Q1 2022 Clean Harbors Inc Earnings Call
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Greetings and welcome to the clean Harbors, Inc. First quarter 2022 earnings 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 Sir you may begin.
Thank you Christine 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, President and Chief Operating Officer, Eric Hirshberg, and SVP of Investor Relations Jim Buckley.
For today's call are posted on our website. We invite you to follow along matters. We are discussing today that are historical facts are considered forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 participants are cautioned not to place undue reliance on these statements, which reflect management's opinions only as of today April 22.
22 information on potential facts 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.
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 these 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.
With that I'd like to turn the call over to our CEO Alan Mckim, Alan Thanks, Michael Good morning, everyone and thank you for joining us I'd like to start today's call with the topic I'm passionate about and that safety.
It's our priority here is we focus across the organization our number one core value having had the privilege of being in this seat for more than 40 years, I've always envision that by continuing to integrate safety and our culture that we could show continuous improvement and really generate an annual total recordable incident rate of under one without.
<unk> goal of being zero incidents, we took a significant step toward that milestone in Q1, concluding the quarter with a tier I or a point 97.
When you look at the waste industry that level of safety you would far exceed anything that our peers are delivering and I want to express my appreciation to our entire team for looking out for one another.
More importantly, practicing our core safety philosophy of safety starts with me live at 365.
That mindset is critical in order for us to achieve our goal of a sub one zero.
T our eye out for this year.
Turning to our Q1 financial results on slide three.
We exceeded our Q1 guidance says both segments performed ahead of expectations. Our results were consistent with the past several quarters with strong demand across our key lines of business driving healthy top line growth.
And what has historically been our seasonally weakest quarter margins came in at a solid 15.4%.
Outside of the first quarter of 'twenty 'twenty. One this quarter was our best Q1 margin performance since we purchased safety Kleen in 2012.
Despite supply and inflationary challenges the team executed well implementing comprehensive pricing programs supported by cost control initiatives.
A couple of metrics that are not on this slide.
But I wanted to mention this morning, our hiring and turnover on.
On the hiring side, our recruiting team has done an excellent job, attracting new talent and expanding our workforce given all the demand for our services in Q1, we added a significant number of billable employees and expect to extend that hiring momentum in the coming quarters.
The opportunity to work for a sustainability focused company that protects the environment has really been a strong selling point for our recruiting team.
Over the past several years, we've made substantial investment in our workforce. These have included offering additional benefits absorbing health care cost increases increasing compensation and promoting more employees from within.
These investments have resulted in a decrease voluntary turnover.
After a brief uptick in the second half of 2021 voluntary turnover has since re seated to pre pandemic 2019 levels clean.
Clean harbors is a place where many people have built and are continuing to build a successful career.
With more now than 6000 of our employees haven't been with us over 10 years and of those even 1500 had been here more than 25 years.
That creates a lot of stability across our business and a wealth of institutional knowledge that enables us to train the next generation of leaders here.
Yeah.
Turning to our segments starting on slide four.
Environmental service revenue grew 45% in Q1.
This increase reflected the H P. C acquisition in late 'twenty, one and healthy organic growth driven by customer demand and increased pricing.
While we're still in the early innings of integrating H P. C. After just one full quarter, we're already beginning to benefit their broad capabilities, particularly as we've moved into the spring turnaround season.
The potential to capture synergies and to cross sell our products and services is quite extensive.
During the quarter the pace of activity in our services business quick and considerably.
Resulting in strong organic growth.
Revenue in our legacy industrial service business, if you exclude H P. C grew 24%.
Likewise, our base business and field services, not including H P C and the decontamination work in both the periods increased 28% driven by cross selling and a steady flow of small to medium emergency response jobs safety Kleen Environmental also continued the positive momentum increase.
<unk>, 9% from a year ago.
Looking at the Es segment profitability adjusted EBITDA climbed 31% in Q1 on strong revenue and pricing coupled with cost control initiatives as expected segment margin was down year over year. This is primarily attributed to a tough comp with Q1.
One of 2021, which included both the government assistance and a higher level of Covid emergency response work as well as the fact that we have yet to fully integrate the H P C business.
Environmental service margins should improve as we move through the year and we would expect the incremental benefits of our pricing cost reductions and synergy initiatives excuse me to more than offset the impact.
Of inflation.
Within our disposal network incineration utilization improved to 85% from 80% in Q1, a year ago average incineration pricing was up 2% from a year ago based on mix in the quarter, which included some project volumes. So if you use a market basket approach.
<unk>, our average price was up 7%.
A pickup in projects also enabled us to increase the tonnage into our landfills by 14%.
The head of our remediation team recently commented that the first half of this year was already the strongest that we've seen in the last five years.
Revenue from go Covid decontamination work totaled approximately $9 million in Q1.
That amount was greater than we anticipated, but down substantially from 28 million in Q1, a year ago. We did not expect much more COVID-19 work here in 'twenty to 'twenty two.
Parts washer services were flat with a year ago, while most safety Kleen branch core offerings, including containerized waste pickup and Vac services grew at a very strong pace.
Okay.
Moving to slide five.
Revenue in our S. K S. S segment was up 44%.
Through a combination of healthy production levels at our plants and higher base and blended product pricing.
Backed by overall market demand.
Adjusted EBITDA rose by more than $20 million or 64%.
We continue to capitalize on market conditions to maximize our re refining spread through product pricing gains and effective management of our collection costs were.
Waste oil collection volumes were up again growing 13% to 53 million gallons and at eight P. F O lower than Q4, as we had to address some inflationary pressures in that business.
Our percentage of blended products indirect volumes came in as expected in the quarter.
Given the ongoing additive shortages in the market and the profitability that we're generating in our base oil.
Turning to slide six I wanted to touch on a handful of growth initiatives that we have underway.
This is an exciting time at clean harbors given all the demand we're seeing we're really laying out the foundation for our momentum to continue in years ahead.
We have invested in a number of areas such as expanding our inside sales team supporting our safety Kleen environmental business, where we're already seeing a lower customer churn.
Would bring H P C into the fold, we've launched a renewed focus on cross selling.
For example, at a top industrial service customer in the chemical industry, we leveraged the H P. C relationship to secure a greatest share of industrial cleaning specialty services and waste disposal work at one of their sites and their.
In Canada, we parlayed H P. Six custom tooling technology to convert a customer from performing a turnaround at their plant every three years to really making it more of an annual event and our technology based solution created a more efficient and expedited process for the customer.
Overall shortening that shutdown period.
From a branding perspective, we've combined the hydro Cam PSC name with our legacy clean harbors industrial services brand to create H P. C industrial whose logo you can see on the slide.
We will officially be rolling out this new branding and all of our contracts and legal entities on July 1st.
We're confident that by combining our industrial services organizations under one brand will simplify our service and communications to our industrial service customers.
Finally, when we look at the incineration market capacity is scarce, we're bringing 70000 tons of additional capacity online in early 'twenty, five which is attractive to companies that are weighing whether to shut down their captive incinerators.
Turning to slide seven we continue to evaluate opportunities to execute on elements of our capital allocation strategy.
Internal investments are being prioritized around expanding throughput and our network whether in disposal recycling or re refining.
Certainly what the Kimball incinerator being our most substantial long term investment that remains on schedule.
We're also adding considerable amount of landfill cell capacity this year.
On the M&A front, we continue to look at several bolt on acquisition candidates that could support growth for one or both of our two operating segments.
So let me conclude by reiterating what our numbers over the past few quarters have proven.
That demand has never been stronger.
Within our disposal network, we have a healthy backlog of volume and a strong sales pipeline, particularly within waste projects underlying trends such as U S infrastructure spending chemical manufacturing and re shoring of multiple industries are providing encouraging backdrop for our entire.
Environmental segment.
Within the S. K S S. The demand environment for our sustainable products remains very strong supported by global supply dynamics and the rise in value of our re refined base oil we will continually.
Carefully manage the front end of our re refining spread achieve greater transportation efficiencies using rail and really target market specific pricing to help counter those rising costs that we see.
Across the organization, we are confident that we have pricing and cost reduction strategies in place.
To offset inflation in 2022, we have a uniformity of our systems and processes that enables us to respond quickly to market conditions, and we have an industry leading team that is second to none and.
And we have instilled a culture of accountability continuous improvement here at clean harbors and that drives our results. So as I look out over the remainder of 'twenty two and beyond the market conditions are highly favorable across all our core lines of business and we continue to expect clean harbors to deliver strong profitable growth.
And a robust free cash flow this year, so with that let me turn it over to Mike battles Mike.
Thank you Alan and good morning, everyone I, just want to mention that I have a bit of a cold. This morning, So I apologize in advance.
Let's start with our income statement on slide nine revenue increased 45% in the first quarter driven by the addition of <unk>, which we closed on in October and healthy organic growth in our legacy businesses.
Topline growth, excluding <unk> was 22% I.
Adjusted EBITDA was 39% higher than a year ago coming in at $180 3 million.
SG&A expense on a percentage basis improved by 220 basis points from a year ago to 12, 9%.
Primarily due to our effective cost controls and reduction efforts along with leveraging the <unk> revenue.
We're starting to see some of the early synergy benefits from the acquisition in these numbers.
In addition, we benefited from the 3 million dollar break fee related to the proposed vertex acquisition that we collected in the quarter.
For the full year, we now expect SG&A expense as a percentage of revenue to be around 13%.
Which is a significant improvement over 2021 levels.
Depreciation and amortization in Q1 increased to $84 3 million.
Primarily primarily related to the addition of the HBC assets.
For 2022, we continue to anticipate depreciation and amortization in the range of $330 million to $340 million.
Income from operations in Q1 increased by 71%.
Reflecting revenue growth as well as our efforts to better manage and priced our re refining spread.
Turning to the balance sheet on slide 10, cash and short term marketable securities at quarter end were $415 million.
The decline from year end was expected.
And reflects typical Q1 seasonality and incentive compensation that was paid out in March for the terrific 2021 financial results.
We ended the quarter with debt of just over $2 5 billion.
Leverage on a net debt trailing 12 months EBITDA basis was approximately three times.
Based on the midpoint of our new 2022, EBITDA and free cash flow guidance.
We expect to reduce our leverage to approximately two two times at year end.
Our weighted average cost of debt is 4.46%.
With about 70% of our debt at fixed rates.
Well the market finally saw its first rate hike in two years in March we believe we are well positioned even in a rising interest rate environment.
Yeah.
Turning to cash flows on slide 11 cash from operations in Q1 was a negative $38 6 million, which was largely expected.
Capex net of disposals was $59 million up approximately 70% from a year ago as we added HBC and began to ramp up the spend on our new Kimball incinerator.
That investment in Nebraska accounted for approximately $5 million in Q1.
And we still expect that to be in the range of 40 to $40 million to $45 million for the full year.
Adjusted free cash flow in Q1 was a negative $107 6 million due to the high capex incentive comp working capital and timing of some items, including an extra payroll period versus a year ago.
For 2022, we continue to expect our net capex to be in the range of $310 million to $330 million, reflecting the kimball spend the full year impact of HBC and above average landfill expansion year and inflationary costs for supplies and vehicles.
During Q1, we bought back just over 41000 shares of stock at a total cost of $3 7 million.
We have $152 million remaining under our existing buyback program.
Moving to slide 12 based on our first year with first quarter results and current market conditions for both of our operating segments.
We are raising our 2022 adjusted EBITDA guidance to a range of $800 million to $830 million with a midpoint of $815 million.
Looking at our guidance from a quarterly perspective, we expect Q2, adjusted EBITDA to be 25% to 30% higher than what we posted in Q2 of 2021 due to HBC higher profitability in the <unk> segment and continued strong demand in the Es segment.
Here's how our our revised full year 2022, adjusted EBITDA guidance translates to our three segments.
In environmental services, we now expect adjusted EBITDA at the midpoint of our guidance to increase in the mid twenties on a percentage basis from full year 2021.
HBC pricing strategies volume growth in our core lines of business and multiple cost mitigation initiatives, we believe will more than offset the inflation the lower <unk> revenue and lack of pandemic assistance versus 2021.
As a point of reference this segment received government assistance of $10 2 million in 2021 and as soon as none this year.
For S. K S. S. We now anticipate full year adjusted EBITDA at the midpoint of our guidance to decline mid single digits.
Impressive 2021 results.
Given where we are today in the current market conditions. Our original assumptions that this segment would produce significantly less adjusted EBITDA than in 2021, no longer seem realistic.
Our revised guidance assumes that our re refining spread starts to narrow in the third quarter and more in the fourth quarter compared with a year ago with the first half of this year exceeding 2021.
But as you sit here in early May.
I did not know that has not started to narrow at all yet.
This segment received government assistance of $1 4 million in 2021 and assumes none this year.
In our corporate segment at the midpoint of our guide we continue to expect a negative adjusted EBITDA to be up around 5% from 2021, largely due to the addition of the <unk>.
Full year of HBC corporate costs, and wage inflation offset by lower severance and integration expense compared with a year ago.
Along with the vertex payment.
Based on our Q1 free cash flow results and working capital assumptions. We continue to expect 2022 adjusted free cash flow in the range of $250 million to $290 million or a midpoint of $270 million.
I'd like to remind everyone that those numbers include the substantial investment in our Kimball facility of $40 million to $45 million.
Let me conclude by echoing Alan's comments on the current demand demand environment for our company, which we expect will support strong profitable growth throughout the remainder of the year.
On our Q4 call I highlighted the fact that we are an amazingly resilient company, which is something that I believe is underappreciated about clean harbors.
I've seen a CFO in the past six years is that we have worked extremely hard to instill consistency across all elements of our organization.
That focus has fostered greater predictability in our results that enables us to invest prudently make informed strategic decisions around M&A and generate stronger shareholder returns over both the short term and long term.
I'm personally very bullish about 2022 as both of our operating segments had decidedly favorable outlooks.
With that Christine Please open up the call for questions.
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Thank you. Our first question comes from the line of David Manthey with Baird. Please proceed with your question.
Thank you and good morning, everyone.
Okay.
Thinking about your key verticals like chemical manufacturing refining and so forth the cyclical components of your business. How are you thinking about those in the coming year here is that the U S economy, and the global economy, if it slows as generally expect.
Good.
Yeah, David I'll take a shot at this.
And Alan can chime in or Eric can chime in.
You know the market demand continues to be very strong we have you know some.
Some waste streams, given our increase in deferred revenue are out.
Few months now to try to get it open slot for incineration.
All all all lines of business are kind of back beyond 2019 levels. So you know it's hard for me to comment on macro factors, but certainly what we see is very strong demand across all verticals.
Okay. Thank you and second Alan Thanks for the update on the personnel and labor situation, but if you had to gauge it one to 10, one being really bad 10 being completely fine where do you stand today and maybe if you could address the financial impact on your costs.
Stack of using outside service providers versus what Youll see when you can ultimately internalize those functions.
Yeah. Thanks, Dave So we're probably at a seven seven to eight you know in regard to staffing levels that we would like to have so we are seeing increased costs, both with temporary labor as well as a sub contracting we enjoy some really strong relationships with our subs and and certain.
We that that does pressure our margins when we do a sub but I would say, we're probably in that range and I think that we saw a nice improvement in the first quarter, Eric you might want to touch on them gains that we've seen yeah, we've really flattened out our turnover from and increased turnover in 2000.
'twenty, one we've rebounded back and we've been able to decrease our turnover, while adding a substantial labor billable workforce throughout the Q1 as we finished the year and we continue to have momentum in Q2.
Really seeing that across all of our services for our customers, but as Alan mentioned, we continue to have a reliance on subcontracted and temp workers to help us to get us through this demand.
Got it thanks guys.
Yep.
Okay.
Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.
Hi, This is Adam on for Gary today, Thanks for taking my question.
Industrial and field services could you update us on how much market share you have today in these businesses and how you're thinking about the potential for.
Further consolidation in the space.
Sure I'll take a shot I think.
Pretty fragmented industry as you know there's a lot of small regional players in both industrial and field services and then you know theres certainly some of the more larger.
National players both in the U S and Canada quite frankly and so.
I I don't probably have a number to share with you about what that percentages what market share would be but we certainly have a leadership position in some of the.
Emergency response capabilities that we offer you know we're the go to company very much when there is a major event or and where probably handling six or 7000 emergencies. A year. So that that is something that we I think would say that we are the market leader in and certainly on the industrial side with our capacity.
<unk> capabilities on turnaround work I think we have by far more equipment and personnel to do those kinds of services. When you think I was absolutely and I'd also just add with the with the larger customers that have multiple sites in industrial as well as in field service larger players that are like utilities that.
Cover large geographies, we have a very strong presence with all of those customers.
Thanks, that's helpful and I'm wondering when you expect the mix of blended products and your safety Kleen segment to begin to normalize and once that normalizes, how should we be thinking about the impact on margins.
Sure. So so we theres still a hydrogen excuse me Oh, an attitude problem in a hydrogen problem. So our volumes were constrained somewhat in the first quarter because of the hydrogen.
And we think by the Middle of May are our hope is that we'll come back and so we'll we'll see much stronger volumes, even though the ones that we've seen.
In April and here in early May.
On the attitude front, we're hoping by the end of this year theres been a significant disruption and additive suppliers and many of our products that have all been approved have got their million mile approvals. So to speak Ah, we just can't shift different attitude packages in and out of these prada.
That we have approved so we've been very much a constrained on that and I would say probably moving into next year, you'll start seeing that become a growth area for us again.
Great. Thanks, so much okay.
Our next question comes from the line of Tyler Brown with Raymond James. Please proceed with your question.
Hey, Good morning, guys can you all hear me yes.
Okay, no that sounds a little bit you did this morning, but hey, Mike I, just want to ask a little bit about the EBITDA guidance. So I think you beat the midpoint of Q1 call it by $9 million.
You guided to Q2, EBITDA, but it looks to be I don't know 20 $30 million above the street and I realize the sweetest certainly not your guidance budget, but my point is is it feels like.
The 35 million a guide raise at the midpoint, it's simply on a better Q1 in a better Q2, so one am I in the right ballpark there and two does it just feel like there's some conservatism in the back half here, maybe you were just going to wait and see how things play out.
Yes, hi.
That that's accurate because you just don't know if you don't know and there's a lot of factors that can go a lot of different ways. We are hopeful that you know are our internal forecasts are higher than than what we have guided today and that's consistent with what we've been doing over the past few years.
Okay. Okay. That's helpful. Thanks.
Thanks for that and then I think he is margins were down about 100 basis points year over year in Q1, and I know, there's a ton of noise, you've got H D. C government bonds decon inflation et cetera.
If you kind of post it all all good core margins improve year over year and are you still expecting those margins in that segment to be flattish for the full year.
Yeah, Tyler so a couple of things. So first of all when you look at Q1, Es margins, which are down 200 basis points.
Year over year on a reported basis, if you back out the decontamination work.
Higher margins on that business.
The government money.
And H P C. As we can estimate it for an apples to apples comparison, you know our margins are either flat to up a bit.
And let's say legacy EES, which is really a testament to the pricing and the cost controls we put in place is something we're really proud of.
And if you look out for the rest of the year Q2, there'll still be down versus prior year Q3 would be flattish in Q4, I think will be up quite a bit year over year and so I think when you look at the full year for Es margins for 2022 versus 2021 and that would be flattish to 2021, which is great. Okay.
Yeah. That's helpful. And then I think last quarter, you talked about increasing the cadence on pricing.
That required you to walk away from some business and so be it but I'm just curious how some of those broader pricing discussions have gone.
Yeah. We are we have been meeting regularly every every week across the business.
And looking at all of our major our pricing and.
The pricing initiatives and we certainly have walked away from some of our lowest.
Lowest margin business, where we weren't able to get the kind of price increase we needed and in this market with the labor constraints equipment constraints and really the lack of capacity that we have available and some of our waste disposal.
Parts of our business, it's the right thing for us to do and and so I think that's why you know to Mikes point I think we made up a lot of margin you know from the benefits that we had in the first quarter and are in a really high cost inflationary environment that we're operating in particularly when you look at you know.
Diesel today at the on the street being over $6, a gallon and so we've been very aggressive and are really driving pricing initiatives and are and will continue to do that as inflation continues to work its way through the company.
Right right and this is my last one I thought the commentary on hasty about the tier ratio of spot in line seven what's interesting.
I just want to make sure I understood. The message in there was that you highlighted that that was like a best ever safety performance for a quarter or is that just like we're kind of getting to our near term goal of them one or just can you talk a little bit more about that in some of the benefit.
Financially culturally that you see with obviously, a really strong safety.
Yeah, I think if you look at the trends over the last 10 years, we've seen a continuous improvement with safety not last year was it was an anomaly we thought because of COVID-19.
And seeing safety now.
Under one is really we've been under one before but.
But I think what was important coming out of the first quarter when youre coming out of the winter season. It's typically when we don't see a safety number like that but our overall goal. This year is one.
That's set you know from the management team and in particularly right across the whole organization.
And that would be at a phenomenal number.
For 20000 people that are working in all sorts of difficult environment.
Dangerous work that we do so well.
We just wanted to make a point that.
It's great for our employees to be safe. It's also economically it's very good as well from a workman's comp and insurance standpoint. It is a phenomenal improvement if you look at it over the past 10 years.
Okay. Yeah, that's helpful and then.
One quick one just on the landfill solid capacity. This year is that a material piece of the Capex profile is that a multiyear spend or is that something that falls off in 'twenty three 'twenty four.
It's something this is Erik this is something that will be something that will fall off in 'twenty. Three 'twenty four we have a higher spend this year because in multiple sites. We have landfill expansion that we're doing based on fill rates.
Okay, Alright, thank you I'll turn it over.
Our next question comes from the line of Jim Ricchiuti with Needham. Please proceed with your question.
Hi, Thanks, good morning.
It was.
Hoping you might shed a little bit more light on the cost reduction strategies. He alluded to yeah, just particularly in light of the cost pressures you know the wage inflation and obviously the significantly higher transportation costs, which I'm sure you're incurring I mean, what can you say about what you're doing on the on the cost side.
How meaningful is it.
In terms of offsetting some of these pressures.
Hey, Jim This is Mike I mean cost containment is everything we do here, it's a it's part of our core.
We look at cost of consolidating sites internalizing maintenance.
Leveraging our our footprint.
Selling you know looking at unprofitable branches and if they need to be close closing them. I mean, we are constantly looking at ways to drive to drive costs out of the business low performing individuals' and especially in SG&A, we looked hard at that.
Instantly trying to make sure that we are it's you just can't price your way to glory here, we have to we have it's a mix of of cost containment and maybe that's just keeping the costs flat because you know we know inflationary pressures everything I'm, putting pressure on certain on almost all items all line items in our P&L. So really it is a it is it is just part of our mantra and end.
And nothing changes here at clean harbors, even in an inflationary environment, Yeah, and I think I would just add that you know every year you know for.
15 years.
We have a number of strategic initiatives around driving cost and improvement of the business, whether it's through technology investments or it's leveraging as Mike mentioned, you know our footprint.
There you know 750 locations today, leveraging rail and our whole rail infrastructure. For example, so I think as Mike mentioned, you know those initiatives are something that each and every year, we do to drive costs out of the business.
Got it and yeah, you talked about.
Momentum in the industrial services business going into the spring turnaround season.
And I'm wondering what you're seeing both legacy in the legacy business and H P. C. I mean, you you gave us some color on that and Mike.
Quickly I may have missed it but did you actually say what H P. C contributed in revenue in the quarter I may have missed it.
Yeah.
In the quarter was about $184 million.
Thank you.
And I can't just this momentum that you're seeing going into the turnaround season is that are you seeing some benefits from the combined company just cross selling or is this just healthy conditions in both the legacy business and the HBC business that you brought on.
It's a combination of both we've certainly been able to leverage our cross sell with the HBC business their automation technology into.
Our past legacy clean harbors industrial clients and we've seen a very robust demand going into the second quarter from industrial turnarounds and so we're really leveraging the combined workforce.
<unk> taken that opportunity with us.
Got it I'll jump back in the queue. Thank you.
Thanks, Tim.
Our next question comes from the line of Michael Hoffman with Stifel. Please proceed with your question.
Good morning, Thank you for taking the questions I'm, sorry about your cold Mike.
So I'd like to dig a little deeper on the fundamentals of the business and yes, when we think of the volumes and the traditional treatment storage disposal side.
What's the trend with landfill liquids in incineration.
And have you seen a peak.
Yeah, Michael it's.
Demand continues to be robust and increasing we came out of March with one of them with our strongest though volumes ever and a strong liquid demand for incineration strong direct burn strong container volumes.
As mentioned earlier by both Michael and Alan the the project services robust demand there into our landfills, so strong trends across all verticals as mentioned before as well, Okay and then in industrial and field services I think what I'm hearing is that H P. C. Aside as an incremental add.
<unk>.
The customer demand is returning to some sense of normal maintenance cycles is that an accurate observation.
Yes, I think that's an accurate observation Michael it is.
And that's a pretty significant statement in itself since it's been disrupted for two years.
Yes, Okay, I would say I wouldn't I would say, Michael though that you know with the price of crude and particularly with diesel.
That there are going to be some companies in the refining side to be pushing.
You know to try to maximize our what's going on right now in the marketplace, because there's such a huge shortage.
Of both base oil and diesel oil jet fuel and so there there is somewhat of a.
A little bit of conservative here in regard to whether those plants will actually come down with the market the way it is.
Yeah, well the refining margins haven't been this good in probably a decade.
Michael just to just just not to put too fine a point on it industrial services.
Within Q1 without <unk> is up 28% and so that is that speaks to the recovery that we're seeing kind of across the board in our industrial services. Okay. That's a big statement and then.
Our safety Kleen was a Standalone company I remember one of the things you always have to watch as you get gasoline over $4 consumer stopped driving that lengthens the parts washer service cycle.
Yeah, we touched $5 some.
Someplace, it was highest nine but anyway, probably touched $5. So what are you seeing in the parts washer service cycles.
Accident <unk>.
We've looked at that because obviously that was a concern service cycles haven't really changed our they've been hanging around the same.
Nine weeks for the past.
For five years, and if you look at even Q1 nothing has changed in that area.
So that might argue because we think there's a theory now that maybe the old for dollar thresholds now $5 before we stopped driving.
It would seem to support that.
I think in a wasteful volume clearly, where we're seeing the heavy demand not volumes are up and we.
Expect to collect you know well over 230 million gallons. This year. So I would say that we are not seeing that kind of reduction at all.
Okay. So then I was going to switch gears to S. K S. S.
I wanted to make sure I heard the question or comment correct. So on the front end you are actually were able to reduce what you're paying for oil sequentially.
And I'm, assuming that's over and above anything having to do with I M. O 2020 at this point.
Despite that crude oil prices are as high as they are what's what's allowed you to do that.
You know I think we had.
A good message to our customers about those rising costs that we were incurring ourselves to be able to provide the service and because there are a lot of cost increases in transportation and rail.
With which is an important factor in and moving around a lot of the products that we have to move and and and quite frankly, I think customers realize that and so we have given some of that back in the first quarter and certainly will here in the second quarter, two because of the strengthen and the market out there. So we're we're trying to.
Work with our customers, both good and bad times and end up but I do believe that you know compared to where we would've been 10 years ago to today I think we're doing a really good job of managing.
The spread in the business, Okay, and then on the backend.
I get that there are additive and hydrogen issues that are impacting blending and the like but is the demand for a sustainable gallon.
Narrowing the discount you used to have to take for posted prices.
Certainly as I think that we're clearly able to get more of a market price today than we ever have and I think Greg.
Craig Lenington and the team here have really done a nice job of.
Creating value for our products and we'll be coming out with some new marketing initiatives here and there coming coming weeks and months here that we think will really.
Expand our visibility to our customers with the the whole messaging of being a green product.
And then do you have a feel for how much the posted price.
Well I need to correct.
And there's two very important here supply demands out of balance because of Russia now.
And we're at a really high oil price, but if oil prices come in and in the world absorbs Russia, what what happens to posted prices what are your thoughts about that.
You know I think it's far out right now based on what we see with diesel and jet fuel.
And with the demand on base oil base oil demand is really strong and I think it gets back to the issue that we're seeing that you know cars cars are out on the road you know I think.
We have not yet seen a big slowdown and even with diesel at $6 a gallon up here in the north East. So I think it's going to be a while myself Michael.
Okay.
And then I get that there are limits on being able to meet the demand what's the what is the level of demand, though on blended if we really are now in the sustainable commitments.
Commitments by.
Various companies.
I think over the next five years, if we could get to 25 million on the direct blended that would be a good target for us to go at we were at about 12.9 $13 million right. Now so I think that would be a good number to kind of write down.
And then mic free cash flow doesn't change in 2022, despite the raised guidance I'm, assuming your have a use of cash is working capital a ours up in response to the sales and that's the issue.
Yeah, Michael if you look at March revenue versus February .
February revenue, it's up it's up 90, it's up $90 million.
I look at my revenue versus prior year, it's up $140 million in both of those things kind of put pressure on on are there all the AI buckets, all current and as such that is that.
Our cash flow bad yet.
The other thing that happened is that we add an extra pay period.
The timing of the how the quarter ended we had an extra pay period about 2000 $22 million in Q1.
Versus last year and that also put some put some pressure on that so but I feel like given the new guidance and even with that working capital as a whole we're in a bit I think we're fine from where we're going to land for the year. So there's an opportunity that you might be able to collect your money a little bit faster than that and that's the upside of the free cash flow that's right.
And and and the EBITDA guide is up and that should translate into faster.
After collections, Okay, and then Alan I don't know how to ask this question without sounding gratuitous, but I've always thought you were really good at seeing where the puck was going insane.
And this industry what do you think this place this business looks like given U S. A college being bought and what's going on what does it look like in three to five years.
Oh, well I think you know environmental regulations infrastructure I think are all going to drive more volume and I think our I think we're in for a good run I think we've.
We've seen a continuation of customers looking at alternatives to running their own waste treatment plants, you know, whether it's a water treatment or in incineration facility. So I really feel like we're gonna see more outsourcing, we see more outsourcing on the industrial and tech services side. So.
So our presence on our customer sites is growing in.
Many of our employees show up every day at these large chemical plants and.
We find the reason Patrick you know pharmaceutical locations.
I think that there's a demand shift that's happening so.
I don't know I think overall unless there's some significant great recession that we have a really good market in front of US right now okay. Thank you very much.
Thanks, Mike Thanks, Mike.
Our next question comes from the line of Noah Kaye with Oppenheimer. Please proceed with your question.
Hi, Thanks for taking the questions I'm, just trying to think about our capex, a good and bad headwind tailwind for 23 years 'twenty to you you mentioned that landfill cell construction or probably could come down I wonder if it's possible to roughly dimension that and then obviously kimball stepping up is.
Is gonna be a little bit of a headwind. So you know obviously, you're not going to be giving 'twenty three guidance today, but I'm just wondering how to think about those fairly known pieces.
Yeah, So I'd say that on the landfill volume landfill cell construction is probably $10 million to $15 million of incremental spend in 2022.
And on the Kimball construction, there that's going to ramp up in 2023, that's gonna. It's if it's $40 million to $45 million here in 2022 is going to be in the eighty's in 2023, because that's when a bulk of the actual construction of the of the kiln is happening so.
Those are some of the easy puts and takes that we know of obviously the business will be bigger and will generate more kind of operating cash flow in that area.
Yep that makes sense. Thanks, and then just to go back to pricing in an incinerator.
So obviously utilization began to trend better over the balance of 2020. One you know so you won't necessarily have that.
That mix headwind, perhaps or at least not to the same extent how should we think about you know pricing trajectory and your expectations.
And if you can disaggregate price versus mix.
Mix effects.
As we go forward for the balance of the year.
Yeah, So I assume that can speak to Q1. So when you look at the kind of Es business and you look at it organically taking out HBC and you can do the math on that it's about 17% kind of organic growth and I would break that down between half of that price and half of that volume mix, a pretty small number the volume is pretty.
Much in field industrial and SK branch business doing youre kind of getting back to 2019 levels. The pricing is across the board primarily in the Tech service business, where we're going to have the most and most disposal usage.
I'm not sure if that and going forward, it's kind of hard to say yeah I see here when you think about pricing in that in the <unk> business means that I'll see that spread narrowing here today.
To tell exactly when.
Okay very helpful. Thank you.
Yeah.
Our next question comes from the line of Zane Karimi with D. A Davidson. Please proceed with your question.
Hey, good morning, guys and thank you for taking my questions. Good.
Morning.
First off on Sks that.
They had another strong quarter, but can you elaborate on what change occurred from a waste oil collection standpoint that help improve the margins year over year and to what degree the effective management of questions persist or expanse from current level.
Certainly the volumes are up in the first quarter over a year ago quarter, and I think our <unk>.
<unk> management in that first quarter was a real effective with with dealing with the inflationary costs that we were experiencing in our labor costs in our transportation costs to service those customers and certainly in the second quarter here and moving back into the third quarter, we will be giving some of that back.
Reflective in our guidance because we are seeing a stronger.
Price per Gram.
Price per gallon for our base oil.
And so I think those are a couple of the factors that really impacted that Mike I'm not sure. If you want to add anything yeah, Yeah, and I think that if you look at Q1 over Q1.
Fred didn't really start to widen in our business until Q2 of last year. So Q1 was still a relatively easy comp versus Q1 of last year. It really was in Q2, where the spread starting to expand and then expanded kind of all year.
So that's helping us a bit here when you look at kind of 2022.
Okay.
Thank you and on the incinerator front I believe Alan you mentioned earlier that bring down the incremental 70000 tons of capacity by 2025.
When looking at other incinerator.
Hey peers. They are beginning to weigh the benefits of staying open versus shutting down but can you elaborate on the opportunity you see for clean harbors and either from like a.
A tam tightening our servicing standpoint.
Right I would say that you know over the past several years, we've seen captives.
Which at one time or over 100 captive incinerators to now down to about 50, maybe even a little bit less than that and still a number of them that are operating are you know getting a foothold in age and certainly they need to meet the new Mac standards in some cases, if they want to do any capital investment so.
Where you know we're anticipating a continuation of that trend from 100 down to 50, and then continuing to go down and that's why the timing of Kimball. We think is important to be able to not only take the growth in the market that's happening because of onshoring and just the overall growth in the chemical.
<unk>, but also because of the reduction in captives.
Okay. Thank you I'll jump back into queue there.
Okay. Thanks, Dan.
Our next question comes from the line of Alexander Leach with Bahrenburg. Please proceed with your question.
Hi, guys. Thanks for taking my question.
A bit about the front and back end of the re refining spreads, but was there any sort of quantifiable benefit from.
I know 2020 limiting outlets.
Now that with the pulse to the Covid related noise.
It clearly there's.
There's a strong market.
For collections out there that we were going into this year with the best inventory position, we've been in a long time.
And that's you know typically you see an inventory buildup in the fall and then you burned down a lot of that or or.
Basically process a lot of that inventory, but we're very strong inventory wise. So we we would envision to expand our recycled fuel oil sales program.
This year that because of the excess material that we haven't particularly on the industrial side not necessarily on the used motor oil side and I think all of that speaks to what's happened with Idaho I think the use of.
<unk>.
Low sulfur oil moving a lot of the shifts to a half percent sulfur I think I think that's definitely had an impact on the market in a favorable way for us.
Okay, Great and just on a driver of attrition in the quarter and it seems like the industry has really been accelerating pay for drivers.
In Q1.
But as you mentioned in your prepared remarks function turnover has fallen and.
So why is retention.
Despite such off hiring market recently to drive specifically.
Eric would you like to comment.
We certainly implemented many programs across all of our drivers to do.
We do a better job of retaining them our equipment.
Certainly in the pay increases across the board better pay programs being able to leverage those better and multiple driver committees that we've had and just making it a better sustainable place to work for drivers across the board and I think our net driver of head count is up quite a bit here. It is after the first.
So although we continue to have a large number of openings I think that really is going to support more of our growth and internalization rather than the sub contracting because our our sub contracting for transportation continues to be very very high but.
But I think that Eric and the team have done a nice job of having a net increase in overall driver head count going into the second quarter.
Okay.
Yeah, Okay, great. Thanks.
Yeah.
As a reminder, if you would like to ask a question press star one on your telephone keypad.
Our next question is a follow up question from Jim Ricchiuti with Needham. Please proceed with your question.
Yeah in the past you've talked about some opportunities related to PFS and I'm just curious.
Do you still see anything on the horizon near term or do you see things in that area just seem to be getting pushed it a little more to the right.
We continue to see our overall pipeline continue to grow about few false opportunities remediation type.
It's still it's still an overall small part of what were looking at still need regulation change to accelerate that but we do see a growing pipeline.
And just with respect to yeah, obviously.
We're seeing.
With the revision to EBITDA, you'll be paying down debt, then that leverages kind of is going to look a little better by year end you talked about M&A.
What do you think about bolt on type acquisitions I Wonder you know is there an opportunity to do anything more meaningful and what types of even bolt ons in both businesses would you be looking at in this environment.
Yeah, I'll take a shot at it so I think there's a.
Pretty steady pipeline of opportunities that Brian Weber, who heads up our M&A.
Area here is seen.
And it it really encompasses all the different lines of business that we're in and so you know we we continue to vet out those and and tried to you know.
B.
Mindful of what we're trying to accomplish and we got to adding capacity disposal capacity in our environmental business how do we.
Kind of leverage our scale, how do we get more capacity to process our oil because as we continue to grow volumes, we're looking at.
Maybe acquisition, but also making internal investments to process more of the oil ourselves.
And expanding our or our plants.
And so because we're in so many different lines of business under those two segments I think that we just see an awful lot of opportunity out there and so we're trying to be selective and make sure that we we kind of achieved the goals that we want within each of those two businesses.
Got it thank you.
Okay.
We have no further questions at this time, Mr. Mckim, I would now like to turn the floor back over to you for closing comments.
Thanks, Christina and thank you for joining us today the team will be out at the waste Expo next week and participating in the Stifel Investor Summit on Monday. So we will also have a number of conferences in early June . So we look forward to sharing our story.
With you at those events.
Have a great safe day. 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.