Clean Harbors Inc (CLH) 2022 Q3 法說會逐字稿

Greetings, and welcome to the Clean Harbors, Inc. Third Quarter 2022 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Michael McDonald, General Counsel for Clean Harbors, Inc. Thank you, Mr. McDonald. You may begin.

Thank you, Daryl, 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 Gerstenberg; and SVP of Investor Relations, Jim Buckley. Slides for today's call are posted on our Investor Relations website, and we invite you to follow along.

Matters we are discussing today that are not historical facts are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Participants are cautioned not to place undue reliance on these statements, which reflect management's opinions only as of today, November 2, 2022.

Information on potential factors and risks that could act 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. Today's discussion includes 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.

Let me turn the call over to our CEO and Founder, Alan McKim. Alan?

Thanks, Michael. Good morning, everyone. Thank you for joining us.

Turning to Slide 3. Before discussing our quarterly results, I wanted to touch on our other major announcement this morning regarding executive management. Next March 31, I'll be stepping down after 42 years of leading this wonderful company. At that time, our Chief Operating Officer, Eric Gerstenberg; and Chief Financial Officer, Mike Battles, will assume the role of co-CEOs. And I'll remain as Executive Chairman of the Board and Chief Technology Officer for the foreseeable future.

For the past several years, our Board has discussed succession planning as part of its regular meeting agenda. So today's news has been in the works for some time. The company is in great shape financially and is strong strategically with leading market share in all of our core businesses. We've built a deep organization and even recently strengthened our Board.

A long-term goal that I've had for our company has been to achieve $5 billion in revenue and $1 billion in EBITDA or a margin of 20%. It is a financial accomplishment that we're on the verge of realizing with our results in 2022. Therefore, I felt it would be the right time for me to step down as CEO, and I made the Board aware of my intentions. The Board reviewed all of our options and decided that moving to a co-CEO model was the best plan and most seamless transition.

As a founder-led company, we elected to keep the senior leadership team together, with me moving to an Executive Chairman role. Our 2 outstanding leaders, Mike Battles and Eric Gerstenberg will take over running the company effective April 1, and over the next several months, we'll transition responsibilities amongst the leadership team. I'll turn over day-to-day responsibilities to these guys as my focus will shift to overall strategy, M&A and driving technology.

For example, we're in the middle of converting our ERP to Oracle from PeopleSoft. So I'll continue to oversee our Tech Steering Committees as well as completing several other strategic initiatives that are underway. Mike and Eric are exceptional executives who have clearly demonstrated their ability to lead, manage and grow the company.

The 3 of us have worked well together for a number of years. And keeping that management team in place has been a top priority. It has been my honor to lead this company since its founding in 1980. The Board and I are confident that under the leadership of Eric and Mike, along with the wider management team, that the company will continue to grow and deliver strong results for all of our stakeholders.

Turning to Slide 4. As we highlighted in this morning's earnings release, the company reported another quarter of strong results in Q3, exceeding $300 million in adjusted EBITDA for the second consecutive quarter, with both segments contributing to our growth. On the top line, we benefited from HPC, healthy organic growth and pricing that offset inflation.

Our bottom line performance highlighted that our leveraging of our valuable assets and diligent capital allocation strategy is working as net income, adjusted EBITDA and adjusted free cash flow were up significantly over the prior year period. And Mike will take you through the details in his remarks.

Before we get into our segment numbers, let me spend a moment talking about some of the key takeaways from this quarter. From my perspective, the most important metric from the third quarter is not one that you'll see on our income statement, rather it's our total recordable incident rate, or TRIR, a key measure of safety. Our goal for '22 is to achieve an annual TRIR of less than 1 for the first time in our history. In Q3, our TRIR was just 0.65. And through the first 9 months of '22, we sit at 0.74, both of which are outstanding. So the team really has done an amazing job all year of keeping themselves and each other safe as we continue to set the standard for safety in our industry.

On a somewhat related note, I also want to highlight the outstanding work that our team did during Hurricane Ian. We have 18 facilities in Florida, including several directly in the storm's path, and the teams were able to get back up and running within days. I'm happy to report that our hundreds of employees in Florida and other nearby states that were impacted by that storm were all safe. And we assisted with temporary housing for some before they could return home. I'm proud of how the teams all rallied to help each other. It's what Clean Harbors is all about.

Another key takeaway from Q3 is the unprecedented demand we saw for our network of disposal assets across many verticals, particularly chemical and general manufacturing. We are benefiting from strong tailwinds as U.S. manufacturing continues to generate record levels of waste and stricter regulations in retail and other markets are generating higher volumes for our facilities. Through our Safety-Kleen branches, we are seeing more containerized waste than ever coming into our network. This is a direct result of the reorganization we undertook at the start of '21 to focus both parts of Safety-Kleen business on what they do best.

With the record level of demand across our business, finally Clean Harbors is at an all-time high, and we are committed to continuing to attract and retain great people. Since the start of the year, we've grown our direct labor force by nearly 1,500 employees on a net basis. As a result of the ongoing investments in our people, turnover continues to decline, which is a trend that we hope will expect to continue.

And one more thing, we are continuing to deliver great returns for our shareholders. Our return on invested capital is back into the low teens, and that has tripled over the past 5 years. The company today is clearly extracting great returns on all our assets. Our ROIC results are even more impressive, considering that we completed the second largest acquisition in our history last October with HPC and really have not yet fully realized the potential of that transaction.

Turning to the segments on Slide 5. The addition of HPC accounted for a little more than half of the 46% increase in Environmental Services revenues. We also benefited from organic growth generated by higher disposal and recycling revenues in our facilities, pricing gains and increased service demand. Incineration utilization was 86% in the quarter and average incineration pricing increased by 10%. Landfill volumes rose by 38%, reflecting our strong base business and more waste project opportunities.

We capitalized on a busy summer season in our Industrial Services group as we continue to enjoy steady contributions out of HPC. And at the same time, field services grew 29% through emergency response projects and the addition of HPC's utilities business. Safety-Kleen Environmental grew 23% in Q3, as the team continues to drive healthy demand for its core service offerings.

Looking at our Environmental Service segment profitability, adjusted EBITDA growth outpaced our top line, increasing by 57% as we leveraged our extensive network of locations and assets. Pricing kept pace with inflation and combined with our cost and productivity efforts, we raised our ES margins by 120 basis points from a year ago.

Moving to Slide 6. Revenue in our SKSS segment was up 34% in Q3 on the strength of increasing pricing of both our base oil and blended products versus a year ago. We also achieved growth in the recycling services we offer in this segment, including oil filter collection and (inaudible) for recycling. Adjusted EBITDA rose by more than $32 million or 46%. The SKSS team continues to capitalize on favorable base oil market conditions and available waste oil volumes to maximize profitability. Waste oil collection volumes increased as we gathered 62 million gallons at favorable cost levels compared with 60 million gallons a year ago.

Sales of blended products and direct volumes in Q3 were in line with our expectations, given market conditions, including the ongoing additive shortages in the industry and the profitability available to us in our base oil.

Turning to Slide 7. We're evaluating opportunities to execute on all elements of our capital allocation strategy. On the M&A front, we continue to evaluate both bolt-on transactions and some large acquisitions that would provide us more permitted facilities, leverageable assets or support our leadership in a particular market. We are continuing to maintain our strong balance sheet. And given the potential for future economic downturn, we want to ensure we have the flexibility to be opportunistic.

We also continue to invest in our business to drive additional organic growth. For example, in Kimball, Nebraska, the $180 million build-out of our new state-of-the-art incinerator is proceeding on plan. Recently, we built a 66,000 square foot warehouse that will help us through the winter construction phase. And we've already poured more than 7,000 yards of concrete at the facilities foundations take shape. And while we wish we could accelerate the time line, that 70,000 tons of capacity will come online in early 2025. We're also expanding cell capacity at several of our key landfills this year to prepare them for greater project volumes in the coming years and Mike will touch upon the debt and share repurchase elements of our strategy in his remarks.

Looking ahead, we expect to conclude 2022 with a strong fourth quarter. We continue to believe that our key markets are in great shape, based on a number of favorable domestic trends, reassuring initiatives, the U.S. infrastructure bill, new environmental regulations, such as PFAS and plans among high-tech manufacturers to significantly expand production of semiconductors, EV batteries and other products.

With Environmental Service, we continue to maintain a record backlog of waste and healthy demand for our network of scarce disposal and recycling assets. We anticipate a strong finish to 2022 through a combination of base business and project work. All our service businesses are entering the final quarter of the year on a positive trajectory. We are continuing to hire as rapidly as possible across our Environmental Service segment to facilitate additional growth going forward while also lowering our third-party spend.

Within SKSS, the record results we're achieving this year demonstrate the benefit of having it as a stand-alone business and how well we can now manage both ends of our re-refining spread. Our re-refining business is executing well in all phases from collection to production to sales. We are experiencing growing interest in our sustainable products including our recently launched KLEEN+ brand, as more customers seek ESG-friendly solutions. We remain confident that the value of our base oil versus the general market will only increase in the years ahead.

On the collection side of our spread, we are continuing to gather the volumes necessary for our 8 re-refineries at rates that are better than historical norms. And really, we believe this is due to the impact of IMO 2020 on the available supply in the market, the internal changes we made to the organization, which better capture the value of our collection services, and overall continued improvements in our systems and transportation.

We increased our annual adjusted EBITDA guidance to more than $1 billion, which reflects the acceleration of demand for our environmentally focused service and products. In this inflationary climate, we are continuing to execute on our strategies for pricing, cost mitigation and operational efficiencies to drive our margins. We anticipate leveraging the strengths of both our operating segments to achieve record top and bottom line results in 2022.

So with that, let me turn it over to Mike Battles. Mike?

Thank you, Alan, and good morning, everyone.

Turning to our income statement on Slide 9. Q3 revenue increased to a record $1.36 billion, over 20% of that growth was organic. And HPC Industrial continues to perform to expectations. Adjusted EBITDA was 67% higher than a year ago, coming in at $308.6 million. That equates to a margin of 22.6%, a 310 basis point improvement from Q3 of last year. We achieved this record margin performance in the quarter by improving both gross profit margin and exercising strong controls over SG&A spending in all 3 of our business segments.

Gross margin improved 40 basis points to 33.2%. In this environment, we've proven our ability to price through inflation and improve gross margin through productivity and operational efficiency gains. SG&A as a percentage of revenue improved substantially to 11.1%, down 290 basis points from Q3 2021. The improvement demonstrates our success in leveraging the HPC acquisition and a number of other initiatives to reduce nonbillable costs.

Even with approximately $400 million more in revenue, our SG&A on an absolute dollar basis rose less than $19 million, largely consisting of the addition of HPC. For full year 2022, we continue to expect SG&A expense as a percentage of revenue to be approximately 12%, substantially below our 2021 level.

Depreciation and amortization in Q3 increased as expected to $88.4 million, largely reflecting the addition of HPC. For 2022, we continue to anticipate depreciation and amortization in the range of $335 million to $345 million. Income from operations in Q3 essentially doubled to $209 million as a result of our 43% revenue growth combined with our efforts for across-the-board margin improvements. Net income in the quarter was $135.8 million, more than double the figure from a year ago.

Turning to the balance sheet on Slide 10. Cash and short-term marketable securities at quarter end was $514 million, up approximately $100 million from June 30. We ended Q3 with debt of just over $2.5 billion. Leverage on a net debt-to-EBITDA basis for the trailing 12 months has now improved to approximately 2.2x after being north of 3x at the start of the year.

Based on the midpoint of our guidance, we expect to reduce our leverage to less than 2x by year-end. Our weighted average cost of debt is currently 4.28% as 70% of our debt is at fixed rates.

Turning to the cash flows on Slide 11. Cash from operations in Q3 also more than doubled the $225.6 million. CapEx, net of disposals, was $94.4 million, up about $50 million from a year ago. This was primarily driven by HPC and the ongoing construction phase of our Nebraska incinerator. The new incinerator accounted for $13 million in Q3 and approximately $27 million year-to-date. We now expect that project to be in the neighborhood of $40 million to $45 million for 2022.

Adjusted free cash flow in Q3 was a record $131.2 million compared with $61.1 million in Q3 a year ago. For 2022, we now expect our net CapEx to be in the range of $325 million to $345 million. During Q3, we bought back 109,000 shares of stock at a total cost of $10.5 million. Year-to-date, we've purchased 485,000 shares at a cost of $44.2 million for an average cost of just over $91 a share. We have approximately $110 million remaining under our existing buyback program.

Moving to Slide 12. Based on our third quarter results and current market conditions for both our operating segments, we are raising our 2022 adjusted EBITDA guidance to a range of $1.01 billion to $1.03 billion with a midpoint of $1.02 billion. This is how -- here's how our revised full year 2022 adjusted EBITDA guidance translates to our segments.

In Environmental Services, we now expect adjusted EBITDA at the midpoint of our guidance to increase approximately 42% from full year 2021. Demand for our disposal and recycling facilities has enabled us to drive more volumes of high-value waste streams all year, and we're benefiting from a full year of the contributions from HPC. Our pricing and strict cost controls have also made a significant positive impact on our profitable growth.

For SKSS, we anticipate full year 2022 adjusted EBITDA at the midpoint of our guidance to increase approximately 37% from 2021. This guidance reflects our strong Q3, along with recent base oil pricing trends in the market and the seasonal slowness that the industry typically sees in the fourth quarter.

In our Corporate segment, at the midpoint of our guide, we now expect negative adjusted EBITDA to be up approximately 8% to 9% from 2021. The year-over-year increase is largely due to the addition of HPC corporate costs for a full year as well as wage inflation, offset by lower severance and integration expenses compared with a year ago.

Based on our third quarter free cash flow results, higher interest rates and the latest working capital assumptions, we now expect 2022 adjusted free cash flow in the range of $260 million to $290 million or $275 million at the midpoint. Along with higher cash interest payments due to rising rates, there were 2 primary operational factors that ultimately increased our working capital needs through the remainder of the year, both timing related.

First, our rapid revenue growth has been even stronger than we expected, which was resulting in higher upfront expenses from a working capital perspective. These expenses like payroll, fuel and supplies were paid much faster than we can collect the cash from our revenue generated creating a timing item. Cash will be collected over the next few months as those receivables come in the door.

Second, in light of ongoing global supply chain disruptions, we made a strategic decision to increase inventory of critical supplies at our facilities. We're managing our business for the long term, and it's imperative that we be there for our customers when called upon.

A combination of those 2 items means that our working capital for 2022 is more than $50 million above what we anticipated when we spoke to you in August. We fully expect our working capital needs to return to normal in 2023 as we collect our receivables in a timely fashion and use up that inventory. We're not assuming any increase in bad debt going forward and the current aging of our receivable buckets is all consistent with historical levels. We still have to go through our year-end budgeting process, including setting our CapEx expectations to develop our 2023 adjusted free cash flow guidance range that we will share in February. However, I would anticipate that next year's free cash flow, even with as much as $90 million of spend planned for our Kimball incinerator, will be well north of $300 million.

In summary, Q3 was another strong quarter for Clean Harbors, led by our disposal network and management of our re-refining spread combined with good contributions from our service businesses. Margin performance in the quarter was again terrific as we capitalized on robust demand while operationally addressing inflationary pressures through intelligent pricing and cost mitigation.

Our near-term growth prospects remain promising. Based on our expected strong Q4 and pipeline opportunities for 2023, we are maintaining a bullish outlook. While we need to run through our budget process in the coming months, and are not providing any preliminary guidance for next year today, we do expect another year of profitable growth for Clean Harbors in 2023.

Let me conclude by saying that personally, I'm thrilled about the next chapter at Clean Harbors and working closely with Eric as co-CEO. Eric and I have formed a great working relationship over my 9 years with the company. I'm thankful to our Board of Directors and Alan for the opportunity and the belief they've shown in me and Eric. While we recognize we have big shoes to fill, I'm confident in our ability to continue Alan's legacy of success at the company.

Before we open up the call for questions, I know Eric wanted to add a few comments as well. Eric?

Thanks, Mike, and good morning, everyone. I would first like to take the opportunity to publicly thank Alan for his tireless leadership for the past 42 years. You not only built the largest environmental service provider in North America, but in the process, you transformed the industry itself into something that is far more compliant and safer than when you started.

And Clean Harbors today is unmatched in its hazardous waste capabilities, geographical coverage, service offerings, and the quality of our team, thanks to Alan's efforts. I'm personally excited and honored to lead the company in the co-CEO role. Clean Harbors has been my home for 32 years, the last 23 of which have been working directly for Alan.

For those of you that don't know my background, my path here is similar to Alan and that I started on the front lines as a field lab tech chemist in one of our branches in 1989 and rose through the organization. At different stages in my career, I've been the General Manager of several of our facilities and have overseen both our disposal and our environmental business before being named Chief Operating Officer in 2015.

I've worked closely with Alan during the last 2 decades and know our industry well. There continues to be significant opportunity to profitably grow this company for the benefit of our employees and our shareholders. I know what makes this company prosper and look forward working with Mike to extend Alan's 40-year plus track record of success.

With that, operator, please open the call for questions.

(Operator Instructions) Our first questions come from the line of Tyler Brown with Raymond James.

Just congrats on everything, including the 50 record. But Eric, I know there's a lot of hand-wringing about a potential economic slowdown. It sounds like your backlog is very strong, maybe even at an all-time high. So you think that even if things slow down a bit next year, that eating some of that backlog could maybe help smooth out (inaudible) in '23?

Yes. Tyler, as you mentioned, our deferred inventory backlog continues to be very strong. Our volumes finishing the year are strong. We do anticipate to work down a little of that backlog as we progress through the fourth quarter and into the first. And we do expect it to smooth out in 2023, but we do anticipate continued strong volumes throughout the whole network with strong incinerator utilization.

Yes. Perfect. Okay. That's very helpful. And my quick note on free cash flow, I just want to be clear, the guidance this year does not include the $17 million divestiture, is that right?

Tyler, you're breaking up. Can you repeat the question, please?

Let me switch over. So sorry, the guidance, though, to be clear, does not include the $17 million divestiture on the cash flow side this year?

The divestiture of Airborne in June?

Yes.

The cash flow guidance includes that. Our cash flow guidance today includes divestiture. It doesn't include the proceeds, no. That's does not include any M&A nor any divestitures.

Okay. Perfect. And it just seems like if we back into Q4 interest expense, it's kind of, call it, circa $35 million. I mean if we baseline that through into next year is interest going to be something like a $25 million headwind next year?

Yes, I'd say so. I mean, you got to take a guess at what interest rates are going to be. But as we thought about kind of 2023 preliminary cash flows, we do have it going up a bit.

Okay. And then it just sounds like there's a lot moving on kind of moving pieces in free cash flow next year. So I just want to see if I've got some of the big pieces. So, there's a potential for cash interest to step up. There's probably a potential for cash taxes to step up with some of the depreciation step down. It sounds like CapEx will likely be up because of Kimball, but then maybe working capital is going to be a good guy. Are those kind of some of the big conceptual pieces?

Yes. The other thing, too, Tyler, is that we had -- as part of the CARES Act, we did defer a portion of payroll taxes back in 2020, and we have to repay -- we repaid a portion of that, about $18 million in 2021, and we're going to pay another $24 million here in 2022. And so then we'll be done. And so that, in my mind, is a big good guy as you think about kind of 2023 from -- I think, in my mind, that kind of offsets some of the interest expense that we're going to see.

Our next question has come from the line of Michael Hoffman with Stifel.

And Alan, it's been a lot of fun doing this with you for the last 35 of your 42 years. So where do you take the boat first to go fishing?

As soon as tuna season opens up, Michael, I'm there.

All right. Could we touch on -- continue with the thesis of '23. You've had one heck of a '22. And as the market is doing, everybody beats their '22 and they pivot immediately to '23. One of the things you've done in '22, which again, in my 35 years, I haven't seen, you've used price like you've never ever in this industry. How much of a price as part of organic growth is a permanent change in the business model going into '23?

Yes, Michael, it's a good question because in 2022, with high inflation, and we did -- we were aggressive in pricing. I see that even -- and I think we've learned that we have scarce assets and we can use them and price accordingly. Because I think that there's certainly demand for our services, given our strong safety and compliance and our strong team, there's good pricing opportunities.

I think as you think about 2023, I don't see that changing. I see that -- as others have said, I see that as an opportunity. So let's say, inflation comes back down a bit. I don't know why we kind of changed tack on this. I feel like we have these such scarce assets that have a huge amount of compliance associated with them, a huge amount of regulation that it's important that we maintain them well and that all costs money. And so I feel like -- I feel like as I think about 2023 early days, we have to go through a budget process, which we're going through right now. But I feel really good about the pricing as we roll into 2023.

The other thing I'd say, just one last point is that, we also -- we have a pipeline. We use Salesforce. We have a pipeline of opportunities, some of which are very near term, Q4 related. But some are laid into 2023, and that pipeline remains very strong. So I'm more bullish than I was, let's say, 90 days ago, thinking about 2023 because not only are we going to have a strong Q4, which we talked about this morning. But the pipeline of opportunities as you look at 2023 remains really robust. And so that's going to give us a good running start, if you will, into 2023.

Okay. Just to tie loose end around that. I mean, we -- you've had an unbelievable price because of inflation. Let's say, inflation has to normalize at some point. We'll pick a number, call it 4%. Historically, in a 4% world, you weren't pricing it 4%. You relied on operating leverage through volume and a little bit of price. So the way to think about it is, if we have inflation of 4%, price at 4% is not an unreasonable way to think about part of the organic growth.

Yes, I'd say that's the case. I think that's -- I think, again, as we're putting our budgets together, I think that certainly in certain parts of our business, especially in technical services and feeding into our landfills, incinerators, containerized waste and safety clean, Michael, you know these businesses, they have -- we have an ability to continue to price and price aggressively.

All right, cool. Everybody is trying to figure out what happens at SKSS as the world rebalances on supply/demand. Can you give us some sense of how to think about what the premium might be in the selling price for the imbalance in the supply demand and how that corrects? But we're going to end up at a much higher low total profit of SKSS because IMO 2020 and better overall spread management. I know that was a lot, but...

Yes, I think -- Michael, I'll kick this off, and then Mike can add in. I think since we separated the business out in '21, coupled with IMO, I think we have, I think, done a really good job of managing that side of the business better than ever before. And I think we're growing our volumes. We're seeing the market is long on the used motor oil side. Those are all good signs.

We also know that with diesel and fuel oil being at sort of a 40-year low inventory level that there's going to be a lot of VGO moving over into that side of the refining process, if you would. And -- so we're not anticipating any significant change here. And quite frankly, I think our premium that we're now starting to get for our base oil, I think, is a reflection of really people wanting to have a recycled product. Many customers are now being required to have some percentage of their base oil be re-refined.

And so the demand for that both here in the U.S. as well as in other parts of the world where we're getting a lot of inquiries on. So we really think that -- we still have a lot of runway in that business even though there's been some global disruption with the Ukraine war.

Okay. So just so -- I think I heard it right, you used to have to take a discount on price. Now you're suggesting you're at on par to a premium. So even if there is a supply premium -- supply-demand premium in base oil, those 2 probably offset or not work to the good?

Yes, I'd say that, plus we didn't really sell a lot of blended product this year because there were additive shortages and so forth. I'm of the view of that if the world normalizes, that's what we think is going to happen. There'll be more additives and there'll be more of an opportunity to sell our blended oil, which has a higher price point and a higher overall EBITDA contribution.

All right. Of course, everybody is running in their hands that the Fed is going to throw us into a recession. We've got what's going on in Europe. When I look back at the second half of '15 and all of '16, the last true industrial recession, not sure what we call the pandemic, but the true industrial recession. And if I take out your upstream energy exposure, there's somewhere down 8%, 10% in EBITDA total was sort of what happened in that 18 months.

What's different about the model today that would dampen some of that down? And more importantly, it was only down 8%, 10% versus the cyclical markets were down 20% and 30%?

I think the company has went through a number of recessions and crude crashes during 2014 and other periods. And I think the company has really been opportunistic to continue to grow during those downturns and being positioned in a way where we could take advantage of maybe competitors weakness out there. I think we're in a great shape financially here with our balance sheet where it's at to grow through any recession like we have in the past 4 or 5 that we've experienced there, Michael.

And this is Eric, Michael. I'll add to that, that I think today, capacity of the hazardous waste disposal market is tighter than at that time. Obviously, by some captives coming offline, our utilization continues to be strong. The utilization in the industry is strong. So there's much less capacity overall in the market than there was in the past.

And I think the onshoring of manufacturing, like we've spoken about, clearly, we're seeing that in new construction, increased volumes, that whole disruption in the supply chain has really forced companies to relook at staying closer to home rather than global, seeing more local than global. And I think that's really helping our business here in North America.

Yes, I saw some in the paper, ABC, anywhere but China.

Yes.

One last for me is your big competitor has about 10% of the market in incineration. It's been offline due to a vendor causing a fire. Any visibility when that capacity comes back on?

It's our understanding, Michael, that the capacity comes online in mid-December, and they'll be ramping up again into the first quarter.

Our next question is coming from the line of Jerry Revich with Goldman Sachs.

And Alan, Mike, Eric, congratulations.

Thank you.

Mike, Eric, I'm wondering if you just talk about how you envision the co-CEO roles and what will each of you be focusing on? Will one of you take one of the business or the other? Can you just give us a bit context? And I know it's early, but any potential strategic priorities that you would outline for us at this point? Obviously, the core strategy is the same, but I'm sure each of you will bring your own labor to the role?

Yes. So yes, Jerry. So the answer is the purpose of getting the announcement out today was so that we can have kind of open conversations with the organization as to how we go forward. Certainly, we've talked to the Board about directionally, but we have to work through that process. And that's why we announced today. So we can have kind of good conversations with the team as to kind of who does what.

The fact of the matter is that, as Alan says, that he has given Eric and I kind of more and more responsibilities and -- so those kind of -- those roles are kind of well defined. And as I said, Eric and I have worked well together for the past 9 years, and we'll continue to do that. At the end of the day, in my opinion, as co-CEOs, we're responsible for all of it. And so I think that, that is going to be the way it's going to work. And obviously, we're going to divide and conquer and we don't need to all be together on everything, but I think that it's going to be -- is going to be a great working relationship like it has been. Continuing to work with Alan. Alan still the Chairman and the Board is still working as a technology officer. So we're going to lean on his knowledge and experience kind of as we go forward.

Super. And then given the really strong performance in Environmental Services this year, can we just revisit the long-term margin trajectory? How should we think about the level of margin expansion that you folks are targeting on an annual basis within the context of the really strong performance we've seen this year?

Yes, Jerry. So one of your colleagues kind of in Q1 asked us, we were going to get back to 2022 -- getting back to 2021 margins in 2022 for ES. And I'm here to report that based on our kind of our Q4 number that we talked about this morning, we're going to be able to beat those numbers by quite a bit in the U.S. So I'm really proud of the team of rallying around kind of pricing and cost controls to kind of get to that answer.

So yes, is going to finish, let's say, above where we landed for the year in 2022, even with the slow start that we had in Q1 of 2022. And so in my view, as I said earlier, I'm really bullish on 2023 and beyond of our ability to execute on cost controls and strategic pricing, intelligent pricing to bring margins up from there. So we're going to end ES for the year in the low 20s. I think it grows 30, 50 basis points from there. I really believe that our ability to kind of manage our contracts, price intelligence, make sure the plants run well, run safe and compliant, I think those -- all those things continue. And you see it from our safety stats and from our results you see this morning.

Yes, Jerry, and this is Eric. I would add to that. I think we continue to be opportunistic to drive cost out of the business, and we have things in play right now that will take more effect into 2023. And we'll continue to drive price. Everything that is consistent with our strategy over the past year, in particular, there continues to be opportunity there.

Super. And lastly, on Safety-Kleen, can you folks just talk about how you view the full cycle range of earnings power in that business? You spoke to a lot of the structural changes in your prepared remarks. And so I'm wondering if you could care to update us on your framework for what the through-cycle performance looks like in the business today given all of the items that you outlined earlier in the call?

Yes, Jerry, this is Mike. I'll take a shot at it. The -- so we're going to end the year at the midpoint of the guidance we gave this morning, $310 million, $311 million. And I think what you're asking is kind of how that goes -- kind of goes forward. And again, I feel -- as Alan communicated, with our kind of managing the spread really well, increased regulations, managing kind of both sides of the business as a separate business, you really -- I really think that this continues.

And the focus on blended products in 2023, the acquisition we did in 2022 is going to have some returns in 2023. The KLEEN+ recycled oil argument that we've made, and I think has been getting a lot of traction, both here in the U.S. and globally. So again, I feel kind of really bullish about 2023 and beyond for the SK business. And if there are macro factors that are helping us this year, I mean, I think that we have a lot of internal factors are going to help us next year. And so regardless of kind of what happens to base oil and crude oil and things like that, I think we'll be able to manage through that, like we always have.

Our next questions come from the line of David Manthey with Baird.

And Alan, Mike, Eric, congratulations to all 3 of you. Maybe I missed it, but do you have any initial comments on the Board's direction for succession in the COO and CFO role? It seems like clock is ticking here on a relatively short time line, any insights you could provide?

Yes. So again, as I said earlier, the purpose of the announcement was to get -- to talk about kind of Alan and the CEO role. We recognize the fact that we need to have a CFO, and we're working down that path. We have a few months in front of us, Dave. I think that I'm -- again, the purpose of today was more to talk about kind of where we are from a CEO standpoint. Today and tomorrow, I'm still the CFO and Eric is still the COO. And we do have to work on that. We have kind of good plans to do that. We've already shared that with the Board. We just got -- the purpose of today is to have kind of more open and honest conversation with the broader organization so we can move forward.

I would just add, this is Eric, Dave, that obviously, succession planning has been in play for quite a while now, and we've worked on that and continue to have a plan as we work forward going on to the first quarter here on those roles.

Okay. And then more operationally, looking down your broad list of end markets here. Even if they're all growing and doing well, if you kind of had to single out top 2 versus bottom 2, can you just give us an idea because you have a pretty good window into the economy here, and I'm just interested in which are sort of top of the stack rank, which are the bottom?

Well, probably a couple, this is Alan. A couple of things I would probably mention is that if it wasn't for the additive shortfall in our in our SKSS, we would have had a much stronger year there. So we've really been constrained both ourselves, but also our customers that buy our base oil have also been constrained because they haven't been able to get the additives they need.

I think the second thing would be is we're into the HPC acquisition for a year. And I would say that it's really the early innings there in regard to margin improvement, pricing, cost management. I think that acquisition, like the Safety-Kleen acquisition in 2012, I think, is really in the early days, and it's going to be a home run for us here. We're really excited about that.

When you think about Safety-Kleen back 10 years ago at $150 million EBITDA, and today, a $500 million EBITDA kind of business, I think it shows where we put the right systems and management place and processes where we really can drive margin. And those numbers -- those Safety-Kleen numbers would even be better this year if it wasn't for some of the headwinds we had on the additive front. So I think those are really 2 things to mention. Mike, I'm not sure if you want to add other points here or not or Eric?

Yes. I think I'd add, Alan, that instead of a top 2, I think there's more of like a top 10. I think that certainly, there's been many strong trends across various areas of the business this year. Our technical service branch business, volumes and collections very strong. Field services, we've grown within utilities accounts. On our branch collection business as mentioned earlier, our containerized waste volumes and collection are an all-time high. Throughout the SKSS business, used motor oil collection is very strong. And base oil sales as well very strong. So there's many top items. I think totally aligned with what Alan said there on those 2 items that we continue to need to work on, but much opportunity there.

Our next questions come from the line of Jim Ricchiuti with Needham & Company.

I'll add my congratulations on the transition. Maybe to that last point about the additive shortfall that you've experienced. Is that -- I think -- Mike, I think you alluded to some increase in inventory of critical supplies. I wonder if you could elaborate on that in your opening remarks?

Sure, Jim. So 2 things have happened. So first of all, we made a strategic decision to say, with problems at other plants in our network, we want to try to avoid any types of down days and any unplanned downtime in our incinerators. We -- looking at the peers that you -- I'm sure you cover, there's a tremendous demand, as Eric said earlier, for the network capacity. And so we want to make sure that our plants don't suffer an unplanned outage for any extended period of time.

And so to do that, we want to make sure that critical supplies and spares are there. And so we made that. And given the long lead time for some of these supplies coming from Asia and Europe, we wanted to make sure that we had those in place at our site. So that if there was a problem, we could get back online relatively quickly. So we made the strategic decision to add a little more inventory of critical spares kind of across the network for our facilities to try to prevent that. So that's a bit of a bad guy from a cash flow perspective. I think that will bode well from a strategic standpoint as far as you think about kind of long-term kind of importance of the incinerators and our other facilities to have these critical spares. So that was the deal on the, let's say, the spare side.

On the oil side, that's just the cost of oil being a little higher, putting a little more in our tanks to try to make sure that we can service our customers through the winter months and be strategic about the pricing as we go forward. So we have added a little oil in our -- in the inventory. And I think that again all bode well into 2023.

Got it. How are you guys thinking about the PFAS opportunity in '23 and maybe it's more meaningful in '24? Is that when you think it has the potential to have a meaningful impact on the business? And I'm wondering what kind of contribution might, I don't know, a base case look like in this area of the business?

So Jim, this is Eric. I'll answer that. Our strategy continues to be around predominantly taking advantage of high-temperature (inaudible) permitted incineration at our units. As we mentioned a quarter ago, we have undertaken compliance testing and have proven well that our incinerators have the technology to properly destroy PFAS contaminated material.

That being said, we also have other opportunities to manage those contaminated waste into our landfills as well as treatment systems that we can treat water on our customer sites and perform remedial activities, and we continue to build out our portfolio to take advantage of that. We are seeing a continued growth in our pipeline. Hard to, at this point, really define what that contribution might be into 2024. But it needs to be said that opportunities and how we work with our customers, contaminated soils in particular, in water treatment, the pipeline continues to grow here for us.

And then final question for me is, I guess, you've anniversaried the HPC acquisition last month and it appears to have gone well. I'm wondering how has the integration of that perhaps impacted or is impacting the way you're thinking about the near-term opportunities, intermediate opportunities in terms of future M&A?

Yes, Jim, so this is Mike. I'd say that our focus has been to integrate HydroChem. And to your point, I think it's been a good success, but down point, I think there's still much more work to do and there -- we're probably in the early innings as he mentioned earlier. I would say that our focus has been to focus on that integration. And I think we're going to end the year in a really good shape from a cash and a balance sheet standpoint with our leverage being under 2x levered. I think there's plenty of opportunity, probably in the smaller nature of tuck-ins that are out there that we continue to look at.

As Alan said earlier, too, if there is a recession coming in 2023, some of these companies may not -- may not come out so good. And there's -- and we want to be opportunistic that if there are opportunities out there to buy kind of permanent facilities and other key assets that were there. And so we're going to try to be as nimble in our strategic priorities around cash flows and around the balance sheet to give ourselves that opportunity that if there was a problem, we could take advantage of them.

Our next questions come from the line of Noah Kaye with Oppenheimer.

And congratulations, Alan, Eric and Mike, happy for all of you. And I want to ask about this succession. There is a fair amount of business literature on what makes a co-CEO organizational structure successful, right? I mean you need the right mix of personalities and shared values and complementary skill sets, backing of the board. And then really clear responsibilities and decision rights being delineated. And Eric and Mike, I think you checked those boxes. So obviously, in a lot of respects, it seems important to communicate to investors over the coming months, how you're delineating those responsibilities. So just when and how do you anticipate communicating that to the Street?

Well, go ahead.

Noah, this is Eric. So we'll -- as Mike said earlier, we'll continue to work out the details of the internal organizational structure throughout Q1 and would be more prepared to talk about that after we get through Q1. That being said, as you mentioned, we do check many of the boxes to have a great co-CEO relationship here.

The support of Alan, the support of the Board. We've worked together for a long time. We've shared many responsibilities to get to the point that we are today. And so it is just an excellent structure here for us at Clean Harbors and I'm excited to work with Mike. And again, we'll be disclosing more of those details in the future. But needless to say, you're right, we do check all the boxes here.

Noah, I would add to that to say that we are going to have some form of Investor Day in 2023, not sure exactly the exact day, but I think it's important to kind of -- to your point, to kind of talk about kind of our strategy going forward, how to delineate roles and responsibilities, who's who on the team. And I think that's going to be a good opportunity to do just that.

Okay. Great, I will be looking forward to that. And then I want to come back to pricing, which a lot of folks have discussed already on this call. It seems like there are a lot of levers for continued price momentum as we go into 2023. Maybe you could talk about some specific pricing actions that were taken in this quarter? I think in prior quarters, you've helped us unpack a little bit price versus volume contribution within parts of the ES business. And then how to think about just taking the impact of your pricing actions year-to-date and how much that rolls over into growth for next year?

Yes, Noah, this is Mike. So there are a fair amount of pricing actions we've taken Q2, Q3 and here in Q4 that will have kind of good rollover impact into 2023. The challenge we're into is our costs have gone up as well, whether it be labor, whether it be trans, whether it be supplies and those costs also roll over into 2023. And so I think that we'll have -- I think we'll have a fair amount of good rollover of the pricing initiatives that we put in place, and that should bode well, certainly through the first half of the year.

My view is that we're going to continue to drive price into 2023 for new price increases. And I think that's going to help us kind of survive any type of downturn that we see in any end markets.

Our next questions come from the line of Larry Solow with CJS Securities.

It's Pete Lucas for Larry. You guys have covered a lot, so it leaves me with just one question on the industrial side. Can you speak about the timing of major turnarounds at manufacturing facilities? Have a lot of those been delayed over the last 12 months? And perhaps, can we see more of those in '23 as a potential offset to a slowing economy?

Yes, Peter. So this is Eric. Our -- throughout the course of this year, the industrial turnaround business has been very strong as plants delayed their turnarounds into 2022. So we had a very robust turnaround season. More from the point of the turnarounds were extended more than usual because of the amount of work that needed to be performed. That being said, we all know that the refinery market and chemical markets, they continue to run very, very strong.

And we anticipate continued strong turnaround season, probably a little bit shorter turnarounds than what we experienced through Q2 and into Q3, but continue to be robust because they're running full tilt and making products and refining oils. And so we're very bullish about the turnaround season and strength continuing, especially with the combined HPC platform on our industrial business.

Our next questions come from the line of Zane Karimi with D.A. Davidson.

Congrats on the strong results. And again, congrats, Alan, Mike and Eric for each of your respective transitions.

Thank you Zane.

Thank you.

So a lot of questions have been asked. But wanted to touch on SG&A a little bit more as a percent of (inaudible) , right? They reflected a fairly significant improvement, which I believe you alluded to being due to the effective consolidation with HPC, but what other internal initiatives are you taking that helped with the improvement? And what should we be expecting moving forward?

Yes. Zane, this is Mike. The data is pretty good. Whether you look at corporate costs or SG&A, both of those kind of ticked up moderately given our large kind of revenue growth. And there's a lot of things that are out there that, that we've done to manage our cost structure there. Some of that is simple. As far as third-party spend and project work, we try to do a lot more things internally this year versus using third-party resources to help us.

Site consolidation continues to be a priority to try to manage our sites and limit the amount of rent expense we have to pay for our operating locations. We've done a lot of that. There's still much more work to do. We also have used kind of lower-cost jurisdictions to help us offset some of the cost of labor. And that's been a helper as we look out for the past year or 2 and most importantly, and here in like year 3 of that exercise. So all those things have really driven kind of good cost management on the SG&A and the corporate side.

I see that -- I see all this continuing into 2023. I don't see ourselves kind of slowing down. We do manage head count very well. We have tried to hold the line on headcount and remain a flat level headcount as the business has grown. That's been a big winner for us using technology as much as we can to kind of offset the incremental work. And so I think that -- again, I think all of these things just continue on in 2023.

And also, Zane as part of our culture, we try to run as lean as possible to manage our nonbillable headcount very tight. That doesn't change whoever CEO is, that's part of our culture, and we'll continue to do that.

Our final questions come from the line of Scott Levine with Bloomberg.

Congratulations all the way around on the promotions. And I guess my first question is with regard to -- I just want to push a little bit more on the -- on the oil recycling, obviously, you guys have been killing it the last couple of years. Base oil prices have been surging. And now we're seeing them pull back a little bit. I know the additive shortage is an issue in terms of blending.

But how can we think about that business continuing to grow, if indeed, we do see a continued pullback in base oil prices? Are you confident that an increase in blending mix and IMO demand, et cetera, will enable you to grow that business or continue to grow it off of very strong levels the last couple of years?

Yes, this is Alan. I'll start out here. That certainly when the additive shortage normalizes, which probably will take place somewhere in the first or second quarter next year, we anticipate to be shifting more of our sales back to where we were on the blended side because there was a better margin for us there and a strong demand. We have a direct organization now to sell those materials and have a number of distribution locations that we've built to support that effort.

But clearly, we had continued shortfalls as we mentioned, with additive, but also with hydrogen as well. I mean, our refineries were on allocation even for hydrogen this year. We are putting added CapEx to generate our own hydrogen at a number of our larger plants so that we're not going to get caught short again because we have been on allocation. Even CO2, pressurized CO2 to run our Baltimore plant was in a force majeure. So there's really been quite a bit of disruption.

So when you think about '23, sort of getting back on track with our blended sales program as well as some of the things that we've been able to be successful at with our byproducts coming out of our plants. Our asphalt bottoms, our vacuum gas oil fuels, all of those things, the team has really done some great work, and we think that momentum is going to continue through next year. So a lot of good headway there in the future, I think.

Good stuff. One last one really quickly. We haven't heard as much out of you guys over the last several years really on the energy-oriented businesses. And clearly, with oil prices where they are and with the growth potential, we're seeing production and interest in that in U.S. shale fields, et cetera, do you guys have any interest in maybe growing the energy side of your business again?

Or is that really not in the thought process here when you think about businesses you want to get larger in or maybe businesses you want to get into a new or something along those lines?

Yes. Our interest certainly is on the waste disposal side of activities that are going on in the shale area. But that's really to the extent of our focus. We're really trying to grow our environmental business. We're really looking at how do we leverage those disposal assets like Eric talked about, picking up additional TSDFs that would really help, get us some more processing capabilities to feed our incinerators, particularly with Kimball coming on and realizing that with the number of captives considering shutting down, which is sort of an ongoing thing that we've seen over the last 10 or 15 years.

We really want to position ourselves in that environmental space, and that's really where our focus is. Been in the oil and gas area. Particularly up in Western Canada, we've got a strong presence in the oil sands, but it's all focused on industrial. And that business has been doing very well for us this year.

There are no further questions at this time. And I would now like to turn the call back over to Mr. McKim for any closing comments.

Okay. Thanks for joining us today. Mike, Eric and myself will be participating at the Baird's Industrial Conference next week in Chicago. So we hope to see some of you there or at future investor events. Thank you, and stay safe today.

Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.