Q3 2024 Earnings Summary
- Robust Environmental Services (ES) Performance: The company’s ES segment benefits from low customer churn and strong demand, which supports pricing power and margin expansion in its core offerings.
- High-Growth PFAS Opportunity: The PFAS business is already trending at an $80–$90 million run rate, with expectations to reach around $100 million, supported by a robust pipeline amid favorable regulatory tailwinds.
- Operational Synergies and Capacity Expansion: Accelerated integration of acquisitions like HEPACO and capital investments in new capacity (e.g., Kimball incinerator) are ahead of schedule, setting the stage for improved operating margins and long-term earnings growth.
- Softening Demand & Pricing Pressure in SKSS: Q3 results revealed that SKSS experienced softer demand and declining base oil pricing, leading to a shortfall of about $11 million versus expectations, indicating that market pricing dynamics could continue to pressure margins.
- Excess Inventory Impact: There is a significant buildup of inventories in the SKSS segment, partly due to the idled California re-refinery, which may depress margins in Q4 and require until 2025 to normalize, thereby delaying potential margin recovery.
- Underperforming Industrial Services: The Industrial Services segment is facing headwinds as refineries are reducing the scope and size of turnaround work amid weaker market conditions, which could lead to further margin compression and lower-than-expected EBITDA growth.
-
SKSS EBITDA Outlook
Q: Will SKSS reach $200M EBITDA?
A: Management noted that returning to $200 million EBITDA is an aggressive target; current guidance centers around $150 million, given softer base oil pricing and cost pressures. They are taking steps through pricing and production adjustments, with only modest improvements expected in 2025. -
Q4 Margin Drivers
Q: Is SKSS weakness affecting Q4 margins?
A: Management explained that while the core Environmental Services business performed strongly, weakness in SKSS—due to declining base oil demand and pricing—dragged down overall margins, driving the guidance revision for Q4. -
Incinerator Ramp-Up
Q: What initial EBITDA will Kimball provide?
A: The Kimball incinerator is targeting a 30,000-ton throughput next year, expected to contribute between $8 million to $12 million initially, with plans to scale as capacity increases over the next few years. -
Cash Flow Improvement
Q: Will cash flows improve in 2025?
A: Management is optimistic about 2025, expecting stronger cash flows driven by lower CapEx at projects like Kimball and Baltimore, resolution of AR delays, and a reduction in excess inventory levels. -
PFAS Revenue Guidance
Q: What PFAS revenue run rate is anticipated?
A: The PFAS business is trending towards an $80–90 million run rate, with expectations to finish the year around $100 million, indicating steady progress in this emerging market. -
Inflation & Pricing
Q: What inflation pressures are you seeing?
A: Management highlighted labor inflation at around 3–4% and noted a 6% price increase in incineration services, reflecting ongoing initiatives to counteract inflationary pressures across the P&L. -
Unbilled AR Issues
Q: How will billing delays be corrected?
A: Billing delays from the AR integration, mainly seen in July–August, are being addressed with dedicated resources, and management expects these issues to normalize by 2025. -
HEPACO Integration
Q: Are HEPACO synergies meeting expectations?
A: The integration of HEPACO is ahead of schedule, with quicker-than-anticipated synergies and larger job wins reinforcing the positive impact on the combined business. -
Re-Refinery Strategy
Q: What is the plan for the California refinery?
A: The California re-refinery is idled to reduce high production costs; it still functions as a distribution centre with no additional exit or remediation costs, aiding in inventory normalization. -
Spot Pricing Discounts
Q: Why are discounts on Group II pricing evident?
A: Management noted a disconnect between published and actual market spot prices, with both contracted and spot customers receiving discounts due to oversupply pressures in the base oil market.