Clean Harbors - Q2 2023
August 2, 2023
Transcript
Operator (participant)
Greetings, welcome to the Clean Harbors second quarter 2023 earnings conference call. At this time, all participants are in a 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 introduce your host, Michael McDonald, General Counsel. Thank you, sir. You may begin.
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're 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, August 2nd, 2023. Information on potential factors and risks that could affect our results is included in our SEC filings.
The company undertakes no obligation to revise or publicly release the results of any revision to the statements made today other than through filings made concerning this reporting period. 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. Turning to our Q2 financial results on slide three, our second quarter performance underscores the strength of our environmental services segment, where our adjusted EBITDA margin climbed by 140 basis points from a year ago. This is a highly resilient business that is supported by scarce permitted assets, a strong safety record, technical expertise, a highly trained workforce, close customer relationships, and effective capital allocation. Q2 marked our ES segment's seventh consecutive quarter of growth and profitability. Its performance partly offset the decline of our Safety-Kleen Sustainability Solutions segment, which experienced some headwinds resulting from the adverse conditions that continue to affect the base oil and lubricant markets. Before I review the segments in more detail, I'd like to highlight our safety results, as safety is central to everything we do.
After a record Q1 performance, we delivered a second quarter TRIR of 0.68, the best Q2 in our history, which keeps us on track to achieve our ambitious annual TRIR goal of 0.70. The record-breaking heat across much of the country posed a unique challenge in Q2 and continues to do so, do so as we move through the third quarter. Because our team is often required to wear personal protective equipment, both outdoors and in-plant, we are focused on monitoring temperature and hydration. To everyone on our team, we appreciate all the proactive steps you take to keep yourself and your colleagues safe. Turning to environmental services on slide four, segment revenue increased 7%. The growth of our services business was underpinned by pricing and volume initiatives.
Each of the segment's four business units posted year-over-year gains, with industrial services and Safety-Kleen Environmental branch businesses leading the way. Industrial services revenue grew 11% on the heels of a strong spring turnaround season and initial contributions from our Thompson acquisition. Our second full year of HPSC, which we acquired in late 2021, is trending better than we anticipated. Safety-Kleen Environmental revenue climbed 16%, with the demand for business' core offerings continue to grow. For the second consecutive quarter, we performed 250,000 parts wash services, an increase of 4% from Q2 last year. Field services revenue grew 7%, despite not having any large-scale emergency response-related projects. Technical services revenue grew modestly, largely attributed to the many planned maintenance and repair days at our disposal facilities to address weather-related outages that occurred in Q1.
As expected, utilization at our incinerators reached 84% this quarter, up 4 points sequentially, down 6 points from Q2 last year, which had fewer down days. Looking ahead, we anticipate less down days in the back half of this year than we had in the first half. Average incineration price was up 8% in Q2. We made some important repairs and investments in the incinerators that limited utilization, but our operations team worked hard to maximize the throughput to address our increasing backlog of waste. Landfill volume in the quarter was flat with the prior year. This year, our base business was particularly strong, with a good mix of high-value waste, which resulted in average pricing increasing by 21%. Looking at segment profitability at 13% Adjusted EBITDA growth, the ES segment once again outpaced the top line.
Given our highly leverageable network of assets, higher revenues should consistently drive greater profitability. As noted last quarter, we are also benefiting from a number of productivity programs and cost reduction efforts across the organization. To counter inflationary pressures, we've been targeting $100 million of company-wide cost reductions in 2023, much of it in ES. As a result of all these factors, we increased our ES margins and are now topping 26%. Overall, a great quarter for the ES segment. Before handing it off to Mike to take you through SKSS, let me touch on a recent development related to PFAS that should benefit our environmental services business materially in the coming years.
Turning to slide five, in July, the U.S. Department of Defense issued new guidelines related to the incineration of materials containing PFAS, which research indicates is present at hundreds of military installations. The DoD has authorized commercial hazardous waste incineration as a method of addressing these forever chemicals. The DoD guidance also allowed for hazardous waste landfills as an alternative remediation method. Last year, we published the results of a comprehensive third-party study that clearly demonstrated that we could effectively destroy a wide range of PFAS compounds, including AFFF firefighting foam, at commercial scale. In that study, we proved that we can consistently achieve at least six nines of destruction, which is the gold standard for thermal methods. The EPA conducted its own pilot study at its North Carolina facility and came out with similar conclusions about the potential for incineration.
Given the compelling results of our study, we view the DoD's decision to lift the PFAS moratorium as a very positive development for Clean Harbors long term. That being said, we don't expect a material amount of opportunities from the DoD this year. The EPA still must set final guidelines related to acceptable levels of contamination in soil and water, and provide recommended methods of storage, removal, transportation, and destruction. In the interim, we plan to work closely with the DoD to develop the right solutions at military installations to best protect our nation's armed forces. With that, let me turn things over to Mike to discuss SKSS and capital allocation. Mike?
Mike Battles (Co-CEO)
Thanks, Eric. Good morning, everyone. Let me echo Eric's comment about the great work of our team this quarter. We had a number of standout performers in our ES segment that helped us deliver overall results in line with our guidance for the 23rd consecutive quarter. That consistency is something that we personally take pride in. Moving to slide six, SKSS had another challenging quarter as the segment fell short of our profitability expectations. While we lowered our expectations on our last call, we did not anticipate the unusual absence of the Q2 seasonal pickup in demand and pricing this year. In fact, after a price decline in early April, posted prices fell again in June, which was the culmination of a weak spot pricing environment all quarter long.
While crude prices have risen more recently, they have not yet correlated to a rebound in base oil and lubricant pricing. On the top line, SKSS revenue dropped 15% based on the weak pricing climate brought on by global market conditions, compared to a year ago, when scarcity of supply was customers' primary concern in the wake of major market disruptions. In Q2 of last year, posted prices rose by $1 a gallon, whereas this year in Q2, posted prices fell by $0.60, with spot pricing exhibiting even deeper discounts. In 2022, customers were concerned about shortages and allocations. Conversely, this year, buyers have been able to patiently wait on the sidelines, destocking inventories and holding out for lower prices.
As a result of these conditions, SKSS Adjusted EBITDA decreased 45%, with a year-over-year drop in margin as our near-term refining spreads have been compressed. While market conditions have remained unfavorable, the SKSS team has acted quickly to counter the spread compression. The team is executing well in the areas we can control, such as collection, pricing, and volumes, as well as plant production and volumes sold. During the quarter, we shifted rapidly from a pay-for-oil to charge-for-oil pricing model, while generating record collections of 64 million gallons. We also sold a record level of base oil gallons in Q2, as our re-refining plants continued to run well.
Blended product volumes—blended product sales accounted for 19% of total output from our plants, flat compared with a year ago, but up from the 15% we reported in Q1. We continue to win back blended customers we lost in the back half of 2022 due to additive shortages. Our direct volumes, which represent our closed-loop approach, were at 7% in Q2, which is flat with a year ago and in line with our expectations. Our goal remains to increase our blended volumes this year through efforts on both the direct and wholesale sides. Overall, even with the declines we've seen this year in SKSS, this segment is still expected to deliver an approximately 20% Adjusted EBITDA margin this year, and it remains a strong free cash flow generator and high ROIC business for us. Turning to slide seven in our capital allocation strategy.
As part of our Vision 2027 strategy that we laid out at our Investor Day earlier this year, we have multiple avenues to grow our company. We continue to evaluate opportunities to invest in CapEx to drive organic growth, particularly in the facilities network, our maintenance shops, and other areas. The build-out of our new state-of-the-art incinerator in Nebraska remains on plan, on budget, and on track for opening in early 2025. We installed the kiln this quarter and are on track to hit a number of other critical construction milestones in the back half of this year. On the M&A front, the early returns on our Thompson Industrial acquisition are very promising. The business is proving to be synergistic and should support cross-selling going forward. We continue to see a good flow of potential bolt-on transactions for both operating segments.
In Q2, we closed a very small acquisition, less than $10 million in size, where we added a company that leases more than 500 intermodal containers. We are confident that these assets will benefit, benefit us as we grow our business in the years ahead, particularly with the new incinerator coming online and larger PFAS opportunities starting to develop. Eric Dugas will, will discuss our financial activity for the quarter, but I'd like to remind investors that our strong and flexible balance sheet allows us to remain opportunistic with respect to potential M&A. Overall, we remain on track to hit our financial targets in 2023 as the momentum in our ES segment continues to offset any declines in SKSS.
The strong demand for ES is not abated, and our favorable market dynamics supporting our profitable growth in all of our four business segment units. Growth in industrial services continues to be a meaningful contributor to our 2023 success as we move towards the fall turnaround season. Within our disposal network, our record backlog positions us well for the back half of the year. The project pipeline within the ES segment shows no sign of slowing as the pace of reshoring picks up and government infrastructure spending is starting to make its way into the market. Given the trajectory we've seen through 2023, we continue to expect nothing short of a record year in our ES segment. Although it's disappointing that the summer driving did not stabilize the pricing environment in SKSS, we have responded quickly to market conditions.
We will continue to control costs across the business, particularly on the collection side, while still ensuring that we have enough supply to maximize output at our re-refineries. In total, we are maintaining our Adjusted EBITDA and adjusted free cash flow guidance for the year, as we believe our ES segment will offset the slowdown in SKSS. 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. As Eric and Mike outlined, Q2 was a strong quarter for us, with our ES segment again delivering exceptional results, exhibiting continued profitable growth and exiting Q2 with significant momentum across many of our service businesses. Total revenues for the quarter increased $42 million, with our ES segment growing $81 million to more than offset the lower top-line figures for SKSS. Adjusted EBITDA was $287.5 million, in line with the guidance we provided in May, but down from the $309.1 million we reported a year ago when we benefited from much higher base oil pricing due to global supply disruptions. Our Adjusted EBITDA margin was 20.6%, in line with our expectations.
Gross margin was 32.2%, reflecting our ability to offset inflation with appropriate price increases and cost savings, while increasing productivity and realizing gains from operational efficiencies. SG&A expense as a percentage of revenue was 12% in Q2, consistent with our expectations. For the full year, we anticipate being in the low 12% range and essentially flat with 2022. The team continues to do a great job offsetting inflation and wage pressures with cost mitigation strategies. Depreciation and amortization in Q2 increased slightly to $89.7 million, again, consistent with our expectations, given the addition of Thompson. For the full year 2023, we continue to anticipate depreciation and amortization in the range of $350 million-$360 million.
Income from operations in Q2 was $189.8 million, largely driven by our strong performance in environmental services. Net income for the quarter was $115.8 million, resulting in a GAAP earnings per share figure of $2.13. Turning to the balance sheet highlights on slide 10. Cash and short-term marketable securities at quarter-end were $326.1 million, reflecting our decision to pay down the entire $114 million of debt that was outstanding on our ABL revolver. Given our strong current financial position, we thought it was prudent to lower our interest expense with some of the excess cash we had on hand. As a result of that action, we ended the quarter with debt of just over $2.3 billion.
We remain very comfortable with our overall debt portfolio, as there are no significant amounts coming due for a number of years. Leverage on a net debt to EBITDA basis as of June 30th was approximately 2x, and our weighted average pre-tax cost of debt at the end of Q2 was just over 5%, with approximately 85% of our portfolio being at fixed rates. Turning to cash flows on slide 11. Cash provided from operations in Q2 was up 22% to $207.6 million versus $170.6 million a year ago. CapEx, net of disposals, was $121.5 million in the quarter, up from prior year, partly as a result of spend on our Nebraska incinerator project, which accounted for $22 million of our Q2 CapEx.
In the second quarter, adjusted free cash flow was $86 million, which was right in line with our internal expectations and keeping us on track to hit our annual target. For 2023, we continue to expect our net CapEx to be in the range of $400 million-$420 million. Full-year spend on our Nebraska incinerator is expected to be in the range of $85 million-$90 million, having spent $35 million year to date and some major construction phases planned for the coming months. We are also continuing to make investments in both equipment and our transportation fleet, with an aim to minimize third-party rental spend while accommodating the growth that the businesses need. During Q2, we bought back 36,000 shares of stock at an average price of $137 per share and a total cost of $5 million.
We still have close to $100 million remaining under our existing authorized buyback program. Moving to slide 12. Based on our Q2 results and current market conditions for both of our operating segments, we are maintaining our 2023 Adjusted EBITDA guidance range of $1.02 billion-$1.06 billion, with a midpoint of $1.04 billion. Looking at our guidance from a quarterly perspective, we expect Q3 Adjusted EBITDA to be approximately 7%-9% below Q3 of 2022, due to a challenging year-over-year comp for our SKSS segment, offset by continued positive growth in our ES segment. I'll now provide an updated breakdown of how we expect our full year 2023 Adjusted EBITDA guidance to translate to our reporting segments.
In Environmental Services, we now expect Adjusted EBITDA at the midpoint of our guidance to increase 15%-17% from the full year of 2022. Demand for our range of services, particularly in industrial and at our disposal facilities, continues to be very strong. As a reminder, our full year 2023 guidance for the ES segment includes $12 million of Adjusted EBITDA attributable to the Thompson acquisition. For SKSS, we now anticipate full year 2023 Adjusted EBITDA at the midpoint of our guidance to decrease in the 35%-40% range from last year, reflecting the ongoing pressure on base oil pricing. In our corporate segment, at the midpoint of our guide, we now expect negative Adjusted EBITDA to be up 7%-8% in 2023.
The slight increase from our prior guidance reflects some higher expenses that occurred in Q2, primarily relating to insurance programs and professional fees. Overall, the team is doing a good job offsetting items like higher insurance expenses, salaries, and corporate costs related to the Thompson acquisition with cost savings programs. For 2023, we continue to expect to deliver adjusted free cash flow of between $305 million and $345 million. I want to remind everyone that this guidance includes approximately $85 million-$90 million for the new incinerator this year. If you add that spend back, the midpoint of our adjusted free cash flow guidance would be about $450 million. In summary, Q2 was marked by solid execution in both segments. Our ES segment delivered profitable growth above our expectations.
In our SKSS segment, while the financials were less than anticipated, the team responded rapidly to declining market conditions, and as Mike said, did a nice job controlling what they could. Looking ahead, we're enthusiastic about our near and long-term prospects, especially in the ES segment, where there are numerous tailwinds. We have not seen a meaningful slowdown in any of our core lines of business. Our sales pipeline, as we sit here today, is larger than it was 90 days ago. We have a healthy outlook for the second half of the year for multiple reasons, including the backlog of waste in our facilities, the additional waste streams that we continue to see enter the commercial marketplace, the emerging PFAS opportunity that Eric spoke about, and the schedule of projects we anticipate commencing going forward.
Our goal is to continue to capitalize on these positive market dynamics in ES, while managing through the current downturn in SKSS, while setting the business up for future growth as macro factors impacting SKSS stabilize. Overall, we continue to expect another solid year for Clean Harbors in 2023, as we work towards achieving our Vision 2027 goals. With that, Christy, please open up the call for questions.
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 Research)
Hey, good morning, and thank you for taking the time. You, you said all this in the call on your prepared remarks. I just want to make sure we emphasize it. All lines of business, not just technical services and not just incineration, saw growth in ES. The pricing, is that spread across all of them as well, or is it concentrated just in disposal?
Eric Gerstenberg (Co-CEO)
Yeah, Michael, this is Eric. Thank you for the question. Yes, the pricing is across all lines of business. We continue to push price for disposal, transportation, labor across all areas of our businesses, and that continues to take effect.
Mike Battles (Co-CEO)
You know, Michael, going back, this is Mike. Just to add on to what Eric said. You know, if you think back, you know, a few years, it was, you know, incineration scarce, and so we get pricing, we've always gotten pricing in our facilities, whether it be landfills, incinerations, TSDF, what have you. What's happened over the past couple of years is that there's been a switch, and that getting, you know, qualified, safe, compliant labor is also very tough. Getting trucks and equipment, also very difficult. That's allowed us to drive price kind of beyond just incineration, beyond just the facilities. You see that, you see that this quarter with the terrific results in the industrial side and the field service side that Eric mentioned in his prepared remarks.
Michael Hoffman (Managing Director and Group Head of Diversified Industrials Research)
Historically, the, the turnaround business is a little stronger in the first half than the second half. Is that pattern holding, or is it re-reversed, and that's helping give you even that much more confidence about total ES directionally?
Eric Gerstenberg (Co-CEO)
It certainly gives us that confidence. Yes, the first half of the year was more turnarounds than traditional. We had very strong turnarounds season for our industrial services. We expect that to continue, and it's really reflective in the numbers of that business.
Michael Hoffman (Managing Director and Group Head of Diversified Industrials Research)
Okay. Of course, everybody's got to ask this SKSS question. I won't be the first one, I'm sure. How do you give the market confidence on what you think the bottom is? When you think about that bottom, is there enough data, I can't find it, to tell you whether there's a correction has is done in the finished goods side of the market, which is partly influencing this problem? There's just too much finished good out there, and the blenders are going, I, you know, we don't need to buy oil to blend, to make finished goods.
Mike Battles (Co-CEO)
Yeah, Michael, this is Mike. I'll, I'll answer that question. You know what? At the end of the day, you know, we feel that the business. We did everything we could to kind of control the costs, control the costs, drive blended guidance, drive down PFO pricing to CFO pricing, you know. The plants ran really well. And we're executing on the strategy we talked about back in our Vision 2027 presentations back at the end of March. You know, you know, what's the bottom? Hard to say. I think that the, the, the midpoint of the business, it starts with 2 over the short term, and if, if prices are increasing, it's in the, you know, mid to high 2s. If price is decreasing, it's in the, you know, high, high 1s.
Our midpoint of our guide today is in the $190 range, and that's after 3+ price decreases over the first half of the year. I'm hopeful that with crude prices coming back a little bit over the past few weeks, we see base oil pricing increasing. Just as a, just as a modeling answer, you know, for the purposes of the back half of the year, we're assuming base oil prices remain flat. If, you know, I, I'm, I'm hopeful, given the most couple of weeks that I've heard around, you know, crude prices coming back, maybe there's a base oil price increase, which would certainly kind of help us kind of get back to the $2 number we talked about a minute ago.
Michael Hoffman (Managing Director and Group Head of Diversified Industrials Research)
Okay. just... you alluded to midpoint SKSS $190. That puts ES at, like, $1.11 if you're landing at somewhere around $255-$260 on corporate overhead. Is that?
Mike Battles (Co-CEO)
Yes, sir.
Michael Hoffman (Managing Director and Group Head of Diversified Industrials Research)
We did all that math right?
Mike Battles (Co-CEO)
That's exactly right.
Michael Hoffman (Managing Director and Group Head of Diversified Industrials Research)
Okay.
Mike Battles (Co-CEO)
Really, too, and so we're happy to answer questions about SKSS all day, and to your point, Michael, we probably will. The ES business continues to do incredibly well. As Eric said in his prepared remarks, you know, the incinerators had challenges in April and into May, and yet we still delivered 140 basis points of margin expansion in the ES business. If you look at the guide and, and make an estimate for revenue, you know, our margins in the back half of the year for the ES business will be, you know, 150-200 basis points better than prior year. As such, we really are very bullish on that business and, and, and excited about the future.
I want to make this point on the call, is that, you know, we gave our Vision 2027, you know, Eric and I stood in front of the investing community and talked about it. I'm more bullish about, about, you know, Vision 2027 now than I was 90 days ago, and more importantly, our pipeline has not changed. Our pipeline still is stronger today than it was 90 days ago, which, again, I'm really excited about.
Michael Hoffman (Managing Director and Group Head of Diversified Industrials Research)
Okay. Thank you very much for taking my cue.
Eric Gerstenberg (Co-CEO)
Thank you, Michael.
Operator (participant)
Our next question comes from the line of Noah Kaye with Oppenheimer. Please proceed with your question.
Noah Kaye (Senior Research Analyst)
Thanks. Yeah, just, just a little bit more math that, you know, last year, ES was 75%, right, of EBITDA pre-corporate expense, and this year it's gonna be 85% or more. I think I'll focus on the 85%. Can we start with that PFAS commentary? Maybe you can level set for us how much PFAS remediation revenue you've seen year to date, and what's in the 2023 guidance. Then can you kind of break up the PFAS opportunity into different chunks? Maybe you can talk about potential revenue just with DoD or, you know, the government. Just different ways for us to wrap our heads around how big this could be for you over time.
Eric Gerstenberg (Co-CEO)
Yeah, Noah, this is Eric. I'll take that question. First, I'd say that our pipeline of PFAS opportunities continues to grow. Not gonna put any exact revenue number on it, we can tell you confidently that the number of opportunities we're seeing across the board is a large opportunity for us. We have really total comprehensive solutions that we like to talk about. We're doing sampling, we're doing analysis for our customers. We're able to provide remediation, full remediation of sites and transportation, and a full suite of disposal capabilities from treatment, treatment of groundwater, treatment of industrial water. We can obviously provide landfill solutions with a closed-loop landfill of managing the leachate. Then finally, obviously, the incineration that we talked about, that's really a phenomenal study that came out.
Great release by by the DoD to lift the moratorium. The opportunity for us continues to be there, and as regulations will continue to come into effect throughout the course of this year and into next year, we're optimistic. The team has seen a lot of opportunities from all of our customers in a number of different areas, and, we think the-- our total waste solution is unmatched in the industry, and, it really continues to look like a good prospect for us.
Noah Kaye (Senior Research Analyst)
I appreciate that. Hopefully, you can put some numbers around it over time, but that, that sounds upbeat. Y-you also made reference, I think-
Eric Dugas (EVP and CFO)
It's-
Noah Kaye (Senior Research Analyst)
Yeah, go ahead.
Eric Dugas (EVP and CFO)
It's pretty small this year. As Eric said in his prepared remarks, you know, the EPA has to kind of put more kind of guardrails as to how clean is clean. But, you know, it's a, it's a $40 million-$50 million opportunity this year. It's, it's not, it's not a needle mover per se.
Noah Kaye (Senior Research Analyst)
Yep, appreciate that. Then you made reference to some of the IIJA funding starting to come through. You know, that was, I think, $21 billion, right, of appropriated money for environmental remediation? Just, you know, how much of that do you think Clean Harbors potentially captures and kind of over what timeframe? I mean, we see some of the funding announcements already coming out of EPA, but just want to understand how, how, how this impacts kind of the outlook for the year and maybe over a multi-year timeframe.
Eric Gerstenberg (Co-CEO)
Yeah, no, I think that that projection of the $20 billion of spending was over the course of five years. That a large part of that is go get for us to be able to perform the remediation services and be able to feed volume into our landfills and our incinerators, depending on the characteristics. A good chunk of that $20 billion, $21 billion is go get for us, go get for the industry, and we're well positioned with all of the assets and great infrastructure that we have to be able to, to participate in a substantial part of that.
Noah Kaye (Senior Research Analyst)
Great. Thanks very much for taking the questions.
Eric Gerstenberg (Co-CEO)
Thank you.
Eric Dugas (EVP and CFO)
Thanks, Noah.
Operator (participant)
Our next question comes from the line of Tyler Brown with Raymond James. Please proceed with your question.
Tyler Brown (Senior Research Analyst)
Hey, good morning, guys.
Eric Gerstenberg (Co-CEO)
Morning.
Eric Dugas (EVP and CFO)
Hey, Tyler.
Tyler Brown (Senior Research Analyst)
Hey, Eric G., pricing in in-incineration, it was awfully good, and if I'm not mistaken, it was on a really tough comp. Can you just talk about the outlook in terms of price and volume in that market? Because we have heard about some weakness in the chem markets. Industrial markets aren't exactly the best, so maybe the backlog is smoothing that out, but can you just give us any color there?
Eric Gerstenberg (Co-CEO)
Yeah, that's right, Tyler. Our price and mix continues to be about 50/50. We have opportunity in the backlog of that incineration that we built up throughout the second quarter to bring that into the third quarter and the fourth quarter as our incineration utilization improves. We're continuing to see. We're not seeing any slowing of chemical pricing or no give-the-backsies there. We're continue to be on the trend of increasing our pricing, taking advantage of the difficult-to-handle waste streams, feeding a tremendous amount of volume into our incinerators of drums and direct burn streams.
We've also been leveraging our TSDF to handle a lot more volume and prep it for our incinerators, so that's helping us well. Price mix continues to be in that 50/50 area, and we continue to be bullish about it.
Tyler Brown (Senior Research Analyst)
Okay, perfect. Then it looks like ES margins were up. I think you guys called it out 140 basis points year-over-year. I mean, that's very solid, particularly given that you're now starting to lap tougher comps. If we were to take a walk and bridge that 140 basis points, what were the key drivers in there? I would assume that Thompson was actually dilutive to margins, but then maybe fuel was a good guide. Any thoughts on kind of how you got there, was it more driven by pricing or cost control or a little bit of both?
Eric Gerstenberg (Co-CEO)
Tyler, I'll, I'll start, and then I'm sure my colleagues here will, will add on. The 140 basis points was driven by a number of things. You're, you're correct in your assumption about industrial, a little bit dilutive on that. We have. We're steadfast about driving price in every single one of our lines of business for labor, equipment, materials, and also taking costs out of the business. We're focused on that. As mentioned in our discussion earlier in the call, we have a target at $100 million of cost savings, and we're executing on that to continue to expand the margins.
We also are in the process of putting in a, a new system that's going to help support our industrial services platform to squeeze more margin out of that, that business and get more billable hours on worksheets and get paid better for our services there. All those things have cumulated together, and what we saw in Q2, what we continue to see, and we continue to be, again, bullish on the outlook as we execute on the cost programs, execute on pricing, execute on efficiencies within our business, leverage our labor network, which I think is really powerful. The team has done a great job of sharing resources. That industrial team from Thompson has played well into our core legacy industrial services to help support their work. The sharing of assets, the sharing of people, those have all contributed to that, that increase.
Eric Dugas (EVP and CFO)
I think Tyler, just to add on to some of Eric's comments, this is Eric D. Again, I think you're right, Thompson, probably a little antidilutive to that, but if I think about the HydroChem acquisition that we did and continuing to integrate that into the platform. I think this year we're really seeing some better margins out of that business from a lot of the cost cutting and labor management that Eric mentioned. Better use of internal folks rather than third parties, reduction in rental costs that will continue to drive through the business. Certainly that acquisition is proving to have been a good one for us to this point. You know, certainly the synergies from that are contributing to the margin growth in ES as well.
Tyler Brown (Senior Research Analyst)
Okay.
Mike Battles (Co-CEO)
Tyler, the only, the only thing I'd add, Eric said it, Eric said it well. The only thing I'd add is that, you know, the other thing that's happened is turnover is down. You know, direct labor turnover is down 200 basis points from the beginning of the year and 500 basis points year-over-year. That, and that investment we made in people and, and, and in our, in our organization, I think is a, a material impact on our margins because those that turnover cost us a lot of money. That turnover coming down because of the investments we made in benefits and people, is starting to really pay some dividends, something we're really proud of.
Tyler Brown (Senior Research Analyst)
Yeah. Just my last one here. I think you were at 26% in ES, and I get it, this is seasonally a strong quarter, but I think that was kind of the best since 2012, when you didn't have as much lower margin field and industrial service work. If we were to kind of, quote, unquote, "Dream the dream," I mean, why, why couldn't this business be a consistent 30% or a 30+% margin business longer term? Thanks.
Mike Battles (Co-CEO)
Yeah, Tyler, we're, we think it can be. We're, we're gonna continue to execute on all the programs across our businesses, you know, with the, the market positions that we have in industrial and field and, and large and small customers with Safety-Kleen Environmental on the small and Clean Harbors on the large. We, we'll continue to execute and drive towards that 30%, and we see that in our path.
Tyler Brown (Senior Research Analyst)
Okay. Thanks, guys.
Mike Battles (Co-CEO)
Thank you.
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 U.S. Machinery, Infrastructure, and Sustainable Tech Franchise)
Hi, good morning, everyone.
Mike Battles (Co-CEO)
Hi, Jerry.
Jerry Revich (Senior Investment Leader and Head of U.S. Machinery, Infrastructure, and Sustainable Tech Franchise)
Hi. I'm wondering if we could just talk about the free cash flow cadence over the course of this year and how to think about conceptually 2024. You know, obviously, an environment where equipment availability has been all over the map, et cetera. How should we think about the puts and takes around the free cash flow bridge 2024 versus 2023, you know, outside of earnings? Ultimately, any opportunities, either from a timing standpoint or free cash flow improvement standpoint, to 2024 versus 2023, compared to what we're seeing this year. Thanks.
Eric Dugas (EVP and CFO)
Yeah, Jerry, it's Eric Dugas. I'll, I'll start here. You know, I think the first thing I would point out, too, is, you know, really strong free cash flow so far this year. We're nearly $50 million ahead of where we were last year, despite some real headwinds with kind of cash taxes we paid on, on last year's profitable earnings also the increased CapEx that, that we pointed to, some of which or a lot of which is related to the Nebraska project. You know, really happy this year with where we are. I think we're well on our way to hitting the target for next year.
You know, when I think about 2024 in puts and takes, you know, obviously, we'll, we'll have a little bit less, I think, being spent on the Kimball incinerator. That's why we always like to talk about, CapEx excluding that number, but we continue to go up. You know, long term, I think we are kind of, kind of targeting that free cash flow conversion, kind of in the low 40% range and, and above, is when you look at our long-term targets, you know, and really think, with the business and, and the margin expansion we're seeing and, and, many of the other long-term tailwinds that we've talked about today, that's, kind of where we look to long term.
Jerry Revich (Senior Investment Leader and Head of U.S. Machinery, Infrastructure, and Sustainable Tech Franchise)
Okay. Separately, you know, Safety-Kleen Sustainability Solutions had pretty good margin performance sequentially, you know, a good 2 points better than normal seasonality. It looks like that business might be bottoming and turning the corner just based on your performance there. Can, can you just talk about, is that consistent with what you're seeing? I, I know you took down the outlook, but it feels like sequentially, things are stabilizing, and if that continues, you know, EBITDA for the business should be up 3Q versus 2Q, I think.
Mike Battles (Co-CEO)
Yeah, no, I think that, you're, you're right, Jerry. You know, we did make a large shift from PFO to CFO, in the quarter, which had a dramatic impact on our profitability. I think that really is a testament to the team and their ability to drive, you know, that and still collect a record amount of gallons. Really kind of a great, a great quarter by them. I, I'm hopeful that we're there. I certainly as, as we've talked about it, earlier, you know, the model has base oil prices stabilizing, and if it raises, then it's, then probably a good guide to us in the back half of the year.
Jerry Revich (Senior Investment Leader and Head of U.S. Machinery, Infrastructure, and Sustainable Tech Franchise)
Mike, just given the complexity of transitioning from, you know, paying people to charging them, was the exit rate significantly more positive than the full quarter average? Just because these types of initiatives, I, I think, take time to implement. Is that a fair characterization?
Mike Battles (Co-CEO)
They absolutely did. They started the quarter in a pay-for-oil, and we ended in a kind of mid-teens, you know, charge-for-oil at the end of the quarter.
Jerry Revich (Senior Investment Leader and Head of U.S. Machinery, Infrastructure, and Sustainable Tech Franchise)
Super. Thank you.
Operator (participant)
Our next question comes from the line of David Manthey with Baird. Please proceed with your question.
David Manthey (Managing Director)
Hi, good morning, guys.
Mike Battles (Co-CEO)
Good morning, David.
David Manthey (Managing Director)
First question on the, on industrial exposure. Has Clean Harbors disaggregated from trends in industrial end markets? The reason I ask is you, you got, you know, 2.5 years of decelerating ISMs. It's been below 50, the PMI, for the last nine months now, but yet you continue to see excellent trends to today and into the second half in your ES business. Just thoughts on cyclicality of the business today versus what you had in the past?
Mike Battles (Co-CEO)
Yeah, Dave, this is Mike. I think that the, I think that, you know, there are, there are definitely, I see your concern where, you know, market factors tend to go down. I think there's, there's more complex waste streams coming into the network, which results in us, you know, being able to charge more and, and, and handle them. You know, not all, not all industrial production is weighted equally.
I would say that, you know, the, the, the advent of electric battery manufacturing and other types of, of complex, you know, complex chemicals, around, around, air conditioning and other types of, you know, chemicals in the marketplace that are, that are really driving kind of, more complex waste streams into our network, and as such, being able to counterbalance any industrial production trends you may be seeing in the macro environment.
David Manthey (Managing Director)
Yeah, that's great to hear. Thanks for that, Mike. Second, on the PFAS outlook, I guess the EPA is signaling that they may not mandate enforcement against passive receivers of PFAS, and it sounded like that's landfills and airports and municipal water systems, and a lot of potential parties here. Are the enforceable situations and the self-policing that'll go on in this industry, are those enough to realize the opportunity that you see in front of you today?
Eric Gerstenberg (Co-CEO)
Yeah, I'll answer that, Dave. Eric here. The, you know, the enforcement, putting that aside, what I think the opportunity is, is regardless of past enforcement, there's a treatment that needs to happen, treatment and remediation. That's where the opportunity is. They're gonna have lower discharge standards for water treatment and industrial streams and groundwater streams. You know, obviously, the remediation of the sites is gonna fuel material into our incinerators and into our landfills. That's, that's really where we see the opportunity.
David Manthey (Managing Director)
All right. Thanks very much, guys.
Eric Gerstenberg (Co-CEO)
Thank you.
Mike Battles (Co-CEO)
Thanks, Dave.
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 Tobey Sommer with Truist. Please proceed with your question.
Jasper Bibb (Equity Research Associate)
Hey, good morning. This is Jasper Bibb for Tobey. industrial services revenue was up 11% with Thompson. Longer term, how will you address the pricing and margin outlook for that business as you continue to build your market share there?
Eric Gerstenberg (Co-CEO)
Yeah, Jas, Eric here. We, we continue to drive price on a pretty set cadence with all of our customers in the industrial business. As mentioned earlier, we, we also have a, a new platform that we're rolling out to combine the, the systems for both the Thompson Industrial, and those systems will really help us, deliver electronic worksheets that allow us to capture any leakage that we might be able to see across the business. At that, combined with the efficiencies that we're realizing in the business by, leveraging the combined headcount, leveraging the rolling stock, the assets, the people together, working together, is, is all contributing to the expansion, the margin expansion of that business, and will continue.
We're, we're bullish about increasing the margins as we go forward by combining the businesses and getting more stickier and cross-selling. There was a couple of new lines of business that we acquired through the Thompson, Thompson acquisition that we're selling to our legacy HBC customers, so that's powerful as well. That whole sales team from the Thompson Industrial Group also recognizes the environmental lines of business that we can cross-sell into the customers there. All those things combined contribute to improving our margins and improving our growth and stickiness with those customers across the board.
Jasper Bibb (Equity Research Associate)
I think that makes sense. Then with respect to the SKSS guide, just to clarify, do you think you've now fully adjusted your charge-for-oil there to align with demand conditions? Would you expect to have to continue metering up those charges based on what you saw in July pricing?
Mike Battles (Co-CEO)
Yeah, Jas, I think we have set ourselves up for a decent back half of the year. We're assuming pricing stays in our model, in our guide, pricing stays solid and our ULO pricing stays the same. We're not, you know, if pricing goes down, we'll adjust that ULO pricing, like we did in the first half of the year. I think we've done all the actions that we need to do, in my opinion, to kind of deliver on the numbers that are in front of us, assuming stable base oil price.
Jasper Bibb (Equity Research Associate)
Got it. Last question for me on the, the DoD authorization of incineration for PFAS. Just on timing, do, do you have any sense of a timeline for when federal RFPs for PFAS disposal contracts might materialize, or is that, I guess, more dependent on, on what comes out from the EPA?
Eric Gerstenberg (Co-CEO)
We think, Jas, that, we'll see that over the next year or two, the, the opportunities with DoD. We're, we're already working collectively with them in a number of different sites, a number of different opportunities, and we think that'll continue to grow here.
Jasper Bibb (Equity Research Associate)
Okay, great. Thanks for taking my questions.
Eric Gerstenberg (Co-CEO)
Thank you.
Operator (participant)
Our next question comes from the line of Jim Ricchiuti with Needham. Please proceed with your question.
Jim Ricchiuti (Analyst)
Thank you. How does the DoD announcement affect conversations you may be having in the market with commercial customers, other government bodies?
Eric Gerstenberg (Co-CEO)
You know, Jim, I would say that, there's a strong set of customers that, were involved in, you know, manufacturing into some of these PFAS compounds that I think they, they know well that, incineration, thermal temperature incineration is really a preferred method here. I think that resonates as well with the DoD. Our experience and our interactions with, chemical customers and DoD based on the concentration in DoD of the AFFF that has shown contamination. Thermal temperature, high temperature, rotary kiln incineration, it, it seems to be a preferred method there in those high concentrations. We think that's an opportunity for us. That's why we, really going back in time, we wanted to prove out through our testing that, our incinerators is a, is a great, technology to effectively, with six 9s, destroy that contamination.
We think that there is a, a good audience, a solid audience that recognizes that that is the best disposal method for highly concentrated contamination.
Mike Battles (Co-CEO)
I would add, Jim, that the DoD, you know, lifting of the moratorium kind of validated our study. So I really believe that, you know, what it means in the back half of the year in 2024, as Eric said in his prepared remarks, to put a finger on that. It really just continues to substantiate kind of our long-term business model, that incineration is a safe and effective way to handle these forever compounds.
Jim Ricchiuti (Analyst)
Got it. Now, that's what I was driving at. Just with respect, I may have missed it: did you provide the Thompson contribution in the quarter?
Eric Dugas (EVP and CFO)
In the quarter, we didn't provide it. It's, you know, mid-single digit millions.
Jim Ricchiuti (Analyst)
Got it. Just as we think about the second half of the year, on the ES side, you, you alluded to some of the, the benefits. You're seeing some, some improvement in turnover. How much more of a tailwind is pricing going to be in the second half versus the first half? Just related to that, on the cost side, have you seen some moderation at all in other cost pressures in the business?
Eric Gerstenberg (Co-CEO)
Yeah, Jim, we've certainly seen moderation really on the salary side across the workforce, and that's moderating. Our pricing efforts will continue to outpace inflation, and we continue to execute well on that. We have a comprehensive program across all of our business units to continue to drive price, along with the efforts that as mentioned earlier on taking costs out of the business and continuing to get more efficient. We will continue to execute on that plan.
Jim Ricchiuti (Analyst)
Thank you.
Eric Gerstenberg (Co-CEO)
Thank you.
Mike Battles (Co-CEO)
Thanks, Jim.
Operator (participant)
Thank you. Mr. Gerstenberg, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.
Eric Gerstenberg (Co-CEO)
Thanks, everyone, for joining us today. Management will be participating in a number of IR events in the coming months. We look forward to interacting with you further at some of those events, and, please enjoy the rest of your summer. Stay cool. 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.