Clean Harbors - Q1 2024
May 1, 2024
Transcript
Operator (participant)
Good day, ladies and gentlemen, and welcome to the Clean Harbors first quarter 2024 earnings conference call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to turn the floor over to your host, Michael McDonald, General Counsel for Clean Harbors. Sir, the floor is yours.
Michael McDonald (General Counsel)
Thank you, Christine, and good morning, everyone. With me on today's call are our Co-Chief Executive Officers, Eric Gerstenberg 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 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 May 1st, 2024. 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 revisions in 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 Eric Gerstenberg to start. Eric?
Eric Gerstenberg (Co-CEO)
Thanks Michael. Good morning, everyone, and thank you for joining us. Before we get into our prepared remarks, I want to take a moment to recognize our 23,000 strong Clean Harbors team for their efforts in Q1. Thank you for your focus and dedication to safely delivering on our commitments to customers and the communities we serve.
I also wanted to welcome the HEPACO and Noble teams to Clean Harbors. We look forward to your leadership and insight as we continue to set the standard for our industry. I also wanted to highlight our safety results for Q1. Not a financial metric, but in our view, the most important metric. Our total recordable incident rate, or TRIR, was 0.69 for the quarter, which gets us off to a good start to the year.
Starting on slide three, we opened the year with an even stronger than expected first quarter performance as we exceeded the guidance we provided on our year-end earnings call. Our 5% top-line growth drove a 7% increase in adjusted EBITDA, with margins improving year-over-year. Robust demand continues across our Environmental Services segment.
All of our ES businesses, Technical Services, Safety-Kleen Environmental, Industrial Services, and Field Services, delivered better than expected growth in the quarter. Volumes coming into our disposal and recycling network continue to increase. Our ES segment grew both organically and through strategic M&A from HEPACO. Within SKSS, which Mike will cover in more detail, lubricant pricing was soft until the very end of the quarter. Our corporate segment was up year-over-year due to compensation, acquisitions, and professional fees.
Turning to environmental services on slide four, segment revenue increased 10%, with two-thirds driven by organic growth from volumes and pricing, and a third from the acquisitions of Thompson and HEPACO. Adjusted EBITDA increased 16%, resulting in margin expansion of 130 basis points from the first quarter of 2023. Q1 represented our 10th consecutive quarter of year-over-year adjusted EBITDA growth in this segment and the highest Q1 adjusted EBITDA margin for the ES in company's history.
Our Technical Services business was the primary contributor to ES top-line growth, posting a revenue increase of 11%. A record level of Q1 drum volumes flowed throughout our network, which also helped drive the record deferred revenue you see on our balance sheet.
As a result of heavy Q1 maintenance schedule and weather disruptions in January, which we noted on our year-end call, incineration utilization was 79% in the quarter, in line with our expectations. Average incineration pricing increased 6% in the quarter, thanks to mix and pricing. Despite all the turnaround time we've had in the early part of 2024, we still expect that our incinerators should deliver mid- to high-80s utilization for the full year.
Although landfill down modestly year-over-year, healthy drum volumes and base business drove a 16% increase in average price per ton. As with our incinerators, landfills should deliver a very good quarter in 2024, given the market conditions we see today. Those favorable conditions should also support the other 100+ permanent hazardous waste management facilities we maintain in our network.
Safety-Kleen Environmental Services generated another quarter of record revenue growth, climbing 9%, largely on the strength of containerized waste and other core services. Field ervice revenue was up 10% in Q1, driven by consistent base business, ER events, and high employee utilization. The Field Service results included in the first week of contributions from HEPACO, which we acquired towards the end of March. Early returns on that acquisition have us very encouraged about its future potential. Industrial Service revenue grew 7% in the quarter, largely from the addition of Thompson, as that group continues to focus on higher-margin work and cost controls. Overall, ES produced an excellent start to 2024 in Q1. With that, let me turn things over to Mike. Mike?
Mike Battles (Co-CEO)
Thanks Eric, and good morning. Turning to SKSS on slide five, the year began with a challenging demand environment for both base oil and lubricants, which led to lower pricing, particularly for our non-contracted volume sold in the spot market. Our volumes produced and sold were similar to the prior year, so it really was the pricing environment that impacted us, which you can see in the year-over-year adjusted EBITDA comparison.
The weakness in pricing was partially offset by the shift we had completed to a charged oil collection model versus the paid for oil average we had a year ago in our waste oil collection services. We gathered 55 million gallons of waste oil as we aggressively managed our spread to gather feedstock at the best price possible. Despite the difficult Q1, we're encouraged by more recent trends.
Base oil demand has begun to recover, leading to rising market prices as we head into the balance of the year. In Q1, we increased our blended sales volumes by 36% as we focus on more value-added products. Blended sales, where pricing tends to be less volatile than base oil, accounted for 21% of our total volume sold, up from 15% a year ago. Another program, which will assist in both the stability and profitability of this segment, is our Group III base oil project. We now have dedicated one of our smaller re-refineries to full-time Group III production. We are enthusiastic about the long-term potential for this initiative as we move to open more Group III production in the coming quarters.
And lastly, we have been hard at work, in recent years, to find the ideal partner that recognizes the value of our KLEEN+ base oil and lower carbon footprint it carries. We wanted to align with someone who had the brand recognition to meaningfully impact the lubricants market. Turning to slide six, we are partnering with Castrol on the nationwide launch of MoreCircular, a lower carbon footprint offering. This is an exciting and innovative program, and we're thrilled to work alongside one of the industry's leading brands to bring it to their customers.
Under the terms of this multi-year agreement, Castrol will be responsible for selling this sustainable product offering by using its considerable marketing muscle to drive its success. Safety-Kleen will be responsible for the collection of waste oil from Castrol customers in the program.
We will also supply our base oil to Castrol to include in their MoreCircular lubricants. We see this arrangement as a strong validation of our high quality, sustainable base oil, given the recognition of Castrol's lubricants and brand. This program evolved following a series of highly successful market trials and will be officially launched later this month at a key industry expo.
We are thrilled to have Castrol's endorsement by partnering with us on their closed - their own closed loop solution. We have said that as EV transition plays out, we said that, that as EV transition plays out over the next several decades, we see our green base oil as an ideal bridge for this market. It offers an opportunity for companies, particularly those with large vehicle fleets, to immediately lower their carbon footprint. We look forward to updating you on this promising program in the quarters ahead.
Turning to slide seven, Eric and I, along with the entire executive team, are laser focused on our capital allocation strategy. We are now in the second year of Vision 2027, our five-year growth plan that relies on a mix of organic growth and acquisitions. As I outlined on our last call, and I believe it bears repeating, the foundation of the strategy is to drive margin improvement every year through pricing and productivity gains, and by achieving economies of scale on not only a highly leveraged network of permanent facilities and unique assets, but also a highly trained personnel who provide our customers with increased value from our services. This will continue to lead to increasing cash flow generation and long-term shareholder value creation. The HEPACO acquisition was our headline M&A transaction in Q1.
We also recently completed an attractive bolt-on deal with the acquisition of Noble Oil to support our collection footprint in the Mid-Atlantic market and add more re-refining capacity. We continue to evaluate other potential transactions and see a healthy pipeline of candidates. We expect to remain active with acquisitions as we execute against Vision 2027.
In terms of growth CapEx, we continue to advance our Kimball, Nebraska incinerator, which remains on track to open commercially in Q4. Suffice to say, we are eager to bring this $200 million investment online, as that capacity is much needed in the market based on many trends, from reshoring to new regulations such as PFAS to government infrastructure spending. Adding this permitted scarce asset will create another long-term competitive advantage for Clean Harbors.
On our last call, we detailed the planned $20 million expansion of our Baltimore facility to create a regional hub with manufacturing capabilities. We completed the purchase in Q1 and will be investing in and upgrading the site over the course of the year, with material savings to be achieved in 2025. Let me conclude my remarks by emphasizing how bullish we are on our growth prospects in 2024.
Favorable market dynamics and the current economy should support our continued momentum. We have a clear line of sight across multiple businesses that should enable us to achieve our profitable growth plans for this year. Demand for our services continued to accelerate, as evidenced by Eric's mention of our record deferred revenue and strong pipeline of products.
In addition, our conversations with customers about their future needs and the opening of the Kimball incinerator reinforces our confidence in the ES segment. For SKSS, with all the initiatives highlighted earlier, several of which have great multi-year potential, we expect to return that segment to more stable, profitable growth in 2024. Overall, we have much to be excited about in both our operating segments this year. With that, let me turn it over to our CFO, Eric Dugas.
Eric Dugas (EVP and CFO)
Great. Thank you, Mike, and good morning, everyone. Turning to the income statement on slide nine, we started off the year on a strong note with another great performance by the ES segment. The positive demand trends that have underpinned three straight years of healthy revenue growth in this segment continued in Q1, as revenues across all four businesses in ES were up from the prior year. Adjusted EBITDA of $230 million was above the expectations we provided on our Q4 call and up $15 million from a year ago. Our adjusted EBITDA margin in the quarter was 16.7%, up 20 basis points year-on-year and driven by the ES segment. Gross margin in the quarter was 29.5%, an increase of 80 basis points from a year ago.
Within gross margin, we are seeing the benefit of our continued focus on pricing, greater productivity, and operational efficiencies. SG&A expense as a percentage of revenue was 13.2% in Q1, which is slightly higher than the prior year's quarter. Some of that increase was acquisition related, as we absorbed some initial SG&A costs and incurred some incremental transaction-related severance costs, as well as higher professional fees.
We expect this percentage to improve in the upcoming quarters as we continue to manage SG&A headcount and further integrate the HEPACO and Noble Oil acquisitions. For the full year 2024, we anticipate our SG&A expense as a percentage of revenue to be in the mid-12% range, which is consistent with prior year. Depreciation and amortization in Q1 came in at $95 million, up from a year ago due to our acquisitions.
For 2024, we now expect depreciation and amortization in the range of $390 million-$400 million. Income from operations in Q1 was approximately $125 million, up slightly from the prior year. Q1 net income was $69.8 million, resulting in an earnings per share of $1.29. Turning to the balance sheet highlights on slide 10, cash and short-term marketable securities at quarter end were $443 million. In connection with the HEPACO and Noble transactions, we added $500 million in incremental debt to our term loan to finance those deals. Even with those additional borrowings, our balance sheet remains strong.
We ended Q1 with total debt of $2.8 billion, a net debt to EBITDA ratio of 2.4 times, and continued to have no significant debt amounts coming due until 2027. Our weighted average pre-tax cost of debt at quarter end was 5.7%. Turning to cash flows on slide 11, cash provided from operations in Q1 was $19 million, reflecting our seasonally weakest quarter. CapEx, net of disposals, was $137 million, up significantly from prior year due to investments in our facilities network, including approximately $20 million for our Kimball expansion and $15 million for our Baltimore facility.
In the quarter, adjusted free cash flow was a negative $118 million, which was in line with our expectations. In addition to CapEx spend, this total reflects the timing of incentive comp payments, interest payments, and working capital.
For the full year 2024, we now expect our net CapEx to be in the range of $400 million-$430 million. This range includes the new additions of HEPACO and Noble Oil, plus approximately $65 million to complete the construction of our Kimball incinerator, and approximately $20 million for the purchase and expansion of the Baltimore facility. During Q1, we bought back approximately 27,000 shares of stock at a total cost of $5 million, or an average price of approximately $183 a share. At March 31st, we had $549 million remaining in our repurchase program.
Moving to slide 12, based on our Q1 results, current market conditions, and our recent acquisitions, we are raising our 2024 adjusted EBITDA to a range of $1.10 billion-$1.15 billion, with a midpoint of $1.125 billion. This guidance assumes $30 million of contribution from HEPACO this year and approximately $5 million from Noble Oil. Looking at our annual guidance from a quarterly perspective, we are expecting Q2 Adjusted EBITDA growth of 7%-8% versus prior year. We expect ES to continue its upward trajectory, and SKSS should benefit from the rising base oil pricing environment to deliver growth versus prior year.
We now expect this revised full year 2024 adjusted EBITDA guidance to translate to our segments as follows: In Environmental Services, we expect adjusted EBITDA in 2024 at the midpoint of our guidance to increase 10%-12% from 2023. Leveraging our network of assets, volume growth in our core lines of business, pricing strategies, the addition of HEPACO, and multiple cost mitigation initiatives will drive this result.
For SKSS, we expect full year 2024 adjusted EBITDA at the midpoint of our guidance to increase 6%-8% from 2023. In current market conditions and where we are today, we expect pricing to improve here in Q2 and into the back half. The promising initiatives that Mike outlined give us confidence that we can achieve this anticipated level of growth, despite the slow start of the year.
In our corporate segment, at the midpoint of our guide, we expect negative adjusted EBITDA results to be 8%-9%, to be up 8%-9% this year compared to 2023. More than half of that increase is additional costs from the acquired companies and related severance and integration costs. Looking at it as a percentage of revenue, we expect corporate segment results to be flat to slightly down from prior year. For adjusted free cash flow, we continue to expect a range of $340 million-$400 million for 2024, or a midpoint of $370 million.
If you take that midpoint and add back the Kimball and Baltimore spend, you arrive at adjusted free cash flow of $455 million, which is greater than 40% of our Adjusted EBITDA expectations at the midpoint. In summary, Q1 was a great start to the year. We expect a favorable demand environment to support strong, profitable growth throughout the remainder of this year.
The ES segment has a healthy backlog of waste, a robust project pipeline, including PFAS opportunities, and our services business all have good momentum. We expect our SKSS segment to begin posting year-over-year growth this year. Overall, we look forward to the remainder of this year and continue to execute against our longer-term Vision 2027 goals. With that, Christine, please open the call for questions.
Operator (participant)
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question comes from the line of Michael Hoffman with Stifel. Please proceed with your question.
Michael Hoffman (Managing Director and Group Head of Diversified Industrials)
Good morning, and well done, given this is normally a seasonal tough quarter. If we think about in ES, you said it in the, in the comments, but I want to clarify: You absolutely had volume growth, where last year we were really looking at most of the growth was price driven and some M&A. There is a clear volume improving volume trend. And then on the price side, you're managing a positive price cost spread, so you're driving operating leverage there as well. Is that a correct observation?
Eric Gerstenberg (Co-CEO)
Absolutely, Michael. This is Eric. Our volumes have been very strong to start 2024 here, particularly in the drum growth area across our network of TSDFs, incinerators, so real strong volume growth across the board. Price efforts, as you know, we continue to have a very disciplined pricing approach across the board, and we see that continuing to outpace inflation. Continue a lot of focus there.
Michael Hoffman (Managing Director and Group Head of Diversified Industrials)
Then on the billable hour segment, IS and Field Services, can you talk about what your billable hour utilization look like?
Mike Battles (Co-CEO)
Yeah, Michael, this is - first of all, Michael, congratulations on your new role. We're all excited for you. We're gonna miss you. We're also excited for you for your new role in the NWRA. So just congratulations. The answer your question on utilization, you know, we, we have been able to do a good job of utilizing people. We've gotten some good data out of the system to really drive utilization for both FS and IS. And I think that what, what's really been driving that productivity is also we've been doing a good job with voluntary turnover.
Our turnover is down, you know, 400 basis points year-over-year, and having more, you know, more experienced people in those roles drives productivity, less training time, less startup time, and that's really been helping us with utilization, which is, again, you know, a key metric that we measure across the organization, especially in those, you know, high labor hours, like in IS and FS.
Eric Gerstenberg (Co-CEO)
Just to add one other point, Michael, to that, is that we really have seen a great job by our teams, cross-selling and driving utilization of people by sharing people and assets across branch types within our network. So that's a real positive trend for the team, working together out there to service our customer needs.
Michael Hoffman (Managing Director and Group Head of Diversified Industrials)
Just to tease out a little bit, I mean, given the performance, it feels like you ought to be in the mid-to upper 80s on billable hour utilization, which is a nice place to be in that type of business.
Eric Gerstenberg (Co-CEO)
Absolutely.
Mike Battles (Co-CEO)
That's where it is.
Eric Gerstenberg (Co-CEO)
That's where it is.
Michael Hoffman (Managing Director and Group Head of Diversified Industrials)
Yep. Okay. And then, with regards to, PFAS, we all know, and I think we all believe there's a great opportunity coming, and you have an underlying base level of activity, but, but one of the things we still need, just to manage everybody's expectation, is a remediation MCL. We've got a drinking water, but that's not really your niche, even though you are doing drinking water at Naval Base Pearl. We really need a remediation MCL. Is that, is that correct in, in understanding what creates the real momentum eventually?
Eric Gerstenberg (Co-CEO)
Yeah. Yeah, no doubt about it, Michael, but I'd continue to reiterate that we really are in the drinking water. We're seeing a lot of opportunities there. As you know, from our total focus here across the board, we're really focused on sampling, analysis, baseline, whether it be a remediation event, whether it be drinking water, whether it be industrial.
In giving our customers that baseline so that we can help them make strategic decisions on the way forward. Certainly, we're, we've mentioned many times that our pipeline continues to grow, and we're the total solutions provider with our network of incinerators and our landfills and, our wastewater treatment plants and our team remediation that's out there training them, working in industrial water. So the pipeline, we see strong.
Our team is out there. We're also working with EPA directly on our Aragonite incinerator, where we're doing updated testing. There's been more parameters that have been put in place on a new method for background incineration, throughput and efficiency. And we've, we're working with them to redo and upgrade that test to show that, to continue to show that high temperature pyrothermal incineration is the preferred method.
So your point is dead on with remediation. We need that standard. However, we, we continue to see bullish opportunities and pipeline growing there in many different areas.
Michael Hoffman (Managing Director and Group Head of Diversified Industrials)
Just to close the loop on your comment about the testing, you feel really good about being able to meet OTM 50, where you hit the ball out of the park on OTM 45. But there's nothing about OTM 50 that you say precludes you from proving to EPA thermal is the right answer?
Eric Gerstenberg (Co-CEO)
Highly, highly confident. Not, not a problem.
Michael Hoffman (Managing Director and Group Head of Diversified Industrials)
Would you use the same consulting group to help do that test since they've got an experience?
Eric Gerstenberg (Co-CEO)
Yeah, absolutely. Absolutely. I think it's also important to note that we see more and more interest in cooperation with EPA on helping to make sure that the tests and the parameters and everything that we're doing there, they're supportive of. So good, good cooperation there.
Michael Hoffman (Managing Director and Group Head of Diversified Industrials)
All right. Well, thank you, Clean Harbors, for the kind words. I do appreciate it and thank you for taking the questions.
Eric Gerstenberg (Co-CEO)
Thanks, Michael.
Mike Battles (Co-CEO)
Bye, Michael. We'll see you Monday.
Operator (participant)
Our next question comes from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.
Jerry Revich (Senior Investment Leader and Head of US Machinery, Infrastructure and Sustainable Tech Franchise)
Yes. Hi, good morning, everyone.
Mike Battles (Co-CEO)
Hi, Jerry.
Jerry Revich (Senior Investment Leader and Head of US Machinery, Infrastructure and Sustainable Tech Franchise)
Hi. I'm wondering if we could just ask you to update us on your M&A pipeline today. Obviously, pretty active couple of quarters for you folks. Can you talk about what's the range of outcomes in terms of potential additional deal flow over the next 12-24 months, based on your discussions?
Mike Battles (Co-CEO)
Yeah, Jerry, this is Mike. You know, I think that it's the pipeline remains really strong. And, you know, we closed, you know, two deals here, both the HEPACO transaction, which was pretty material, but also an acquisition in the oil space. And, and we look at a lot of deals in both parts of the business, you know, two to three a week at least, and we have discussions, and a lot of them don't make the cut, so it's hard to kind of prove a negative on this call. But we do do a lot of deals. It has to make strategic sense, it has to make financial sense. We kind of, we have to measure, measure that. But there, the pipeline remains strong on both businesses. Obviously, you know, we're excited about the HEPACO deal.
That turned - I think that's gonna turn out to be a home run. Noble also should be a really good deal. We're looking for acquisitions in that type of area. So pipeline's strong, very active. Our leverage is in pretty good shape, and we're generating, we generate a fair amount of interest in our term loan we did for the connection with the HEPACO transaction. I think more to come. Very active. As we try to go after Vision 2027, we're gonna generate a fair amount of free cash flow in the back half of the year, and we want to put to work.
Jerry Revich (Senior Investment Leader and Head of US Machinery, Infrastructure and Sustainable Tech Franchise)
Super. And then in terms of the marketing arrangement that you reached with Safety-Kleen, can you expand a little bit about that? Where's the pricing point versus virgin base oil? Are we starting to see a premium open up? And, you know, what's the opportunity under the agreement for that premium to widen over time?
Mike Battles (Co-CEO)
Yeah, I think that it's, you know, we don't give out, you know, financial details on our deal with Castrol. You know, we're really excited about the opportunity. As I said in my prepared remarks, it kind of validates the sustainability of our base oil. It immediately lowers our customers and their customers' carbon footprint. There's a lot of good value. We've been talking about, you know, going after large fleets for years, and we partnered with Castrol, and they have the marketing and the sales muscle to go and penetrate those markets. And I think that it really is gonna be a great, great partnership.
And I do think that, you know, overall, you know, selling more contracted oil is at a better price than in the spot market. So, but it, we're not gonna give financial details on this call.
Jerry Revich (Senior Investment Leader and Head of US Machinery, Infrastructure and Sustainable Tech Franchise)
Okay. In terms of the Industrial Services business, you know, at the Analyst Day, we discussed pretty clean runway in terms of improving billable terms and driving higher contracted billable hours. Can you just update us on progress on that journey this year? How much of a contributor was that in the quarter, and where do we stand in terms of potential additional upside on continuing to improve those terms?
Eric Gerstenberg (Co-CEO)
Yeah, Jerry. Our industrial team continues to do a solid job of placing more of our employees at billable rates within the sites that we work on day in, day out. Large chemical plants, large refineries, building out our insight programs, the tools that we can provide for them, the automated tools, all that is in an effort to have more of our industrial teams, day in, day out, with high billable hours at our customer sites. And the team is really focused on doing that, and the results are showing that.
Jerry Revich (Senior Investment Leader and Head of US Machinery, Infrastructure and Sustainable Tech Franchise)
It was a meaningful driver in the quarter, Eric?
Eric Gerstenberg (Co-CEO)
It has. We see our utilization of our employees continue to improve year-over-year. That along with some of the things that we've been doing on a pricing side, better truck price improvement on our billable labor on site has also been a key driver. The Thompson Industrial continues to work with our teams very well, and the teams working together, Thompson and our HPC on customer sites and growing our verticals has also shown up in our results.
Jerry Revich (Senior Investment Leader and Head of US Machinery, Infrastructure and Sustainable Tech Franchise)
Thank you.
Eric Gerstenberg (Co-CEO)
You're welcome.
Mike Battles (Co-CEO)
Thanks, Jerry.
Operator (participant)
Our next question comes from the line of Tobey Sommer with Truist. Please proceed with your question.
Jasper Bibb (VP of Equity Research)
Hey, good morning. This is Jasper Bibb for Tobey. Following up on Environmental Services and outperformance in the first quarter and the higher guide, would there be any way to, I guess, quantify the expected pricing outperformance relative to your initial assumptions?
Eric Gerstenberg (Co-CEO)
Yeah, across the board, we would say that about 50%-60% is price and about 40% volume. And we, you know, we're, we're really focused on making sure price is ahead of inflation and our cost structure, along with efficiencies improvements that we're seeing. And volumes are robust, as we mentioned earlier on the call. Volume is very strong in the first quarter, and we anticipate that continuing to grow as we go into the second half of the year, when we look to get our new Kimball incinerator on board here.
Eric Dugas (EVP and CFO)
Jasper, this is Eric. Just adding on to that comment a little bit, I would say that in terms of pricing, I think it was in line with our expectations in terms of what we see in the marketplace and what we're able to do against our goals. I think volume became a larger piece of the pie here in Q1 because of the significant growth that we're seeing on drum counts that Eric Gerstenberg mentioned earlier. So you know, the 60/40 pricing, we probably came into the quarter thinking it would be a little bit higher on the pricing side of that equation, but volumes have just been really strong, not just with drums, but also, you know, you probably noticed the growth in field services as well as SK brands.
Those businesses both grew at about 10% this quarter. So volume is certainly a key component this quarter as well.
Jasper Bibb (VP of Equity Research)
Yeah, that's helpful. And then you mentioned the improvement in base oil demand through the quarter. I was just hoping you could maybe give a bit more color on what you've seen in April so far from a pricing and spread perspective.
Mike Battles (Co-CEO)
Yeah, this is Mike. The, you know, I think that we ended the quarter kind of on a good note. There were two, you know, posted price increases, not all of which will get into Q2, but a good chunk of them will. And I think that we have a big, we have some growth from Q1 into Q2, and we see kind of the summer driving season, the normal seasonality returning. And I think April, you know, so far is actually gonna be a pretty good, pretty good month in the oil business, and that gives us a good running start into the quarter.
Jasper Bibb (VP of Equity Research)
Makes sense. Last one for me. Just any change to the interest expense assumptions for the 2024 guide with the incremental borrowings in the quarter?
Eric Dugas (EVP and CFO)
No, I think we're still in line kind of with what we guided to. We did guide, I think, as we came to the quarter for some incremental debt. You know, but that incremental debt, the $500 million, you know, today, it's roughly at 7%. So I'll let you kind of do the math there. But, you know, when you think about overall cash flow for the year, some of the incremental cash that we'll see from acquisitions is being offset by the incremental interest, as well as some capital investments that we always do with some of these things. And that's what's driving the flattish kind of free cash flow or flattish to what our guidance was in Q1, so.
But again, as Mike said, really strong balance sheet. You know, we have some moving parts in our debt portfolio coming up here, and we'll continue to be very smart with how we manage that.
Mike Battles (Co-CEO)
Yeah, I think the team has done a good job with managing, you know, interest rate risk. It's only at 5.7% here in Q1, and the team's done a good job of getting good returns on their cash. So, you know, that's at, you know, 4%-5%. So really, the arbitrage or the incremental debt hasn't been too bad from the P&L standpoint.
Jasper Bibb (VP of Equity Research)
Got it. Thanks for taking the questions.
Eric Gerstenberg (Co-CEO)
Okay, thank you.
Operator (participant)
Our next question comes from the line of James Ricchiuti with Needham. Please proceed with your question.
James Ricchiuti (Senior Analyst)
Hi, good morning. Question -
Eric Gerstenberg (Co-CEO)
Hi, James.
James Ricchiuti (Senior Analyst)
How are you? A question on HEPACO. I know it's early, but I'm just wondering how we should be thinking about the revenue synergies. Seems like there's some real good opportunities here.
Eric Gerstenberg (Co-CEO)
Yeah, James. So, Eric here, I'll begin. One thing that HEPACO has really, really brought to the table is their penetration in the rail vertical. They've had some great relationships with some of the largest railroads and have had a great team that responds to not only events, but ongoing services for the rail industry. That, we're gonna plan on building on that nationwide, so that we're a participant in all rail activities, so that's a great revenue synergy there.
We also have seen some great work with our teams working together across the customer base and sharing assets already. Out of the 40 different branches that HEPACO has brought to the table, there's about 22 of those that are in new markets for us so that we can grow with the customer base there.
The other 18-ish are working in conjunction with our teams at existing field service branches, sharing assets and people to grow our revenue base. Great opportunities there. They also brought to the table a wonderful national response call center that allows small spills, in particular, in servicing large trucking companies to have our network respond and internalize those throughout North America. Great opportunities in all three of those areas.
Mike Battles (Co-CEO)
Yeah, so far, Jim, it's really the hand in glove. You really see a great partnership. And even, we owned it for a week in the month of March, and we were already cross, you know, sharing resources across the network, even in the first week of ownership. So, which is just terrific.
James Ricchiuti (Senior Analyst)
Got it. Hey, by the way, did you size the acquisition related and severance expense that impacted SG&A? Or maybe could you size that?
Eric Dugas (EVP and CFO)
Yeah, there, there were about $4 million of severance and integration kind of running through corporate this quarter.
James Ricchiuti (Senior Analyst)
Got it.
Eric Dugas (EVP and CFO)
So, and yeah-
James Ricchiuti (Senior Analyst)
Last question. Great. Thank you. Last question I had is just in light of the announcement with Castrol, and by the way, congratulations on that. I'm wondering, is that spurring discussions? Are you in discussions potentially that you could talk to with other lubricant suppliers, or will you just, you know, have to see how this plays out and hopefully others come on board?
Mike Battles (Co-CEO)
Yeah, no, I, you know, we just announced the partnership with Castrol. We're gonna work with Castrol. You know, we have, you know, we did some trials, did some pilots. A great relationship. We're excited about working with Castrol. So we're gonna drive that. You know, they have this, a great brand, a very, you know, very well-respected brand in the industry, and we're excited to work with them.
Eric Gerstenberg (Co-CEO)
And James, just to add to that, as Mike mentioned earlier, the great partnership there is really to help grow fleet sales. Castrol brand has been in a number of large fleets already, and the circular offer of collections and then putting our re-refined base oil into those fleets under the Castrol brand is the real opportunity there. So great stuff.
James Ricchiuti (Senior Analyst)
Yeah, makes sense. Good partner to have. Thank you. Congratulations.
Mike Battles (Co-CEO)
Thank you.
Operator (participant)
Our next question comes from the line of David Manthey with Baird. Please proceed with your question.
David Manthey (Senior Research Analyst)
Yeah, good morning, everyone. Thank you.
Eric Dugas (EVP and CFO)
Hi, David.
Eric Gerstenberg (Co-CEO)
Morning.
Mike Battles (Co-CEO)
Hi, David.
David Manthey (Senior Research Analyst)
First, first question, big picture. Should we assume that the guidance update here reflects the acquisitions being added and a little bit of 1Q outperformance and maybe some a little change in the corporate expense? But the message here, if I'm reading it right, confidence is high, but there's no real underlying change in your EBITDA expectations, just given that we're early in the year, or is that how we should read this guidance update?
Eric Dugas (EVP and CFO)
Hey, David, it's Eric Dugas. I think you're reading it into it the right way. You know, being early in the year, you know, the guide is the raise is, you know, counting the new acquisitions, as we talked about and laid out in the prepared remarks, and then kind of the success we saw in Q1, and then maybe a little bit of uptick throughout the whole year. But given Q1, you know, given our history of wanting to meet and beat, we set up some guidance that we feel very comfortable beating here going forward. But you're reading into it the exact right way.
David Manthey (Senior Research Analyst)
Okay. And on the first quarter turnarounds, were any of those unplanned and therefore offsetting expected work for later in this year? I think that you have sort of a once in every five-year kind of turnaround at Deer Park coming up in the second quarter. And as it relates to that, just wondering if we should factor that into utilization or ES growth profitability in the second quarter specifically.
Eric Gerstenberg (Co-CEO)
Yeah, David, a couple of things there. We did have a little bit, a small amount of weather-related activities that were associated with that deep freeze that occurred in January, but it was pretty small. Last year, when we ran into those issues, we spent some nice capital on upgrading the weather protection across our El Dorado facility, so that prevented one of our trains from having to come down in those deep freezes. So we really saw the results of being able to stay online for the most part through that deep freeze. There is a little on one of the trains. In addition to that, we had planned turnarounds.
We had a major outage that we did up at our Canadian incinerator in Sarnia that really drove most of the incremental down days that we had year-over-year in Q1. So that was planned activities. So by and large, to answer your question, planned activities, we do have a large shutdown that we're working through at our Deer Park plant. As you mentioned, that's a 7-8 year event that we're doing to retool some of the wastewater treatment activities down there that are on the back end of that plant. That is proceeding extremely well. Team's doing a good job. So we expected the 79%-80% in that area, and we still fully anticipate with the activities that we have underway that we'll be into that mid- to high-80s for 2024.
Mike Battles (Co-CEO)
The only thing I'd add to that, David, is that to your point in Q2, the margins in ES, you know, they won't be enough. There'll be good margin growth, and there'll be material margin growth, but it won't be as substantive as what we see in Q1.
David Manthey (Senior Research Analyst)
Right. And just to follow on that train of thought here, my understanding is that the kiln right now in Deer Park isn't able to take certain materials because of the state of the kiln today. And I'm wondering, going forward, could we see an uptick in value there, just given that you'll have that refreshed and ready to go?
Eric Gerstenberg (Co-CEO)
Yeah David, the Deer Park incineration units have very robust capabilities. They take a very diverse suite. That site, along with our El Dorado site, can take everything. So the, it's not that we're adding additional capabilities. The capabilities there are as robust as any plant in our network and any plant in the industry, for that matter. So, we handle a significant amount of the direct burn streams from that, Gulf market on there, but, by and large, very robust capabilities, and that will continue.
David Manthey (Senior Research Analyst)
Got you. Thank you.
Mike Battles (Co-CEO)
Thanks, Dave.
Operator (participant)
Our next question comes from the line of Timna Tanners with Wolfe Research. Please proceed with your question.
Timna Tanners (Managing Director)
Yeah. Hey, good morning, everyone. Hope you're doing well.
Eric Gerstenberg (Co-CEO)
Good morning.
Eric Dugas (EVP and CFO)
Good morning.
Timna Tanners (Managing Director)
Wanted to ask about the base oil outlook, what you're budgeting in your guidance, given the comments about the uptick. It's so great to see some of the measures you're taking. We're hopeful to see the negative comparisons behind, but just wanted a little bit more color on how you're thinking about the trajectory in your estimate forecast.
Mike Battles (Co-CEO)
Yeah, this is Mike. Thanks for the question. You know, we are gonna have - it's a pretty modest uptick, and we try to be thoughtful as we've, as we've given guidance. We've been, we've been burnt a little bit in the past by it. We were - although the base oil prices, posted pricing, has gone up, you know, quite a bit over the past month or so, we've been pretty cautious, and it's a pretty modest increase in the pricing environment. We're hopeful we'll come back here 90 days from now and report, you know, a nice, a nice beat to that number. And, and to your point, you know, put the, put the negatives kind of behind us.
Timna Tanners (Managing Director)
Okay, fair. That's helpful. And then, regarding capital allocation, you know, what, what drives the pace of buybacks quarter to quarter? How, how do you think about that? How do you balance the, the pipeline for M&A with buybacks and, you know, any debt pay down, which you don't have to do, it sounds like, but could do? Just, just any thoughts there.
Eric Dugas (EVP and CFO)
Yeah, Timna, Eric here. You know, when we think about buybacks, we're really opportunistic under that program. I think we utilize it when we think the share price is extremely undervalued, and we also utilize it so as not to dilute our current shareholders as new shares come into the market. So that's really the way we've handled that program in the last couple of years, when each of the last two years we've bought back about $50 million, and that's accomplished those goals. So I would anticipate that we'll continue to use the program in that manner. When I think about overall capital allocation, you know, as evidenced by what we did this quarter with the two acquisitions.
Acquisitions and, you know, accretive internal growth projects, like Kimball, and like the Baltimore project, those are where we'll put most of our capital, and we'll continue that going forward. In fact, that's always an option. We certainly like our debt portfolio from the perspective of we do have some debt where we can pay down if that's an attractive option for us. You know, but certainly, I think acquisitions has and will continue to be the heavy hammer there when it comes to capital allocation.
Timna Tanners (Managing Director)
Okay. Helpful very much. Thank you.
Eric Dugas (EVP and CFO)
Thank you.
Eric Gerstenberg (Co-CEO)
Thank you.
Operator (participant)
Our next question comes from the line of Noah Kaye with Oppenheimer. Please proceed with your question.
Noah Kaye (Senior Research Analyst)
Hey, good morning. Thanks for taking the questions. First, you discussed it previously. Just hoping to get a little bit more granular on the free cash flow guide walk. You know, raising EBITDA $50 million, operating cash flow looks like about $10 million or so. So it doesn't sound like that was interest expense, maybe some CapEx related to HEPACO. But just help us, maybe think about the bridge there.
Eric Dugas (EVP and CFO)
Yeah, I mean, Noah, it's Eric. I think I'd - you start with the uptick in EBITDA from the acquisitions and the good Q1 growth. And then I think it was a reconcile from kind of EBITDA to free cash flow and the rationale for keeping free cash flow guide flat to what we said last quarter is really the incremental debt. So you've got, based upon today's rates, about, you know, $25 million of incremental interest payments on the debt. And then, as we know, when we buy these acquisitions, there's always some incremental CapEx. So there's probably another -
As you saw, we increased our capital expenditures this year by $10 million. So you've kind of got $35 million there in our free cash flow guide that's incremental to last quarter. But keep in mind, I think when we look at certainly the two acquisitions, you know, we have a little bit of synergies kind of built into the forecast, not much, as we continue to integrate this business throughout the year. But as those synergies come, and particularly with HEPACO, we feel really, really good about the synergies, having owned them for about a month now. Certainly from a free cash flow perspective, those kinds of things will become more accretive towards the end of the year and certainly into 2025.
Noah Kaye (Senior Research Analyst)
Yeah. Thanks for anticipating the synergies question. I think you had, you had targeted $20 million after year one, and, and if you're not putting in much this year, obviously, that could be upside. Okay, how do we think about Kimball ramping capacity, and how we think about mix? Maybe we can sort of start with 4Q and then think about the plan for, call it, the first half of next year.
Eric Gerstenberg (Co-CEO)
Yeah, Noah, Eric here. So, we're excited to be on schedule to open Kimball in Q3 and into Q4 of this year and coming online. Our focus will be, again, really around the drum volumes that are throughout our network, that we've seen really substantial drum volumes increase year-over-year. So we'll have really be a ramp up in Q4, and then into 2025, we would anticipate doing 25-30,000 tons through that unit, 20-25 around that sweet spot of drums and also direct burns and lean water streams as we ramp up throughout the course of the year.
Noah Kaye (Senior Research Analyst)
Okay, terrific. And just to circle back on PFAS, you know, Michael asked the questions around that opportunity. I guess, just to simplify it for me, what impacts has the team seen as a result of some of these regulations? And I know there was, you know, some visibility to those coming, so not necessarily suggesting, you know, a spigot was open, but just talk about the impacts on the pipeline that you've seen now that we have some official regulations, and the circular designation.
Eric Gerstenberg (Co-CEO)
Yeah, Noah, we've - as we've said previously, we're doing about $50 million-$70 million of PFAS-related work throughout our network from all the different opportunities we see on our Total PFAS Solutions. Our total pipeline seems to be growing at about 15%-20% each quarter as we go into 2025. So real strong pipeline growth. And I would say the pipeline growth is pretty diverse. It's looking at industrial water opportunities, drinking water opportunities, sampling and background analysis, but also remedial events.
We do see activity where already customers are saying, "Hey, we wanna plan a remediation because we have a construction event that we want to use that site for." We also see some opportunities across with AFFF changeouts throughout different districts, where regulations and the heightened awareness of all PFAS-related is causing fire departments to wanna have a plan where they or I'm, I'm sorry, different customers, that they need to have a plan to change out their AFFF in their lines that need to be drained and recharged.
So that disposal of existing AFFF is some of the opportunities that we see as well, and how we might service that on a broad basis, knowing that there are many areas that need that before they have an event. They need to make sure they put non-PFAS-related AFFF in their lines. So that's, it's really across the board where we're seeing opportunities.
Mike Battles (Co-CEO)
So Noah, just to go back to Michael's question and your question. Obviously, new regulation, very important. How clean is clean? We've said that many, many times. But I don't think, you know, we're stopping, nor are our customers stopping in areas like AFFF and other areas where we know there's a high concentration of PFAS. We're doing.
You know, we rolled out the Total PFAS Solution. We talked about that last quarter. We're doing a lot of training, a lot of marketing around that, and we're getting kind of all our sales organization kind of educated on the benefits. It affects all our businesses. As Eric said, you know, AFFF firefighting foam, whether it be soils, whether it be, you know, even field service cleanout work, it's gonna affect all different lines of our business as we continue to grow.
I do think that this has got, you know, the fact that we've got the drinking water standards out there and they're getting more and more regulation around circular rules around this, you know, we have that solution. You know, we, you know, it's very, very important for us and our customers to have a, you know, a total destruction, you know, a total destruction solution, and we have that today.
Noah Kaye (Senior Research Analyst)
Perfect. Thanks so much for the comprehensive answer.
Eric Gerstenberg (Co-CEO)
Thank you.
Mike Battles (Co-CEO)
Thanks, Noah.
Operator (participant)
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 Larry Solow with CJS Securities. Please proceed with your question.
Larry Solow (Partner)
Great. Good morning, guys. Most of my questions-
Mike Battles (Co-CEO)
Good morning, Larry.
Larry Solow (Partner)
Hey. Hey, most of my questions have been answered. Noah stole my last couple there. I guess just coming back to the cadence on SKSS. It sounds like, obviously, you're building in a pretty nice ramp. Looks like you almost have to get to, like, an average of, like, $50 million a quarter to kind of get to the midpoint of the numbers. So, is it kind of a Q2, a little bit up, and then the back half of the year is really where you get the full impact of, you know, some of these projects, too, and some of the ramp of the base oils or the blend, I mean?
Mike Battles (Co-CEO)
Yeah. Yeah, you got it right, Larry. There's a pretty big jump from where we ended Q1 into Q2. I think that's better pricing, that's better production in our plants and a few other good things that are happening for us, including Group Three and our rollout. And so you're a bit of a beat in Q2. Obviously, a big beat in Q3 because of where we are versus the beat we had in Q3 and in Q4.
Larry Solow (Partner)
Right. Gotcha. Okay. And then just on Kimball, on the CapEx, I think $65 million this year, does that basically complete the majority of the bulk of the spending, and then going forward, it's just the incremental maintenance stuff?
Eric Gerstenberg (Co-CEO)
Yeah, that's right, Larry. It will. The $65 million will get us to that $200 million mark, and we'll have some related startup additional capital, but that's really gets us to that full spend.
Larry Solow (Partner)
Got it. Okay, great. And then just lastly, HEPACO, it sounds like you, you know, you're reaffirming all the - it sounds like things are going good. It's early on, obviously, early days, but the synergies, I guess, you're not building in much this year, it feels like, right? But it maybe there is a little bit upside there, but you're still kind of holding firm. So within the first 12 months, you don't realize that $20 million, but beyond that, that 12 months, that $20 million should be realized, right? Is that kind of the way to look at it?
Mike Battles (Co-CEO)
Yeah.
Larry Solow (Partner)
You could do $60 million of EBITDA in, yeah, next year maybe, or, you know. Is that fair?
Mike Battles (Co-CEO)
Yeah, that's how we're thinking about it, Larry. I think a smaller amount of synergies this year. Obviously, as we roll in, we'll have some offsetting severance and integration costs we talked about.
Larry Solow (Partner)
Right.
Mike Battles (Co-CEO)
But certainly, that $20 million number, you know, 12 months from now, that's the run rate. And, I think safe to say, we feel really good about that, strong possibility. It's probably even a little bit better. So, you know, really love the acquisition. Fits in nicely, and as Mike and Eric alluded to, we, you know, first week in March, you know, really nice to see them fit in with Clean Harbors, so feel good.
Larry Solow (Partner)
Got it. Great. Excellent. Thanks. Thanks, guys. I appreciate it.
Operator (participant)
Thank you. Mr. Gerstenberg, we have no further questions at this time. I would like to turn the floor back over to you for closing comments.
Eric Gerstenberg (Co-CEO)
Thanks for joining us today. Next week, management will be at the WasteExpo in Las Vegas and participating in Stifel's Investor Summit there, as well as the Oppenheimer Industrial Growth Conference later in the week. We also have several conferences lined up in Boston and New York in early June. With that active calendar, we look forward to seeing some of you at these and other events. Thank you.
Operator (participant)
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.