Q2 2023 Clean Harbors Inc Earnings Call
Okay.
Greetings and welcome to the clean harbors second quarter 2023 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. Thank you Sir you may begin.
Thank you Christine and good morning, everyone.
On today's call are our co chief Executive officers are Christopher and Mike battles, and our EVP and Chief Financial Officer, Eric Dugas, and SVP of Investor Relations, Jim Buckley slides for today's call are posted on our Investor Relations website, and we invite you to board.
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 1995.
You're cautioned not to place undue reliance on these statements, which reflect management's opinions only as of today August <unk> 2023.
Information on potential factors and risks that could affect our results 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 today other than through filings made concerning this reporting period.
There is discussion includes references to non-GAAP measures clean harbors believes that such information provides an additional measurement and consistent historical comparison of its performed.
Yes.
Reconciliations of these measures the most directly comparable GAAP measures are available in today's news release on our website and in the appendix of today's presentation.
Let me turn the call over to my regards to purchase stock.
Thanks, Michael Good morning, everyone and thank you for joining us turning to our Q2 financial results on slide three our second quarter performance underscores the strength of our environmental services segment.
Our adjusted EBITDA margin climbed by 140 basis points from a year ago.
This is a highly resilient business that is supported by scarce permitted assets a strong safety record technical expertise are highly trained workforce close customer relationships.
Capital allocation.
Q2 marked our EES segment seventh consecutive quarter of growth and profitability.
Its performance, partly offset the decline of our safety Kleen sustainable solutions segment, which experienced some headwinds resulting from the adverse conditions that continue to affect the base oil and lubricant markets.
Before I review the segments in more detail I'd like to highlight our safety results as safety is central to everything we do.
After a record Q1 performance, we delivered a second tier.
Six eight the best Q2 in our history, which keeps us on track to achieve our ambitious annual tier I go <unk> seven.
The record breaking heat across much of the country hosted a unique challenge in Q2 and continues to do to do so as we move through the third quarter.
Because our team is often required to wear personal protective equipment, both outdoors and in plant. We are focused on monitoring temperature and hydration.
Everyone on our team. We appreciate all the proactive steps you take to keep yourself and your colleagues safe.
Turning to environmental services on Slide four segment revenue increased 7% the growth of our services business was underpinned by pricing and volume initiatives each of the segments for business units posted year over year games with industrial services and safety Kleen Environmental branch businesses, leading the way.
Industrial services revenues grew 11% on the heels of a strong spring turnaround season, and initial contributions from our Thompson acquisition.
Our second full year of HBC, which we acquired in late 2021 is trending better than we anticipated.
Safety Kleen environmental revenue climbed to 16% with the demand for businesses core offerings continue to grow.
For the second consecutive quarter, we performed 250000 parts wash services, an increase of 4% from Q2 last year.
Field services revenues grew 7% despite not having any large scale emergency response related projects.
Technical services revenue grew modestly largely attributed to the many planned maintenance and repairs days at our disposal facilities to address weather related outages that occurred in Q1 as.
As expected utilization at our incinerators reached 84% this quarter up four points sequentially, but down six points from Q2 last year, which had fewer down days.
Looking ahead, we anticipate less down days in the back half of this year that we had in the first half.
Average incineration price was up 8% in future, we made some important repairs and investments in the incinerators that limited utilization, but our operations team worked hard to maximize the throughput to address our increasing backlog of waste.
Landfill volume in the quarter was flat with the prior year. This year, our base business was particularly strong with a good mix of high value waste, which resulted in average pricing increasing by 21%.
Looking at segment profitability of 13% adjusted EBITDA growth the Es segment once again outpaced the top line.
Given our highly leverage able network of assets higher revenue should consistently drive greater profitability.
As noted last quarter. We are also benefiting from a number of productivity programs and cost reduction efforts across the organization.
To counter inflationary pressures, we have been targeting $100 million of companywide cost reductions in 2023 much of it any yes.
As a result of all these factors we increased our es margins that are now topping 26%.
Overall, a great quarter for the segment.
Before heading off handing it off to Mike to take you through <unk>.
Let me touch on our recent developments related to <unk> that should benefit our environmental services business materially in the coming years.
Turning to slide five in July the U S Department of defense issued new guidelines related to the incineration.
<unk> containing T plus which research indicates is present at hundreds of military installations.
D O D as authorized commercial hazardous waste incineration as a method of addressing these forever chemicals.
The guidance also allows for hazardous waste landfills as an alternative remediation.
Last year, we published the results of a comprehensive third party study clearly demonstrated that we could effectively destroyed a wide range of P fast.
Including a triple S firefighting foam at commercial scale in that study we prove that we can consistently achieve at least six nines of destruction, which is the gold standard for thermal baths.
Additionally, the EPA conducted its own pilot study and its North Carolina facility and came out with similar conclusions about the potential for incineration.
Given the compelling results of our study we view the dod's decision to lift the piece parts moratorium as a very positive development for clean harbors longterm.
That being said, we don't expect a material amount of opportunities from D. O D. This year do you see a still must set final guidelines related to acceptable levels of contamination of soil and water and provide recommended methods of storage for local transportation and construction.
In the interim we plan to work closely with the Doj to develop the right solutions at military installations to best protect our nation's armed forces.
With that let me turn things over to Mike to discuss S. K S S capital allocation.
Thanks, Eric and good morning, everyone. Let me Echo Eric's comments about the great work of our team. This quarter, we had a number of standout performers and our Esa where they helped us deliver overall results in line with our guidance for the 23rd consecutive quarter that consistency is something that we personally take pride.
Moving to slide six S. K S. S had another challenging quarter and segment fell short of our profitability expectations.
We lowered our expectations on our last call. We do not anticipate any unusual axis Q2 seasonal pick up in demand and pricing this year.
In fact after a price decline in early April posted prices fell again in June which was the culmination of a weak spot pricing environment I'll call them all well.
While crude prices have risen more recently, they have not yet correlated to a rebound in base oil and lubricant pricing.
On the top line <unk> revenue dropped 15% based on weak pricing based on the weak pricing climate brought on by global market conditions compared to a year ago, when scarcity of supply, Wisconsin primary concern in the wake of my major market disruptions.
If you do it last year posted prices rose by a dollar a gallon.
Or is this your Youtube posted prices fell by 6% with 515 exhibiting even deeper discounts in.
In 2022.
Customers were concerned about shortages in allocation. Firstly. This your buyers have been able to patiently wait on the sidelines destocking inventories and holding out for lower prices.
As a result of these conditions as soon as that suggested EBITDA decreased 45% with a year over year drop in margin as our near term as a near term refining spreads have been compressed.
Market conditions remain favorable the S. K S. S. Team has has acted quickly to counter the spread spread compression. The team is executing well in the areas. We can control such as collection pricing and volumes as well as rapid production.
As well as plant production and volume show.
During the quarter, we shifted rapidly from a pay for oil to charge for oil pricing model, while generating record collections of 64 million gallons.
We also saw the record level of base oil gallons that you do.
We were finding plants continue to run well.
Blended product volumes spending like sales accounted for 19% of total output from our plants flat compared with a year ago put out from the 15% we reported in Q1 we.
We continue to win back customers, we lost in the back half of 'twenty. When you do do that insurers are.
I direct claims, which represent our closed loop approach, where 7% Youtube, which is flat with a year ago and in line with our expectations.
Our goal remains to increase our blended volumes this year to average on both the direct and wholesale sides.
Over at all even with the declines we've seen this year in Afghanistan.
Segment is still expected to deliver approximately 20% adjusted EBITDA margin this year and it remains a strong free cash flow generator and high our IC business for us.
Turning to slide seven and our capital allocation strategy.
Eight of our vision 2027 strategy, we laid out in our Investor day earlier. This year, we have multiple avenues to grow our company, we continue to evaluate opportunities to invest in capex to drive organic growth, particularly in the facility network, our maintenance shops in other areas the build out of <unk>.
Our new state of the art CDMA in Nebraska remained on plan on budget and on track for opening in early 2025, we installed this quarter and are on track to hit a number of other critical construction milestones in the back half of this year.
On the M&A front the early returns on our towers and industrial acquisition are very promising.
This has proven to be synergistic, it's just supporting cross selling going forward. We continue to see a good flow of potential bolt on transactions for both operating segments. In Q2, we closed a very small acquisition less than $10 million in size, where we added a company that leases more than 300.
500 intermodal containers, we are confident that these assets are little better paid it benefit us as we grow our business in the years ahead, particularly with the new incinerator coming on line and logothete that opportunity starting to develop.
Eric Dugas, who will discuss our financial activity for the quarter, but I'd like to remind investors that our strong and flexible balance sheet allows us to remain opportunistic with respect to potential M&A.
Overall, we remain on track to hit our financial targets in 2023 as well as the momentum in our E. S segment offsets continues to offset any declines in SaaS apps.
Strong demand for E. S has not abated and our favorite unfavorable market dynamics supporting our profitable growth in all of our fourth business segment units.
Growth in industrial services continues to be a meaningful contributor for 2023 success as we move towards the fall turnaround season.
Within our disposal network, our record backlog positions us well for the back half of the year.
I think pipelines within the Es segment shows no signs of slowing at the pace that we've shown it picks up in government infrastructure spending is starting to make its way into the market.
Given the trajectory we've seen through 'twenty three we can see.
Didn't expect nothing short of a record year in our Es segment.
Although it is disappointing that summer driving that summer driving did not stabilize the pricing environment and S. K S. S. We responded quickly to market conditions. We will continue to go control costs across the business, particularly on the collection side, while still ensuring that we have enough supply to maximize output and I re refineries.
In total we are maintaining our adjusted EBITDA and adjusted free cash flow guidance for the year as we believe our Es segment will offset the slowdown in Afghanistan.
With that let me turn it over to our CFO Eric Dugas.
Great. Thank you, Mike and good morning, everyone.
Turning to the income statement on slide nine as Eric and Mike outlined Q2 was a strong quarter for us without yes segment again, delivering exceptional results exhibiting continued profitable growth.
In Q2, the snack gets momentum across many of our service businesses.
Total revenues for the quarter increased $42 million without E. S segment growing $81 million to more than offset the lower top line figures for S. K S. S.
Adjusted EBITDA was $287 5 million in line with the guidance, we provided in may but down from the $309 1 million reported a year ago. When we benefited from much higher base oil pricing due to global supply disruptions.
Adjusted EBITDA margin was 26% in line with our expectations.
Gross margin was 32, 2%.
So I think our ability to offset inflation with appropriate price increases and cost savings, while increasing productivity and realizing gains from operational efficiencies.
SG&A expense as a percentage of revenue was 12% Q2, consistent with our expectations for.
For the full year, we anticipate being in the low 12% range and essentially flat with 2022.
The team continues to do a great job offsetting inflation and wage pressures with cost mitigation strategy.
Depreciation and amortization in Q2 increased slightly to $89 7 million again, consistent with our expectations. Given the addition of Thompson.
For the full year 2023.
We continue to anticipate depreciation and amortization in the range of $350 million to $360 million.
Income from operations in Q2 was $189 $8 million.
Largely driven by a strong performance in environmental services.
Net income for the quarter was $115 8 million, resulting in a GAAP earnings per share figure of $2 13.
Turning to the balance sheet highlights on slide 10.
Cash and short term marketable securities at quarter end were $326 1 million.
Reflecting our decision to pay down the entire $114 million of debt that was outstanding on our ABL revolver.
Given our strong current financial position, we thought it was prudent to lower our interest expense with some of the excess cash we had on hand.
As a result of that action, we ended the quarter with debt of just over $2 3 billion.
We remain very comfortable with our overall debt portfolio as there are no significant amounts coming due for a number of years.
Leverage on a net debt to EBITDA basis as of June 30 was approximately two times.
And our weighted average pretax cost of debt at the end of Q2 was just over 5%.
With approximately 85% of our portfolio being at fixed rates.
Turning to cash flows on slide 11.
Cash provided from operations in Q2 was up 22% to $207 6 million versus $176 million a year ago.
Capex net of disposals was $121 5 million in the quarter up from prior year.
As a result of spending on our Nebraska, incinerator project, which accounted for $22 million of our Q2 Capex.
In the second quarter adjusted free cash flow was 86 million, which was right in line with our internal expectations and keeping us on track to hit our target.
For 2023, we continue to expect our net capex to be in the range of $400 million to $420 million.
Full year spend on our Nebraska incinerator is expected to be in the range of 85 to 99.
Spent 35 million year to date and some major construction days is planned for the coming months.
We are also continuing to make investments in both equipment and our transportation fleet with an aim to minimize third party rental spend all the time to grow the businesses need.
During Q2, we bought back 36000 shares of stock.
Average price of $137 per share and a total cost of $5 million.
We still have close to $100 million remaining under our existing authorized buyback program.
Moving to slide 12.
Based on our Q2 results and current market conditions for both of our operating segments.
E. R 2023, adjusted EBITDA guidance range of 1.02 billion to one point below 6 billion with a midpoint of one point or building.
Looking at our guidance from a quarterly perspective, we expect Q3, adjusted EBITDA to be approximately 7% to 9% below Q3 of 2022 due to a challenging year over year comp for SK at that segment, but offset by continued positive growth yes. It.
I'll now provide an updated breakdown of how we expect our full year 2023, adjusted EBITDA guidance to translate to our reporting segments.
The environmental services now expects adjusted EBITDA at the midpoint of our guidance to increase 15% to 17% from the full year of 2022.
Demand for our range of services, particularly in industrial and at our disposal facilities continues to be very strong.
As a reminder, our full year 2023 guidance, Yes segment includes $12 million of adjusted EBITDA attributable to Thompson acquisition.
Breast cancer, we now anticipate full year 2023, adjusted EBITDA at the midpoint of our guidance to decrease in the 35% to 40% range from last year, reflecting the ongoing pressure on base oil pricing.
Our corporate segment at the midpoint of our guidance, we now expect negative adjusted EBITDA to be up 7% to 8% in 2023.
A slight increase from our prior guidance reflect some higher expenses that occurred in Q2, primarily related to insurance programs and professional fees.
Overall, the team is doing good job offsetting items like higher insurance expenses salaries and corporate costs related to his house an acquisition with <unk>.
Cost savings programs.
For 2023, we continue to expect to deliver adjusted free cash flow of between 305 $345 million.
I want to remind everyone that this guidance includes approximately 85 to 90 million for the new incinerator this year.
If you add that spend that the midpoint of our adjusted free cash flow guidance would be about $450 million.
In summary.
Q2 was marked by solid execution in both segments, our es segments delivered profitable growth above our expectations.
S. K S that segment, while the financials were less than anticipated.
Team responded rapidly to the market conditions and as Mike said did a nice job controlling what they could.
Looking ahead.
Suzy I think about our near and long term prospects, especially in the Es segment.
There are no where there are numerous tailwind.
We have not seen a meaningful slowdown in any of our core lines of business.
Our sales pipeline as we sit here today is larger than it was 90 days ago.
A healthy outlook for the second half of the year for multiple reasons, including.
The backlog of waste at our facilities.
The additional waste streams that we continue that we continue to see into the commercial marketplace.
The emerging T that opportunity that Eric spoke about and the schedule of projects, we anticipate commencing going forward.
Our goal is to continue to capitalize on these positive market dynamics and the yes.
While managing through the current downturn and S. K S S. While setting the business up for future growth.
Macro factors impacting U S S stabilize.
Overall, we continue to expect another solid year for clean harbors in 2023, as we work towards achieving our vision 2027 goals.
With that Christy Please open up the call for questions.
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Thank you. Our first question comes from the line of Michael Hoffman with Stifel. Please proceed with your question Hey, Good morning, and thank you for taking the time. So you you said all of this in a call on your prepared remarks I just wanted to make sure we emphasize that all lines have been.
There's not.
Not just technical services and not just incineration so.
All growth.
And the pricing is that spread.
Spread across all of them as well or is it concentrated just in disposal.
Yeah. Michael This is Eric Thanks for the question, yes, the pricing is across all lines of business. We continue to push price for disposal transportation labor across all areas of our businesses and that continues to take effect you know Michael going back it's Mike I'll, just add on to what Eric said.
You know if you think back a few years. It was you know incineration scarce and so we get pricing that has gotten pricing in our facilities, whether it be landfill incineration T. S. Yes, what have you what's happened over the past couple of years is that they've been in switching that getting qualified safe compliant labor. It's also very tough getting trucks and equipment also very good.
And that's allowed us to drive price kind of beyond just incineration E. Beyond just facilities and you see that you see that this quarter with a terrific results in the industrial side in the field service side that Eric mentioned in his prepared remarks.
And it historically the turnaround business, a little stronger than the first half than the second half is there does that pattern holding or has it reversed and that's helping give you mean that much more confidence about.
Totally yes directionally.
It certainly gives us that confidence, but yes. The first half of the year was most more turnarounds than traditional we had very strong turnarounds.
Season for our industrial services, we expect that to continue and.
Really reflected in the numbers of that business.
Okay, and then of course everybody's got to ask this S. K ask matts question I won't be the first one I'm sure.
Uh huh.
How do you give the market confidence on what you think the bottom is.
And and when you think about that bottom Ken is there enough data I can't find it to tell you whether there's a correction. This is don in the finished good side of the market.
Which is partly influencing this problem is just too much finished goods out there in the blenders are going right now.
We don't need to buy oil to make the blend to make finished goods.
Yeah. Michael This is Mike I'll I'll I'll answer that question you know like at the end of the day, we feel that the business. When you did everything we could you kind of control the cost Holocaust dry blended guy and drive down P. F O pricing to CFO pricing you know are in the plants ran really well and we're executing on the strategy would be.
Talking about back in our vision 2027, frac stages at the end of March Yeah, Yeah, what's the bottom hard to say I start I think that the.
The midpoint of the business it starts with the two over the short term and if if prices are increasing in the mid to high twos, if prices decreasing isn't that high high once we're in the midpoint of our guide today isn't the 190 range and that's after three plus price decreases over the first half of the year and I'm hopeful that.
With crude prices coming back we've been over the past few weeks, we see we see base oil pricing increasing just is that just had a modeling answer you know for the purposes of the back half of the year, we're assuming base oil prices remained flat and so I'm I'm hopeful given the most a couple of weeks driver around crude prices coming back maybe to the base oil pricing.
Increased which was certainly kind of help us kind of get back to that two number we talked about a minute ago.
Okay, and just so you alluded to midpoint S. K S 190 that puts yes it like.
1.11, if you're landing at somewhere around $2 55 to two six now in corporate overhead.
Yes, Sir we did all that math right that's exactly right.
And really too and so we we can happy we're happy to answer questions about SK, that's all day and to your point, Michael We probably will but yes business continues to do incredibly well and Eric said in his prepared remarks, you know the incinerators had challenges in April and into May yet, we still delivered 140 basis points of margin expansion in the Es business.
And if you look at the guide and make an estimate for revenue.
Margins in the back half of the year for the Es business, we will get it will be 150 to 200 basis points better than prior year and as such we really are very bullish on that business and and and are excited about the future and I want to make this point on the call is that you only gave our vision 2027, you know Erik and I sit in front of the organs, it's been fun.
The investing community has talked about it I'm more bullish about.
'twenty two is having now than I was 90 days ago and more importantly, our pipeline has not changed our pipeline still is stronger today than it was 90 days ago, which again I'm really excited.
Okay. Thank you very much for taking my two.
Thank you Michael.
Our next question comes from the line of Noah Kaye with Oppenheimer. Please proceed with your question.
Thanks, Yeah, just just a little bit more met that are you know last year E. S was 75 per cent rate of EBITDA pre corporate expense and this year, it's going to be 85% or more so I think I'll focus on the 85%.
[laughter] can we start with that P. First commentary, maybe you can level set for us how much P. Fast remediation revenue you've seen year to date and what's in the 2023 guidance and then can you kind of break up the PFS opportunity in two different chunks, maybe you can talk about.
Potential revenue just with D O D or the government just different ways for us to wrap our heads around how big this could be for you over time.
Yeah. No. This is Eric I'll take that question first I'd say that our pipeline of Pete Baas opportunities continues to grow not going to put an exact revenue number on it but we can tell you confidently that a number of opportunities we're seeing across the board as a large opportunity.
For us and we are really total comprehensive solutions that we like to talk about we're doing sampling we're doing analysis for our customers, we're able to provide remediation full remediation of sites and transportation.
And a full suite of disposal capabilities from treatment treatment of groundwater treatment of industrial water. We can obviously provide landfill solutions with a closed loop landfill managing Alicia and then finally, obviously the incineration that we talked about that's really a phenomenal study that came out great release.
By D O D to lift the moratorium so the the opportunity for US continues to be there and as regulations will continue to come into effect throughout the course of this year and into next year. We're optimistic the team has seen a lot of opportunities from all of our customers and a number of different areas.
And we think the our total waste solution is unmatched in the industry and our Israeli continues to look quite a good prospect for us.
I appreciate that hopefully you can put some numbers around it over time, but that's that sounds upbeat Ah you also made reference I think yeah go ahead.
It's pretty small this year.
Eric said in his prepared remarks, the E. P. A M to kind of put more kind of guardrails as to how clean is clean but you know it's it's a it's a $40 million to $50 million opportunity. This year, it's not a it's not a needle mover per se.
I appreciate that and then you made reference to some of the I E. G. A funding is starting to come through you know that was I think $21 billion rate of appropriated money for environmental remediation. So just you know how much of that do you think.
Clean harbors potentially captures and kind of over what timeframe I mean, when we see some of the funding announcements already coming out of EPA, but just want to understand how how how this impacts can be outlook for the year and maybe over a multiyear time frame.
Yeah, No I think that the protection of the 20 billion of spending was over the course of five years.
A large part of that is is go get for us to be able to perform the remediation services and be able to feed volume into our landfills or incinerators, depending on the characteristics. So a good chunk of that $20 billion $21 billion to go get Rusty will get for the industry.
We're well positioned with all of the assets and a great infrastructure that we have to be able to do it.
Participated a substantial part of that.
Yeah.
Thanks, very much for taking the questions.
Thanks, Alex.
Yeah.
Our next question comes from the line of Tyler Brown with Raymond James. Please proceed with your question.
Hey, good morning, guys.
Alright got it.
Hey, Oh Gee pricing in an incineration. It was awfully good yeah, My mom Sneaky news on a really tough comp. So can you just talk about the outlook in terms of price and volume in that market because we haven't heard about some weakness in that Kim markets. The industrial markets aren't exactly that so maybe the backlog of smoothing that out.
But can you just give us any color there.
Yeah, that's right Tyler or a price and mix continues to be about 50 50, we we have opportunity in the backlog of that incineration that we built up throughout the second quarter to bring that into into the third quarter and the fourth quarter reservoir incineration utilization.
Crews, but we're continuing to see where we're not seeing any slowing of chemical pricing or no gives me back sees there were continue to be on the trend of increasing our pricing taking advantage of the difficult to handle waste streams feeding of trying to tremendous amount of volume into.
Our incinerators of drums, and direct burn streams and we've also been leveraging our T. S. Yes to handle a lot more volume and profit for our incinerators. So that's helping.
Helping us well, but price mix continues to be in that 50, 50 area, where we continue to be bullish about it.
And then it looks like yes margins were up I think you guys called that out of 140 basis points year over year I mean, that's very solid.
Particularly given that you're now starting to lap tougher comps, but if you were to take a walk and bridge that 40 basis points what were the key drivers in there because I would assume that Thompson was actually dilutive to margins, but then maybe fuel was a good guy just any any thoughts on kind of how you got there and then wasn't it.
More driven by pricing or cost control or a little bit of both.
Tyler I'll I'll start and then I'm sure my colleagues here well, we'll add on the.
The 140 basis points was driven by a number of things Youre correct in your assumption about industrial a little bit dilutive on that.
We have we're steadfast about driving price in every single one of our lines of business or labor or equipment materials and also taking costs out of the business. We're focused on that is as mentioned in our discussion earlier in the call or what do you have a targeted $100 million of cost savings and where.
We're executing on that to continue to expand the margins. We also are in the process of putting in a new system, that's going to help support our industrial services platform to squeeze more margin out of that that business and get more billable hours on worksheets and get paid better for our services there and all of those things are formulated.
Together and what we saw in Q2, what we continue to see him well we continue to be again, a bullish on the outlook as we execute on our cost programs execute on pricing execute on efficiencies within our business leverage our labor network, which I think is really powerful the team has done a great job of sharing.
Resources that industrials team from Thomson, that's played well into our core legacy industrial services to help support their work. So the sharing of assets. The sharing of people. Those have all contributed to that increase and I think just to add onto some of Eric's comments. This is Eric D.
Again, I think you're right Thompson are probably a little anti dilutive to that but if I think about the hydro can't acquisition that we're getting continuing to integrate that into the platform.
This year, we're really seeing some better margins out of that business from a lot of the cost cutting and labor management that Eric mentioned, so better use our internal folks rather than third parties a reduction in rental costs that will continue to drive to the business, but but certainly that acquisition is proving to have been a good one for us at this point and you know certainly.
Certainly the synergies from that or are contributing to the margin growth in es as well.
Okay. The only thing he might be like I E. The Eric Eric said it well the only thing I'd add is that you know the other thing. That's happened is turnover is down you know.
Direct labor turnover is down 200 basis points from the beginning of the year and 500 basis points year over year and that and that has definitely made in people and in our in our organization I think is a material impact on our margins because those those are that turnover cost is a lot of money and that turnover coming due.
Down because of the message we've made in benefits and people is starting to really pay some dividends suddenly were really bad.
And just my last one here. So I think you were at 26%, yes, and I'd get it. This is seasonally a strong quarter, but I think that was kind of the best since 2012. When you didn't have as much lower margin field and industrial services won't so if we were to kind of quote unquote dream. The dream I mean, why why couldn't this business be a consistent 30.
Center of 30 plus percent margin business longer term.
Yeah, Tyler, we're we think it can be where we're going to continue to execute on all the programs across our businesses you know with the <unk>.
Market positions that we have in industrial and field.
And the largest small customers with safety kleen environmental and small at clean harbors on a large we will continue to execute and drive towards that 30% and we see that in our app.
Okay. Thanks, guys.
Thank you.
Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.
Oh, hi, good morning, everyone.
I guess I'm wondering if we could I'm wondering could you just talk about the free cash flow.
Cadence over the course of this year and how to think about conceptually 24, obviously.
An environment, where our equipment availability has been all over the map etcetera, how should we think about the puts and takes around the free cash flow reached 24 versus 23, you know outside of earnings and ultimately any opportunities.
Either from a timing standpoint, or Hum free cash flow improvement standpoint, 24 versus 23 compared to.
What we're seeing this year thanks.
Okay.
Yeah, Gary It's Eric do gets I'll I'll start here and you know I think the first thing I would point out too as you know really strong free cash flow. So far this year were nearly $50 million ahead of where we were last year. Despite some real headwinds with kind of cash taxes, we paid on last year's profitable earnings and also the increased capex.
That we pointed to some of which are a lot of which is related to the Nebraska projects. So you know really happy this year with where we are I think we're well on our way to hitting the target for next year, you know when I think about 'twenty 'twenty four and puts and takes you know obviously, a well we'll have a little bit last night may be spent on the Kimball incinerator. So that's why we always like to talk.
About capex, excluding that number but we continue to go up.
Long term I think we are kind of targeting that free cash flow conversion kind of in the low 40% range and above is when you look at our long term targets you don't really think that with the business and the margin expansion, we're seeing in and many of the other long term tailwind that we've talked about today are that.
That's kind of where we look to long term.
Okay.
And separately you know our safety Kleen sustainably solutions had a pretty good margin performance sequentially, you know a good two points better than normal seasonality.
It looks like that business might be bottoming and turning the corner just based on your performance. There can you just talk about does that consist.
Consistent with what you're seeing I know you took down the outlook, but it feels like sequentially.
Things are stabilizing and if that continues you know EBITA for the business should be up versus two.
Yeah, and I think that you you're right you're right. We did make a large shift from CFO to CFO .
In the quarter, which had a dramatic impact on our profitability and I think that really just testing the team and their ability to drive you know that does that and still collect a record amount of gallons. So really kind of a great a great quarter by that I'm hopeful that we're there I certainly haven't and we've talked about it earlier you know in our model and base oil prices stabilizing and there's a range.
Is that I think that's probably a good guide to us in the back half of the year.
And Mike just given the complexity of transitioning from pain.
People to charging them.
What's the exit rate significantly more positive than the full quarter average just because these types of initiatives I think take time to implement or is that a fair characterization.
They absolutely did they started when they started we started the quarter in a pay for oil and we ended up kind of mid teens charge for oil at the end of the court.
Super Thank you.
Our next question comes from the line of David Manthey with Baird. Please proceed with your question.
Hey, good morning, guys.
Good question.
Industrial exposure is clean harbors.
Aggregated from trends in industrial end markets and the reason I ask because he got.
Two and a half years of decelerating I guess, it's been below 50.
PMI for the last nine months now, but yet you continue to see excellent trends today and into the second half and your Es business just thoughts on cyclicality of the business today versus what you had in the past.
Yeah, Dave This is Mike I think that'd be a I think that you know yeah.
There are definitely Ah I see your interest I see you're concerned where you know the market factors tend to go down I mean, there's there's more complex waste streams coming into the network, which results in us being able to charge more and and and handle that and so you know not all not all industrial production weighted equally.
I would say that you know that that you know the advent of electric battery manufacturing and other types of a complex deal complex chemicals are around <unk> around our air conditioning and other types of chemicals in the marketplace and that's been a really driving kind of a more complex waste streams into our network and as such.
Being able to counterbalance any industrial production trends you may see in the macro environment.
Yeah, that's great to hear thanks for that Mike and second on the PFS outlook.
I guess the the E. P. A is signaling that they may not mandate enforcement against passive receivers of P fast and it sounded like that's landfills in airports and municipal water systems and a lot of a potential parties here.
Are the enforceable situations and the self policing that'll go on in this industry are those enough to realize the opportunity that you see in front of you today.
Yeah, I'll answer that Dave and Eric here of the right you know the the enforcement putting that aside what I think the opportunity is as regardless of past enforcement, there's a treatment that needs to have the treatment and remediation. So that's where the opportunity is and they're gonna.
How lower discharge standards for water treatment and industrial streams and groundwater streams and <unk>.
And you know obviously the remediation of the sites is going to fuel.
Material into our incinerators and into our landfills. So that's that's really where we see opportunity.
Alright, thanks, very much guys.
Thank you.
As a reminder, if you would like to ask a question press star one on your telephone keypad.
Our next question comes from the line of Tobey Sommer with true with please proceed with your question.
<unk>.
Hey, Good morning. This is Jasper bibb on for Tobey Industrial services revenue was up 11% with Thompson.
Longer term, how would you address the pricing and margin outlook for that business. As you continue to go up your market share there.
Yeah, Josh Eric here, we we continue to drive price at a pretty sudden cadence with all of our customers in the industrial business.
As mentioned earlier, we are we also have a new platform that we're rolling out to combine the systems for both.
See industrial and those systems will really help us.
Deliver electronic worksheets that allow us to capture any leak, which that we might be able to see across the business. So that combined with the efficiencies that we're realizing in the business by leveraging the combined headcount leveraging the rolling stock.
With people together working together is all contributing to the expansion the margin expansion that business and we will continue so we're we're bullish about our increasing the margins as we go forward by combining the businesses are getting more stickier at cross selling there was a couple of new lines of business that we acquired.
Through the top and Thompson acquisition that we're selling to our legacy H B C customers. So that's a powerful as well and they are that the wholesales team from the Thomson Industrial group also recognizes the environmental lines of business that we can cross sell into the customers. There. So all those things combined contribute.
Improving our margins and proving our growth that's stickiness with those customers across the board.
And so it makes sense and then with respect to the S. K S. S Guide just to clarify do you think you've now fully adjusted your charge for oil there to align with demand conditions or when do you expect to have to continue metering up those charges based on what you saw in July pricing.
Yeah, Josh we I think we have set ourselves up for a decent back half of the year, we're assuming pricing stays in our model how guide prices. They saw it in our you'll know pricing stays the same. So we're not you know so if prices go down we will jump at heal more pricing.
Like we did in the first half of the year. So I think we're I think we I think we've done all of the actions that we need to do in my opinion.
On the numbers that are in front of us assuming stable base always.
Got it last question for me on the D. O D authorization of incineration for key thoughts just on timing do you have any sense of a timeline for when federal Rfps for pizza disposal contracts might materialize or is that I guess more dependent on what comes out from API.
So we think Josh that we'll see that over the next year or two.
Opportunities with D O D, where we're already working collectively with them in a number of different sites a number of different opportunities.
We think that will continue to grow here.
Okay, great. Thanks for taking my questions.
Thank you.
Our next question comes from the line of Jim Ricchiuti with Needham. Please proceed with your question.
Thank you.
D R.
Announcement Oh.
The effect conversations maybe.
May be having in the market with our commercial customers other government.
Ladies.
Yeah.
You know, Jeff I would say that there are there's a strong set of customers that we're involved in manufacturing in some of these P fast compounds that.
I think they they know well that our incineration thermal temperature incineration is really a preferred method here and I think that resonates as well with the D O D.
Our experience and our interactions with our chemical customers in D. O T based on the concentration of D. O T. A triple left that has shown cut contamination.
Thermal temperature and high temperature record incineration.
It seems to be a preferred method, there and those high concentrations and so we think that's an opportunity for us. That's why we are really going back in time, we wanted to prove out through our testing that are our incinerators.
<unk> technology.
Technology to effectively with six nines destroy that contamination.
And we think that there is a good audience of solid audience that recognizes that that is the best disposal method for highly concentrated contamination.
Yeah, Jim that the D M D.
Now lifting of the moratorium kind of validating our study it and so I really believe that you know what it means in the back half of the year in 2024, and Derek said in his prepared remarks to put a finger on but it really just continues to substantiate kind of our long term business model and incineration is that a safe and effective way to handle.
These forever compounds.
Got it that's what I was driving that and just with respect I I may have missed it did you provide that.
Thompson contribution in the quarter.
In the quarter it didnt provided it.
As you know mid single digit millions.
Got it.
And I'm just as we think about the second half of the year.
On the Es side, you alluded to some of the benefits you're seeing some some improvement in turnover.
How much more of a tailwind is pricing going to be in the second half versus the first half and then.
Related to that on the cost side have you seen some moderation at all in the other cost pressures in the business.
Yeah, Jim we've certainly seen moderation really on the salary side across the workforce, that's moderating our pricing efforts will continue to outpace.
Should we continue to execute well on that so.
Well.
We have a copper Cas comprehensive program across all of our business units to continue to drive price.
Along with the efforts that as mentioned earlier on the on taking costs out of the business and continuing to get more efficient. So we are we.
We will continue to execute on that plan.
Thank you.
Thank you Jim.
Thank you Mr. Gershon broke we have no further questions at this time I would now like to turn the floor back over to you for closing comments.
Thanks, everyone for joining us today management will be participating in a number of events in the coming months, we look forward to interacting with you further but some of those events and please enjoy the rest of your summer.
Stay cool 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.