Q2 2019 Earnings Call
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[noise] Congress I think of your first and last name.
Range Sealy.
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Ryan Haley.
Ha only white.
Yes.
Im sorry.
Yes.
J L Eli and hear from 472.
I'm from era.
Yes.
I'm sorry, what was the name of the company.
I am.
Era.
A or B I a. right.
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Oh, you're calling for clean harbors right.
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Endeavors.
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Yes, correct.
After the tone, please clearly state and spell your company name and then press the pound key to continue.
Okay.
Era.
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Thank you.
6% a year ago.
Total blended product sales were 28% compared with 27% a year ago.
Turning to our corporate update on slide six.
As we look at the back half of this year profitable growth remains our focus and as I mentioned, we expect volumes to ramp up considerably starting here in Q3.
We continue to pursue multiple avenues to increase our total blended sales in Q in 2019.
We've had reasonably good volumes during the first half and our direct program and like to see that momentum continue as well as driving volumes on the distribution side.
Not too much report today on IMO 2020, or PFS since we last spoke in early may.
Each represents potentially meaningful opportunities for us.
With one strengthening our safety Kleen segment and the other the environmental services segment.
With IMO 2020.
It could material and widen one or both ends of the spread we manage in our safety Kleen oil business.
We should begin to see various markets respond to its in pending implementation later in the year and hopefully in a way that is going to be favorable to our business.
Turning to our capital allocation strategy on slide seven.
We continue to execute across all four categories in 2019.
As noted on prior calls we are investing a bit more capex this year, but we remain selective in our investments.
We're continuing to acquire companies this year that support our core businesses.
We have continued to buy back shares and will repay debt opportunistically based on timing and market conditions.
So in summary recall, we cross the midway point of 2019, and a strong position and anticipate an excellent second half from both of our segments and overall 2019 should see significant profitable growth and margin expansion for clean harbors.
So with that let me turn it over to Mike battles.
Thank you Alan and good morning, everyone.
Turning to slide nine in our income statement as Alan highlighted we delivered another solid quarter of profitable growth and margin improvement in Q2.
We increased revenue by $19.5 million, while growing adjusted EBITDA by $10.5 million in incremental flow through a more than 50%.
Our profitability and margins in the quarter were driven primarily by pricing and cost initiatives, along with operating efficiencies within both our segments.
From a gross margin perspective, we saw a 20 basis point improvement in Q2 from a year ago due to favorable business mix pricing and improved asset utilization.
Those Dave by areas more than offset the higher the higher down days year over year within our incinerators that Alan mentioned.
As gene expenses were down both in absolute dollars and on a percentage basis, where we achieved a 50 basis point improvement driven largely by safety Kleen.
Using the midpoint of our guidance range for full year 2019, we continued to expect SDMA to be down slightly in absolute dollars with annual improvement of 40 50 basis points versus 2018.
Depreciation and amortization in the quarter was up $1.5 million, which reflects assets. We've added from tuck in acquisitions and increased capital spending.
For 2019, we now expect depreciation and amortization in the range of $290 million to $300 million.
Which is flat to prior year, resulting from increased capital spending offset by some existing assets becoming fully depreciated.
Income from operations for the quarter increased 14% to $73 million, reflecting the improving the improved operating margins.
As well as our revenue growth.
On a GAAP basis, EPS was 65 cents versus 54 cents a year ago.
Our effective GAAP tax rate was 30.7% in the quarter versus 30.8% in the previous year.
On an adjusted basis, our tax rate for Q2 was 29.4%.
For the full year 2019, we continue to anticipate that our tax rate on an adjusted basis will be in the 28% to 31% range.
Before walking through the balance sheet items on slide 10.
In June we refinanced a large portion of our large long term debt.
Replacing $845 million of 508 senior notes due 2021.
With a combination of $545 million and eight year notes and $300 million and tenure notes.
This benefits us in multiple ways.
We will save we will save about $1.4 million in annualized interest expense.
The tenor of the debt that is pushed out by at least eight years and advise a large debt towers into two pieces.
On the balance sheet cash and short term marketable securities at quarter end totaled $259.7 million.
Up approximately $35 million from the end of Q1 and in line with our expectations.
During the quarter, we acquired and environmental services firm based in the Pacific Northwest for approximately $15 million.
The firm has locations in four states and serves a similar set of end markets, making it a complementary addition to our environmental services segment in western in the Western region.
DSL at quarter end was 74 days, a four day improvement from Q1, and two days better than year end.
It's nice to see the NIM nice to see that number trending in the right direction.
It remains a primary focus of our team who is driving a current refresh of our billing and collection process.
We expect our DSL to continue to come down in the quarters ahead.
Our debt balance was $1.57 billion flat with year end.
On a weighted average cost of.
Our weighted average cost of debt today is 4.7% down slightly from prior year.
Our balance sheet remains strong.
Using a trailing 12 months adjusted EBITDA.
Our and our current cash balance we were 2.5 times levered at the end of Q2 on a net debt basis.
Turning to slide 11 cash from operations in Q2 was was up 40% to $108.7 million Capex net of disposals was $56.4 million up about $8 million from a year ago.
Adjusted free cash flow was up 76% for the quarter to 54 $52.4 million.
This was a strong follow up to a seasonally weak Q1, putting us back on track from an annual perspective.
For 2019, we continue to expect net capex of $190 million to $210 million, which represents a 12% increase from the mid point.
As a result of growth in our business landfill soap cell construction in incremental capital investments to enhance our re refining capacity.
During the quarter, we repurchased 74000 shares at an average price slightly below $67 a share for a total of $4.9 million.
Moving to guidance on slide 12.
Based on our year to date performance and current market outlook, we raised our 2019 adjusted EBITDA guidance to a range of $520 million to $550 million.
This represents.
A midpoint increase of $10 million from our prior range.
The new pit, the new midpoint would equate to 9% growth from 2018 for the top end of the range would represent 12% growth.
Looking at 2019 in total.
We continue to expect normal seasonality this year, where the back half of the year will be stronger in terms of absolute dollars than the first half.
On a percentage basis, we currently expect adjusted EBITDA in both Q3 and Q4 to grow in the mid to high single digit range compared with the prior year.
Here's our current full year 2019 guidance translates from a segment perspective.
In environmental services, we now expect adjusted EBITDA to increase in the low teens percentage in 2019.
This growth will be driven by higher by waste streams overall performance in our facilities and some project work in the second half.
For safety Kleen, we continue to anticipate adjusted EBITDA growth in the low single digit range due to growth in key lines of business in our branch network, including direct loop sales effective spread management and safety Kleen oil an increased annual production in our re refineries.
In our corporate segment, we now expect negative adjusted EBITDA to grow by mid to high single digits from 2018 due to increases in salaries and benefits as we continue to invest in our people.
Looking at our adjusted free cash flow guidance.
Based on our current working capital assumptions.
In expectations for higher adjusted EBITDA, we have raised the low end of our range by $10 million to $200 million.
Which now gives us a midpoint of $210 million for 2019.
In summary, Q2 was another strong quarter for the company.
Adjusted EBITDA in the environmental services and safety Kleen grew 8% to 9%, respectively with 100 120 basis point margin improvement in both segments.
Looking ahead, we made we remain enthusiastic about our prospects.
While we recognize there are some macroeconomic uncertainties, we have not seen a meaningful slowdown in any of our core lines of business.
For the most part it has been just the opposite.
We have a strong outlook for the back half of the year based on our backlog of waste in our facilities.
New waste streams that continue to enter the commercial marketplace. The scheduled projects commencing and the stability of the safety Kleen branch business.
Our goal remains to deliver on our promises and consistently report predictable results, which is our expectation for the back half of 2019.
And with that Sheri, Please open up the call for questions.
Thank you if you would like to ask a question. Please press star one on your telephone keypad a confirmation gela indicate your line is in the question queue. You May Press Star two if you would like to remove your question from thank you.
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Our first question is from Tyler Brown with Raymond James. Please proceed with your question.
Hey, good morning, guys.
28.
Hey, Alan So pricing was once again very strong in incineration based on my notes. It was a mid teens increase off of a mid teen increase comp I know you mentioned mix, but is there a way to bifurcate that 15% increase between maybe mixing core price and then can you give us any thoughts on pricing as we get into the back half for incineration.
Probably think about one third price and about two thirds mix as we as we think of the margin improvement there.
Okay, and then any thoughts as we move into the back half.
Should we see this momentum.
We continue to look at the mix and.
As we've now gotten our El Dorado plant up and running.
As you remember when we first started that plant up we were burning some very low margin business just to.
I'll get the get the unit up and running and now we've been able to get a much more selective.
Type of waste stream to prove that and we've also seen a lot of new.
Waste streams coming online from some of the expansion in the chemical industry in the Gulf. So I would say that we should continue to see that kind of improvement.
Both in price and mix for the rest of this year.
Okay, Thats, great and then utilization in the first tax obviously in the low 80% range, which is well off last year's number I know that there is a number of reasons, but should we think about utilization in the back half of the year kind of improving and then.
Into 2020 should we expect maybe a smoother utilization rate throughout the year how should we.
Yes, we had.
No major disruption in our Deer Park plant due to catastrophic fire that was adjacent to our facility where.
We had to evacuate our plant we had to shut our plant down for several weeks.
And in the process of of bringing that plant back online.
We had a come offline again and bring it back online and subsequently we we probably saw some.
Impact to our refractory in that plant and so quite frankly, we had a move forward a turnaround in July into June .
In Deer Park, so I would say that should not happen again next year, but that was probably a big part of our.
Are you.
Utilization issue there.
Okay, Yes, a little funny this year.
But then you mentioned that there were some large projects kicking off in the third quarter, you specifically talking landfill projects.
Our predominantly although we do have some ways coming in for the incinerators due to those projects but.
Where our landfill business was about 10% off.
Prior year, you know you're going to see that come back this year and particularly on the west coast. So one of our landfills. There was off line with one of its processing units and of that took us or in another three months longer than we had expected.
But that unit is back up and running as well. So we have a 350000 ton or so cap at that landfill and we so we have substantial volume they are available and we expect to fill it by the end of the year.
Okay, and then you mentioned $5 million of major IAR work this quarter does anything linger into Q3.
Our non anything substantial at this point.
Clearly, we do a lot of events, but those that sort of.
Number they are kind of represents really two major kind of events. So we aggregated together just to kind of give some color there.
Okay. No that's helpful and just my last one just real quick on safety Kleen.
So at a very high level are you guys kind of happy with where the spread is today and if so is that business really kind of designed to do and then in the high 200 million of EBITDA kind of no matter the base oil price.
On that 150 million gallons sold and produced.
And is the opportunity to really grow EBITDA dollars in that business.
Really the long term migration towards blended in closed loop sales again all of this excluding IMO, but it's not the is that the big picture way to think about safety kleen.
Yes, I would like to think that we're we have a much.
Better control over that spread with the tools that we have given the team over the last three or four years and so.
So as as base oil changes or as the price of crude oil changes and as the price of number six oil you know has an impact on our waste oil collection business, we're doing a good job of managing that spread.
The big opportunity, obviously as you mentioned is.
The more that we can.
Convert our base oil into a blended products, we see some margin lift by doing that and we also see some opportunity if the market goes along because of IMO.
I'll bet that may be our input costs will even go down further so that that will improve the spread too.
Okay, Alright, guys I appreciate the time.
Okay. Thanks, guys.
Our next question is from Jeff Silber with BMO capital markets. Please proceed.
Thanks, So much in your prepared remarks, you mentioned that you haven't seen a meaningful slowdown in any of your core lines of business forgive me, but.
Would your company be more of a lagging indicator there since your clinic at the backend of the streams I'm just curious how you think about that.
I guess I wouldn't think that we would lag too much in because a lot of the the waste that we bring into our plants as a result of.
Manufacturing, whether it be making your chemical or making a car or making some other kind of products. So a lot of the waste that we collect.
As we look at our drum counts for example that sort of reflective of the the regular waste streams that are being generated by industry and I haven't seen anything Mike you want or color on that yeah. Jeff. So so we can certainly conceptually I can I see your points into a waste we would we would lag other industries, but our pipeline is very strong and so so and we try to we are very close to some long long tenured customers and so we are pretty close to them and we don't we just don't see it. So your hypothesis is not inaccurate I think that obviously central waste will be in the back end of any have any type of slowdown, but I mean, we look we have a pipeline that that looks as strong as ever been so that kind of that kind of that's how we got to the comments we've gotten our prepared remarks as you get some context on that typically the currently has 90 days to store ways before they need to move it from a regulatory standpoint so.
I would say that the drum volumes, which is really reflective of the health of our customer base continues to be very strong.
Okay, Great that's really helpful and as a follow up you mentioned the comparison to last year with the heavy turnaround activity how much visibility do you get on that you know quarter to quarter visit a ballpark of that it's going to be thanks.
What happened in Q2 last year that we there was a bunch of turnaround, especially in Western Canada that we end up winning.
Lithia.
More than our fair share so that really became a really a good spike for us in a really good win for us in Q2 at this time last year GAAP.
I think our turnarounds, we do get good visibility to it but the turnaround and be flat in the back half I'd say, both in the USA and Canada as far as this year versus last year and just that it is very unusual in Q2 last year. There were a few there were a lot of turnaround specialty in Western Canada, and we won kind of lets say almost all of them. So that was really kind of a great win for us then.
It may is it possible to get which made it very tough comp here in 2019.
Yeah that was not going to be my question, how pulpwood comp what was the order of magnitude that that impact into Q1 8.
June alone was 10 million yeah in Western Canada was a bit was a big number Jeff I can't put up on for too fine a point on it but it was really that was very high.
Tough they didnt have the of the region that did all our region did pretty well kind of year over year in the Western region in Western Canada region was down based on but it is doing fine but versus.
Versus actual prior year, there are way down and millions of fans.
All right that's helpful I'll get back in the queue. Thanks, so much.
Yep.
Our next question is from Michael Hoffman with Stifel. Please proceed.
Hi, Thank you very much.
If we could walk through the segments. So.
Based on the way you're framing the guidance. It would suggest that you would return to.
Low single digit three five kind of second half growth any asked is that the right way to think about what happens on the topline.
Hop line, while we don't give topline kind of numbers.
So it's hard for us to kind of speak to that specifically.
Certainly we think the back half of the business is going to be up 8% as we said in our remarks in the back half of 2000 2019.
Okay.
And then within context of where this operating leverage is coming from the the.
Industrial and field services.
It had declined a lot a couple of years ago that impacted profitability apart, but its contribution to the overall margin how would you frame those margins.
Today relative to where you'd like them to be.
And then and then I'd like to talk a little bit about where the the technical services margins are sort of the mix of how you got the improvement in the us.
Yes so.
So going to answering your last question first I think Michael It was a combination of higher margin way streams is as Alan said better pricing again as Alan mentioned, but also in a lot of operating efficiencies and we have done we put in a new team in place a year or so ago and they've done a nice job kind of de bottlenecking plant the driving operational efficiencies and that's really driven that's really great in it and there's still plenty more to do we are not going to Honda Odyssey juice, there, but certainly they made some good progress in the first half of the back half of 18 into 19.
Thats really help the operating margins and so kind of back to your question on on kind of where industrial and field are certainly in that those businesses I'd say high single digit is a good place for them to be.
Yeah, obviously want them to be higher based on that level of events and field that that drives that margin kind of in the mid teens, but you know as as as Alan mentioned there was at the Apple kind of let's say, we call national events that we call out wasn't that big of a needle mover in the quarter, but it was certainly helpful and I think the industrial services business continues to do well it had a tough comp as I mentioned before.
In Western Canada, but that business is still kind of chugging, along and producing I'd say kind of high single digit.
EBITDA margins and Weve, Okay, fulsome nicely streams from those absolute leases into our plants. In fact, one of the larger waste streams going into our Deer Park plant right. Now is the result of a significant incident that we've been working on so that really.
Tends to show up in the out years business.
Got it all right and then how sensitive is your guidance to the sentiment around trade and tariffs related to your customer base.
If it remains less favorable how how sensitive is your guidance to that.
Michael We've tried to as you know we've tried to be reasonable in our guidance and trying to give ourselves.
Cushion so that there is a problem that we have that covered and so we feel like you know.
If its trade tariffs affecting our customer that could be a problem. It could be a weather issue could be a plant outage. We try to give ourselves you know as as we have for the past couple of years and give ourselves an opportunity to kind of meet guidance. Even if there is a problem now obviously there is a massive problem and then at the different animal, but we I think that the guidance is structured so that that's up more to go sideways, we still will still be fine.
Okay, and then nice job on the Dsos is is your thought that you could improve the year over year on a full year basis. So you're 76, you are going to stay below 76 days for the year in 2019.
Yeah. Our goal is to drive kind of working capital improvements, we see that as a key to driving free cash flow and not so much in today at the back half of the year into 2020 that now DSL, we talk a lot about that but also inventory we're trying to manage our inventory. We're trying to manage payables were trying to manage that kind of all the different areas that that could affect freak defect operating working capital anomaly and ultimately free cash flow and so we recognize the fact that that number has gone up obviously in a growing business. It will go up we're trying to manage that and keep that keep that under control.
Okay. Thank you very much.
Thanks, Michael Michael.
Our next question is from Noah Kaye with Oppenheimer and company. Please proceed.
Thanks, Michael put my Dsos question. So ill move on [laughter], you know I think just to go back to the point about.
Visibility into this very strong pipeline in the back half.
You've you've you've.
Presented recently about kind of the diversity of your streams, maybe it'd be helpful. If we could just get a little bit more color on kind of the types of streams that you're seeing coming into the pipeline.
Maybe you can speak to sector or region, just to give people a little bit more flavor.
Yes, so so no I'll take a shot and now please feel free to jump in so we see no more in the areas. We've talked about you and I've talked about before in the chemical manufacturing space in Allen talked about drum volumes in that that is really been.
A key in the first half and we see that continuing as a key in the back half of the year, we've talked about the chemical Renaissance in the Gulf and other areas and that certainly is.
Continued to manifest itself and I'd say that growth goals is where we're getting candidate the high margin waste streams, we talked about and also kind of the margin expansion that we've also talked about.
The interesting thing is that the is that we see that pipeline continuing to grow and we're hopeful that we'll watch those opportunities.
Continuing that certainly in the back half of the year and into 2020.
We've seen them plant new plant, starting up and some of those take longer than they expected. So some some of the things that were expected haven't yet materialized through sort of the first six months, but clearly these plants are starting to go through startup and.
Where we're dedicating capacity for them to make sure that that were going to be there for them.
Mhm and do you have any sense on what's pushing those start times out not too would speak for your customers but.
You know as it is it macro related or is it just sort of mechanical so it just engineering mechanic.
Starting up you know some of these significant plans are or.
Difficult to get them up and running sometime so.
No in fact, I know Kevin.
Like ours that right.
Okay, and then and then on the S.K. side.
I'm struck by how potentially dynamic a situation we could be getting into later this year. Early next as you pointed out with IMO 2020, there is still a fair amount of uncertainty.
And then I think about the comments you made about the tools you have given your team to be able to respond.
Obviously, you're you're getting higher CFO now.
But can you elaborate just a little bit more on those tools and how you think you've improved your ability to.
Respond and capitalize on whatever the shift in the spread is as we get into the later this year.
Well.
I think we monitor the.
What's going on in the market you know in all areas you know we have.
200 branches over 650 trucks collecting oil and we're we're certainly very close and capturing local information thats going on in the market as well as very close to understanding the outlooks for oil that you know is a available to some of our competitors and and how those markets are being changed and potentially.
How those outlets are going to restrict flow of oil coming coming.
So down the pipe here over the next three or four or five months or and into next year. So I would think that you know we have a much better.
Source of information and be able to take that information and put it into the hands of the team who are running these different branches and.
Well, probably that's the most color I, probably could share with you right now, but we're on top of it because we know it's critical that we maintain a spread and what sometimes can be a volatile business might yet yes note two things I wanted to add first of all we are making a small capital investment in our re refinery to kind of have them run a little more efficiently to break out a little more about base oil, which is going to be hopefully will give us what happens IMO 2020, it looks like a winner.
And secondly, our guidance as we given out this morning Doesnt include any IMO impact and so and I know, it's going as you said in your opening comments very dynamic we agree with that but we want to make sure that that that the that the investing public know that our guidance is assuming that's a that's a non event in the back half of the year and Thats becomes a winner for US well, that's just upside to this model.
Perfect. Thank you.
Okay.
Our next question is from David Manthey with Robert W. Baird. Please proceed with your question.
Hi, good morning, everyone. Thank you.
First off.
You mentioned workforce additions, which makes sense given the strength of your business, but can you discuss the specific areas of opportunity that you're seeing today.
I think it was probably more investment in the workforce I think.
We have expanded.
Our benefits program like our four one k. our health care benefits. We've we've taken on a lot more additional costs. So we recognize that we're in a tough environment.
And that we are.
Very much dependent on.
A a workforce that is going to stay with us and in that we train and we invest in and we want to make sure. They stay with us for a long period of time. So it was probably more in that context, Dave Yeah, David I think our headcount our headcount in SG nine indirect actually down kind of year over year and so it really is we're making a slightly and I think we're making a much more the numbers I talked about when we talked about in that in the Q1 call or the year end call was an incremental investment in in net benefit comp and benefits stock islands at fallen case dotcom and on other types of benefits between investing in people.
Okay that makes sense.
And second on the IMO eight it's pretty clear it's happening now obviously, but is there anything that youve heard or seen that makes you more or less confident.
Specifically on the impact kind of the secondary impact onto the used motor oil market.
And I'm wondering about your how your contracts are set up I think you answered in response to a previous question.
You know referencing six oil is your contracts are set up that way maybe it doesn't matter so much but I'm. Just wondering if you can give any color in terms of increase or decrease in confidence that you're actually going to see some benefit even though it's not in your forecast.
Well.
It's certainly a global issue and.
No its upwards of 50 billion gallons that that as being flipped here.
We do see.
Some news you know in some some countries, particularly in Asia, where companies with their own internal ships are not going to adopt.
Im old 2020 regulations, and they're going to continue to do what they're doing because they the ships are too old and they can't possibly convert them and so you know.
There is certainly going to be non compliance with these rules and we read about that but I do believe you know that a substantial amount of that 50 billion gallons is going to be.
Flip to a low sulfur diesel oil and.
I think that we have seen limited numbers of ships retrofitting would scrubbers and and so it just seems between those kind of points that are making and the investment that a lot of the large majors have made to be able to.
Meet the needs of almost 20 that it has to happen and I think the end result has to be that.
Hi, sulfur heavy number six oil is going to be stranded in there is going to be a substantial oversupply of that material without a home and I think that's that's our hypothesis at this point.
Okay, and then just finally not to pin you down on a on P. fast, but if it were to be declared hazardous material can you just tell us how that would manifest in your various lines of business.
You know from a onsite treatment.
We see a lot of opportunities to.
In our environmental services business, particularly our field services group to go out and perform.
Onsite treatment of materials.
That have been contaminated.
There may be.
Need to transport some of those materials instead of instead to actually remove those materials and incinerate them more landfill those and I think it's really too early to tell just where EPA and where the market is going to go on that but those are the two points that I guess, we would see as opportunities.
Great. Thank you.
Yes.
Thanks, Kevin.
As a reminder, it is star one and your telephone keypad. If you would like to ask a question we will pause for a brief moment to poll for questions.
Oh, we have a question.
A follow up from Michael Hoffman with Stifel. Please proceed.
Hi, this is as much a comment is that question you know I always want to be a little bit cautious when the market gets excited about some new opportunity. They thought tronics was going to be a big windfall and it didn't play out PFS potentially could be huge but.
To be clear, it's initially a drinking water issue you guys really to steer clear of drinking water.
Maybe the secondary plays you capture the filter media and get to handle disposal that but without a national contamination limit.
Even if this is just an industrial waste without a national contamination to limit. It seems like that is going to slow the remediation side, particularly on the federal government. The depot de doesn't do anything until at least get a federal standard as it is that the right way to think about that so lets be cautious there could be a great opportunity, but nobody should get over their skis and go Wow. This $13 million last year is going to turn into a 100 million next year kind of opportunity.
Yes, I think Thats fair I think what we're seeing we're pretty much fully utilized with our mobile treatment capabilities are handling the Hudson said, you kind of opportunities, but you're absolutely right Michael.
Okay, Mike we put in our prepared remarks, because we get asked a quite a bit and we wanted to give people an update there is no nothing really to talk about here, we think that the IMO opportunities much more much more.
Tangible.
Thanks.
Great.
We have reached the end of our question and answer session I would like to turn the call back over to management for closing remarks.
Okay. Thanks for joining us today, we look forward to speaking with many of you over the next several months at our investor events, including our Needham event in mid August .
And enjoy the rest of your summer everyone.
Thank you.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and have a great day.
[noise] [noise] you still there sorry.