Clean Harbors Inc Q2 FY2022 Earnings Call

Greetings and welcome to the Clean Harbors, Inc. Second Quarter 2022 Conference Call. It is now my pleasure to introduce your host, Michael McDonald, General Counsel. Thank you, sir. You may begin.

Thank you, Christine, and good morning, everyone. With me on today's call are Chairman, President and Chief Executive Officer, Alan McKim; EVP and Chief Financial Officer, Mike Battles; President and Chief Operating Officer, Eric Gerstenberg; and SVP of Investor Relations, Jim Buckley. Slides for today's call are posted on our Investor Relations website, and we invite you to follow along. Matters we are discussing today that are not historical facts are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Participants are cautioned not to place undue reliance on these statements, which reflect management's opinions only as of today, August 3, 2022. Information on potential factors and risks that could affect our 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. Today's discussion includes references to non-GAAP measures. Clean Harbors believes that such information provides an additional measurement and consistent historical comparison of its performance. Reconciliations of these measures to the most directly comparable GAAP measures are available in today's news release, on our website, and in the appendix of today's presentation. With that, I'd like to turn the call over to our CEO, Alan McKim. Alan?

Thanks, Michael. Good morning, everyone, and thank you for joining us. I'd like to start by talking once again about safety. It's a critical metric for us and our employees that is often underappreciated by investors. For customers, it's one of the most important numbers that we deliver and can oftentimes decide who wins in a competitive bid. For 2022, we challenged the team with an ambitious goal of delivering a total recordable incident rate, or TRIR, of under 1 for the year. Through June 30, we are currently at 0.82 and in a good position to achieve that milestone for the first time in our 42-year history. Our level of safety far exceeds anything that our peers are delivering and is a competitive differentiator for us. The team is doing a phenomenal job this year. Turning to Q2 financial results on Slide 3. We have far exceeded our guidance for the quarter on the strength of both of our operating segments, each of which was a great story to tell. I'll let Mike walk you through the specifics of our financials, but I want to focus on 4 key takeaways from our results this quarter before going through the segments. First, demand for our services, particularly our scarce disposal assets, has never been higher. As U.S. manufacturing continues to flourish, we are processing more volumes of high-value waste than ever before, largely due to partnerships with companies like 3M, who closed their captive incinerator earlier this year. And other captives are also in the final stages of determining whether they will shut down and outsource. Second, HydroChemPSC, now branded as HPC Industrial, which includes our legacy Industrial Service business, is proving to be a great acquisition. The deal elevated our Industrial Service offerings, provided us with an impressive set of assets and talented employees, and gave us a market leadership position. While we still have work to do to capture all the synergies available to us, the cultural fit remains strong and we are excited about the long-term prospects for this business. Third, all our service businesses, whether the Field Services, Safety-Kleen Environmental, our retail or energy services, are on a positive trajectory. While our organic growth results were impressive this quarter, we believe they could have been even higher if the labor market weren't so tight, and we could have hired more and faster. And lastly, the rise in our Safety-Kleen Sustainability Solutions profitability to record levels is not transitory. While we are benefiting from a historically wide spread, many of the favorable market changes are long-lasting in nature. For example, the positive impacts of IMO 2020 are permanent. And as ESG becomes more prevalent, we are seeing interest in our sustainable base oil and blended products grow exponentially. We expect to command a premium for our green products in the future. Years ago, we were forced to discount our base oil output to move volumes. Those days are long gone. Overall, in an inflationary and supply chain-challenged environment, our team executed exceptionally well to meet the record demand for our services through effective pricing, cost-reduction programs, process improvements, and best-in-class industry performance. Turning to segments on Slide 4. Environmental Services grew 51% in Q2. Approximately 60% of that growth was generated by the addition of HPC. While the remainder of the results of increased disposal recycling and service demand, incineration utilization was 90% and average incineration pricing increased by 18%. At the same time, landfill volumes rose by 36% from a sizable pickup in remediation and waste projects. We capitalized on an extensive spring turnaround season in our Industrial Services Group, while Field Services grew 35% through a steady stream of emergency response projects and the addition of HPC's utility business. COVID decon work generated $5 million in the quarter, about half the size of a year ago. Safety-Kleen Environmental also grew 21% in Q2 with healthy demand for its core service offerings. Looking at our Environmental Service segment profitability, adjusted EBITDA rose 53% in Q2 on the higher revenue, supported by our pricing efforts to offset inflation, coupled with cost reductions and technology investments to enhance our overall productivity. Segment margin expanded by 40 basis points from a year ago and more than 500 basis points on a sequential basis from Q1. If you exclude HPC, which has not even hit its full stride in terms of capturing synergies, margins were up 250 basis points from a year ago. Moving to Slide 5. Revenue in our Safety-Kleen Sustainability segment was up 31% in Q2 on the back of higher pricing of our oil products versus a year ago. Adjusted EBITDA rose by more than $30 million or 53%. We continue to maximize our re-refining spread by carefully managing our collection costs on the front end and capitalizing on pricing and market demand on the back end. Waste oil collection volumes were up again in the quarter as we gathered 60 million gallons at favorable cost levels, up from $57 million a year ago. Our sales of blended products and direct volumes came in as expected in the quarter given the ongoing additive shortages in the market and the profitability that we're generating on our base oil sales. The value of our base oil also continues to rise not just due to industry conditions but the recognition of the quality, scarcity, and reliability of our re-refined products. In conjunction with that view, we recently launched our Clean Plus brand to really fully capture that value. Turning to Slide 6. We continue to evaluate opportunities to execute on all elements of our capital allocation strategy. On the M&A front, we completed a bolt-on acquisition late in the quarter of a vacuum gas oil re-refinery and waste oil collection business based primarily in Georgia and Florida. This acquisition will not only generate additional production for us, but will reduce our overall transportation cost by providing a local outlet for the waste oil we collect in the Southeast U.S. Part of our strategy also includes divesting businesses that we believe are outside of our core focus. In Q2, we sold non-core Western Canadian assets that were part of our legacy Oil and Gas segment for proceeds of approximately $18 million. Given the unique nature of these assets and a limited crossover with Clean Harbors core services, we determined that this business would perform better under new ownership. From a CapEx perspective, the build-out of our Nebraska incinerator remains on plan and on schedule, and that substantial investment will bring 70,000 tons of needed capacity into the market in early '25. In the interim, we are continuing to make investments around our expanding throughput and in various parts of our disposal recycling network to facilitate our growth. And this year, we're adding a considerable amount of landfill cell capacity. Mike will touch upon our debt and share repurchase program in his comments. But let me conclude by saying that we see no indication of the trends that supported our stellar Q2 results slowing in the back half of '22. Our network of disposal and recycling assets remain in high demand, and that demand should accelerate faster in the years ahead through infrastructure spending, strict enforcement of U.S. and Canadian regulations, captive incinerator closures, a robust project pipeline, and reshoring of multiple industries. We will continue to invest in and grow our network in order to meet this increased demand. Within our service businesses, we are continuing to hire as rapidly as possible to meet the demand and to facilitate additional growth. For SKSS, our refining business is well managed in all phases from the collection to the production to sales. There's been a paradigm shift in this business over the past two years since the implementation of IMO 2020. In addition, our sustainability products continue to gain traction with our customers. So as we move through the back half of '22, we will continue to leverage our superior systems and processes to drive margin improvement like we've seen in the first half of the year. We have an industry-leading executive team and focused and fostered a culture of accountability to optimize our performance. We expect to deliver record top and bottom line results this year along with a robust free cash flow to support our capital allocation strategy. So with that, let me turn it over to Mike Battles. Mike?

Thank you, Alan, and good morning, everyone. Let's start with our income statement on Slide 8. Revenue rose to a record $1.3 billion in the second quarter. Out of the $430 million increase from last year's second quarter, we estimate that about $210 million is attributable to HPC. Excluding HPC and currency impacts from both periods, our revenue grew by about 25% on an organic basis. Adjusted EBITDA was 65% higher than a year ago, reaching $309.1 million, which translates to a margin of 22.8%, reflecting a 250 basis point improvement year-on-year. We achieved this record margin performance through enhanced gross profit and strong management of SG&A costs. Gross margin improved by 50 basis points to 33.8%, highlighting our effective pricing and the productivity improvements mentioned by Alan. SG&A expenses as a percentage of revenue decreased by 190 basis points from a year ago to 11.5%, thanks to leveraging increased revenue from HPC and reducing various non-billable costs. Despite ongoing inflation pressures, SG&A in absolute dollar terms only increased by $31.5 million against about $430 million of additional revenue, which is excellent. For the full year, we now project SG&A expense as a percentage of revenue to be around 12%, significantly lower than our 2021 figures. Depreciation and amortization in Q2 rose as anticipated to $87.9 million due to the addition of HPC assets. For 2022, we estimate depreciation and amortization to be between $335 million and $345 million. Income from operations in Q2 climbed by 92%, reflecting our substantial revenue growth alongside our margin improvement efforts. Turning to the balance sheet on Slide 9, cash and short-term marketable securities at the end of the quarter stood at $415 million, unchanged from the prior year. We concluded Q2 with over $2.5 billion in debt. Leverage on a net debt-to-EBITDA basis has now decreased to approximately 2.6x, down from over 3x at the beginning of the year. Based on the midpoint of our updated 2022 EBITDA and free cash flow projections, we anticipate reducing our leverage below 2x by year-end. Our weighted average cost of debt currently stands at 3.84%, with about 70% fixed rate debt. Despite recent rate hikes, we feel confident about our debt situation. Moving to cash flows on Slide 10, cash from operations in Q2 was $170.6 million, consistent with our expectations. Net CapEx, after disposals, was $76 million, up roughly 60% from a year ago as we expanded HPC, progressed with our Nebraska incinerator, and increased capacity at several landfills. The new incinerator accounted for $9 million in Q2 and about $14 million year-to-date. We now expect full-year costs to be in the range of $45 million to $50 million, slightly above our previous estimates due to successful progress. Adjusted free cash flow in Q2 was $94.6 million, down from $114.6 million in Q2 a year ago, primarily due to increased CapEx and expanded working capital related to business growth. For Q2, we now expect net CapEx to be between $320 million and $340 million, a slight increase from earlier guidance due to rising Kimball expenditures and inflationary pressures on supplies and vehicles. During Q2, we repurchased 335,000 shares for a total cost of $30 million. We have about $120 million left under our existing buyback program. Moving to Slide 11, based on our strong second quarter results and current market conditions, we are significantly raising our 2022 adjusted EBITDA guidance to between $975 million and $1.005 billion, with a midpoint of $990 million. For Q3, we expect adjusted EBITDA to be about 50% higher than Q3 of 2021, driven by HPC's contribution, ongoing strong demand in the ES segment, and increased profitability in the SKSS segment. In Environmental Services, we now anticipate adjusted EBITDA to rise about 38% from full year 2021 at the midpoint of our guidance, benefiting from volume growth across all core business lines and the addition of HPC. We are counteracting inflation impacts through our comprehensive pricing strategies and enhancing our profits and margins via various cost-reduction activities. For SKSS, we expect full-year adjusted EBITDA at the midpoint of our guidance to increase approximately 35% compared to 2021. Given the current market conditions and the improvements we've made along with ongoing initiatives like Clean Plus, we do not anticipate our spread narrowing significantly in the latter half of the year beyond typical seasonal slowdowns. In our corporate segment, we now expect negative adjusted EBITDA at the midpoint of our guidance to rise about 10% from 2021, a slight adjustment from previous guidance, primarily due to the addition of a full year of HPC corporate costs and wage inflation, offset by reduced severance and integration expenses relative to last year. With our first-half free cash flow outcomes, working capital assumptions, and revised adjusted EBITDA forecasts, we are also increasing our 2022 adjusted free cash flow guidance to a range of $310 million to $350 million, with a midpoint of $330 million. This range includes significant investment in Kimball. Excluding that investment, our adjusted free cash flow midpoint would be around $380 million this year. In conclusion, I share Alan's excitement about our growth prospects for 2022 and beyond. I discussed Clean Harbor's resilience in our Q1 earnings call, and I believe that attribute is a hallmark of our organization, evidenced by our successful growth trajectory and consistently strong performance. We are a critical vendor and partner for our customers, often serving as their sustainability solution. I remain optimistic about both operating segments despite inflationary pressures. With that, Christine, please open the call for questions.

Our first question comes from Noah Kaye with Oppenheimer.

These are some pretty incredible results. So congratulations to the team on this. And I would like to maybe start with picking up on some of the comments you made around the outlook. And Mike, your comment around resiliency, I think, is something that a lot of investors are trying to wrap their heads around right now. We hear a lot of commentary broadly about an economic slowdown, decelerating manufacturing indicators. And it looks like for your business, I mean, all the lights are green at this point. So can you talk a little bit about what gives you confidence in the sustainability of some of the trends in Environmental Services into the back half and potentially beyond?

Noah, maybe I'll start. This is Alan. I think the company has grown through many recessions and passed through many recessions and really have tried to take advantage of the opportunities that those downturns present and whether it's looking at M&A or it's expanding geographically to continue sort of growth and keeping our top line going and our profitability going. So I think from our experience going through all those downturns in the past, I think we feel really confident in our ability to deal with whatever gets thrown at us from a slowdown standpoint. But I think the growth that we're seeing with expanding manufacturing, with on-shoring, I think is quite significant. And I think we're seeing it in our volumes coming into our plants. When we look at our deferred, our deferred, Eric is up again. You might want to speak to that backlog that we have.

Yes. We continue to have a very strong backlog of deferred inventory. Our bulk volumes have continued to grow. Our project business is up. And across the board, as you know, we have a very, very diverse customer base. And that customer base has been spinning off volumes into all of our plants, not just our incinerators, our recycling plants, water treatment plants, our landfills. All volumes of waste and flavors have been increasing. And so very strong outlook going into the future here.

Yes. No, I also say that there's strength in regulatory enforcement. We've certainly seen that in the first half of the year. And I don't see how that changes going forward. So all those 3 things: Alan was talking about reshoring, Eric talking about our pipeline and the high house waste streams that we take, and the increased regulatory enforcement, all kind of bode well regardless of what happens in the market. And as Alan said, he's been doing this for 42 years. He's seen plenty of recessions, and we always come out at the other end stronger.

Appreciate the commentary. And then I just want to pick up on your comments around SKSS product pricing and potentially being able to price that at a premium to the market. I guess, can you give us some additional color around that? Is that something you're seeing currently? Do you see that happening more around base oils or blended products? Just help us understand what exactly you mean by the level of pricing and the timing around pricing at a premium.

Yes, this is Mike. We are definitely in the early stages of this. We launched a new brand and are gaining significant traction in the market. As Alan mentioned, the days of discounting our base oil are behind us, and we are actually pricing it at or above market levels. There's still more work to be done. It's important for people to grasp the sustainability aspect and our ability to provide documentation on sustainability and energy savings to our customers. I believe this sets us up for long-term benefits, not just for Q3 and Q4.

Right. So just to confirm, you're pricing base oil now at or above the market?

I would say we're probably at market now, whereas we were discounting quite a bit. I also think that we've put together a better logistics plan to manage the business in such a way where we're not held somewhat captive. If our plants are full and we need to move product, we're now able to reposition product to get closer to the market. And I would just say, manage the overall supply chain much better instead of discounting to move products. And so I think those 2 factors have allowed us to keep our pricing relatively at market pricing right now, and we think we can even do better than that.

Our next question comes from the line of Tyler Brown with Raymond James.

Congrats on the quarter here. On ES, Alan, is there any way you could parse the 18% incinerator pricing between, call it, core price and mix? It seemed like mix was a good guy.

Yes. Tyler, this is Eric again. I'll answer. All of the captive incinerators continue to be our customers, and we have established strong partnerships with them, similar to our collaboration with 3M. We see other captives that will be closing soon, and we work alongside them to manage some of those challenging waste streams. Therefore, that pipeline remains strong.

Okay. Yes. That's very interesting. Okay. Just shifting gears over to SK. So I want to kind of focus on the part that you have a little bit more control over on the front end. So you mentioned IMO is seemingly having an impact. And I don't know exactly how to ask this question. But basically, if you looked at history, I mean how much better is your PFO tracking versus what you might have expected at this level of base oil in the past? And again, I don't know if that's a great way to ask the question, but I'm trying to understand how much of the better spread is based on some of your front-end actions.

We acquired Safety-Kleen in 2012, and at that time, they generated around $150 million, with around $70 million expected the following year. We faced a significant decline in base oil pricing due to the disconnection that occurred with crude oil. Now, ten years later, we are looking at potentially over $500 million in EBITDA. We've been able to effectively manage the spread and control the prices we pay for oil. Currently, we're paying about one-third less than we did back when we first acquired Safety-Kleen in early 2013. Additionally, the implementation of IMO 2020 has increased the demand for diesel, leading to a surplus in bunker oil and used motor oil. The market is currently oversupplied, and we expect this trend to continue. This shift is significant, and we do not foresee any changes. The many ships that have installed scrubbers indicate ongoing demand for marine diesel, which we believe will positively impact us in the future.

Okay. Yes. That's extremely helpful. But on the flip side, on the back end, so I'm just going to look at this really simply. I'm a pretty simple guy. But basically, you're selling some 140 million gallons of base and blended oil annually. You've got the addition of Clean Plus. You're trying to help the market understand the green aspects of re-refined oils. So basically, the idea is that should help you improve your price realization versus, call it, the base oil index. Basically, you can't control base oil because it's a commodity, but you can improve your spreads to that index. Is that kind of a good way to think about it conceptually?

Yes. Certainly, as it purely relates to base oil, but our real opportunity here is to continue to grow our blended business where we even have a better margin than our base oil margin. And we've really been constrained over the past 2 years with additives. We even had a recent force majeure because of the flooding out in St. Louis, for example. So additives have been a real problem, not only for us but for the industry, which has curtailed demand to some extent for our base oil, but also our ability to actually manufacture the necessary blended oil that we want to sell and that we have a demand for. And so we believe we'll continue to grow our direct and our indirect blended materials and really branding that as a green product, we think we will have a premium margin because of that side of the business.

Okay. Excellent. My last one. Mike, did the Georgia re-refinery close this quarter? It appears maybe it did, but how much capacity does that plant have?

Capacity is 18 million gallons with potential to expand.

And it did close in the second quarter, Tyler. We sell 150 million gallons of oil a year.

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

Congratulations on a fantastic quarter. My first question, Alan, is about the environmental aspect. There's been concern regarding the sustainability of the SKSS. You've had an impressive quarter and provided several indicators that suggest strong visibility for margin improvement at least through the end of the year. It seems likely that margins may enhance further with the synergies from your recent large acquisition. However, I'm curious about any potential concerns regarding the sustainability of this progress. It's possible there was a perfect storm effect and as the economy slows over the next couple of years, I'd like to play devil's advocate. You've mentioned various factors that could mitigate this, such as the onshoring and the PFAS infrastructure bill, but do you have any worries that a general economic slowdown might lead to some deceleration in your business?

Larry, I'll start and then Alan will join in. Regarding the ES business, as we discussed last quarter, we expect the ES margins to be flat year-on-year. Given the strong performance in Q2 and our outlook for the second half of the year, we anticipate an increase of 80 to 90 basis points compared to the previous year. By the end of 2022, we believe these margins will be sustainably higher than the all-time record set in 2021. To add to that, our pipeline remains very strong, as noted during our recent quarterly operating review where multiple participants affirmed that our pipelines are robust and extend well into 2023 and beyond. I'm very optimistic about our long-term outlook. Additionally, we are actively working on cost-containment strategies, with an extensive list already in progress and a new list being developed. This focus is part of our culture at Clean Harbors, and it reflects our resilience as we face challenges ahead.

Absolutely. I’d like to shift the discussion to SKSS. The addition of the 18 million gallons at the Georgia facility seems like a positive incremental purchase. What are your thoughts on further expansion in that area? I know you explored the Vertex assets last year. Are there still assets out there in the re-refinery sector that you are considering? Would it be accurate to say that possible additional acquisitions are a focus for you?

I think clearly, there's some opportunity in the M&A space, certainly. And I think there's also opportunities to expand our existing plants. Eric, you might want to speak for that.

Yes. Well, while we took the synergy asset into our network, we have the ability to continue to expand our hydrotreating capacity in our existing plants. We also have some targeted efficiency projects to grow our throughput across every one of our re-refineries. So we're very bullish about continuing to grow internally but also look at acquisitions.

Okay. Great. And then just lastly, just back just on the PFAS. I know I mentioned that earlier. Could you just give us a general update? Anything going on, on that space? I suppose you're not building in too much. There's a lot going on. But in terms of near-term revenue opportunities, I assume you're not building in too much in your 2022 guidance. But can you just maybe just give us sort of a quick update on that?

Yes. Regarding PFAS, the regulatory landscape is continually changing, and Clean Harbors is very well positioned with our treatment, landfill, and especially incineration assets. We strongly believe that the best method for disposing of PFAS contaminants is the RCRA permitted high-temperature thermal destruction offered by our facilities. We've conducted tests with a third-party company which confirmed our emissions are significantly safer—5 to 8 times safer—than the strictest state and federal standards. We're optimistic about the future. While we haven't projected significant growth from PFAS yet, we anticipate the market will continue to develop.

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

So speaking about the structurally higher spreads in the oil business, could you talk about how you're currently sourcing used motor oil? And what I mean by that is approximately how much is contractual versus just negotiated on The Street. And of those contracted volumes, could you discuss the escalation indexes versus what you might have had 5 years ago? I suspect they're more favorable for you these days, but if you could just give us some color on that.

Sure. I'll begin. We have our national accounts, and one of the key offerings for major corporations is our North American presence. We negotiate those contracts to ensure they are beneficial for both parties. Additionally, we have many branch-owned accounts where business is negotiated locally based on market conditions. We usually price our services according to the recycled fuel oil market, as this is where much of the oil is directed, including off-spec oil, industrial oil, and hazardous waste collected from oil spills and tank cleanings. We actively participate in the local recycled oil market. Therefore, we analyze our market pricing in a more detailed and regional manner, avoiding any long-term commitments that might lead to issues. Our experiences from 2013 and 2014 have taught us to steer clear of that. Importantly, our used motor oil customers are generating additional service demands, such as parts washer services, oil filter disposal, and containerized waste emergency response. Consequently, we are introducing a greater volume of higher-priced containerized waste into our network through our sustainability solutions segment, which is a significant advantage for us today.

Okay. And I don't mean to throw a wet blanket on your excellent results today, but if...

You're going to.

But I'm going to anyway. If we were to enter a recession in 2023, you mentioned reshoring and we've talked a lot about the U.S. chemical renaissance and other factors that are favorable to you. But could you just discuss when you think about your cyclical end markets, what would the impact of a, say, minus 5% industrial production print be like if that was the state of being in 2023 for Clean Harbors?

Yes, Dave, I appreciate your comments. Looking back to 2020 when the pandemic hit and everything paused, our EBITDA continued to grow as if the pandemic didn't affect us at all. It’s difficult to predict what we would do in such a scenario, but I can confidently say we are very resilient and adaptable. This involves cutting costs, managing the business effectively, and closing sites. In fact, during 2020, we shut down 5 of our 6 re-refineries within a month, demonstrating our speed and agility. Regardless of what lies ahead, similar to the situation in 2008, our business generally performed well. Certain sectors like tech services thrived because they are challenging to place elsewhere. If a recession were to occur, a situation that no one desires, I believe we would be well-positioned, as we have been for 42 years. As Alan mentioned earlier, he has experienced several recessions, and we have always turned that into an opportunity to become more agile, and possibly explore mergers and acquisitions to accelerate our growth.

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

I'm here. Alan, I've covered you for a long time. I don't think I've ever heard you use the word thrived in a quote in a press release. That's how strong you feel about the business right now.

Right. Yes.

So Mike, taking your guidance about segments, ES, around $890 million; SKSS, around $310 million; that's corporate overhead, around $210 million. That gets you to the $990 million?

Yes. I think you're pretty close. I think it's a little higher on the ES side and a little higher on the corporate side. But I think you're in the ballpark, Michael.

Okay. So we might be in like the $225 million, and that puts us in a right around $910 million, okay. That gets me to the SKSS. So you all have and all of us have sort of looked back on '19 and said, 'That was kind of a normal world in SKSS.' Did round numbers, $130 million. And now we've had this extraordinary spread expansion. At this point, we're up somewhere in the $180 million difference. How much of that at this point do you really think is structural? Because your guidance this year in February, you acknowledged there would be some narrowing and that the guidance reflected that. We've now plowed right through that. What stays with us of that $180 million as supply and demand rebalances. I don't think oil is coming down below $80 anytime soon. So maybe $80 is the base there. Help us understand what reflection is on that $180 million.

Yes, Michael, I think you're correct. We've previously mentioned that normal years would yield around $130 million. However, many factors have changed since 2019, including regulations and an increased focus on sustainability from our customers. All of these elements have influenced our perspective on the long-term direction of the business. Regarding the growth and management of our operations, Alan touched on this during the call, and I want to expand on it. Having our storage facilities strategically located and improving terminal capabilities for oil storage are small yet significant changes that help us manage the business more effectively. For instance, we now have a winter storage program that allows us to transport base oil closer to our customers during winter months, preventing shortages and the need to purchase oil from the market. These adjustments will likely have a lasting impact on our operations. While crude prices have risen and with a significant portion of base oil sourced from Russia and Ukraine, the situation does not appear to improve in the near future. I believe the new baseline is substantially higher than the $130 million we discussed, although it's difficult to specify the exact figure at this time. However, it is certainly closer to our expected outcomes for 2022 than to those from 2019.

Okay. Eric, regarding the Georgia plant, what is the yield into the VGO for the 18 million gallons? Is it the same 3 to 3/4 of...

75%.

75%?

70%, 75%.

And then is there a plan to put a hydrotreater on and convert that to base oil? Or do you take that VGO and push it into your other plants and turn it into base oil?

We certainly, in the short term, plan to move that VGO into our other plants. But we've had some initial discussions about expanding some hydrotreating capacity there in the future.

Okay. Regarding incineration, there is a significant percentage increase in the market between your operations and those of Gum Springs or Veolia. Veolia appears to enter the market first. How do you view the potential impact of that additional 100,000 tons regarding your current pricing structure and the supply-demand dynamics? How will that affect the normalization of capacity in the marketplace?

Yes, we are optimistic about the capacity that is coming online and the high utilization rates across all of our units. The amount of waste generated across various customer segments continues to grow. Our incinerators are especially well-equipped to manage challenging waste streams and mixes. This is evident in the market, and we have structured our operations to handle more drums and direct burn processes. We remain very positive about our outlook, and that additional capacity will be beneficial. I don't believe that Gum Springs will take precedence over us, and we feel confident about our position moving forward. The increased capacity is certainly needed in the market.

Okay. That brings me to the next point. I believe it's reasonable to say that you have experienced a rate of price change like never before since the company's inception. You have adjusted unit prices across nearly all product lines. How confident are you that you will maintain these unit price changes when we eventually enter a cycle?

Costs are still on the rise, including natural gas, transportation, and general service and labor expenses. These inflationary pressures aren't going away, so we've had to increase our service pricing aggressively while also cutting costs. We made workforce reductions in April and are exploring ways to shift costs to more affordable locations and utilize our rail network to reduce transportation expenses. We're considering all options to tackle these challenges. However, we must continue to adjust our pricing, especially in our industrial sector, where our profit margins are not as strong as we would like. We also face capacity issues, leaving us unable to meet all our customer demands due to labor and equipment shortages. In some cases, we are experiencing delays of up to two years for new tractors. While we will be flexible with our customers as we did during COVID by offering some concessions, we must focus on improving our margins as inflation and other costs keep rising.

The last one for me, there was an industrial recession in the second half of 2015, all of 2016. What is different about Clean Harbors today versus that operating period, and therefore, give us the market more confidence that this $990 million, while it might have some spread compression on oil in that, maybe that's really $940 million. But that's the baseline.

If you remember, after the Eveready acquisition and a lot of our growth and expansion, going after a lot of the oil sands work and a lot of the fracking work, we were generating close to $150 million in EBITDA on that part of our business. We'll probably generate $25 million in EBITDA in that business now because we've sold a lot of those assets, as you know, and we've really tried to focus on the pure environmental side and the industrial service side of that business. And so when we were going through all those challenging times during that recession, as you talked about, we made up for that loss. We grew in other parts of our business. And I think we grew because the nature of our customer base, the verticals that we service, whether it be health care and the expansion we're doing in health care, adding autoclaves, expanding our medical waste capabilities, the retail side of business. The retail side has been a real growth market for us. Whether it's the pharmaceuticals or the big boxes, the regulatory environment on them has been extremely stringent on how they're dealing with their returns and their waste materials. That market has really been growing. And so when we look at some of these verticals that historically might not have been of any size, we're really seeing those grow for us. And we continue to kind of drive route density, go after those small quantities. And I think those are the things that we can do and grow through another recession.

Our next question comes from the line of Jim Ricchiuti with Needham.

I wanted to just go through HPC, if I could, which seems to be performing better than expected. And I'm hearing comments on a couple of things. In terms of the costs, are you ahead of the target there? Have your expectations for that business changed versus where you were earlier in the acquisition?

Yes. Jim, this is Eric. Our synergies continue to be on track as we go through 2022 here. We still have a lot of opportunity to continue to work with our branches. Most importantly is really working with those large customers that we're servicing there and continuing to expand the margins that we're getting with those customers, develop partnerships with them better, support them better. But we're really just midway through some of the synergies we've looked at.

I think I would say we're probably lagging on the pricing initiatives. So keeping up with the tremendous cost increases that we've taken on simply from inflationary cost increases. I would say that's one part of the business that's lagged, and we're hoping that we can continue to do a better job in that area.

When do you expect that some of those improvements might start to take effect?

We've been working on it, although it's taken longer than we anticipated. We have rebranded and merged contracts, which has added time to rationalize the legal and pricing aspects. However, we are actively addressing this, and I expect to see progress throughout the rest of this year.

It certainly has started to show up here in the second quarter, but we have a long way to go here in the latter half of this year.

No, we really haven't. We certainly see that fuel prices are coming down a bit, which is helpful. But outside of that, some of the price increases we see, like wage inflation, don't go away. I feel like that's not going back. Certainly, some of the commodities for steel and steel drums have started to slow down, but we really haven't seen that reflected in our pricing yet.

Yes. The materials that we use in our parts washers, both the solvents and ESOL cleaning solution, have really elevated over 250% over the past year and 1.5 years. So we're continuing to see that. So costs are continuing to increase in certain areas. On the labor side, as Mike said, while we've been fairly successful at adding over 1,000 people year-to-date, we still have a long way to go on continuing to retain good employees and grow our employee base.

Are you seeing moderation in the attrition levels?

We are. We are. We've reduced our attrition rate.

Yes. I think we're flat. I think we're flat, Jim, from where we were, which is good, which I think as we start to see that belt. And so as Eric said, we've done a better job of hiring people. So that's why we're up headcount from year-end.

There are no further questions at this time. I would like to turn the call back over to Mr. McKim for closing comments.

Okay. Thanks for joining us today. The team will be active on the Investor Relations front in the next several months, starting with the Raymond James event in New York City later this month. So have a great rest of the summer and stay safe. Thank you.

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.