Clean Harbors - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 delivered revenue of $1.55B, diluted EPS of $2.21, and adjusted EBITDA of $320.2M; adjusted EBITDA margin expanded 100 bps YoY to 20.7% as ES pricing, productivity and disposal volumes offset macro softness in industrial and field services.
• Versus consensus, CLH missed on revenue ($1.549B vs $1.572B*) and EPS ($2.21 vs $2.39*); prior Q2 also missed revenue and modestly missed EPS, while Q1 beat EPS but modestly missed revenue*.
• FY25 guidance: adjusted EBITDA lowered to $1.155–$1.175B (midpoint $1.165B) while adjusted free cash flow raised to $455–$495M (midpoint $475M); D&A raised to $445–$455M reflecting stronger landfill performance.
• Strategic update: announced $210–$220M SDA unit to upgrade VTAE into 600N base oil (EBITDA run-rate $30–$40M, payback 6–7 years, launch 2028); buybacks of $50M in Q3; net leverage <2x and blended interest rate 5.3% provide balance sheet flexibility.
• Near-term stock drivers: estimate misses and guide-down on EBITDA vs strong FCF raise, high incineration utilization (92% ex-Kimble), PFAS momentum ($100–$120M revenue in 2025), and capital allocation optionality (M&A + internal projects).

What Went Well and What Went Wrong

What Went Well

• ES segment achieved its 14th straight quarter of YoY margin improvement; ES adjusted EBITDA margin rose 120 bps to 26.8% on pricing, labor management, and network leverage.
• Disposal network KPIs were strong: incineration utilization 92% ex-Kimble (88% including ramping Kimble); landfill volumes up ~40% YoY; Technical Services revenue +12% on steady demand and projects.
• PFAS momentum and credibility strengthened: EPA-published study validates safe, cost-effective destruction at commercial scale; PFAS revenue expected at $100–$120M in 2025 (+20–25% YoY).
• Cash generation: Q3 operating cash flow $302M and record adjusted FCF $230.6M; capital discipline with net CapEx down YoY; share repurchases of $50M; net debt/EBITDA <2x and blended interest 5.3%.

Selected management quotes:

• “ES segment achieved its 14th consecutive quarter of year-over-year improvement in Adjusted EBITDA margin… increased by 120 basis points to 26.8%.”
• “The study confirmed… our high-temperature incinerators can… safely destroy these forever chemicals… at a cost-effective commercial scale.”

What Went Wrong

• Industrial Services revenue declined ~4% YoY as chemical and refining customers deferred turnaround scope; Field Services revenue fell ~11% YoY with absence of medium-to-large response projects.
• Healthcare expense spike: elevated high-cost claims drove SG&A up and were a notable headwind; management is modifying plans to mitigate in 2026.
• Estimate performance: Q3 missed revenue and EPS vs consensus; Q2 also missed both, while Q1 beat EPS but missed revenue*.

Transcript

Speaker 3

Meetings, and welcome to the Clean Harbors third quarter 2025 financial results conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael McDonald, General Counsel for Clean Harbors. Thank you, sir. You may begin.

Speaker 6

Thank you, Christine, and good morning, everyone. With me on today's call are our Co-Chief Executive Officers, Eric Gerstenberg and Mike Battles, our EVP and Chief Financial Officer, Eric Dugas, and our 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, October 29, 2025. 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 the performance. Reconciliations of these measures to the most directly comparable GAAP measures are available in today's news release on our IR website and in the appendix of today's presentation. Let me turn the call over to Eric Gerstenberg to start. Eric?

Speaker 0

Thanks, Michael. Good morning, everyone, and thank you for joining us. As always, let me start with our safety results. Through September 30, we were at a TRIR of 0.49, putting us on a track record for another record year. We are extremely proud of that performance. The only way you achieve this level of excellence is with constant operational focus from the whole team to protect themselves and each other. Safety performance delivers measurable benefits across multiple dimensions, from enhanced operational efficiency and productivity to stronger employee retention and company reputation. For any team members listening, congratulations on these great safety results, and let's finish strong in Q4.

Turning to a summary of results on slide three, our Q3 performance reflected year-on-year growth from an increase in overall waste volumes into our network, pricing gains, and increased productivity, even in an environment where softer conditions resulting from macroeconomic factors have impacted some customers. Our ES segment grew on strength in technical services and SK branch. Our Safety-Kleen Sustainable Solutions segment performed in line with expectations, mainly due to our charge-for-oil program and product mix. Driving margin growth continued to be a focus for us as we were pleased to see our consolidated adjusted EBITDA margin increase by 100 basis points from a year ago to 20.7%, demonstrating the effectiveness of our pricing, the leverage in our network of permitted facilities, and cost-saving strategies. Within all of the underlying ES businesses, we drove pricing gains and improved productivity while lowering costs, driving better margin contributions.

Corporate segment costs were up from a year ago, primarily due to higher insurance expenses and healthcare increases, offsetting partially by cost-cutting actions. Overall, Q3 results fell slightly short of our expectations, due primarily to slowness in field services and industrial services, combined with some higher than anticipated employee healthcare costs. We remain optimistic with the continued growth in momentum in our waste collection and disposal assets. We believe that the productivity and margin enhancement initiatives undertaken throughout 2023 and across our businesses put us in a position to benefit as some macroeconomic conditions improve. Turning to our segments, beginning with ES on slide four, segment adjusted EBITDA margin grew year over year for the 14th consecutive quarter, with revenue up 3% and adjusted EBITDA of 7%.

Our waste volumes, PFAS work, remediation projects, and pricing drove our revenue increase, as that more than offset the slowdown in industrial and field services. Looking at revenue by the segment components, technical services led this quarter with 12% growth, as demand was steady. Incineration utilization remained high, and our landfill volumes were up 40% from a year ago. Incineration utilization was set at 92% versus 89% in the same period of 2024. For comparison purposes, our utilization excludes the new unit in Kimble, as we continue to ramp up. With Kimble included, our utilization rate was still high at 88%. As we've seen in the past several quarters, incineration demand has remained high due to the diversity of our end markets, as well as projects underpinning our growth.

Our sales teams have done an excellent job winning volumes in an environment where some of our customers have been impacted by current economic conditions. That sales effort includes our SK branches, who have consistently driven significant containerized waste volumes into our network. In Q3, Safety-Kleen Environmental services rose 8% through a combination of pricing gains and growth in our core service offerings. The number of parts washer services was 249,000 in the quarter, with a larger average service ticket per stop. The consistency of that business has been a key element to our profitable growth over the past five years. Field services revenue declined 11% from a year ago, more than we anticipated in our guidance. This shortfall reflects the absence of medium to large response projects. While we responded to more than 5,900 events, demonstrating consistent baseline demand, the revenue impact came from having no substantial projects.

Within industrial services, we continue to see customers in both the chemical and refining verticals limit their spending on turnarounds, as they remain under significant cost pressure. As a result, revenue was down 4% from a year ago. In light of these market conditions, we focused on cost management, including workforce and equipment utilization. While we are hopeful that maintenance deferrals from IS customers we've seen for the past few years improve, we do not expect any meaningful recovery in revenue opportunities for chemical and refining customers before the spring turnaround season. Based on our service platform and extensive lines of business we provide, we are focused on growing our wallet share with these customers. Turning to slide five, we want to highlight our recent successful PFAS incineration study done in partnership with the EPA, as well as the Department of Defense.

This study, which we completed in late 2024 in our Utah facility, was a milestone achievement for the company. The study, published by the EPA in September, provided the type of scientific data sought by customers and regulators. The study was conducted using the EPA's most recent and rigorous emission standards. The study confirmed what we already know: our retro permitted high-temperature incinerators can not only safely destroy these forever chemicals in various forms, but can do so at a cost-effective commercial scale. In addition, our total PFAS solution has continued to gain traction in the marketplace, with offerings ranging from lab analytics to water filtration to site remediation to disposal. We are in active discussions with customers on projects across many of these fronts and expect PFAS to generate $100 to $120 million in revenue this year, up 20% to 25% from a year ago.

Moreover, based on our pipeline and our momentum in the marketplace, we expect PFAS-related sales to further accelerate in the years ahead. With that, let me turn things over to Mike to discuss SKSS and capital allocation. Mike.

Speaker 2

Thank you, Eric, and good morning, everyone. Turning to SKSS on slide six, this segment delivered results in the third quarter that were in line with our expectations. Despite pricing headwinds in the base oil market all year, we effectively managed our re-refining spread and drove value from other initiatives. During the quarter, we dramatically lowered our waste oil collection costs versus a year ago as we advanced our CFO program. It is clear that our used oil customers understand that we are collecting a waste from them and providing value and reliable services. The team continues to manage costs while still collecting the volumes we need to run our plants. In Q3, we gathered 64 million gallons of waste oil, which is consistent with the second quarter. On the top line, our revenue decreased as expected. In terms of profitability, our adjusted EBITDA was essentially unchanged.

The result was a 100 basis point margin improvement, largely stemming from the CFO increase, cost reduction initiatives, and efficiency gains. We also increased our direct lubricant sales, which are among our highest margin gallons, to 9% of our total volumes, which also contributed to that margin improvement. During the quarter, we continued our partnership with BP Castrol to support their more circular offering for corporate fleets. Additionally, we are growing our Group 3 production, as those gallons carry a premium to our traditional Group 2 volumes, and we remain on track to add several million gallons of Group 3 this year. Turning to slide seven, today we announced plans to construct a state-of-the-art processing plant that we refer to internally as the SDA unit.

By using an industry-proven solvent de-asphalting process and combining it with our existing hydrotreating capabilities, we can unlock incremental value from an everyday product, VTAE, generated today in our re-refining. This new plant will upgrade VTAE into a high-volume 600N base oil. 600N neutral is a high-purity base oil that is typically used in heavy-duty industrial applications due to its durability and high-performance characteristics. Total spend on the SDA unit is expected to be $210 million to $220 million, with commercial launch anticipated in 2028. We spent approximately $12 million on this project year to date, with a total of approximately $30 million expected in 2025. As a result of the project, we expect to generate annual EBITDA in the range of $30 million to $40 million, a six or seven-year payback on the investment once completed.

Such a return will rival what we've seen from similar size incineration projects and represent an additional growth opportunity for SKSS. Turning to capital allocation on slide eight, we remain active in seeking opportunities to generate strong returns for shareholders. We also remain well-positioned to execute our strategy with record cash flows in Q3, low leverage, and a terrific balance sheet. On the M&A front, we're evaluating both bolt-on transactions and larger acquisitions that would provide leverageable assets with high synergy potential that support our market position in a particular business or geography. We believe that in our space, it's best to be patient and prudent in pursuing the right transactions. We've also been evaluating a series of internal investments, including today's announcement of the SDA unit.

Including that facility, we currently see a path to potentially investing over $500 million in internal projects over the next several years, ranging from greater processing capabilities within our network, additional hub locations, fleet expansions, and additional incineration capacity. We look forward to sharing more of these plans with you in the coming quarters as plans for individual projects get finalized. We also view share repurchases as an attractive capital allocation opportunity to generate strong shareholder returns as demonstrated by our $50 million in repurchases in Q3. Looking ahead, while we believe that the challenges we face in Q3 are temporary and market-driven, with year-over-year growth illustrating our resiliency, we expect our incinerators to run strong through year-end and waste projects to continue to feed our entire disposal and recycling network.

Term-related uncertainty and other macro factors in the North American economy have ripple effects through some of our customers over the past two quarters, but we believe the overall economic outlook remains promising. Based on conversations with customers, we anticipate incentives to reshore and the benefits of the recent U.S. tax bill will drive meaningful lift in American manufacturing and continue to support remediation and waste projects. We expect that spending constraints related to industrial services and field services in our key verticals, including chemicals and refineries, will loosen in the coming quarters as economic conditions improve. Overall, our project pipeline remains substantial, with growing PFAS opportunities expected to contribute meaningfully to future activity. We also remain excited about the steady ramp-up in production and mix in our new Kimble incinerator as it works toward full capacity.

For SKSS, we believe we've stabilized this business with our efforts around CFO, partnerships, and Group 3 production, and are looking forward to the new SDA unit. We expect to achieve our profitability targets for this business in 2025. With that, let me turn it over to our CFO, Eric Dugas.

Speaker 5

Thank you, Mike, and good morning, everyone. Turning to our Q3 results and the income statement on slide 10, while our quarterly performance came in below our expectations due to the factors Eric outlined, primarily a shortfall in industrial and field services, plus elevated healthcare costs, I want to highlight the underlying strength in our business. Total revenue increased to $1.55 billion in the quarter, with environmental services growth stemming from our wide range of service offerings and diversified customer base. Adjusted EBITDA increased 6% to $320 million, demonstrating our ability to drive profitable growth through a steadfast commitment to margin expansion. Our consolidated Q3 adjusted EBITDA margin expanded to 20.7%, led by a 120 basis point improvement in environmental services.

This margin expansion reflects our strategic focus on pricing initiatives, cost reduction efforts, and productivity gains, as we see evidence of margin improvement across each of our business units within the ES segment. Within environmental services, demand in our disposal network and collection businesses remains solid, driving revenue growth despite macro headwinds in some verticals like chemical. SKSS delivered more than $40 million in EBITDA, its strongest quarter in a year, demonstrating operational resilience in a soft base oil market. SG&A expense as a percentage of revenue increased from a year ago to 12.2%, reflecting higher healthcare costs, professional fees, and compensation. We are maintaining our full-year SG&A guidance as a percentage of revenue in the low to mid-12% range. Depreciation and amortization was approximately $115 million, reflecting our continued capital deployment, including Kimble operations, and increased landfill amortization related to greater disposal volumes.

We've raised our full-year depreciation and amortization guidance to $445 to $455 million, primarily due to the strong landfill performance. Income from operations in Q3 was $193 million, flat versus the prior year, as our 6% adjusted EBITDA growth was offset by higher depreciation and amortization, as I just mentioned. Net income grew modestly year over year, delivering earnings per share of $2.21. Turning to the balance sheet on slide 11, with continued focus on cash flow generation and a record level of free cash flows in the quarter, we ended Q3 with cash and short-term marketable securities of $850 million, providing substantial flexibility for our capital allocation strategy that Mike just outlined. Our recent refinancing was executed at favorable terms as we replaced our 2027 senior notes with 2033 senior notes and replaced our term loan at a more favorable rate of SOFR plus 150 basis points.

This refinancing provides us with more surety, extends the maturity of the debt, increases our flexibility, and demonstrates market confidence in our credit profile. With net debt to EBITDA below two times and a blended interest rate of 5.3%, we maintain a conservative capital structure. Our credit profile remains strong, just one notch below investment grade on our overall debt rating, while our secured debt carries an investment grade rating, reflecting the quality of our asset base, cash flow stability, and overall capital policies. Turning to cash flows on slide 12, our Q3 cash flow performance was exceptional. Operating cash flow of $302 million and a Q3 record adjusted free cash flow of $231 million, which was up $86 million year on year, underscores the generative nature of our business, the cash generative nature of our business model.

CapEx, net of disposals of $83 million, was down from the prior year, reflecting disciplined capital allocation. As previously highlighted, we began construction of our high-return re-refinery project, investing more than $10 million in Q3 to launch this exciting initiative that we expect to deliver excellent shareholder value. We also continued advancing our strategic hub facility in Phoenix, further strengthening our network capabilities. For 2025, excluding the SDA unit and Phoenix hub project, we now expect our net CapEx to be in the range of $340 million to $370 million. This is slightly down from our previous range, as we expect asset sales to be closer to $15 million this year instead of the $10 million previously thought. We bought back more than 208,000 shares of stock for a total spend of $50 million in Q3. We currently have roughly $380 million remaining under our authorization.

We continue to view our shares as attractively valued at current levels. Turning to our guidance on slide 13, based on Q3 results and current market conditions for both of our operating segments, we are revising our 2025 adjusted EBITDA guidance to a range of $1.155 billion to $1.175 billion, or a midpoint of $1.165 billion. This adjustment reflects the Q3 EBITDA results factored into our annual guide. Importantly, we anticipate any Q4 carryover effects in the field services or industrial services will be offset by our facility's performance, project pipeline, and PFAS opportunities. A long-term trend of PFAS remediation and reshoring creates substantial upside potential, with recent developments like our EPA incineration study further validating our strategic positioning. For the full year 2025, our revised adjusted EBITDA guidance will translate to our reporting segments as follows.

At our guidance midpoint, we now expect 2025 adjusted EBITDA in environmental services to increase by more than 5% from 2024. While recent economic turbulence has impacted some aspects of our business, we're optimistic about our future and ability to navigate the current landscape. SKSS is stabilizing effectively. We continue to expect full year 2025 adjusted EBITDA at the midpoint of our guidance to be $140 million. The combination of our operational improvements, CFO strategy, and initiatives that Mike outlined have established a stable foundation for this business. Within corporate, at the midpoint of our guide, we expect negative adjusted EBITDA to now be up 3% to 5% compared to 2024, driven by growth-related expenses, higher wages and benefits, and rising insurance costs. We continue implementing multiple cost-savings initiatives to partially offset these increases.

We are raising our full year adjusted free cash flow guidance to a midpoint of $475 million, based on year-to-date performance and favorable provisions passed in the U.S. Tax Act this summer. This represents more than 30% growth from 2024, underscoring our focus and ability to convert earnings into substantial free cash flow returns. While Q3 presented near-term challenges, our highest margin businesses continue to grow and demonstrate competitive strength. Our incinerators, landfills, and other permanent locations drove our profitable growth and supported our margin improvement. The slowdown in industrial services reflects deferred maintenance and projects that will return to market, positioning us well for recovery. Within field services, we remain confident in our prospects despite the absence of medium and large event work in the third quarter. SKSS appears to have leveled off, and we expect this segment to deliver greater consistency moving forward.

We look to finish the year strong and carry that momentum into 2026 and are excited about the many growth and margin increasing initiatives undertaken this year, which places us in a solid position for profitable growth as macro conditions improve and we execute on longer-term goals. With that, Christine, please open the call for questions.

Speaker 3

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 Tyler Brown with Raymond James. Please proceed with your question.

Hey, good morning, guys.

Hey, guys.

Speaker 0

Morning, Tyler.

Hey, you know it feels like there's a lot of puts and takes out there. The industrial malaise, I guess, continues to march on a bit. Eric Dugas, it looks like you brought the midpoint down, call it $15 million. If you had to bucket the culprits, would you say it was really the field and industrial shortfall? How big was the healthcare issue? You brought it up a few times. Was that one time, or is that a go-forward step up in cost?

Speaker 5

Sure, Tyler. In terms of the total takedown, the $15 million, a lot of that is reflected in our Q3 results. Industrial services being the most predominant piece of that. We estimate maybe $7 million. Field services, really just the lack of those medium and large projects that we've seen a good chunk of in earlier quarters, probably about $4 million. The healthcare and the environmental services segment is about $4 million and probably about $6 million overall to the entire company. I think you're absolutely right in terms of a lot of puts and takes. We still see really strong momentum and good volumes in more of our waste disposal-related businesses of technical services and SKE, and think those will perform quite strong here into Q4 and on into 2026. The last point on healthcare, Tyler, it is a trend I think a lot of companies are combating.

We have built-in increases into our Q4 guidance, and we're in the process of doing some things to make sure that we can offset some of the increases we're seeing there. Probably not entirely unusual, but certainly a higher cost than we would have liked here in Q3.

Speaker 2

Hey, Tyler. This is Mike.

Speaker 5

Hey, Mike.

Speaker 2

The one thing I'd add to what Eric said, we did have a fair amount of high-cost claims.

Speaker 5

Right.

Speaker 2

Now that's much higher than, let's say, averages for the past two or three years. Hard for me to say if that's the new normal. It doesn't feel that way, but as Eric said, we're trying to make sure we're changing some of our plans to make sure we cover off on that in 2026.

Okay, that's helpful. I appreciate that you guys aren't giving 2026 guidance, but conceptually speaking, should we think about EBITDA on a more consolidated basis, kind of flattening out year over year just into maybe the first part of 2026? It sounds like maybe, Eric Gerstenberg, you're not looking for an industrial pickup really until the spring turnaround season, or are there enough internal levers to kind of drive EBITDA growth even in the first half without a whole lot of economic help?

Speaker 0

Yeah, Tyler, I'll start. They certainly are not expecting a real rebound of industrial turnarounds until the spring. However, you know we're going to continue to grow our EBITDA across our waste collection businesses and our service businesses as well. We're looking at next year preliminary. We still have a budget process to go through, but 5% EBITDA growth, I mean, we're really still targeting that. We think we can do that based on the demonstration of cost-cutting initiatives and volume and pricing growth in those waste businesses.

Okay. That's extremely helpful. I do just want to come back to capital allocation, Mike and Eric. Obviously, you guys announced a very sizable organic growth project. I'm sure someone will go over all of that. There was another decent buyback in the quarter. Realistically, what should we be expecting on the M&A front? I mean, how does that pipeline look? Are you looking at bigger deals? Are you looking at smaller deals? Do you think you can get something across the line this year, or is that something maybe more into 2026? You know.

Speaker 2

Tyler, the answer to that question is yes. We are looking at larger deals. We're looking at smaller deals. I think that we obviously will talk about the SDA unit. Happy to go into that and maybe other projects we're thinking about. In the interim, we want to remain prudent. We want to remain disciplined like we have for the company's history, frankly. Certainly, in the past couple of years, we certainly try to be very thoughtful about it and make sure we're getting a good return on our shareholder investment. I think there's plenty of things out there, both large sizes publicly available and smaller things that are out there. We remain very active. In the interim, we did buy back some shares. I don't think that's a change in trends.

That's more like we saw opportunities there to take advantage of some market dislocation, and we took advantage of that. We bought back over $115 million worth this year. I think that was a good return on our shareholders' investment. We'll continue down that path. I don't think that's a change in strategy, but we see ourselves as a growth company. We see ourselves as an M&A company, and we'll continue to do things like that.

Okay. Perfect. Thanks, guys.

One follow-up too, Tyler. When you think about the 5% that Eric mentioned, obviously, budget processes, it's in that area code, and it's probably most of that's going to be in ES, with a little bit in SK and a little bad guy in corporate, I think, as I think about the piece parts of that.

Speaker 3

Our next question comes from the line of Noah Kaye with Oppenheimer. Please proceed with your question.

Thanks. Let's kind of continue along the capital allocation theme. We made some really nice progress this year on free cash flow conversion and free cash flow generation, as you talked about, Eric, you know with Kimble rolling off and the underlying growth. Mike, when you talked about potentially up to $500 million of organic investments, and obviously, this SDA investment might be part of that, can you give us some guardrails around where you want to convert free cash flow out to EBITDA within the business broadly over the next couple of years? Is there a baseline we should think about? I know it's a little bit past dependent on what kind of M&A you do, but just kind of try to give us a baseline level that we should be underwriting here.

Speaker 5

Sure. No. This is Eric Dugas, and I think you're absolutely right. The free cash flow generation has been fabulous this year. A lot of initiatives on that front. As we look out into the future, I think we're going to continue to target kind of that 40% free cash flow generation, 40% of EBITDA. I think there'll be pluses and minuses to that along the way. The minuses would be these accretive capital investments that we mentioned that'll be adjusted out of that, and we'll call that out and explain those clearly. Those are really growth projects that we see, and that'll be a detriment to the 40%. Normal baseline guardrails, I'd say 40% conversion and each year trying to grow up from that.

Speaker 2

I think the team under Eric's leadership has done a great job with cash collections. The organization's done a great job with cash collections, managing our spend, and you really see it in the margin improvement. That has really been helpful trying to get to that 40% and hopefully beat that over the next few years.

Okay. Thanks. Just so we're clear, you do intend to formally adjust this SDA investment out of free cash flow because that was not the case with Kimble, right? Is that kind of the practice going forward that these extraordinary organic investments would be excluded?

Speaker 5

Yes, you got it, Noah.

Okay. To double-click on this specific investment, I think just help us understand some of the key assumptions you made in underwriting this. You talked about the six to seven-year payback. Obviously, we've seen the value of base oils fluctuate a lot over the company's history. What is it sort of dependent on to hit those target returns from a commodity value, if at all?

Speaker 0

Yeah, Noah, this is Eric. I'll start. You know it's really a great investment for us. It's a bolt-on technology out at our East Chicago refinery, and it's upgrading a product that we already produce called VTAE, a vacuum tower asphalt extract. It's moving it up the value chain by implementing this technology and taking over 30 million gallons of what we already generate and sell and creating it at a better market value. There is certainly some fluctuations in the price of that 600N product. It doesn't fluctuate as much as base oil. It's used in heavy-duty applications, so it's a more stable price look at when we sell that product. We're excited about that. Overall, though, it's just a straight baseline upgrade of that 30 million gallons into a new arena, bringing that up the value chain.

Proven technology with a hydrotreater back down the back end, and we're excited about that incremental $30 to $40 million of EBITDA once we start up in 2028.

Speaker 2

Noah, one thing I'd add to that is that, you know as Eric said, we're using kind of the byproduct of the re-refining processes, VTAE, as Eric mentioned, and using that in this process to make a higher-value product. There's also that we're not, this won't fill the, that 30 million gallons won't fill the new product. We'll have an opportunity to grow from there. We're not assuming we get any other VTAE from any other third parties, which that would be upside to the model. The reason why I bring that up just as an example is that I think that as we built this model up, it came up with the $30 million, $30 to $40 million that we spoke of in the live call. I think there's plenty of upside to that model.

I think that we, I thought Eric and I, when we went through the analysis with the team, you know we're very reasonable in our assumptions as far as how we build it, how we think about the price of VTAE, how we think about the price of 600N, how we think about the cost of building the plant, how we think about the timeline of building the plant. I mean, we thought through that, we've had many, many meetings on this, you know with the team and with the board to ensure that we're doing this in a thoughtful way, so we continue to do what we've done with every large project: on time, on budget, hit the numbers we say we're going to hit. Simple as that.

If I could sneak one more in, I think you were clear now on sort of the delta versus expectations in industrial and field services. I guess just from a forecasting perspective, I know usually IS tends to gather steam into September, and October is kind of the big month. With that particular line of business, was it just the case that these deferrals really started to manifest late in the quarter and kind of continued through October here, and that's what we're seeing? Is there some way to think about normal seasonality in the future perhaps being different at all than what we've seen in the past?

Speaker 0

Yeah, Noah, I'll begin. This is Eric. When you look at kind of what occurred in the quarter, our turnarounds have been, the number of count of turnarounds has been pretty stable. There's been some pushes, but overall, when we get into working for the turnarounds at our customer sites, the scope of the turnaround ends up being a little bit less than what we originally quoted or scoped with that customer. They really wanted to get the units cleaned and back online as quickly as possible. As we proceed into the fourth quarter, we took that into our guidance for the fourth quarter. We're still having turnarounds here, as you mentioned, as we flow into October here, and that's solid. We really didn't, we pared back a little bit of what we expected based on the third quarter results.

We truly expect, as things continue to stabilize, that as we get into 2026, we're not losing turnarounds to any competition. We're performing all the turnarounds, and we expect it to have a little bit better growth path as the economy recovers a little bit, particularly in the chemical and refinery sector.

Speaker 5

Yeah, I think just to add one thing to what Eric said, one thing that we can see in our P&Ls and hear around the business is the business is we're setting ourselves up really well for when things loosen up and come back. When I look at even the industrial services P&L, Noah, I can see much better labor management. I can see labor as a percentage of revenue in a better spot. I can see overtime coming down as a percentage of revenue. I can see us using less subcontractors and internalizing more work.

Despite the financial results here in Q3 and what we believe into Q4, which is really impacted by the cost pressures, particularly in chemical and refinery, as we said, that those customers are seeing, we set ourselves up really well for when things change in the future because I do think those investments, particularly on the labor front and other areas, we should reap benefits of that, hopefully next year, but definitely in coming years.

Okay, thank you very much.

Speaker 0

Thanks, Noah.

Speaker 3

Our next question comes from the line of James Schumm with TD Cowen. Please proceed with your question.

Hey, good morning, guys.

Speaker 5

Hi, Jim.

Hey, how's it going? Maybe just help me understand. I'm sure other people don't know the 600N base oil market very well. Can you just help us with what is the market pricing right now? What is peak to trough pricing for this market? You know, what's the total demand? Just how should we think about this? What's the total demand this year? What was it five years ago? Is demand expected to grow? Why? What's the end market? Just help us understand. This is a fairly big investment for you guys, so just want to understand this market a little better.

Speaker 2

Yeah, Jim. We have an hour on the call, so we're not going to take an hour trying to explain that 600N base oil market. I will tell you that it is used primarily in industrial applications, which tend to be a little more resilient, in gear oils, heavy-duty diesel engines, hydraulic oils. It's not as sensitive to electrification as passenger car engine oils would have. We've had a lot of customers express interest in this high value of buying this high 600N oil, and we've kind of worked out, we've kind of given them samples of what we provided, and they seem like there's a very good receptivity in the marketplace for this base oil. When you think about the market, we'd be a very, very small player in a very large market.

It tends to trend a little bit with Group 2 base oil, which has been down over the past couple of three years, but it's at a much higher premium. It's been a consistent dollar premium to what we're thinking in the Group 2 base oil. Most of the country has to import 600N today, including from Korea and from other places. It's hard to kind of put a finger on what's it going to be three years from now. We're assuming that the trend we see of some decreases, we're assuming decreases over the modeling period. We're not expecting this plant to get turned down until 2028, so we do have some time there. I do think that we've cut this way, we've cut this seven different ways, so let's assume that the Group 600N pricing is down.

I think there's other levers out there, including taking additional VTAE from other customers to help offset that. I think the model that we put forth is a very balanced model. Hard to predict what happens to base oil, hard to predict what happens to 600N oil, but we think we have enough levers in the actual model that even if that comes up a little softer than we expect, there's other levers we can pull to help offset that to kind of get to where we need to get to. Again, we've consistently put together large-scale construction projects that are on time and on budget that hit or exceed the EBITDA numbers that we have quoted. I believe this is no different.

Mike, thanks for that. I just want to clarify. It sounded like you said, were you saying the consumption, you're expecting the consumption to decrease over the next couple of years of this oil?

It is more about we have assumed pricing goes down a little bit in the modeling period, not the demand per se. The point I think that maybe I misspoke is that when we produce this 600N base oil, we'd still be a very small player in a very big 600N market, I guess is what I'm trying to say.

Okay. All right. Thanks for that. Maybe switching over to the SKSS guidance, my recollection was just that it was sort of the $140 million was the number. You guys just referenced a midpoint. What is, just so everybody's clear, like what is the range for SKSS this year? You know, what's the confidence level in hitting that $140 million midpoint?

Speaker 5

Jim, Eric here. I'd say that as we sit here today, we're very confident in that $140 million mark. To range-bound that, I hesitate to do so. You might have to force me into a range. Maybe it's a few million on either side. The way the business is performing right now, particularly around our initiatives of CFO and our ability to continue to drive CFO pricing due to market conditions, the catalyst of that is obviously the high-level service we continue to provide and the fact that we haven't lost customers. That really is the area that the team has done excellent on this year, and that gives us the confidence that we'll be able to meet that $140 million of EBITDA. Hopefully, that answers your question. Range-bound, we haven't really looked at it that way, but high confidence in that number right now.

Speaker 2

We feel the $140 is a new low-water mark. We grow from there.

Okay. Great. Thanks a lot, guys. Appreciate it.

Speaker 0

Thank you.

Speaker 3

Our next question comes from the line of David Manthey with Baird. Please proceed with your question.

Good morning, everyone. My first question is on incinerator pricing. I didn't see a number in the slide deck. Could you talk about what that was? I know you gave the data specifically in the 10-Q later today, but could you talk about specific growth rates for industrial services, field services, Safety-Kleen Environmental, and technical services?

Speaker 5

Sure. David, it's Eric. I'll take that, and I'm sure the guys will add on. In terms of incineration pricing, there's pockets, but over the entire population, we're looking at mid-single digits again. I think pretty consistent with prior quarters. In terms of the different sub-business lines or business units underneath ES, you'll find our technical services business, really great revenue growth there, some nice volumes, good pricing, but some of our, as we alluded to in the prepared comments, kind of waste remediation projects, those types of things really saw a really strong quarter. You're looking at double-digit growth there. Safety-Kleen branch continues to do really well. Again, some nice initiatives around our back services and pricing, mostly leading to about an 8% growth. We mentioned field services, not overly concerned here.

You'll see, I believe, about a 9% drop in revenue there, maybe a little bit higher, maybe 11% now that I'm thinking it through. Really, it's those projects that didn't come through, kind of medium-large-scale projects. We're not overly concerned about that right now. These things can be a little episodic. When you look at that business over the longer term of the last few years, you're going to see some nice organic growth there. Not concerned with that. Industrial services, as Eric mentioned earlier, about, I think, a 3% or 4% decline kind of year on year there, largely related to the turnaround services.

That's great. Thank you. I know we've talked a lot about capital allocation here this morning, but does the investment you're making in this SDA unit say anything about your M&A outlook? I was also wondering that, you know, since you put out these Vision 2027 goals, we're a little bit past halftime here. I think HydroChem was already in that 2022 starting point, and you've added Thompson and HEPACO, basically. Could you maybe talk about how things have played out since that update and kind of how you're thinking about the market in general?

Speaker 2

Yeah, Dave, this is Mike, and I'm sure Eric and Eric have some thoughts on this as well. The SDA unit has no reflection, no reflection on our M&A appetite. That's been an investment that we've talked about internally for a few years, frankly. This is more like, "Hey, we got the board approval. We're starting to spend money on it. We should talk about it. It's a material asset that we need to make sure that our investors understand and we track against that." That's really the driver of the discussion of the SDA unit. The other items that are out there, the $500 million, those are other things we're thinking about as we think about where we go next with this. Things like adding more hubs or making some investments in other incineration capacity. These are not new topics that we've talked about many times before.

It's more like just trying to say, "Hey, look, that's another good use of capital that has great, awesome returns," as you saw from the math that we're doing on this. That's just a good use of capital. We're going to have a billion dollars in cash by the end of the year. We're going to generate another, you know, high $400 million of cash flows in 2026. I mean, we're going to have plenty of cash to do a variety of different things, including good M&A. As Eric mentioned in Eric Dugas' part in his remarks, the leverage market is very low. Our appetite for debt from our debt investors is very strong. It was way oversubscribed. We got the rates.

Eric and the team did a great job of pushing that debt out for a number of years, and it shows the appetite that the marketplace has for our high-quality debt because it's a high-quality asset. It doesn't change one little bit. When thinking about Vision 2027, and that was always a vision, just what it was. It was a vision of where we want to take the company. We want to be disciplined about capital, and we've been thoughtful about M&A, and we'll continue to be thoughtful. There are opportunities out there that are big and small, and we'll continue to capitalize on. I'm of the view that nothing's really changed with that announcement, with the SDA announcement.

I just want to make sure that you understand that this is more of kind of a timing issue that we've been talking about for a number of years, and we wanted to share it with the investing public because it was getting to be a material number.

Got it. Thank you.

Thank you, David.

Speaker 3

Our next question comes from the line of Larry Solow with CJS Securities. Please proceed with your question.

Great. Thanks. Good morning, everybody. First question, just on the guidance again, not to beat a dead horse, but the miss in the quarter, you guys clearly outlined that a little bit of industrial, a little bit of field services. It sounds like you've kind of, you know, you've bucketed that miss out in the quarter, and it's Q cards out for the year. Do we bounce back? Were you assuming a little bit of a better Q3 than you are going forward already? I'm just kind of curious if turnarounds seem to be a little bit less even than expected. Do we, you know, what gives you the confidence that we kind of get back to where you thought we were going to be in Q4? Not to get into the nitty-gritty of the details, but if you get where I'm going with that question.

Speaker 5

Certainly, certainly, Larry. As we digested kind of our Q3 results and then projected our thoughts on Q4 and the guide there, I think one thing that gives us, makes it, allows us to feel really good about Q4 is, I mentioned a moment ago, and I think in response to Dave's question, kind of the growth that we're seeing in technical services. That 12% revenue growth, more projects coming our way, continued good waste volumes. We're continuing to see, because of our diverse customer base, although there's softness in certain verticals that we mentioned around chemical and refinery, we continue to increase volumes by collecting from other customers and bringing into the network. That part of the business, we see a lot of strength. I think the other thing that, pleasantly, we saw in Q3 here that I mentioned a moment ago is our margin expansion, right?

I mean, as I mentioned in my marks, the steadfast commitment to continuing to drive margins and generate free cash flows. That gives us comfort, quite frankly, as we move into Q4 and some of those more waste disposal type businesses. Certainly, the services business, as Eric alluded to, industrial services, we're not forecasting any large pickups there. Field services, again, like industrial services, a lot of good margin accretion there that we're seeing, but that can be episodic. Both medium and large jobs will come back. It's just a question of when and where, quite frankly.

Speaker 2

Okay. I would say one more thing, Larry, to that end. I'd say that all our LOBs, all the businesses that make up SK, that make up environmental services, had good margin accretion year over year. When you think about from where we were a year ago, where we were concerned about SK assets, we stabilized that business. We were concerned about free cash flow conversion. We're going to have great free cash flow conversion this year. We're going to continue to grow. When you think about EBITDA margins and our marked 30% margins, on ES, that continues on unabated. It's 14 straight quarters of year-over-year margin growth. I feel like we're kind of hitting all our strides. Look, it's a myth. I get that. I get the point. It really is, I think, very, very temporary, as I said in my prepared remarks.

Absolutely. No, absolutely. I appreciate it. I'm kind of looking at how this myth, you know, how you put this on a go-forward basis as opposed to just the myth. I just want to make sure that going forward, obviously, it's only one quarter, but you know, you threw out, we appreciate a little bit of color for next year in that 5% number, which I'm sure could move around. That's just kind of a baseline. We get all that. I just wanted to make sure that you're not, it doesn't sound like you're building in a rapid improvement in industrial or field services. I just was kind of trying to say, if you weren't building that in in this quarter, then why do we have the myth? I get the extra color really does help.

Just shifting gears real fast, just on PFAS, it sounds like things continue to go well internally. To get a real acceleration, obviously, 20, 25% growth is great, but I think your Q is growing a lot faster than that. To translate that into actual sales, right, we'll need some governmental, some kind of legislation or something, I guess, or maybe even the National Defense Authorization Act or something. I guess we're just in a holding period on that. Obviously, government shutdown doesn't help, but any further, any color on that?

Speaker 0

Yeah, Larry, this is Eric. Obviously, getting the results of our tests that we did on our thermal units out and exposed and published by the EPA was a great milestone for us. The activity in the market has been extremely strong and became even stronger when that published results came out. The level of activity of what we've seen, how our pipeline has been growing, we've continuously talked about how our pipeline has been growing 15% to 20% quarter over quarter. It continues to do that. It feels like we even got more of a bump. We're not really thinking that any major change in regulation has to happen to continue to drive that growth and even accelerate it. We're pretty bullish on how our prospects are panning out and the opportunities in front of us. We feel pretty good about it. We think it's just going to accelerate.

As far as the Department of Defense lifting their moratorium, that will be just another accelerator for us. We're optimistic about that as well.

Great. I appreciate it, Eric. Thanks.

Sure.

Speaker 3

Our next question comes from the line of James Ricchiuti with Needham & Company. Please proceed with your question.

Thanks. Good morning. Outside of chemical, the refinery markets, are you seeing any choppiness, any other signs of weakness in some of the broad end markets that you guys service?

Speaker 0

James, Eric, this is, I'll begin. No, we haven't. We really, as evidenced by our results in Q3, our volumes have been growing across our waste businesses. It really strong through Q3. We're beginning Q4 very strong. Where there's been this pullback a little around IS spending, around turnarounds and chemical spending, around turnarounds on the waste side of the business, it's been strong. Volumes, price, into the network and project growth with PFAS, but other projects happening across the board. We feel pretty good about what we've seen from manufacturing, from retail, from all the whole list of other verticals that we service. That's really, you know, very resilient in our waste collection business because of all the diverse verticals that we service. Everybody's generating hazardous waste and what they're making out there these days.

We're certainly a beneficiary of driving those volumes into our network, which we continue to see, and projects are a lift.

Okay. Maybe just turning to Kimble, and I know you touched on it a little bit, but you know, how should we be thinking about how the scale-up of Kimble is going, maybe discussions you're having with customers? You've talked in the past about better network efficiencies that come as a result of this and potentially some lift to margins. Just talk to us about maybe how Kimble plays out in 2026.

Yeah. In the third quarter of this year, the new Kimble incinerator, train two unit, processed over 10,000 tons. When we came into the year, our plan was to burn an incremental 28,000 tons in our network. We're doing that with the Kimble expansion. It's been great. The ramp-up has been solid. Typical startup type things. We expect that tonnage to continue to grow as we've laid out. Everything that we see continues to see a path to hit our ramp-up objectives of that new unit going into 2026. The network efficiencies are alive and well. The routing of how we manage our customers' waste into our units, the transportation efficiencies, those are showing up. We're really bullish about how Kimble has helped the network in so many ways.

As far as speaking with our customers, the trend continues on how our network provides them a real security in being able to have multiple units service their needs and well-positioned geographically with transportation efficiencies built on. When we even think about what's going on with captives, we talk a lot about that, where the interest of what we have now continues to be strong. Those captives are our customers. As we've mentioned, our relationships with them are strong as they continue to evaluate their cost positions. We have active discussions. Adding Kimble to our network continues to prove to them and those large generators of hazardous waste that we have the network and the capabilities to supply their needs.

Got it. Last question, just on M&A, and again, you touched on this, but is valuations, or is that the main challenge with respect to the potential for larger opportunities that might be out there? Just wondering how we might think about the pipeline for larger deals.

Speaker 2

When you think about larger deals, Jim, this is Mike. Certainly, valuations have gone up from where they were. The whole industry, including our stock, has experienced some valuation appreciation, which is well deserved. It probably could go further. I think that we have the best opportunity for the larger deal to provide the most amount of synergies that are out there, and that would provide, when you look at it, a post-synergy basis on multiple levels that are very reasonable and very value accretive to our shareholders. The answer to your question is that we're trying to stay in our swim lane. We look at deals all the time. Price is certainly part of the discussion, no doubt about it. We're trying to be thoughtful and make sure we get a good return.

I think on some of the deals we look at, synergy components are a big part of it, and I think we can provide a fair amount of synergy for the larger deals we're looking at.

Thanks.

Speaker 3

Our next question comes from the line of Tobey Sommer with Truist. Please proceed with your question.

Thanks. I'm going to ask another capital allocation question, but maybe from a broader perspective over the next, you know, two years plus. If you look back at your investor day, you know, two and a half years ago, you have about $3.4 billion you thought at the time you'd incrementally be able to deploy on acquisitions. Now we've got $500 million internal investments that you cited, and who knows, maybe there's even more. How does the, if you could compare and contrast sort of today's capital allocation profile between acquisitions, share repurchase, and internal investments versus what you thought two and a half years ago, what are the differences in that mix of spend?

Speaker 2

Tobey, this is Mike. I'll start, and Eric and Eric can certainly chime in. I think that there's been really no change in our deployment of capital when you think about internal investments or buybacks. I think those two, when you think about the four legs of the stool, the fourth being debt repayments, I think that we have maintained a consistent posture on both capital out, internal growth projects like the Kimble incinerator, now like the SDA unit, or buybacks. We've produced a steady growth of buybacks this year, maybe a little higher than normal, but we buy back the flow plus depending on the market that's out there. We still have $350 plus million of availability under our current authorization. When I think about M&A, M&A is lumpy. It takes two to tango, and we got to make sure that we're getting a good return to our investments.

We never said it was going to be a straight line to get to that level of growth. We always said that it was going to be, this is kind of we wanted to message into the street that this was our, Eric and my intent to go do M&A, but it's got to make financial sense. As such, there have been deals that we got to a point where we stopped or deals that didn't fit very well that we talked to the board about a couple, three times that didn't fit well that we decided not to go forward on. These are all the process of being very cash disciplined, trying to make sure we get a good return. I think that our long-term shareholders are happy about it.

If I could ask another question about healthcare expense, do you anticipate healthcare expense growth increasing or accelerating again next year? Some of the surveys out of the big healthcare consulting firms suggest that next year is going to be even tougher.

Speaker 5

Yeah, Tobey, it's Eric here. I think difficult to project, kind of read the same news you do. I think at a gross level, you know, certainly, I don't think one could say that healthcare costs in general won't increase. However, I think some of the reasons for our increase this year that Mike mentioned around, you know, the preponderance of high-cost claims, the frequency of those this year just seems to be higher than normal. I don't necessarily see that impact continuing. It could, but I think the law of kind of long-term averages would get that back down to a normal level. In short, yes, they'll continue to increase. I don't think they'll increase at the same level that we saw this year at the gross level.

However, as I mentioned earlier, we are doing some things internally to try to mitigate the increase, and I think it will mitigate the increase in healthcare costs going forward.

Thank you.

Speaker 3

Mr. Gerstenberg, we have no further questions at this time. I'd like to turn the floor back over to you for closing comments.

Speaker 0

Thanks, Christine, and thanks everyone for joining us today. Our next investor event will be at the Baird Industrial Conference in Chicago in a few weeks, followed by a Stevens event that Jim will be presenting at in Nashville. Also, have a great day today. Keep it safe and enjoy the upcoming holiday season. Thank you.

Speaker 3

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.