal for 1 point to $5 billion.
We're excited about the prospects for our combined businesses and confident that this transaction will build sustainable shareholder value.
H P. C is planning for $744 million of revenue this year and approximately $115 million of adjusted EBITDA.
We believe that the operational productivity and sales synergies will be broad based and achievable. In this combination as a result, we expect to achieve $40 million plus all the synergies after our first full year of operating H P. C.
Each would translate to a purchase multiple of about $8.1 times on a post synergy basis.
As you can see by the numbers on the slide H P. C brings a lot to clean harbors until it turns of footprint customer base services assets and importantly, a talented team.
In addition, H P C as the only provider of industrial cleaning and specialty services, who maintains a dedicated manufacturing and technology Center.
As a true competitive advantage as it gives H P C. The ability to fabricate customized tools that handle complex and very unique applications.
This technology will enable our combined company to improve safety and operate with less labor as we rollout these robotic and hands free technologies to our customer base.
Turning to slide 7.
The reasons behind this transaction, which we expect to close later this year of many.
H P C as a leader with terrific assets that will enhance our industrial service capability, particularly.
Particularly in the high value areas of especially work in facility services.
The addition of its fleets in site as sites will give of size and scale and what remains of highly fragmented market.
On the field services side, which accounts for about 15% of their total revenues H P. C brings a strong presence in the utility vertical that will complement our nationwide field services organization.
Another key reason, we were attracted to the H P C as the of differentiated technology.
When it comes to hands free devices and increased automation, they're the leader in the industry and part of our ESG efforts here at clean harbors is been around continuously improving safety for our people and the sites that we operate on the.
The acquisition of H P. C is another important step in that.
H P..6 customer service approach commitment to innovation and business philosophy mirror the same principles in many ways that cultural fit is in part what makes this an exciting acquisition for us and why we're confident it will succeed.
We know that we are acquiring a first class organization led by a strong and experienced management team.
In addition to the cost synergies and the debt as a strategic buyer, we see a lot of cross selling opportunities with H P. CS customer base, particularly through waste disposal and emergency response contracts H P. C does not operate any of the disposal of plants.
Our network of landfills industrial oil plants will enable H P. C. The offer more bundled services towards existing customers.
We see a multitude of ways for this acquisition of generate both short and long term shareholder value. We're excited to welcome the more than 5000 members of the H P. C team to the clean harbors family.
Moving to slide 8 another important announcement, we made today is that we're officially moving forward of head with our plans to build of new 70000 ton incinerator and Kimball Nebraska.
With an expected cost of about $180 million. This project will be the largest internal investment in our history.
It is an investment we're excited to make and we intend to mimic the design that we used in our El Dorado site, which should also cut down on our construction timeline.
We believe that we can permit design and build this facility over a 4 year timeframe and that we have the plant operationally by the end of 'twenty 'twenty 4 and accepting waste in the first half of 'twenty 5.
Here on slide 9 on the upper left you can see a nice aerial shot of the Kimball site today with the existing kill them.
On the lower right photo you can see our engineering plan for where the new incinerator will sit.
Be integrated right into the heart of our existing facility to maximize our efficiencies and waste handling at the site.
We have a strong relationship with the Kimball community given our 25 year plus the ownership of our existing incinerator at that site.
We're confident that the new jobs and increased business activity of this plant will bring will benefit the region and the entire state.
And having that additional capacity will enable us to provide greater environmental service capabilities to our customers, particularly in the Western U S.
We're confident that incineration demand driven by the ongoing U S chemical and manufacturing expansion.
Combined with the continuing closure of captive incinerators will enable all of this additional capacity to be readily absorbed when the new killing the opens for business.
Turning to slide 10.
Given to us given our strong cash flow cash balance and low leverage we have been an excellent position to execute our capital allocation strategy.
We've continued to invest capital into the business.
Including today's Kimball announcement.
And on the acquisition front, we're excited about both H P C and vertex.
Going forward, we'll continue to look for similar opportunities, both internal and external that generate the best returns.
With our leverage levels, increasing following the close of the H P. C transaction will be more closely evaluating reducing our debt going forward.
And we also intend to continue with share repurchases as we believe our stock represents a great value at its current levels.
Given the all we of halves to cover today, let me just close by reiterating how excited we are here coming off of very strong Q2, we entered the second half of the year with considerable momentum across all of our key markets.
The North American economy, particularly in the industrial space should support our continued growth or.
We're anxious to bring onboard H B C and the vertex assets.
As Mike will cover we're expecting a record setting financial year for the company.
So with that let me turn it over to Mike battles.
Thank you Alan and good morning, everyone.
Turning to our income statement on slide 12, we delivered exceptional results this quarter.
Revenue increased 30% year over year on the strength of greater volumes higher pricing, especially the <unk>.
Specially in base and blended products and a meaningful pick up in our service businesses.
The dividend grew an impressive 36% to $187.8 million.
We recorded our 14th consecutive quarter of year over year of margin improvement, despite a very difficult comp a year ago.
Our revenue mix widened, we refining spread SG&A cost reduction programs and $5.2 million of government assistance resulted in an 80 basis point improvement in EBITDA margin as the exceeded 20% per the quarter.
If you back the government monies out of both periods.
Our EBITDA margin improved from 16, 2% a year ago to 19, 7% this past quarter.
SG&A costs increased by approximately $20 million year over year, reflecting the $216 million increase in revenues.
On a percentage basis, we improved our SG&A by 120 basis points.
For the full year using the midpoint of our guidance range, we expect SG&A to be in to be up in absolute dollars from the prior year and flat to slightly down on a percentage basis.
Depreciation and amortization in Q2 declined slightly to $71.6 million in line with our expectations.
For 2021, we continue to anticipate depreciation and amortization in the range of $280 million to $290 million.
Income from operations increased by 83%, reflecting a high revenue growth coupled with prior year cost initiatives.
Turning to slide 13, our balance sheet at June 30 remained in excellent shape.
Cash and short term marketable securities at quarter end were $666.3 million.
Approximately 95 million from year end and from March 31.
Our debt was $1.55 billion of quarter end.
With leverage on a net debt on a net debt basis approaching 1.5 times.
Our weighted average cost of debt before factoring in the hydrogen per transaction is 4.2% with no debt maturities until 2024.
To finance the all cash hydrogen deal, we intend to issue $1 billion of additional debt and fund the remainder of between cash on hand, and free cash flow, we generate from now until the deal closes.
We have yet to finalize our plans and we'll have to assess market rates as we get closer to executing this transaction.
However, I would expect the majority if not all of that financing to take the form of the term loan b and it gives us low interest rates and flexibility to pay down our balance without penalty.
Based on our current guidance and assuming the deal closes in Q4, we will anticipate ending the year somewhere around 3.3 times levered.
With the target of lowering that net debt leverage into the mid twos by year end 2022.
Turning to cash to Q2 cash flows on slide 14.
Cash from operations in Q2 was extremely strong at $162.4 million.
Our working capital management initiatives, including collection of aged receivables and inventory management also benefited benefiting our cash position.
Capex net of disposals was up slightly year over year.
$47.8 million, which was in line with our expectations.
The result of all of these efforts was a record Q2 adjusted free cash flow of $114.6 million.
For 2021, we now expect net capex in the range of $190 million to $210 million, which was the.
The addition of some initial spend on the Kimball incinerator.
Turning to the second during the second quarter, we bought back 200000 shares at a total cost of $18.9 million.
Of our 600 million authorization, we now have more than $160 million remaining.
Moving to slide 15.
Based on our Q2 results and current market conditions, we are raising our 2021 guidance.
We now expect adjusted EBITDA in the range of $620 million to $650 million with the midpoint of $635 million.
While we expect both transactions to close this year. This guidance range does not assume any contribution from the vertex assets or from the hydro can PSC transaction.
Looking at the midpoint of our guidance of a quarterly perspective.
The Q3, adjusted EBITDA to be at a level similar to slightly above Q3, 2020, which would infer that Q4 is approximately flat to slightly above the prior year.
Based on where we are midyear, here's a here's how our full year 2021, adjusted EBITDA guidance translates to our segments.
The environmental services, we expect adjusted EBITDA to decline in the low single digits on a percentage basis for the full year 2020.
We still expect the benefit from growth in our incineration profitability of continued rebound in both the safety kleen branches and industrial services and.
And incremental growth and base and base field service with all of these businesses supported by a comprehensive cost reduction measures.
That said these factors are not enough to offset the year over year of decline in high margin decontamination work and more significantly the law.
The contribution from government assistant programs in 2020 debt totaled $35.6 million in this segment versus about $10 million this year.
For <unk>, we anticipate adjusted EBITDA to more than double from a year ago, the midpoint of our guidance assumes growth of approximately 120%.
The combination of our abnormally widespread and having both of our production and collection volumes returned to pre pandemic annual levels is driving this result.
That level of adjusted EBITDA, but also put us approximately 45% above what the segment achieved in 2019.
Which demonstrates how well we are managing the business the impact of IMO 2020 on our markets and the super sized spread caused by supply driven price increases in base oil and blended products.
Our guidance assumes that the spread will continue to now in the back half of the year.
The exact timing and the pace of that will be determined by market conditions.
As the final S. K S. S reference point in 2020. This segment received government assistance of $3.7 million.
That amount will likely be cut in half this year.
In our corporate segment, we now expect negative adjusted EBITDA to be up single digits from 2020.
Largely due to higher incentive comp given the successful year, we're having.
We also had about $3 million of government assistance in 2020 and corporate versus less than half of million. This year.
For the full year of 2021, our adjusted EBITDA guidance now assumes receiving a total of $11 million to $12 million in government program assistance, primarily from Canada.
Based on our current EBITDA guidance and working capital assumptions. We now expect 2021 adjusted free cash flow in the range of $280 million to $315 million or a midpoint of $300 million.
In closing Q2 in many ways, where the continuation and acceleration of the positive business trends, we experienced in Q1.
We had every reason to believe that will continue through the remainder of 2021 and also see macro trends that should support further profitable growth in the years ahead.
We are excited to move forward with our incineration expansion plant in Nebraska, and lastly, with the expected additions of the vertex assets and the and the Heidrick and PSC business, we expect to see significant growth and synergy opportunities for us in 2022 and beyond.
With that Christine Please open up the call for questions.
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Thank you. Our first question comes from the line of Tyler Brown with Raymond James. Please proceed with your question.
Hey, good morning, guys.
Good morning.
Hey, Mike just to be clear so neither of hydro camera vertex or in the guide is that correct.
Yeah, that's correct, where theres been no are all of the numbers reported this morning don't have any M&A in it because it's not closed okay perfect and so can you just kind of bridge the midpoint change the 5.8 to 635, I mean, I know, there's a lot of moving pieces in there just how much of that is really wide spreads better trends.
Sounds like there's higher incentive comp working against you, but then maybe a little bit more government assistance.
Yeah, I think you have most of the piece parts of the.
The biggest piece is the spread being widening of the price increases that we've had in the back half of Q2 and here in Q3 of.
Of that really were a 40% increase in the 30% increase in our in our ability of your kind of manage the front end of the spread on the on the CFO of pricing that really led to kind of a supersized margin and supersize. The results in Q2, and then that's going to carryover into Q3, you know Tyler we did the <unk> business did $63 million of EBITDA.
In Q2 of of 2021, it did $8 million last year. So that was and I think that I think thats, but continues and that's really part of the of the of the of the beat and then from there we say, okay, well, it's beating what's going to continue on at least through Q3, and we've kept the spread pretty wide in Q3.
The other thing that happened on the on the environmental services side is that industrial services came back probably faster than we anticipated. We expected is gonna be a good year, but they really had no net revenues up 50% from prior year again I thought that was a really great result.
Encouraged by the back half kind of.
The Q3 turnarounds that we had.
That's coming up and as such that raised our guidance.
On the on the corporate side, yes. It did go down a little bit because of incentive comp, but I'm here to tell you that that incentive comp is actually probably close to the Max it can be and so my point being any incremental dollar that we get it should be should have a very favorable margin flow through because of the outside of the safety, which Alan says, we're struggling with a bit most of our targets are hitting kind of at the Max If you will.
Okay. Okay. No. That's helpful. And then Alan this is the more conceptual question, but I think you guys upgraded your win ERP platform of few years ago, you've obviously been reworking your technology, but can you just talk about you know potential integration risk I mean, there's a lot of moving pieces going on right now with hydro Camden vertex.
And whatnot it sounds like Hydro Cam also has some really interesting technology and I was just hoping you could expand on that a little bit as well.
Sure I think of when you think about clean harbors technology that it brings the.
It's it's much around sort of the systems to manage the business from the quote to cash and you know our proprietary system really enables us to take a company like H B C and really roll it on onto our network. There. There are some 1 off systems. They have that certainly we'll take a hard look at and determine whether we integrate those into our.
The platform or not.
But for the most part we really have I think that investment in our technology.
To leverage significantly and that's exciting for us and we've tried to do that for day 1.
The technology that H B C's, bringing is really more on the operation side out in the field.
They can bring that technology to customers within the plants, whether it's a leak detection, whether it's you know of hands free technology for cleaning or you know high pressure work things that really drive safety improvements and lower labor cost, which is really what a lot of our large customers are and we're looking for so.
Bringing 2 technology companies together with different kinds of technology, I think it's going to be a home run for us.
Yeah very interesting the my last 1 just real quickly on the 40 million of synergies can you kind of parse out the 2 or 3 buckets. There. So it sounds like most of those are kind of operating synergies not necessarily the cross sell even though you've talked about that and then will there also be any capital synergies as you guys will be much.
Bigger buyer of equipment, yes.
This is Mike and I'll take it I'll take a shot at that the.
Paris Sydney the.
It is it is mostly operational we don't have any end of 49, we don't have any kind of cross sell opportunities we don't.
A lot of put a lot of revenue synergies into our into our model day, they tend to take a little longer little hard to achieve that at the same we don't have a line of sight to them I think we can get them, but we hate to kind of put those in a number that we share with where the investors just because they tend to be harder to achieve so most of those are operational synergies around around the edges. As you can see the footprint, there's a lot of <unk>.
<unk> and leases and between the 2 businesses Alan just talked about the ERP system in the back office support that that provides there is some back office synergies of cost and systems that we should see some savings on we think that debt that 40 million is very doable and we're hopeful to get a good chunk of that in the first year.
You know I think of in regard to capital of 1 of the things that we were excited to leverages. Our refurbishment capabilities. We have 6 locations around North America that could take and really extend the life of of these assets and that is something that we.
We think we can bring to the table as well as of a further reduction on rental of assets internalization of disposal, probably the biggest 1 is maintenance we performed the majority of our maintenance in house.
The H P C put for the most part outsources maintenance so that.
We think we can really leverage that network of refurbishment and maintenance facilities that we have as well as our disposal network.
Okay, Yes that is extremely helpful. Thanks, guys.
Our next question comes from the line of Noah Kaye with Oppenheimer. Please proceed with your question.
Oh good morning, Congrats on the outstanding quarter. So much to cover here I guess, just picking up with hydro Kim.
The the industrial logic here seems is extremely compelling.
My question is really more about like a typical business profile of financial profile of the company I mean, I think you know 'twenty 2020 'twenty, 1 have been anything but typical so would you say the 2021 projections for hydro Cam or a fair representation of what they would do on a standalone basis has this.
Historically been 10, but you know low to mid single digit top line mid teens EBITDA margin type business.
I know this is Mike.
The going back in time.
Has been growing that the thing that makes it such a unique asset is it its EBITDA margin and it's the ability for all of the things Alan set around automation and enhanced technology and some of the systems and processes. They been able to drive margins in a pretty good level. So those margins have been mid teens as net revenue has grown 2012.
As of weird year for us and for everyone really so it's the hard comparison, but they've been growing that business over the past 3 or 4 years of generating kind of mid teen margins, we expect that to continue.
And of post pandemic world.
Okay terrific and then you know I think just touching on on what Alan was saying before around you know, bringing these unique technologies together what is the opportunity just from an operational perspective too.
Do some knowledge sharing around.
The technology design implementation of me you made the point that you know this this acquisition is really the only company to have its own technology design and manufacturing center can you leverage that across the.
The rest of the clean harbors going forward.
So that this really this business becomes even more sort of technology, leading in terms of the services we provide.
Yeah, I think when you look at our.
Our industrial business, which is both in the U S and Canada both of them.
$400 million, we believe that we can take and really leverage psus technology across our customer base.
And particularly in Canada, which would enable us to you know.
Really introduce some newer technology that otherwise we havent had to offer there are some off the shelf robotics technologies that can be used but are just a very unique capability. They have that's been in place of for well over 20 years and.
It's what's been driving the they were much higher margins that we've enjoyed in the industrial side.
Okay, perfect I'll turn it over thank you yep.
Our next question comes from the line of Michael Hoffman with Stifel. Please proceed with your question. Thanks for everybody Hey, Alan most companies never tell us when safety's got an issue and they got to bring incremental focus so kudos to you because it's important that everybody goes home.
To the family.
Mike on the $70 million year over year EBITDA increase.
The increase can you split it between what's the yes, and what's S. K S. S. And then in those 2 how much is things that are above average like incineration getting a really good pricing, but does that normalize when you're.
Past the utilization settles back to of long term average or S. K S. The base oil prices way above normal can you help us with that.
Yes.
Michael So the the big driver of that kind of initial guidance to where we are today is really in the SaaS business and that spread that Alan that we talked about being very large and no 1 kind of anticipated that and that has been kind of a big driver the.
S business has done well, we have we talked about that kind of going down $30 million to $40 million and now we're guiding of you take the midpoint of my comments in the in the low Twenty's and so thats done done better than we had thought I think the speed based on incineration volumes, we've talked about field of industrial coming back kind of better than expected. So that's done that's done well in that.
And we're really proud of that yes business, but what's driving the beat in the guide is really the SaaS business and the team and the leadership that we that Alan demonstrated by bringing those the breaking out the oil business out of the SK branch business merging it with our SK oil business and really driving kind of both sides of the spread along with market conditions and I M O 2002.
And all of those things have really driven.
A supersized Q2 outcome and it really big upgrade and guidance for the year and again some of you really excited about.
The question of what you were asking the question you were asking about about what's what's continuing on hard to answer because it yet because of the fact that we don't know if it's kind of just better management is it is it I M. O 2020 or is it kind of a supersized spread that comes back to normal kind of in the back half of the year, we haven't kind of returning to normal.
In our in our model in our guide.
Michael I'm not sure exactly when that happens, but that's that's in our guide so to just to parse this a little bit $50.560 million of the 70 as S. K S asked the rest is yes.
And the some portion of that 50.560 is an above average base oil price, which we all kind of have to try and figure out maybe it's half of it and that's what I got to think about them, making up a net headwind going into 'twenty 2 before all of the benefit of these deals.
That's exactly right Michael the only thing I'd say is the only thing that's 1 more add to that is that the corporate segment up a bit because of incentive comp is that kind of its max levels.
I said earlier it kind of stays within our guide to be Max of the rest of the years of incremental dollars of all the better flow through but that is that is part of it as well so as gas that's up a ton.
Yes, up a bit doing well corporate up a bit incentive comp.
Got it alright, 3 M has just announced.
They are going to the headline says 3 of them to expand collaboration with clean harbors, but probably the most significant thing when I'm reading this.
Is there of announcing their closing all of their captives and everything is coming to you.
So clearly that supports why youre doing kimball, but can you absorb all of this volume before Kimball could spell what's the volume number look like what would help us understand the significance of the statement probably 3 of them yes.
So theres a lot of ways to think about this and I'll, let Alan comment on the strategic partnership and how happy with half of that but when you think about the numbers Michael.
That plant the Cottage Grove, Minnesota Incinerator has been in turnaround since the fall and so we have been getting a fair amount of that waste kind of anyways, which we have with all of our all of our captive customers, we've been getting the incremental waste and so and so the difference here is that because of the challenges that that plant has had.
Oh, they are giving that waste forever and that's a big deal for US we've talked about strategically being captive closures are a big part of the strategy of this is the largest captive incinerator in North America. So we're really proud of the fact that working with 3 am and allowing us to be part of a strategic partnership with.
Such a prominent company really validates everything we've been doing for the past 2 years and dovetails really nicely with the with the new incinerator, but the price of incremental volumes knowing that we have a problem in that area, we've already been getting the those volumes.
And I would say the you know we have been debottlenecking of.
Our incinerators, we've been adding capabilities like the shredders, we put of $10 million shredding system in it of Reaganite incinerator.
We have expanded our autoclave network to put more medical waste.
Into the autoclave aside of the treatment and get that out of our incineration, So where we're trying to move stuff out of our <unk>.
Generators and move it into a different treatment technology. So I think I think and we also have room for utilization of improvement you know where where are you now we're running at 87% we could do better and we will continue to see unimproved meant there so.
I think we're gonna be okay, but it is it is going to be important for us to expand.
Okay on the H P. C acquisition. So in 'twenty of 11, Alan you tried to buy Badger and the.
No arbitrage market goof debt all up for you how do I compare.
What you're getting at H B C versus what you were trying to get at Badger because that was the big hydrocarbon Hydro Vac play I mean.
When I read H B C stuff it looks like that's the big Hydro Vac play how does that how do I think about those 2 comparatively yeah I think much much totally different I mean, when you think about the daylighting business that Badger was which is basically at the time I think they had 500 or 600 units out.
Performing a lot of.
Work for the utility industry and in the.
In the street so to speak.
H P. C is very much embedded in their customer sites they were 180.
Embedded sites are we call them insight programs and our our speak here, but.
But I think 400 plus million is.
That comes in every day, because they're on the sites now they do use hydro back the high pressure equipment, and vac trucks and all of the things that we do across our entire field services and industrial services business I think the differences is that we typically handle the waste as part of those services, whether it's liquid waste or.
Solid waste.
For example, we have 14000 roll off containers.
And P. S. He doesn't do that kind of work and so internalizing more of that in bringing more of that waste into our treatment facilities and out of landfills. I think is where we will see some real opportunity there, but really totally different than the Bachelor of deal.
Fair enough and then another company severe of a reported earlier this week beat the numbers because the temporary rental space in Canada.
In particular was very good so is that the opportunity here to finally monetize some of those assets you've thought to monetize.
We just are we just sold 1 of our camps are down in the Permian.
Just just recently realizing that that wasn't core for us and as you know the campus that we have up in Fort Mcmurray.
Really provides support for our own.
Folks up there we have 5 of 600 people.
Working at the large end.
Oil sands facilities up there. So we'll continue to look at that Michael but I think that it's not sort of short term for us right now.
Okay, and then last 1 Mike.
Mike on the debt.
Based on where your current credit is in your term b or we are logical and pricing is somewhere between 3 and a half and foreign of quarter, we put it into our model.
It would be much much lower than that given the given the terminal b market and what we've been seeing in the marketplace much much more favorable.
Perfect. That's great. Congratulations on all of this interesting the day. Thanks.
Thanks, Michael.
Our next question comes from the line of Hamzah, Missouri with Jefferies. Please proceed with your question.
Hey, good morning, the sexy I, Ryan gunning filling in for Hamzah.
My first.
First question is just you know you've clearly taken a lot of cost out of the business over the last several years could you maybe just comment on how much room. There is remaining on the cost side to take out either on the gross margin line of SG&A or both of it out.
Yeah, Ryan so we.
We've done some good cost actions.
Automation.
Moving employees of low cost jurisdictions, focusing on cost synergies that are out there I think that it is the we've committed to 30 of base 30 to 50 basis points, a year and Thats true cost and pricing, we've done 3 and a half years of.
The 14th consecutive quarters of year over year margin improvement that is a that is not that the price and cost and that that will continue.
And the over the foreseeable future.
Got it appreciate it that's helpful and then for my follow up.
Maybe could you just comment on the competitive landscape, you're seeing in hazardous waste either larger consolidation that you think could half of them longer term or captive clothing or any other dynamics the long term.
And how that May change property of the ability for the business over time.
Yeah, I think the long term trend has been for captives to look at winding down their operations might be part of their ESG program. It might be part of just a lowering cost and.
Getting out of that.
Non core side of the of the business or if you would so.
We see a continuation of that we also see opportunities like these insight locations, where customers are looking to outsource and bring in people within the plants to help them manage their of environmental programs, putting in the technology CIS.
The systems to track ways to manage the compliance to the.
Basically report for them all of their hazard waste activity. So I think that all of that outsourcing trend is going to continue.
Great. That's it for me. Thank you very much okay. Thanks Ryan.
Yeah.
Our next question comes from the line of Jeff Silber with BMO capital markets. Please proceed with your question.
Thanks, So much wanted to circle back of the S. K S. S segment, I know youre not guiding for 2022, yet, but if we look at the adjusted EBITDA margins for this business on a standalone basis. If my math is correct. You did about 16, 5% in 2020, I think it was closer to about 21%.
In 2019, it's gonna be a heck of a lot higher this year.
Going forward, we can be higher than that 21% level that you achieved in 2019 in that segment.
Hi, Jeff This is Mike I'll take a shot at that so I think that at the end of the day. The question you have to ask yourself is how much of this is IMO 2020.
My view is just the material amount of this but that we're getting and that continues.
I would imagine when the economy cools down a bit and refiners get running in base oil prices get back to some level of normalcy, we'll be able to we'll be able we'll be able to manage the spread that we have for many many years.
So my view on this is that there is that there is a change and that change is IMO 2020, and I think that has a material impact of these financials and I think that obviously continues and us.
In 2022.
Okay, that's actually very helpful. The margin standpoint, Jeff.
Hard to say.
I understand but I appreciate that that kind of framework. It is helpful. And then you know Big picture you know, we've got an infrastructure bill that seems to finally be moving through Congress can you talk about the potential benefits from that bill to your company.
Certainly it.
It might sound minor, but I mean, the fact that it.
It might help out driving situation. We are we have of large fleet. We have over 40.502, the old drivers were.
We're looking for hundreds of drivers right now as many other companies are across the industry and that Bill does Ah my understanding it does lower the age limit for new drivers to enter the workforce and that would be something that would be very positive for us.
There are taxes debt, possibly or coming out of that for hazard waste generators are obviously, there could be a negative to 2 you'll have customers look more of their operations and their the generation of waste, but that's that's it's interesting that theyre looking at has.
Each generation is the source of funds for infrastructure. We also hope that there'll be some additional spending on superfund clean up so that would be really positive for landfills.
Because usually during the infrastructure.
You do come across a lot of waste disposal needs. So it was kind of a few things there just to comment, but you know we'll have to wait and see.
Okay. Thanks, so much yeah.
Thanks, Jeff.
Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.
Hi, This is Adam on for Jerry today.
I was wondering if you could help us think about the organic growth profile of the HBC business into how that organic growth has trended more recently.
Yeah of GDP type grower.
Adam I would say looking at the point that the past few years, good growing and they've done some organic growth there.
As Alan mentioned, they put in kind of the leak detection type of businesses they've had tried to gross of businesses and they've actually done a pretty good job over the past few years, yeah, and I think organically I think almost from the beginning of the grew their utility business basically our field services business and they've grown that to about 102 hundred $15 million in revenue.
So.
I think that's.
A nice growth story for them that are the.
We'll benefit from.
Okay. Thank you and then my second question is in incineration out of the 5% price increase what was mix related versus true year over year price and then it makes it it's been a really strong tailwind over the last several quarters do you expect that to normalize as we move into the back half of the year.
Yeah.
Yeah, Adam I think that a big chunk of this growth.
Was price we have been.
Working on price and in the in Q1, and Q2 and we're seeing some of that we will continue to see some of that in Q3.
When we went up to the against the.
The tough mixed V. We have for many many years and so I feel like that's going to continue on in and we're building this new incinerator in Nebraska to handle kind of the highly chlorinate, how they flow in 8 wasting of like we did in El do and that will just I think we'll have plenty of capacity in the network to take all of that.
Great. Thank you very much.
Thanks, Adam.
Our next question comes from the line of Larry Solow with CJS Securities. Please proceed with your question.
Great. Good morning, guys and congratulations lots of.
Writing things going on.
Just a couple of questions just a couple of follow up smoking with things that the answer, but just peeling back the onion, a little bit on the on the growth of hydrocarbon historically.
Of the GDP type growth.
Imagine the customer base has expanded over the years.
Suppose the you guys acquire them, perhaps you can accelerate that expansion cross selling of whatnot any color on that.
Certainly it's gonna be of key for Us I mean.
They have many customers, where there's a huge opportunity for us to bring in our services that we can provide then.
The complement their you know their great relationships. They have with they were council of lot of lot of opportunity there on the on that side of the business Larry.
Alan you've been looking at the staffing for a while the just kind of come together.
You know in terms of conversations with you.
It doesn't sound of who's the bidding process, but it has been something that <unk>.
I'm sure you've known these guys for quite some time, but just in terms of historical perspective.
We've tried the many times over the years with the original PSC.
Acquisition.
In assets, both on the environmental side and the industrial side to acquire the so we're very very familiar we've got a lot of people work in here that.
I have got a lot of familiarity with the team there and work together with that team over the years. So this is something that we did ourselves a we made the approach of this was the private equity owned company and 1 that we're very familiar with and we just thought that this was the right time and the right.
The.
No opportunity for us to pull the trigger on this.
Right and then switching gears real fast just on the I guess, what now looks like all of it even smaller tuck in but the nice little acquisition of pending on the vertex energy.
If I'm not mistaken.
The majority of our significant piece of their capacity has actually been historically, Phil by the open market purchases. So perhaps some good efficiencies under your umbrella you know going forward. Yes. We've had also on that we've had long relationship with vertex of you know.
Buying a lot of their oil of doing swaps together, we actually bought a felon re refinery from them several years ago.
And so I think.
And know them well, we tried to buy the heartland refinery prior to them acquiring at and you know they've done some nice things. They have some permits that are again the enabled it to expand that we'll want to now invest in and I think as Mike said I'm O 2000, Twenty's has changed and so this gives us.
It's an opportunity to.
To handle more oils debt I think there's gonna fit well into the new market that exist.
And just lastly, you mentioned I am of 2020, and clearly an impossible at the sort of gauge how much of the.
The price equilibrium or anything of that.
1 of us.
The sustainable certainly there will be the short on the short end side that will probably improve as refiners.
Ramp up but just looking at IMO 2020 by itself in the vacuum and maybe that's a difficult task to but do you think youre achieving sort of that full benefit today.
From that alone or where maybe the excess benefit because the you know from that 2 of any way to sort of gauge that by itself.
Right.
I think that the long term trends is going to be the recycle and reuse oil I think that's where industry.
And government is looking you know and sort of taking taking used motor oil and re refining and over and over again and reusing. It is clearly what's in everybody's best interest to do it.
And with the material that otherwise would've been burnt as of as a fuel as you know the that the 3% sulfur fuel now being at 5%, it's all about reducing emissions and lowering greenhouse gases and that just further drives sort of of that kind of material to a recycler so that they can find.
Ways of.
Getting beneficial reuse of that products. So I I personally think we are in the early innings there.
The pandemic has really disrupted so much it's really hard the kind of put up the finger on where we are in the in the in the lifecycle of the Bible.
Got it okay, great and I appreciate that color very helpful. Okay. Thanks, a lot guys.
Hey, Larry.
Our next question comes from the line of David Manthey with Baird. Please proceed with your question.
Hi, guys good morning.
A lot of good news to digest here.
So hydro can you mentioned that there are some high value waste streams that can be directed to your incinerators are day and incineration customer today of.
The clean harbors.
No not necessarily incineration waste of I would say that we do handle some catalyst a waste of.
From a lot of customers that the servers for example, but.
We're pretty competitive right now and we quite frankly have not enjoyed the disposal.
All of this.
From them are the the PSC.
The assets that were sold years ago, the environmental assets that were sold the Steri. Then subsequently the harsco I would say you have probably benefited more of that waste disposal than we have.
Okay.
Alright, and then Mike I think in your monologue, you said that the eggs.
Exiting this year net debt to EBITDA of 3 and change I assume you've met including the debt from both of these deals but no EBITDA from the deals is that correct.
I think we've modeled a little bit.
And to get to that answer and it depends on the timing of the closure of those transactions, but I don't think any EBITDA was in there.
Okay, and your AR and your guidance, Okay right right.
Debt was and that's right that's right the debt.
Right, Okay that was what I thought and then.
We can certainly calculate this I think you've been asked the number of times about some of the moving parts here, but.
How should we think about the the debt ratio. If we do include EBITDA from these deals in the sort of factor out government assistance of decon and kind of the abnormal spreads maybe.
Have you thought about that and can you give us any kind of view otherwise again, we can calculate it and then related to that too is.
Where is your comfort level at this point as the company what what range of net debt to EBITDA are you okay with.
So David as you've articulated there's a lot of moving parts here and it's hard to kind of piece part each piece in pro forma things in and out but I think if you just took if you just took basically took on 2021 guidance and assuming that carries over into 2022.
And then you add in what we've already said on on vertex and in hydrogen and some some level of synergies on both of those transactions you get to the mid twos are low.
Loan and net at the end of 2022.
So I think that's kind of I think mid twos of gets back to me and frankly.
And it does allow us to do other things like building a great new incinerator in Nebraska as well as do some buybacks and so I think that this is although it is a fair amount of debt. We're assuming we're also getting a fair amount of EBITDA and as such I think the the ratio of getting a pretty good spot I would say mid twos as it gets back to being very consistent with the market.
And we'll see where we go from there.
It all sounds great. Thanks, a lot guys.
Dave.
Our next question comes from the line of Jim Ricchiuti with Needham. Please proceed with your question.
Hi, Thanks, Good morning, I Wonder if you could talk a little bit about the customer overlap between yourself yourselves in H P. C is there much.
I am sure. There is we haven't been able to at this point.
Uh huh.
Look at some of that detailed information we do have to go through of Hart, Scott Rodino filing here and so at this point you know there is some information that is not available to us just yet.
Until that Clarence takes place, but I'm sure. There is we were very familiar with their certainly with many of the locations they service.
But not not specifically can we address it yet.
Okay now I'm, assuming all of you probably would be able to answer the the next question either just given that they're just if we think about the.
The.
Profile of their business from the stamp from the standpoint of market verticals or maybe you can give a little color on that.
Yes so.
I'll take a shot at that the and the first piece is about 100 and as Alan said of 150.820 million dollar utilities business.
And that is very similar to our field service business doing.
Doing manhole clean outs and things like that then they have about 30%, 35% and specialty services as Alan said leak detection other injection type of technology.
And the rest of it I would say is that let's say of standard turnaround type of services.
Using the automation that Alan mentioned earlier going into going into plants of doing 2 week turnaround, bringing the hydro kept out of the clean harbors team in there and doing the clean out of the heat exchangers and other and other pipes of doing in there.
A lot of chemical petrochemical refining.
Of large that dry.
Plants that need debt ongoing.
Sort of maintenance and help them sustain those plants is a big is a big part of what they do and anticipating.
Anticipating that there probably won't be any refineries built in some being taken down the.
Keeping the existing ones up and running is really a critical role that they play and 1 that will continue to play.
Okay.
I mean, it just say with respect to your results.
You alluded in the press release to a meaningful contribution from the industrial services I think you said, the roughly 50% over 50% growth.
Talk about the.
The backlog of deferred maintenance.
Where do we stand with that are you are we at the point, where you know.
This business continues to grow maybe beyond historical levels of the coming quarters or have we work down some of this deferred maintenance backlog.
You know I think the pandemic really created such of.
Disruption across so many industries and clearly the ones that.
We serve with our industrial as well as the U S C.
The they're just starting to come out.
The Theres still obviously COVID-19 that we're all dealing with out there the concern about large people you know large groups of people coming on the customers' sites of certainly out there, particularly in Canada. So I think there's still a large buildup of opportunity in the.
Need and we're going to see that this year, we think in the into next year.
But I think I think it's going to become more normalized as we move through next year and the and in the 23.
But it's certainly not yet there where we are here in 'twenty 1.
Got it and last question just rising costs I mean, we're hearing that some of it from everyone in the I'm.
I'm wondering you're you've taken some pricing actions and whatnot, but I'm just wondering how big of a headwind is this who are you guys.
I think the supply chain disruption as this is having a impact on our business the transportation supplies, even steel drums.
The driver shortage that we mentioned.
Of course increases across the board.
As of the things that that really have forced us to go back to our customers and raise prices.
And I think customers. Appreciate the fact that you know that they were seeing it in their own businesses that labor costs are going up fuel costs are going up and so forth. So we're on top of that I think we're doing a really good job of managing the profitability of our business as we know of costs continue to increase.
But just like last year during the pandemic. We also were willing to give concessions to our customers when they needed. It when they were going through the difficult times and and so we're I would say that we got our hands on the throttle there.
Okay. Thank you congratulations on the results and the and the acquisition announcement.
Okay, great. Thank you thanks, Jim Thanks, Jim.
Our next question comes from the line of Alexander <unk> with Bamberg. Please proceed with your question.
Hi, Good morning, guys. Congrats on the on the quarter just a quick 1 from for me can you explain exactly why it was more difficult to tightly manage to manage the spread on the the <unk>.
<unk> structure with this the combination of the branch and oil business.
Yeah, I would say that you know the.
The the business was much more decentralized and of the branches you know had 8 or 9 different lines of business to manage.
And by.
Basically splitting out the.
Bulk products and services piece of our S. K S. S business, we really moved all oil related activities, whether it be oil filters oil.
Our base of oil excuse me of blended oil sales of U.
Used motor oil collections.
It took it took all of those things and we're now able to offer those customers you know sort of defined.
The pricing plans that meet their needs, even bundling things together and just more closely managing those customers that otherwise might have had 8 or 9 different lines of business, you know being provided to them by safety Kleen.
I, just think having that centralized focus having a leadership team that's really driving that in and really understanding what's going on in the market, particularly to do with the recycled fuel oil market I, just think we've gotten better at that now with the focus that we've now put on the business.
Sure and.
And just sticking with the with the SaaS business.
Sorry, if I missed this earlier, but.
And can you sort of discuss the the trends have been saying in the in the first few weeks of Q3 that has supply already began to increase of the spreads narrowed at all you know is that person has already begun in terms of the the step down that you are communicating all of them.
And the interesting.
Alexandra Theres been no change in July.
Okay great.
Good.
Thanks, guys.
Thank you. Thank you.
Our next question comes from the line of William Grappling with UBS. Please proceed with your question.
That's great I appreciate you squeezing me in just 1 quick 1 for me just wondering if you could talk about the extent to which you may have any remaining permitting risks around the the new Kimball incinerator in then.
What's already locked in and what do you have left to do until you can start construction there. Thanks.
We certainly have involved.
All the levels of government and the local community and in regard to our Oh.
Our plan and we wouldn't be announcing this if we hadn't felt very strongly that we have the support of both the state and the community there.
Where we've been out there for the 25 plus years.
We've got a wonderful team there in that community has been very supportive and I think I think.
We're hopeful that this since we've already.
Already permanent of very similar facility recently with the federal EPA, we should not have a problem. This is going to meet the new Mac standards.
Without without question.
I appreciate it thanks, so much.
There are no further questions at this time I would like to turn the call back over to Mr. Mckim for closing comments.
Thanks for joining us today, our Investor Relations calendar remains very active in the coming months here and so starting with the Needham event actually next week.
So enjoy the rest of your of summer and stay safe out there. Thank you very much.
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.