Clean Harbors Inc Q2 FY2023 Earnings Call

Greetings, and welcome to the Clean Harbors Second Quarter 2023 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael McDonald, General Counsel. Thank you, sir. You may begin.

Thank you, Christine, and good morning, everyone. With me on today's call are our Co-Chief Executive Officers, Eric Gerstenberg; and Mike Battles; and our EVP and Chief Financial Officer, Eric Dugas, and SVP of Investor Relations, Jim Buckley. Slides for today's call are posted on our Investor Relations website, and we invite you to follow along. Matters being discussed 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 2, 2023. Information on potential factors and risks that could affect our results is included in our SEC filings. The company undertakes no obligation to revise or publicly release the results of any revision to the statements made today other than through filings made concerning this reporting period. Today's discussion includes references to non-GAAP measures. Clean Harbors believes that such information provides an additional measurement and consistent historical comparison of its performance. Reconciliations of these measures to the most directly comparable GAAP measures are available in today's news release, on our website and in the appendix of today's presentation. Let me turn the call over to Eric Gerstenberg to start, Eric?

Thanks, Michael. Good morning, everyone, and thank you for joining us. Turning to our Q2 financial results on Slide 3. Our second quarter performance underscores the strength of our Environmental Services segment where our adjusted EBITDA margin climbed by 140 basis points from a year ago. This is a highly resilient business that is supported by scarce permitted assets, a strong safety record, technical expertise, a highly trained workforce, close customer relationships and effective capital allocation. Q2 marked our ES segment's seventh consecutive quarter of growth and profitability. Its performance partly offset the decline of our Safety-Kleen Sustainable Solutions segment, which experienced some headwinds resulting from the adverse conditions that continue to affect the base oil and lubricant markets. Before I review the segments in more detail, I'd like to highlight our Safety results as Safety is central to everything we do. After a record Q1 performance, we delivered a second quarter TRIR of $0.68, the best Q2 in our history, which keeps us on track to achieve our ambitious annual TRIR goal of 0.70. The record-breaking heat across much of the country posed a unique challenge in Q2 and continues to do so as we move through the third quarter because our team is often required to wear personal protective equipment, both outdoors and in plant. We are focused on monitoring temperature and hydration. To everyone on our team, we appreciate all the proactive steps you take to keep yourself and your colleagues safe. Turning to Environmental Services on Slide 4. Segment revenue increased 7%, and the growth of our Services business was underpinned by pricing and volume initiatives. Each of the segment's four business units posted year-over-year gains with Industrial Services and Safety-Kleen Environmental branch businesses leading the way. Industrial Services revenue grew by 11% on the heels of a strong spring turnaround season and initial contributions from our Thompson acquisition. Our second full year of HBC, which we acquired in late 2021 is trending better than we anticipated. Safety-Kleen Environmental revenue climbed 16% with the demand for the business's core offerings continuing to grow. For the second consecutive quarter, we performed 250,000 parts wash services, an increase of 4% from Q2 last year. Field Services revenue grew 7% despite not having any large-scale emergency response related projects. Technical Services revenue grew modestly, largely attributed to the many planned maintenance and repair days at our disposal facilities to address weather-related outages that occurred in Q1. As expected, utilization at our incinerators reached 84% this quarter, up 4 points sequentially, but down 6 points from Q2 last year, which had fewer down days. Looking ahead, we anticipate fewer down days in the back half of this year than we had in the first half. The average incineration price was up 8% in Q2. We made some important repairs and investments in the incinerators that limited utilization, but our operations team worked hard to maximize the throughput to address our increasing backlog of waste. Landfill volume in the quarter was flat compared to the prior year. This year, our base business was particularly strong with a good mix of high-value waste, which resulted in average pricing increasing by 21%. Looking at Segment Profitability, a 13% adjusted EBITDA growth in the ES segment once again outpaced the top line. Given our highly leverageable network of assets, higher revenue should consistently drive greater profitability. As noted last quarter, we are also benefiting from a number of productivity programs and cost reduction efforts across the organization. To counter inflationary pressures, we've been targeting $100 million of company-wide cost reductions in 2023, much of it in ES. As a result of all these factors, we increased our ES margins and are now topping 26%. Overall, a great quarter for the U.S. segment. Before handing it off to Mike to take you through SKSS, let me touch on a recent development related to PFAS that should benefit our Environmental Services business materially in the coming years. Turning to Slide 5. In July, the U.S. Department of Defense issued new guidelines related to the incineration of materials containing PFAS, which research indicates is present at hundreds of military installations. The DoD has authorized commercial hazardous waste incineration as a method of addressing these forever chemicals. The DoD guidance also allows for hazardous waste landfills as an alternative remediation method. Last year, we published the results of a comprehensive third-party study that clearly demonstrated that we could effectively destroy a wide range of PFAS compounds, including AFFF firefighting foam at commercial scale. In that study, we proved that we can consistently achieve at least a 99% rate of destruction, which is the gold standard for thermal methods. Additionally, the EPA conducted its own pilot study at its North Carolina facility and came out with similar conclusions about the potential for incineration. Given the compelling results of our study, we view the DoD's decision to lift the PFAS moratorium as a very positive development for Clean Harbors long term. That being said, we don't expect a material amount of opportunities from the DoD this year. The EPA still must set final guidelines related to acceptable levels of contamination in soil and water and provide recommended methods of storage, removal, transportation and destruction. In the interim, we plan to work closely with the DoD to develop the right solutions at military installations to best protect our nation's armed forces. With that, let me turn things over to Mike to discuss SKSS and capital allocation.

Thanks, Eric, and good morning, everyone. Let me echo Eric's comment about the great work of our team this quarter. We had a number of standout performers in our ES segment that helped us deliver overall results in line with our guidance for the 23rd consecutive quarter. That consistency is something that we personally take pride in. Moving to Slide 6, SKSS had another challenging quarter as the segment fell short of our profitability expectations. While we lowered our expectations on our last call, we do not anticipate the unusual absence of the Q2 seasonal pickup in demand and pricing this year. In fact, after a price decline in early April, posted prices fell again in June, which was the combination of a weak spot pricing environment all quarter long. While crude prices have risen more recently, they have not yet correlated to a rebound in base oil and lubricant pricing. On the top line, SKSS revenue dropped 15% based on the weak pricing climate brought on by global market conditions compared to a year ago when scarcity of supply was the customer's primary concern in the wake of major market disruptions. In Q2 of last year, posted prices rose by $1 a gallon, whereas this year in Q2 posted prices fell by $0.50, with spot pricing exhibiting even deeper discounts. In 2022, customers were concerned about shortages and allegations. Conversely, this year, buyers have been able to patiently wait on the sidelines, destocking inventories and holding out for lower prices. As a result of these conditions, SKSS adjusted EBITDA decreased 45% with a year-over-year drop in margin as our near-term refining spreads have been compressed. While market conditions have remained unfavorable, the SKSS team has reacted quickly to counter the spread compression. The team is executing well in the areas we can control, including collection pricing and volumes as well as rapid production and volumes sold. During the quarter, we shifted rapidly from a pay-for-oil to charge-for-oil pricing model, while generating record collections of 64 million gallons. We also sold a record level of base oil gallons in Q2, as our re-refining plants continue to run well. Blended product sales accounted for 19% of total output from our plants flat compared with a year ago, but up from the 15% we reported in Q1. We continue to win back blended customers we lost in the back half of 2022 due to additive shortages. Our direct volumes, which represents our closed-loop approach, were at 7% in Q2, which is flat from a year ago and in line with our expectations. Our goal remains to increase their blended volumes this year to average on both the direct and wholesale sides. Overall, even with the declines we've seen this year in SKSS, this segment is still expected to deliver an approximately 20% adjusted EBITDA margin this year, and it remains a strong free cash flow generator and high ROIC business for us. Turning to Slide 7 and our capital allocation strategy. As part of our Vision 2027 strategy that we laid out at our Investor Day earlier this year, we have multiple avenues to grow our company. We continue to evaluate opportunities to invest in CapEx to drive organic growth, particularly in the facility network, our maintenance shops and other areas. The build-out of our new state-of-the-art incinerator in Nebraska remains on plan, on budget, and on track for opening in early 2025. We installed the kiln this quarter and are on track to hit a number of other critical construction milestones in the back half of this year. On the M&A front, the early returns on our Tonsan Adhesive acquisition are very promising. The business is proving to be synergistic and should support cross-selling going forward. We continue to see a good flow of potential bolt-on transactions for both operating segments. In Q2, we closed a very small acquisition, less than $10 million in size, during which we added a company that leases more than 500 intermodal containers. We are confident that these assets will benefit us as we grow our business in the years ahead, particularly with the newest incinerator coming online and larger PFAS opportunities starting to develop. Eric Dugas will discuss our financial activity for the quarter, but I'd like to remind investors that our strong and flexible balance sheet allows us to remain opportunistic with respect to potential M&A. Overall, we remain on track to hit our financial targets in 2023 as momentum in our ES segment offsets any declines in SKSS. Strong demand for ES has not abated, and our favorable market dynamics are supporting our profitable growth in all of our four business segment units. Growth in Industrial Services continued to be a meaningful contributor to our 2023 success as we move towards the fall turnaround season. Within our disposal network, our record backlog positions us well for the back half of the year. The project pipeline within the ES segment shows no sign of slowing as the pace of restoring picks up and government infrastructure spending is starting to make its way into the market. Given the trajectory we've seen through 2023, we continue to expect nothing short of a record year in our ES segment. Although it's disappointing that some drivers did not stabilize the pricing environment in SKSS, we have responded quickly to market conditions. We will continue to control costs across the business, particularly on the collection side while still ensuring that we have enough supply to maximize output at our re-refineries. In total, we are maintaining our adjusted EBITDA and adjusted free cash flow guidance for the year as we believe our ES segment will offset the slowdown in SKSS.

Thank you, Mike, and good morning, everyone. Turning to the income statement on Slide 9. As Eric and Mike outlined, Q2 was a strong quarter for us, with our ES segment again delivering exceptional results, exhibiting continued profitable growth and exiting Q2 with significant momentum across many of our service businesses. Total revenues for the quarter increased $42 million with our ES segment growing $81 million to more than offset the lower top line figures for SKSS. Adjusted EBITDA was $287.5 million, in line with the guidance we provided in May, but down from the $309.1 million we reported a year ago when we benefited from much higher base oil pricing due to global supply disruptions. Our adjusted EBITDA margin was 20.6%, in line with our expectations. Gross margin was 32.2%, reflecting our ability to offset inflation with appropriate price increases and cost savings while increasing productivity and realizing gains from operational efficiencies. SG&A expense as a percentage of revenue was 12% in Q2, consistent with our expectations. For the full year, we anticipate being in the low 12% range and essentially flat with 2022. The team continues to do a great job of offsetting inflation and wage pressures with cost mitigation strategies. Depreciation and amortization in Q2 increased slightly to $89.7 million again, consistent with our expectations given the addition of Thompson. For the full year 2023, we continue to anticipate depreciation and amortization in the range of $350 million to $360 million. Income from operations in Q2 was $189.8 million, largely driven by our strong performance in Environmental Services. Net income for the quarter was $115.8 million, resulting in a GAAP earnings per share figure of $2.13. Turning to the balance sheet highlights on Slide 10. Cash and short-term marketable securities at quarter end were $326.1 million, reflecting our decision to pay down the entire $114 million of debt that was outstanding on our ABL revolver. Given our strong current financial position, we thought it was prudent to lower our interest expense with some of the excess cash we had on hand. As a result of that action, we ended the quarter with debt of just over $2.3 billion. We remain very comfortable with our overall debt portfolio as there are no significant amounts coming due for a number of years. Leverage on a net debt-to-EBITDA basis as of June 30 was approximately 2x. Our weighted average pretax cost of debt at the end of Q2 was just over 5%, with approximately 85% of our portfolio being at fixed rates. Turning to cash flows on Slide 11. Cash provided from operations in Q2 was up 22% to $207.6 million versus $170.6 million a year ago. CapEx net of disposals was $121.5 million in the quarter, up from the prior year, partly as a result of spending on our Nebraska incinerator project, which accounted for $22 million of our Q2 CapEx. In the second quarter, adjusted free cash flow was $86 million, which was right in line with our internal expectations and keeping us on track to hit our annual target. For 2023, we continue to expect our net CapEx to be in the range of $400 million to $420 million. Full year spend on our Nebraska incinerator is expected to be in the range of $85 million to $90 million. Having spent $35 million year-to-date and with some major construction bases planned for the coming months. We are also continuing to make investments in both equipment and our transportation fleet with an aim to minimize third-party rental spending while accommodating the growth that the businesses need. During Q2, we bought back 36,000 shares of stock at an average price of $137 per share and a total cost of $5 million. We still have close to $100 million remaining under our existing authorized buyback program. Moving to Slide 12. Based on our Q2 results and current market conditions for both our operating segments, we are maintaining our 2023 adjusted EBITDA guidance range of $1.02 billion to $1.06 billion with a midpoint of $1.04 billion. Looking at our guidance from a quarterly perspective, we expect Q3 adjusted EBITDA to be approximately 7% to 9% below Q3 of 2022 due to a challenging year-over-year comparison for our SKSS segment but offset by continued positive growth in our ES segment. I'll now provide an updated breakdown of how we expect our full year 2023 adjusted EBITDA guidance to translate into our reporting segments. In Environmental Services, we now expect adjusted EBITDA at the midpoint of our guidance to increase 15% to 17% from the full year of 2022. Demand for a range of services, particularly in Industrial, and our Disposal facilities continues to be very strong. As a reminder, our full year 2023 guidance for the ES segment includes $12 million of adjusted EBITDA attributable to the Thompson acquisition. For SKSS, we now anticipate full-year 2023 adjusted EBITDA at the midpoint of our guidance to decrease in the 35% to 40% range from last year, reflecting the ongoing pressure on base oil pricing. In our Corporate Segment, at the midpoint of our guide, we now expect negative adjusted EBITDA to be up 7% to 8% in 2023. The slight increase from our prior guidance reflects some higher expenses that occurred in Q2, primarily related to insurance programs and professional fees. Overall, the team is doing a good job offsetting items like higher insurance expenses, salaries, and corporate costs related to the Thompson acquisition with cost savings programs. For 2023, we continue to expect to deliver adjusted free cash flow of between $305 million and $345 million. I want to remind everyone that this guidance includes approximately $85 million to $90 million for the new incinerator this year. If you add that spend back, the midpoint of our adjusted free cash flow guidance would be about $450 million. In summary, Q2 was marked by solid execution in both segments. Our ES segment delivered profitable growth above our expectations. In our SKSS segment, while the financials were less than anticipated, the team responded rapidly to declining market conditions, and as Mike said, did a nice job controlling what they could. Looking ahead, we're enthusiastic about our near and long-term prospects, especially in the ES segment, where there are numerous tailwinds. We have not seen a meaningful slowdown in any of our core lines of business. Our sales pipeline as we sit here today is larger than it was 90 days ago. We had a healthy outlook for the second half of the year for multiple reasons, including the backlog of waste in our facilities, the additional waste streams that we continue to see enter the commercial marketplace, the emerging PFAS opportunity that Eric spoke about, and the schedule of projects we anticipate commencing going forward. Our goal is to continue to capitalize on these positive market dynamics in ES while managing through the current downturn in SKSS while setting the business up for future growth as macro factors impacting SKSS stabilize. Overall, we continue to expect another solid year for Clean Harbors in 2023 as we work towards achieving our Vision 2027 goals.

So you said all this in the call on your prepared remarks. I just want to make sure we emphasize it, all lines of business, not just technical services and not just incineration, saw growth in ES. And the pricing, is that spread across all of them as well? And or is it concentrated just in disposal?

Yes, Michael, this is Eric. Thank you for the question. Yes, the pricing is across all lines of business. We continue to push price for disposal, transportation, labor across all areas of our businesses, and that continues to take effect.

Michael, going back, this is Mike to add on to what Eric said. If you think back a few years, it was incineration scarce. So we get pricing bumps on pricing in our facilities, whether it be landfill, incineration, TSDS, what have you. What's happened over the past couple of years is that there's been a switch, and getting qualified, safe, compliant labor is also very tough; getting trucks and equipment is also very difficult. And that's allowed us to drive price beyond just incineration and beyond facilities. You see that this quarter with terrific results in the industrial side and the field term that Eric mentioned in his prepared remarks.

And historically, the turnaround business is a little stronger in the first half than the second half. Is that pattern holding? Or is it reversed and that's helping give you that much more confidence about total ask directionally.

It certainly gives us that confidence. But yes, the first half of the year was more turnaround than traditional. We had a very strong turnaround season for our industrial services. We expect that to continue, and it's really reflective in the numbers of that business.

Okay. Everyone is asking about the SKSS question, and I won't be the first. How can you instill confidence in the market regarding your expectations for the bottom? Is there sufficient data available? I'm struggling to find information that indicates whether the correction in the finished goods market is completed, which is partly causing this issue. There seems to be an excess of finished goods, and the blenders are indicating that they don't need to purchase oil for blending to create finished goods.

Yes, Michael, this is Mike. I'll address that question. Ultimately, we believe that the business has managed to control costs, provide blended guidance, and reduce PFO pricing to CFO pricing, and the plants have been operating efficiently. We implemented the strategy we discussed in our Vision 2027 presentations back in March. Determining whether this is the bottom is challenging. I think the midpoint for the business will start with a 2 in the short term. If prices are increasing, it will be in the mid to high 2s; if they are decreasing, it will be in the high ones. Currently, our guidance midpoint is around $1.90, after three or more price decreases in the first half of the year. I'm optimistic that with a slight rebound in crude prices over the past few weeks, we may see base oil pricing rise as we model for the second half of the year. We're assuming base oil prices remain stable. However, given the recent developments regarding crude prices, there might be a base oil price increase, which would certainly assist in achieving the targets we discussed.

Okay. And just so you alluded to the midpoint SKSS $1.90; that puts ES at like $1.11 if you're landing at somewhere around $2.55 to $2.60 on corporate overhead. We did all that math.

We are happy to answer questions about SKSS for as long as needed. To your point, Michael, we likely will. The ES business continues to perform exceptionally well. As Eric mentioned in his prepared remarks, the incinerators faced challenges in April and into May. Nevertheless, we still achieved 140 basis points of margin expansion in the ES business. If you review the guidance and estimate revenue, our margins in the latter half of the year for the ES business will be 150 to 200 basis points better than last year. We are very optimistic about that business and enthusiastic about its future. I want to emphasize that we presented our Vision 2027 to the investor community. I'm more optimistic about Vision 2027 now than I was 90 days ago. More importantly, our pipeline remains unchanged and is stronger today than it was 90 days ago, which truly excites me.

Yes, just a little bit more math last year, ES was 75%, right, of EBITDA pre-corporate expense, and this year, it's going to be 85% or more. So I think I'll focus on that 85%. Can we start with that PFAS commentary? Maybe you can level set for us how much PFAS remediation revenue you've seen year-to-date and what's in the 2023 guidance? Can you break up the PFAS opportunity into different chunks? Maybe you can talk about potential revenue just with DoD or the government, just different ways for us to wrap our heads around how big this could be for you over time?

Yes, Noah, this is Eric. I'll address that question. First, our pipeline of PFAS opportunities is growing. While I won't specify an exact revenue figure, I can confidently say that we are seeing a significant number of opportunities. We have comprehensive solutions that we are excited about. We are conducting sampling and analysis for our customers, providing full remediation of sites, transportation, and a complete range of disposal capabilities including groundwater and industrial water treatment. We also offer landfill solutions featuring a closed-loop system. Additionally, there is incineration, which has been positively impacted by a recent study and announcement from the Department of Defense to lift the moratorium. The potential for us remains strong as regulations will continue to be implemented this year and into next year. Our team has noticed many opportunities from various customers across different sectors. We believe our total waste solution stands out in the industry, and it continues to appear promising for us.

It's pretty small this year. As Eric said in the prepared remarks, the EPA has to put more guardrails on how Clean is Clean. But it's a $40 million, $50 million opportunity this year. It's not a needle mover per se.

Yes. No, I think that projection of the $20 billion of spending was over the course of 5 years; a large part of that is go get for us to be able to perform the remediation services and be able to feed volume into our landfills and our incinerators depending on the characteristics. So a good chunk of that $20 billion, $21 billion is go get for us and is go get for the industry. We're well positioned with all of the assets and great infrastructure that we have to be able to participate in a substantial part of that.

Eric G., pricing incineration, it was awfully good. If I'm not mistaken, it was on a really tough comp. So can you just talk about the outlook in terms of price and volume in that market? Because we have heard about some weakness in the Chem markets; the industrial markets aren't exactly the best. So maybe the backlog is smoothing that out, but can you just give us any color there?

Yes, that's right, Tyler. Our price and mix continue to be about 50-50. We have opportunity in the backlog of generation that we built up throughout the second quarter to bring that into the third quarter and the fourth quarter as our incineration utilization improves. We're not seeing any slowing of chemical pricing. We're continuing to be on the trend of increasing our pricing, taking advantage of the difficult-to-handle waste streams feeding a tremendous amount of volume into our incinerators of drums and direct burn streams. We've also been leveraging our TSDF to handle a lot more volume and prep it for our incinerators. So that's helping us well. Price mix continues to be in that 50-50 area, and we continue to be bullish about it.

Okay. Perfect. And then it looks like ES margins were up. I think you guys called it out 140 basis points year-over-year. I mean, that's very solid, particularly given that you're now starting to lap tougher comps. If we were to kind of bridge that 140 basis points, what were the key drivers in there? Because I would assume that Thompson was actually dilutive to margins, but then maybe fuel was a good guide. Just any thoughts on kind of how you got there? And then was it more driven by pricing or cost control or a little bit of both?

Tyler, I'll begin, and then my colleagues may want to add their insights. The increase of 140 basis points was influenced by several factors. You're right in noting that industrial had a slight dilutive effect. However, we remain committed to increasing prices across all our business lines for labor, equipment, and materials, while also working on cost reductions. As I mentioned earlier, we have set a goal of achieving $100 million in cost savings, and we are actively implementing this to enhance our margins. Additionally, we are in the process of installing a new system to support our industrial services platform, allowing us to enhance margins and improve billable hours and compensation for our services. All these elements have come together, and we observed positive results in Q2, which we continue to experience. We remain optimistic about our outlook as we carry out our cost-saving initiatives, focus on pricing strategies, and improve efficiencies within our business while leveraging our robust labor network. Our team has excelled at sharing resources, and the industrial team from Thompson has effectively integrated with our core legacy industrial services to bolster their efforts. The collaboration of assets and personnel has significantly contributed to this improvement.

Just to add on to some of Eric's comments, this is Eric D. Again, I think you're right; Thompson is probably a little anti-dilutive to that. But if I think about the hydrochem acquisition that we did and continue to integrate into the platform, I think this year, we're really seeing some better margins out of that business from a lot of the cost-cutting and labor management that Eric mentioned. So better use of internal folks rather than third parties. Reduction in rental costs will continue to drive the business. But certainly, that acquisition is proving to be a good one for us at this point, and certainly, the synergies from that are contributing to the margin growth in ES as well.

The only thing I'd add: Eric said it well. The only thing I'd add is that the other thing that's happened is turnover is down; direct labor turnover is down 200 basis points from the beginning of the year and 500 basis points year-over-year. That investment we made in people and in our organization is having a material impact on our margin because that turnover costs us a lot of money, and that turnover coming down because of the investments we made in benefits and people is starting to pay dividends, something we're really proud of.

And just my last one here. I think you were at 26% in ES, and I get it; this is seasonally a strong quarter; but I think that was kind of the best since 2012 when you didn't have as much lower margin field and Industrial Service work. If we were to 'kind of dream the dream,' I mean, why couldn't this business be a consistent 30% or a 30-plus percent margin business longer term?

Yes, Tyler. We think it can be. We're going to continue to execute on all the programs across our businesses with the market positions that we have in industrial and field and large and small customers with Safety-Kleen Environmental and Clean Harbors on the large, will continue to execute and drive towards that 30%, and we see that in our path.

I'm wondering if we could. I wonder if you could just talk about the free cash flow cadence over the course of this year and how to think about conceptually 2024. Obviously, an environment where equipment availability has been all over the map, et cetera. How should we think about the puts and takes around the free cash flow bridge for 2024 versus 2023 outside of earnings and ultimately, any opportunities either from a timing standpoint or a free cash flow improvement standpoint for 2024 versus 2023 compared to what we're seeing this year?

Yes, Jerry, it's Eric Dugas. I'll start here. The first thing I would point out is that we have really strong free cash flow so far this year. We're nearly $50 million ahead of where we were last year, despite some real headwinds with kind of cash taxes we paid on last year's profitable earnings. Also, the increased CapEx that we pointed to, some of which is related to the Nebraska project. So we're really happy this year with where we are. I think we're well on our way to hitting the target for next year. When I think about 2024 in terms of puts and takes, we'll have a little bit less, I think, being spent on the Kimball incinerator. That's why we always like to talk about CapEx, excluding that number, but we continue to go up. Long term, we are targeting that free cash flow conversion kind of in the low 40% range and above when you look at our long-term targets. We think the business and the margin expansion we're seeing and many of the other long-term tailwinds that we've talked about today are going to target that long term.

Okay. And separately, Safety-Kleen Sustainability Solutions had pretty good margin performance sequentially, good 2 points better than normal seasonality. It looks like that business might be bottoming and turning the corner just based on your performance there. Can you just talk about is that consistent with what you're seeing? I know you took down the outlook, but it feels like sequentially, things are stabilizing. If that continues, EBITDA for the business should be up 3Q versus 2Q, I think.

Yes. You're right, Jerry. We did make a large shift from PFO to CFO in the quarter, which had a dramatic impact on our profitability. I think that really tested the team and their ability to drive that, and still collect a record amount of gallons. So really kind of a great quarter by them. I'm hopeful that we're there. Certainly, as we talked about it earlier, the model assumes base oil prices stabilizing, and if it raises, that probably will be a good guide to us in the back half of the year.

They absolutely did. We started the quarter in a pay-for-oil and we ended in the mid-teens charge oil at the end of the quarter.

The question on Industrial exposure. Has Clean Harbors disaggregated from trends in industrial end markets? The reason I ask is you've got 2.5 years of decelerating ISM; it's been below 50 the PMI for the last 9 months now, but yet you continue to see excellent trends today and into the second half in your ES business. Just thoughts on cyclicality of the business today versus what you had in the past?

Yes, Dave. This is Mike. I understand your concern regarding the decline in market factors. However, we are seeing more complex waste streams entering our network, which allows us to charge more and manage these streams effectively. Not all industrial production impacts our business equally. The rise of electric battery manufacturing, along with various complex chemicals related to air conditioning and other industries, is contributing to the increase in complex waste that we handle, helping us to balance out the industrial production trends you might be noticing in the overall economy.

Yes, that's great to hear. And second, on the PFAS outlook, I guess the EPA is signaling that they may not mandate enforcement against passive receivers of PFAS. It sounded like that's landfills and airports and municipal water systems and a lot of potential parties here. Are the enforceable situations and the self-policing that will go on in this industry, are those enough to realize the opportunity that you see in front of you today?

Yes. I'll answer that, Dave. Eric here. The enforcement, putting that aside, what I think the opportunity is, is regardless of past enforcement, there is a treatment that needs to happen, treatment and remediation. That's where the opportunity is. They're going to have lower discharge standards for water treatment, industrial streams, and groundwater streams. Obviously, the remediation of the sites is going to fuel material into our incinerators and into our landfills. That's where we see the opportunity.

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

This is Jasper Bibb on for Tobey. Industrial Services revenue was up 11% with Thompson. Longer-term, how do you address the pricing and margin outlook for that business as you continue to build your market share through there?

Yes, Josh. Eric here. We continue to drive price on a pretty set cadence with all of our customers in the Industrial business. As mentioned earlier, we also have a new platform that we're rolling out to combine the systems for both Thompson and the Industrial; those systems will help us deliver electronic worksheets that allow us to capture any leakage we might see across the business. That, combined with the efficiencies that we're realizing in the business by leveraging the combined headcount, leveraging rolling stock, the assets, the people together, working together, is all contributing to the expansion, the margin expansion of that business. We'll continue. So we're bullish about increasing the margins as we go forward by combining the businesses and getting stickier and cross-selling. There were a couple of new lines of business that we acquired through the Thompson acquisition that we're selling to our legacy HPC customers. So that's powerful as well. That whole sales team from the Thompson Industrial Group also recognizes the environmental lines of business that we can cross-sell into the customers there. All those things combined contribute to improving our margins and improving our growth and stickiness with those customers across the board.

That makes sense. And then with respect to the SKSS guide, just to clarify, I think you've now fully adjusted your charge for oil there to align with demand conditions, or would you expect to have to continue metering out those charges based on what you saw in July pricing?

Yes, Josh, I believe we are well positioned for a strong second half of the year. We are assuming that pricing will remain stable in our projections, and that our pricing yield will stay consistent. If necessary, we will adjust the pricing yield as we did in the first half of the year. In my opinion, we have taken all the necessary actions to achieve the targets ahead of us, provided that the base oil price remains stable.

Got it. Last question for me on the DoD authorization of incineration for PFAS. Just on timing, do you have any sense of a time line for when federal RFPs for PFAS disposal contracts might materialize? Or is that, I guess, more dependent on what comes out from the EPA?

We think, Josh, that we'll see that over the next year or two, the opportunities with DoD. We're already working collectively with them on a number of different sites, a number of different opportunities, and we think that will continue to grow here.

Thank you. How does your date announcement affect conversations you may be having in the market with commercial customers, other government bodies?

There is a strong group of customers involved in manufacturing PFAS compounds who are aware that thermal temperature incineration is the preferred method for disposal. This understanding is shared with the Department of Defense. Our experience and interactions with chemical customers and the DoD have highlighted the contamination issues associated with AFFF. High-temperature thermal incineration is seen as the best approach for dealing with these high concentrations. We view this as an opportunity, which is why we have conducted testing to demonstrate that our incinerator effectively destroys that contamination. We believe there is a receptive audience that recognizes this as the optimal disposal method for highly concentrated contamination.

I would add, Jim, that the DoD lifting the moratorium kind of validated our study. I really believe that what it means in the back half of the year and 2024 is hard to put a finger on that. But it really just continues to substantiate our long-term business model that incineration is a safe and effective way to handle these forever compounds.

In the quarter, we didn't provide it; it's mid-single-digit millions.

Got it. As we think about the second half of the year, on the ES side, you alluded to some of the benefits you're seeing – some improvement in turnover. How much more of a tailwind is pricing going to be in the second half versus the first half? And then just related to that, on the cost side, have you seen some moderation at all in the other cost pressures in the business?

Yes, Jim, we've certainly seen moderation really on the salary side across the workforce; that's moderating. Our pricing efforts will continue to outpace inflation. We continue to execute well on that. We have a comprehensive program across all of our business units to continue to drive price along with the efforts, as mentioned earlier on taking cost out of the business and continuing to get more efficient. We will continue to execute on that plan.

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

Thanks, everyone, for joining us today. Management will be participating in a number of IR events in the coming months. We look forward to interacting with you further at some of those events. Please enjoy the rest of your summer.

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.