Greetings, and welcome to the Clean Harbors, Inc First Quarter 2020 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, Inc. Thank you. Mr. McDonald you may begin.

Thank you, Christine, and good morning everyone. With me on today's call are Chairman, President and Chief Executive Officer, Alan S. McKim; EVP and Chief Financial Officer, Mike Battles; and SVP of Investor Relations, Jim Buckley. Slides for today's call are posted on our 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, April 29, 2020. Information on potential factors and risks that could affect our actual results of operations 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 in today's call other than through filings made concerning this reporting period. In addition, today's discussion will include references to non-GAAP measures. Clean Harbors believes that such information provides an additional measurement and consistent historical comparison of its performance. Reconciliations of non-GAAP 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. And now, I'd like to turn the call over to our CEO, Alan McKim. Alan?

Thanks, Michael. Good morning everyone. Thank you for joining us. Starting on Slide 3, before discussing our Q1 results, I'd like to address the Coronavirus pandemic and how we're responding to it. Obviously, the outbreak has created a healthcare crisis and caused economic disruption around the globe, and I hope that all of you and your families are staying safe. Here at Clean Harbors, the safety of our employees is part of our culture and the top priority during this pandemic. As an essential services provider with teams on the frontlines of the COVID-19 crisis, we have instituted rigorous safety protocols and work closely with suppliers to make sure we have the necessary equipment to protect our employees. During the crisis, our workforce has remained out in the field and at our plants supporting our customers' needs across North America, and I would like to acknowledge their hard work and dedication. The workforce representing critical administrative functions has supported our field teams from home, and the strength of our systems has allowed that transition to be virtually seamless. Overall, the pandemic had a limited impact on our Q1 performance, but its effects worsened towards the end of the quarter with the commencement of more shelter-in-place orders in the US and Canada. We expect the virus to impede our business in the second quarter, particularly within Safety-Kleen. In addition to limited driving and business activity across North America, Safety-Kleen also has been affected by the shop downturn and the value of base oil. In short, we are faced with some difficult near-term market conditions, and we are taking significant actions in response. Let me touch on some of those actions. Starting with alignment of our cost structure with a demand environment, we are rightsizing our workforce through furloughs and other reductions, and we have implemented a non-billable hiring and wage freeze, and we've restricted all travel. We've also gone back to many of our vendors and suppliers to negotiate for savings or improved payment terms. In addition, we've temporarily shuttered nearly half of our re-refining capacity to reflect the current demand for base oil as well as the likelihood of less available used motor oil in Q2 and beyond. From a liquidity perspective, we drew down $150 million on our revolver to strengthen our balance sheet in the event that the crisis worsens. We have reset our net CapEx spend plans for 2020 and we've lowered our expected spend by more than $50 million to preserve capital and support our free cash flow for the year. As noted in this morning's earnings release, given current market uncertainty, we're withdrawing our annual guidance for 2020. That said, I believe our strong balance sheet leaves us well positioned to succeed. Turning to Q1 financials on Slide 4, revenues grew 10% from a year ago as both operating segments recorded solid growth. At the same time, our adjusted EBITDA increased to a record $122.6 million, driven by our mix of high value waste streams and high utilization, augmented by projects and emergency response work. Our adjusted EBITDA margin increased 130 basis points to 14.3%. Looking at our segment results, beginning on Slide 5, Environmental Services revenue grew 11% based on contributions from our facilities network and Field Services group, and aided by warmer weather nearly all quarter. Adjusted EBITDA growth of 22% was driven by business mix, disposal volumes, and emergency response revenue. Emergency response work totaled $21 million, representing COVID-19 decontamination work and a cleanup of a chemical plant fire. Our disposal facilities reported impressive volumes this quarter, as incinerator utilization increased 86% and landfill tonnage grew 39%. Our average price per pound for incineration in Q1 was up 11%, reflecting the record level of high margin direct burn streams that we collected. Overall, another terrific quarter for our environmental service segment. Moving to Slide 6, Safety-Kleen revenue was up 8%, primarily due to growth in the SK Oil business. Adjusted EBITDA and margin improved on lower SK Oil transportation costs and higher re-refining production compared with a year ago when volumes were disrupted by frozen rivers and flooding. Within the SK branch business, core services performed well. While parts washer services were flat with the prior year, we saw a collection increase slightly to 55 million gallons, with blended products accounting for 25% of volume in the quarter and our direct volume was 7%. The first quarter began with positive signs that IMO 2020 would enable us to expand; our refining spread for high sulfur fuel oil values had fallen and base oil prices were up in early January, but with the oil shock sparked by the global outbreak of the coronavirus, IMO 2020 has largely been sidelined and base oil prices have fallen by a dollar a gallon. We entered Q2 with significant pressure on our re-refining spread. In this environment, the value of used motor oil is under pressure. In response to the current market conditions, we've significantly raised our charge for oil program. Driving in the U.S. and Canada needs to normalize before our spread and lubricant demand can rebound and when we see conditions improve, we'll consider reopening our closed re-refineries. Turning to Slide 7, given the current environment, our capital allocation strategy is critical as ever. As I mentioned earlier, we are reducing our planned net CapEx by more than $50 million. We divested two businesses in Western Canada during the first quarter, as we continued to steadily shrink our direct exposure to energy. Since we began executing our divestiture program several years ago, we've sold seven businesses for approximately $120 million in proceeds. In terms of M&A, we're not likely to be active in the near term. Long-term, we believe we will emerge from this market downturn stronger both financially and operationally than some of our peers, which will allow us to be opportunistic. For our buyback program, we will likely hold off until we are certain that the domestic economy is on a clear path to recovery. In addition, we'll look to repay the $150 million on the revolver as soon as this crisis shows signs of nearing its end. Looking ahead to our segments, although we have seen some cancellations and project delays due to COVID-19, we expect our environmental service segments to weather the current downturn well. We expect our decontamination work and growing volumes of infectious waste to help offset what would certainly be a larger decline. Within Safety-Kleen, we expect both our branch business and our SK Oil to be hit relatively hard, particularly in Q2, as stay-at-home orders greatly reduce vehicle travel and generate less used motor oil. Our SK branch business should rebound once shelter-in-place mandates are lifted and low gasoline prices encourage a surge in driving. In SK Oil, our refining spread has contracted with a drop in crude oil prices, and we have aggressively increased our charge for oil pricing, but volumes are off and near-term demand for base oil has declined. In summary, our Q1 results demonstrated the strength of our business model, the value of our assets in our frontline role in emergency response, our market leadership, financial liquidity, and positive free cash flow will enable us to navigate this global crisis. And with that, let me turn it over to Mike Battles. Mike?

Thank you, Alan, and good morning everyone. Let me echo Alan’s comments about the outstanding work of our team and everyone on the frontlines of the crisis. The unprecedented events we've experienced in just a few weeks have deepened our appreciation for the professionals, especially healthcare workers, who put themselves at risk every day to help those in need. Turning to Slide 9 in our income statement, as Alan indicated, we delivered record first quarter results. Revenue grew nearly $78 million while adjusted EBITDA grew by nearly $21 million. This reflects the mix of business we achieved in the quarter, project work and favorable weather. From a gross profit perspective, we saw a sharp increase in both absolute dollars and on a percentage basis due to higher utilization, pricing and our favorable comparison with the prior year. Our gross margin increased by 160 basis points from a year ago. SG&A expenses were up $14.5 million in the quarter due to the higher revenue, investments in our employees, and some one-time items from last year. As we move forward, we are focusing much of our cost reduction efforts in this area to bring expenses in line with our revenue. Depreciation and amortization in Q1 was down slightly to $47.5 million. We completed two small bolt-on acquisitions in 2019 while also divesting several businesses. For 2020, we expect depreciation and amortization in the range of $285 million to $295 million, which is slightly lower than last year. Income from operations increased 92% to $45.5 million, a first-quarter record reflecting the combination of our revenue growth and improved gross profit. On a GAAP basis, EPS was $0.21 in Q1 versus $0.02 a year ago. Our adjusted EPS was $0.28. Turning to the balance sheet on Slide 10. As Alan mentioned, we drew $150 million on our revolver during the first quarter, which increased our cash and short-term marketable securities to $494.3 million at quarter-end. We saw reasonable accounts receivable collections late in March, which led to a healthy cash balance. Our strong liquidity position further protects our company and adds financial flexibility should we need it. Our balance sheet remains in good shape; current and long-term debt obligations at quarter-end rose to $1.7 billion, reflecting the drawdown on our revolver. Our weighted average cost of debt is now 4.3% with a healthy mix of fixed and variable debt. Leverage on a net debt basis was 2.2 times for the trailing 12 months ended March 31st. Looking at our most recent cash balance from yesterday, our cash remains essentially flat from where we ended Q1. The team has done a nice job maintaining its focus on collections and managing our spend. Turning to cash flows on Slide 11, cash from operations in Q1 was up slightly at $33.7 million. CapEx, net of disposals and the purchase of our headquarters, was $59.9 million, up from a year ago, resulting in adjusted free cash flow in the quarter of a negative $26.2 million, which is consistent with prior year and our expectations. For the year, we are now targeting CapEx, net of disposals and purchase of our headquarters, in a range of $140 million to $160 million. During the quarter, we repurchased approximately 300,000 shares of our stock, at an average price of $57.41 a share for a total of $17.3 million. As Alan mentioned, we will be cautious in our approach to buybacks until we see evidence that markets are well into their recovery stage. As Alan also noted, given the uncertain market environment, we are withdrawing our 2020 guidance. We're hopeful we'll be able to reinstate guidance with our Q2 earnings announcement, provided markets have stabilized. In summary, Q1 was a strong quarter highlighted by several financial records, including adjusted EBITDA. Were it not for COVID-19, our Q1 results would have positioned us for a fourth straight year of profitable growth. We have taken significant actions in response to that pandemic and are prepared to take additional steps in the event of a prolonged recovery. We are focused on managing costs carefully and pursuing new waste streams to feed our landfills and incinerators. With that, Christine, please open up the call for questions.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Tyler Brown with Raymond James. Please proceed with your question.

Hey Mike. Just real quick, can you parse the $21 million of revenue that came from the chemical plant and the decontamination work just how much for each?

Yes, it is about $10 million for the decontamination work, Tyler, and about $11 million for the chemical fire cleanup.

Okay. And would you expect both of those to continue in Q2 or is the chemical plant cleanup largely complete?

The chemical plant cleanup is essentially complete, the decontamination work will continue into Q2 and beyond.

Okay. And then, Alan, I know these are just unprecedented times, but in the Safety-Kleen branch business, I mean, how should we think about revenues there versus the 50% drop in gas station pump volumes that I think we're seeing here in April? I mean, is that a really good KPI to be watching for the Safety-Kleen branch sales? I assume that that correlates very highly with vehicle miles driven?

No, I think, as you know, a lot of the Safety-Kleen businesses is subscription-based where we perform repetitive services, and we're seeing about a 25% to 30% downturn because of the closures. And so, I think that would probably be a good number to think about for the second quarter for the Safety-Kleen branch side of the business.

Okay. And then quickly on the SK Oil side. So Alan, if I recall back in 2015, you guys talked about having a two-month lag on your used motor oil inventory and that precipitous drop in base oil prices or that precipitous drop makes it really difficult to manage the spread as you kind of flush out those inventories out of the system. So, I mean, if we couple together the shuttering of half the capacity, it seems like you're going to have an inventory lag issue. Is it reasonable to assume that SK Oil, that piece of SK loses money in Q2? I mean, based on my old model, I think you've lost money in clean performance back in Q1 of 2015.

That's not our expectation right now; our forecasts, or at least our discussions certainly indicate that we'll be making money in the second quarter, as a result of all the effort that we're putting in on both the frontend collection side, as well as going back to our suppliers on our additive side and some of the other costs that go into that business. So, we are not expecting to lose money in SK Oil in the second quarter.

Okay. That's extremely good to hear. And then maybe my last one, Mike, was there an incentive comp accrued in the quarter, and if so, what percent of normal?

Yes, Tyler, it was about a $7 million advantage versus our forecast. So that is, in the $122 million for the quarter; there's probably a $7 million reversal of a run rate base. Most of it's in SG&A, some of it's in COGS, depending on the person involved because of the targets being much lower. One point I want to mention before we get into the call is that, in the script I read, depreciation for Q1 was down slightly. It's down slightly to $74.5 million. I misspoke and said a wrong number, just want to add.

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

Thank you and thank you Mike for that D&A clarification, I appreciate that. Can we talk a little bit about the pipeline for the base business? You said in the release, your large quality generators generally have not really seen much of a slowdown yet. Can you talk a little bit about the trends that you are seeing now kind of here at the end of April? What are you seeing from petrochemical customers and chemical customers generally? How much of a volume reduction are you seeing from them? How are you thinking about price mix trends in the second quarter so far?

Yes. So, this is Mike. I'll start now, and Alan, feel free to jump in here. What we're seeing to your point now is that waste, and we had a healthy backlog going into Q1, and we exited the quarter with still a very healthy backlog. The incinerators are running very well and large quantity generators continue to send waste. While we are seeing signs of a slowdown, we absolutely are. But as I sit here today, I think that the plants still are running well with a healthy backlog of waste streams. Many of the things that we deal with in the large quantity generators, whether it be chemical manufacturing, petrochemical, agriculture, we're still seeing agrochemical processes generating a lot of waste streams coming into the network. So, I'm hopeful that the incinerators are going to continue to do well here and kind of carry us for a bit through Q2 and beyond.

And predominantly, I would say the industries that support automotive are the ones that we've seen impacted from a volume standpoint. But for the most part, our volumes have been pretty good, and like I say, our backlog is still strong.

Yes, that's helpful. And then if I could just follow up on the prior question around the COVID decontamination work, I think you said in prepared remarks unless I misheard that, that will help offset or cushion maybe softness elsewhere. I don't think you talked too much about on the industrial services side of the business, but can we just understand generally what your expectations are based on current orders and requests for information? And how big do you think the decontamination work has the potential to be this year from a revenue perspective? Are we talking another avian flu? Or are we talking something much less than that? Can you dimension it out for us a little bit?

Yes, I don't think it would certainly be at that level. We've completed about 2,500 or so decontaminations at this point, and some of them are significant, and some are small. Probably in the $50 million range would likely be a good estimate right now in what we're thinking, but clearly the amount of demand has been significant. We've certainly not been able to meet all the demands, but we have shifted quite a bit of our workforce. We brought people out of the Safety-Kleen business. We brought people out of our industrial services business to bring them over into our emergency response teams and help compliment the Field Services organization. So, that's worked quite well and continues as we speak.

Hey, I want to add to that point. So I think that's a fair estimate; $50 million is as good as anything. But really it does depend on the level of infections and where the economy goes. And where this virus goes. And so, I think we have a pretty decent amount of sight to that number for 2020, but who knows, this may become a line of business for a long period of time. And so, we're treating it like that. Initially, as I think about Q1 and maybe in Q2, it's more like an emergency response type of event, but as I think going forward, perhaps it becomes a longer-term line of business because frankly, it's probably going to endure for a while.

And maybe just to clarify then, I may have heard the word offset, but I think about this relative to maybe some softness in the industrial, I mean, in past industrial downturns. Obviously, that legacy industrial services business was pretty hard hit. Is $50 million kind of enough to offset delays or weakness, do you think, in industrial services? Or is that sort of a net negative in your view when you think about industrial and field?

Yes, I'll start here. I believe that, as Alan mentioned, there will likely be some weakness in industrial services as turnarounds are delayed. This might provide some assistance, but whether it will fully balance things out is uncertain. When we look at the fall turnaround schedule, assuming everything goes well, there could be increased turnaround activity and perhaps larger projects, which might recover some of the losses. It's difficult to predict at this moment. In the short term, the type of work Alan referenced will likely keep us busy in Q2, which could help mitigate some of the weakness in the Environmental Services sector. It may be manageable, but it's challenging to determine the long-term outlook.

Our next question comes from the line of Brian Maguire with Goldman Sachs. Please proceed with your question.

Hey, good morning everyone. Hope everyone is doing well. Just a couple of questions, one on, sticking on Safety-Kleen, I know, the SK Oil business, I think you used to talk about in a good year, it might do $100 million in EBITDA, a bad year $70 million, catastrophic year maybe $50 million or $60 million. I don't imagine you ever contemplated the kind of environment we're necessarily in right now. I'm just wondering, if I know you're not giving guidance per se, but do those sort of rough guideposts still apply here? Or do you think we're maybe just in uncharted territory?

Uncharted territory, Brian, I would say that — I'd say that theory was predicated on us being able to sell everything we made and that was always predicated on the fact that we could sell everything we had and that there was a spot market for that somewhere in the world. And as you well know, and everyone well knows, there is a glut of oil. And so that is putting us into unprecedented territory. And that's part of the reason why we had to withdraw guidance because we just don't know what that number is going to be. But it seems like those old theories will come back again someday, but those old hypotheses that we used to share, which used to be very true for years and years and years, are probably not true in 2020.

Yes, that totally makes sense. I guess sticking on that, I was just wondering thinking about 2Q here with the amount of downtime you'll take in the SK Oil. How should we think about the fixed cost absorption on that? Maybe bucketing, you could talk about just how COGS flex in a down volume environment like this? How much of the costs are fixed and you'll be stuck with them? I think you said that you think it will still be breakeven or slightly profitable, so that helps guidepost a little bit, but just because of the mix of fixed versus variable costs in a business?

Yes, so what we've done is, as Alan said in the call, we have shuttered about half of our capacity. And so that's really predicated on demand coming back, and that's really helped us from a fixed cost perspective. There has been some furloughs associated with that, so that has helped us a bit. We also are looking at every cost, and with the lower cost of oil, the additives that we blend with our base motor oil, and to make blended oil is going down quite a bit as well. And so all of that is going to be kind of factored into this, and what the exact percentage is in the SK Oil business between fixed and variable costs, I don’t have that in front of me, but that's the direction I'm seeing.

Okay. Just last one for me. This was maybe more of a longer-term question. I guess some of it depends on how quickly we recover here, but the price and mix in simulation has benefited a lot over the last couple of years from some of the higher value waste streams. I think a lot of those have been tied to the petrochemical projects that have come online in the U.S. and obviously a lot of those were predicated on us being advantaged from a cost point of view, natural gas and NGL versus global oil prices. Oil where it is today seems like it's taken that advantage away. Obviously, the plants are still there; they haven't gone away, but their ability to be competitive globally might be a bit impaired for the time being. I just wondered if that is part of your thinking or if you're seeing any signs of the backlog in those type 10 waste streams starting to dry up or signs that the backlog might be shifting back towards them or some lower-value waste streams?

You know, I think our direct burn business continues to be very strong, and we actually have quite a backlog in that space that continues today. So, I would say that our competitors as well as ourselves are, I think, very strong from a volume and utilization standpoint. We know that there are several captive operations that are shutting down for an extended period of time. Some of those are the results of the COVID-19 situation, where their manufacturing may be impacted, and therefore it ultimately makes sense for them to shut that capacity down instead of having sort of a 25% to 30% operating utilization. So, we are getting more business from former captive operations out there, and that’s something that we hope will continue. We've had some ongoing discussions with some of our customers who have captive plans and whether that would be a three to six-month type of project or whether that might be something permanent. But as we’ve said for the last several years, part of our expansion of our Eldo plant was because of anticipation of an increase in volume with a lot of the chemical manufacturing expansion due to the low price of natural gas, and we still think that model is intact even regardless of where crude oil is today.

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

On the Environmental Services strength, is there any possibility that you're starting to see or that you've may see in future quarters some pull-forward of customer turnarounds because of the economic pause, so customers taking the opportunity of low demand to take their facilities down, which could actually lead to a surge in volumes for you? But then again, maybe a more lackluster turnaround season in the fall. Is that something you're hearing about as a possibility?

We're not seeing that, David. I think the concern that we hear regarding the delays in some projects is the fear of bringing 500 or 1,000 contractors from all over the country into their plants and the potential of having a significant outbreak in the middle of a turnaround, which would be detrimental. If you've got halfway through one of these turnarounds at one of these major refineries, for example, and then couldn't get it completed, that would be problematic.

Okay, that's good to hear. Thanks for that. Superfund cleanups, if the feds are allowing delays for projects that aren't producing imminent danger, have you seen the impact there yet on your field services business and could there be a drag on the project work and landfill volumes through the second half if that situation continues?

Yes, we definitely saw early in the beginning of the second quarter a number of projects get pushed to the third quarter or even the fourth quarter. So you're absolutely right. If there's some discretion, again, I would say it's as much to do with a concern with the virus and getting into some of these projects that require mobilizing a lot of people from across the country. I think there could be challenges in getting halfway into it and then having a virus outbreak.

And, Dave, just to add to that, we've had a couple of customers say they don't want people from certain states coming to their location. So, that's been a challenge for us from a staffing perspective on some of the projects that are ongoing.

Okay, last quick one here. Alan, you've mentioned aggressively adjusting your oil prices. Is that referring to an increase greater than the $0.70 that you announced in March or not?

Well again, we're modifying some of our contracts as well because as we look at both WTI and some of the base indexes that we use, those contracts that we have allow us to significantly change how we price those products or price our customers on the incoming waste. So, we're certainly working both ends and communicating those challenges to our customers out there. We did have a second increase in fuel prices that was put in place at the end of April, and that will be communicated out between the first and 15th of May. So, we're definitely communicating with our customers to let them know about the real challenges. Obviously when you see crude oil trading at $11 a barrel, you see diesel and gas at historically low prices. Most of the customers that we're servicing, especially the automotive customers, have seen the gas pump price reduction. So, they've been working with us and we continue to really manage that spread there as best we can.

Our next question comes from the line of Michael Hoffman with Stifel. Please proceed with your question.

Thank you all for taking this and wish everyone well. Alan and Mike, on the emergency response, when you look back to the avian flu, if I remember correctly, there was about $300 million tied to that, but it was with the USDA, so it had okay margin but not extraordinary. I'm assuming this margin is much better because you're doing it with private companies.

Michael, this is Mike. It was $300 million for 2018, so not $170 million. But to answer your question, yes, the margins are generally better. We had a first-mover advantage. We did get out in front of this pretty quickly and mobilize the teams. As I look here and review current bids, we're seeing the margins have softened a bit because there are more people entering this space and recognizing the value there. So, I think we had some pretty good margins early on. I'm assuming they'll soften a bit as we get into Q2 and Q3.

But they're definitely better than the corporate margin?

Absolutely.

Yes. Okay. And then when we think about looking at data that's telegraphing this opportunity to incineration your unbilled receivables, can you talk us through how we should read through what that's telling us?

Yes. Unbilled receivables are simply projects that are in the middle of a larger situation, sometimes they end at the end of the month and we can't bill until the actual project is complete, and that rolls into the next month. So that's a timing item, Michael. I wouldn't read much further into that.

So it looked like a good number. So I was just thinking maybe that supports why incineration is going to stay full?

I mean, the deferred revenue is still pretty high, and as Alan said in his remarks, the pipeline coming into it has shown for a strong year in April.

I think, when you think about the deferred revenue Michael, it's only done a couple million from the end of 2019, and that is typically both the backlog and waste disposal as well as the patch washer services for Safety-Kleen because they're reserved as well. So, I think that deferred number is sort of in line with what we're talking about.

The other thing, Michael, we're getting some infectious waste as well, right? So, that's also kind of coming online here in April.

And then, are we in a position to talk about what kind of dollars of costs have been affected so far? And then, I remember on a call we did together about a month ago when $35 million of incentive comp was in the budget, there was $20 million in SG&A. And then, if you've done some furloughing or shuttering capacity, it sounds like these numbers are adding up to $70 million, $80 million potential offsets, and then you deal with the lack of activity as a counter to that. Is that the right way to think about it?

Yes. Michael, so I'll start and Alan feel free to jump in. Regarding incentive comp, of your $35 million, maybe $30 million that comes back in is a reasonable modification. Travel and entertainment expenses are down significantly. When shelter-in-place laws are removed, we'll be judicious about trying to get back to travel, and that spending will probably stay pretty low for the rest of the year. As for furloughs and other actions that we're taking, I'm hesitant to speculate on what that ultimate number will be. I think that we're going to address the cost structure to the lower revenue and we're going to be very smart about that. And Michael, as you know, you've been following us for years; we're a cost-conscious organization. We're an industrial services business. We manage our margins tightly and we'll make necessary adjustments as needed. It's unfortunate that we have to take these measures, but that's where we are.

Okay. And then based on the earlier comment that you, Alan, you expect SKO to be profitable in Q2, that's going to probably be your worst quarter therefore it's reasonable to conclude, you'll be profitable for the year. I get it. It's going to be a low number, but that you expect us to be profitable for the year based on the actions you're taking.

Yes.

Okay. And free cash flow has been a key focus of the Company, it is debt to which you cut the capital spending sort of starting at $225 million less than $25 million for the headquarters and pull out the $50 million, $60 million, there’s your $140 million, $150 million. We're going to end up with a pretty decent free cash flow number too then.

Yes, Michael, I would say that the two things happening in cash flows will be offsetting the lower earnings, right, will be the lower CapEx as Alan mentioned, as well as the CARES Act providing for payroll tax withholds. I’m sure other companies are doing the same thing. We don't have to submit in 2020 our component of employer tax, and that’s a pretty material number for a large U.S. company with many employees. That’s probably going to be a $30 million plus benefit from a cash flow standpoint in 2020. I don't want to get too excited because that needs to be paid back in 2021 and 2022, but certainly in the short term from a liquidity standpoint, it will help companies like ours ensure that it’s lower for longer.

I think just to add to that point, we recognized that a lot of customers are struggling. A lot of our customers are in tough shape and so we're really focusing on receivables making sure that we are getting our bills out the door faster. That's one of the reasons why unbilled receivables actually went down by about $5 million in the quarter. We’re doing everything we can to maintain strict control over our receivables. Our DSO remains around 80 days. Therefore, that’s a top priority for us.

Absolutely, and that leads me to my last one, and then thank you. Bad debt allowances, how are we thinking about that in the context of historic trends?

So, normally, Michael, we have $8 million to $9 million in a normal year. Q1 was a little higher because we are concerned about some of our small quantity generators, the smaller automotive shops and their long-term capital structure for whether they could withstand this. But we raised it up a little bit. I'm not sure what the end number is going to be, but it's probably not going to be double that normal run rate. It's going to be a little higher. In Q1, we tried to cover off on some of that bad debt expense which normally runs $2 million to $2.5 million a quarter; it was $4.5 million here in Q1.

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

Great, good morning guys. Good to hear your voices and echo the well wishes. Just a few follow-ups, if I may. On the cleanup side, margins sound like probably cleanup sound like they're north of the corporate margin and maybe somewhere in that avian flu or swine flu range, but perhaps the opportunity is less. Is that competitive reasons or it seems like we're still somewhat early in the opportunity for cleanups I would imagine, right?

So, glad to hear your voice as well. You know, we have just competitive rates and what those rates are, we'd rather not disclose. We’re battling every day with other companies in our space and I think we offer very competitive rates.

And on the furloughs, I know too early to quantify, but it sounds like it's certainly biased towards the SK side or even significantly biased towards the SK side. Is that fair to say?

Not necessarily; I'd say that it's across all three pieces of our business, both the SK side, the corporate section, and environmental services.

Okay. And CapEx, any particular projects, is it more growth projects I assume that are being pushed out a little bit? I mean any more color on what you sort of postponing or delaying?

Yes, as Alan mentioned that, we took offline about half of our re-refining capacity. So, there was some CapEx that was already invested there. Also in the business with lower revenue needs, we need fewer vehicles, so we had some vehicle upgrades and new trucks we were going to put online but have slowed those down. My view on that is if there's a recovery in the back half of the year, we feel we can come back, and at the end of June, we think that things are looking a little better, maybe it goes a little higher. But right now, that’s the prudent thing to do. Larry, we always give out CapEx numbers. We hit those numbers consistently, so the team is really good about managing that spend and we review it every week.

In the past few quarters, especially regarding environmental services, it's worth noting that your businesses are in a strong position, as indicated by the robust backlog we see in Q1. With the ongoing situation surrounding COVID, could there be a possibility that some of your clients may operate at significantly reduced capacity, leading to decreased waste volumes and a lighter backlog? This could potentially result in a much lower performance in the latter part of the year, even moving into 2021, despite COVID becoming more manageable.

I think particularly in the Environmental Services sector, where a lot of customers have to move waste every 90 days, we will continue to see services performed for the majority of those customers. They've been open, a lot of our Environmental Services customers have been operational — our utilities, refineries, chemical companies, and pharmaceuticals. The businesses that have really been more shuttered that impact us are on the Safety-Kleen side, and although that also does bring in other containerized waste volumes coming in from Safety-Kleen into the Clean Harbors disposal network, things might be slower. But overall, just based on generation cycles and the need to move waste every 90 days, we anticipate to continue to see volumes coming out of our customers. There could be a decline, but we’re optimistic regarding the outlook.

Okay. About just the last couple of questions on the price of oil. Obviously, the precipitous drop is not beneficial to SK in the short term, but how does that impact the environmental side? I suppose that the net benefit is a much greater drop in costs for your operations?

We have a fuel surcharge; we can charge for that, and so all prices go up we can charge our customers a little more. It's not necessarily a short-term linear fall for lower fuel prices for a lot of mediums further investment in the U.S. but that's not a linear relationship.

And then, IMO 2020, obviously still early in the game there to work with the shipping industry on, there are obviously some significant stress — is there a possibility that there are restrictions and regulations on that get lax for even several years?

I don't believe so. I don't think we've heard any rumors at all regarding that, particularly being a UN-sponsored initiative. So we just saw it coming in, in January, like I mentioned in my notes, but no visibility right now, Larry.

Our next question comes from the line of Hamzah Mazari with Jeffries. Please proceed with your question.

Hey, good morning. Hope you guys are safe and healthy. The first question is just around if you could give us April trends; a lot of companies have been talking about or have been pulling guidance for talking about what they're seeing in April in Environmental Services and on Safety-Kleen. Just how does April compare to Q1, to March or however you want to answer that question?

Sure. I'll start it and Alan feel free to jump in. We had a great kind of pricing quarter for Q1. We had 11% on price in Q1, and that was really driven by the high-value waste streams that we had in our network and continued to do well. That trend has continued through what we see as of yesterday. And as I mentioned in my call, Hamzah, our cash balance was flat to the end of the quarter; it's kind of where it was last year and the same with April versus March. So again, I'm really pleased with the collections. As Alan mentioned, we’re focused on receivables and our ability to collect those receivables, especially from our smaller company generators. The fact that cash collections have stabilized has been a positive sign for us from a balance sheet perspective.

As I mentioned, we are concerned about receivables and our small quantity generators. Whereas in the Safety-Kleen business, we've seen that a 30% downturn that is happening and oil prices and the impact on the ability to both collect and sell oil in the SK business has been significantly impacted.

Great. And then, as you had mentioned earlier, the Environmental Services business is clearly performing very well. Could you maybe talk about how it did in the last downturn and how the business is different today?

Yes, I think in the Environmental Services business, with what happened back in 2008, 2009, 2010, the industrial services really struggled. That sector is a big part of ES, but the margins are much lower. We used to have margins in the mid-teens, and now it's more in the single digits. So if that business were to slow down, and it will slow down in Q2 due to a lack of turnarounds, I don't think it's going to have as much of a material impact on earnings as it did back then. The tech service business continued to do well and that sector has slowed down a bit and is experiencing some pricing pressures, but continues to perform well. I think field service is going to get a big benefit from the decontamination work and that’s going to do well here in Q2.

Great. And then just last question, I'll turn it over. Coming out of this, where do we sort of stand on the closed loop strategy? Just any update there coming out of this would be great. Thank you.

We continue to build out our network and our e-commerce platform to support our closed loop. We continue to see broad customer acceptance to that initiative, and we'll continue to drive that initiative. But certainly, that's been disrupted here during the closures. So we'll see how customers behave when states start opening up.

Our next question comes from Jim Ricchiuti with Needham. Please proceed with your question.

Thank you. Questions on M&A sound like things are on hold right now, but I'm wondering how you're thinking about the funnel of opportunities as we start to come out of this. Do you anticipate any potential changes out there in terms of what might be available to you?

I would think that there are companies out there that have heavily leveraged themselves. We see some competitors at 5 to 6 times leverage and we are uncertain about where their new EBITDA numbers are going to come out. There may be some opportunities for us to look at both some smaller or larger deals where we might be a good partner with them. We certainly have passed around a lot of transactions over the last couple of years, as you know, because of the leverage that a lot of private equity firms were putting on some of our competitors and the prices that they were paying. But maybe that world is going to change; we just don’t know until things settle out here the next two to three months.

A question on the SG&A. I'm wondering if there's anything unusual in that number that maybe you haven't talked about that you can point out from the quarter; anything that we need to be mindful of?

Yes, Jim. This is Mike. So, last year, if you recall, we had about $10 million, a little over $10 million of kind of one-time items. We had a settlement of a lawsuit for about $5.5 million. And then we sold some receivables that had previously been fully reserved for about $5 million, and so both those items came into play, which we talked about. They're not a secret; we mentioned them last year. So, when you look at the year-over-year SG&A increase of $14.5 million, about $10 million of that, or $10.5 million is due to these kind of one-time items that I discussed in the call last year.

Our next question comes from the line of Scott Levin with Bloomberg. Please proceed with your question.

So, I was hoping to elaborate a little bit or you could elaborate a little bit on the cleaning and disinfection work that you're talking about. Can you give us a sense of what some of those types of mandates are? Are those kinds of cleanings of commercial facilities, that type of activity? And if you're willing to maybe discuss with the margins, do you guys expect to earn on that or are they comparable to either segment or corporate margins? Just a little bit more color regarding the type of activity there?

Yes, Scott, I'll start in. So, our decon work is really kind of three different areas where we can either disinfect, we can decontaminate, and then we dispose, right? We call it the D3 system. And so, again, we’re really proud of that. And it really depends on the level of service. It’s just someone wiping down some handrails versus bringing in a team with the forgers and really doing it at a detailed level. It depends on what level. If the building has been idle, maybe we’ll do a lighter touch. If this building has had some employees who’ve been sick, we’ll do a heavier touch. And that’s something that we have flexibility on, and I think we do a very good job in this regard. I don’t want to talk about margins; I mentioned that in an earlier question. I think we’ll debate competitive margins in the space, but we are nationally recognized. I’m really proud of what we can achieve there, and I think it’s been great that our employees, as Alan said, have been able to stay busy in other parts of the business that have been slower and getting them engaged, and making sure we’re doing it safely and in compliance with the laws. Again, I’m very proud of that.

Fair enough. And to clarify, you said $50 million in revenue potentially for the year is a decent bogey to think about?

Yes, I mean if you asked me to pick a number out of the hat, I can do that. It really depends on the level of the infection, the timing of the reopening, and where we think the economy is headed. There are a lot of variables out there to put a number on it, but anything beyond that is just difficult to do at this time.

Fair enough. One last one for you. We have seen some sizable consolidation activity within the space, generally with the Harsco Esol deal and some of the activity with U.S. Ecology. Do you expect any changes in the competitive landscape over the next year, two years, maybe opportunities to gain share? Just any other thoughts around the general landscape from an industry standpoint?

I think the consolidation is good for the industry. I mean, certainly, having stronger competitors, rational competitors, I always find is really good for the business. And so from that standpoint, when you look at how much money is being paid for those acquisitions that you mentioned, they’ve got to get a return on that investment. And so our hope and expectation would be that they’re going to be rational, and that’s going to be good for the industry.

We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Alright, thanks for joining us today. We are participating in several virtual investor conferences in the coming weeks. We look forward to connecting with many of you then. We hope you all stay safe out there. Thanks for joining us.

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.