Greetings, and welcome to the Clean Harbors Third Quarter 2024 Earnings 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 turn the floor over to your host, Michael McDonald, General Counsel for Clean Harbors. Sir, the floor is yours.

Thank you, Christine, and good morning, everyone. With me on today's call are our Co-Chief Executive Officers, Eric Gerstenberg and Mike Battles, our EVP and Chief Financial Officer, Eric Dugas; and SVP of Investor Relations, Jim Buckley. Slides for today's call are posted on our Investor Relations website, and we invite you to follow along. Matters we are discussing today that are not historical facts are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Participants are cautioned not to place undue reliance on these statements, which reflect management's opinions only as of today, October 30, 2024. 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 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 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. As we typically do, we'll begin with safety. Our people work in some of the toughest environments, but we do so in the safest possible way every single day. We began Q3 with an internal awareness push to ensure that our employees continue to prioritize safety. Our total recordable incident rate on a year-to-date basis now stands at 0.69, which reflects our position as an industry leader in safety. We are continuing to focus on our comprehensive safety programs to send our 24,000 people home uninjured every day. That above all else represents the foundation of our company. Turning to our Q3 performance on Slide 3. Our financial performance reflected solid year-over-year growth in both segments, but overall was not quite as strong as we had expected, largely a result of a less favorable pricing environment that affected SKSS. The ES segment saw healthy demand for both disposal and recycling services as we again experienced record volumes of containerized waste in the quarter and continued positive pricing momentum. Our field service business showed significant top-line growth for the second consecutive quarter, energized by our March acquisition of HEPACO. In Industrial Services, the scope and extent of our turnaround this fall was less than we originally anticipated resulting in a weaker quarter for that part of our business. Within SKSS, revenue and profits were up from a year-ago but included softer-than-expected Q3 demand and pricing with a more meaningful decline in September. Mike will discuss this in more detail and highlight the steps we are taking in this business. As expected, corporate costs were higher in the quarter as a result of acquisitions, insurance costs, and healthcare expenses, partly offset by cost-reduction efforts and lower incentive compensation. Turning to Slide 4, adjusted EBITDA in the ES segment increased by 15% on a 13% increase in revenue, translating to a 40 basis point margin improvement. HEPACO accounted for half of the segment's $150 million revenue increase with the remainder from organic growth driven by higher volume and pricing of our services. Q3 marked the 10th consecutive quarter of year-over-year improvement in this segment's adjusted EBITDA margin and its 12th consecutive quarter of year-over-year growth in adjusted EBITDA. Field services grew 68% on top-line, primarily reflecting the HEPACO acquisition. Higher network volumes and pricing drove an 8% increase in technical services revenue. Incineration utilization increased to 89% from 86%, underscoring the robust demand and strong backlog in our network. Average pricing in the incinerators rose 6% as we push through more volume. Safety Claim Environmental Services has grown steadily in 2024 with revenue in this segment up 8% in Q3. Parts washer placements were up and services reached a $250,000 mark with other core branch offerings also performing very well. Turning to Slide 5. Our new state-of-the-art incinerator in Kibble, Nebraska is on track to begin accepting hazardous waste in November as we complete final inspections. I had the pleasure of visiting with our team at the facility last week building a 70,000-ton incinerator is a complex project and the team has done an outstanding job, completing the largest construction project in Clean Harbors history on time. Kimbell mirrors the highly successful incinerator we opened in Arkansas in 2017 and will facilitate a smoother flow through our network while addressing the market's need for more outlets for complex waste streams. At an industry level, the recovery of the economy post-COVID, reassuring trends, and the closure of captive incinerators such as 3M spotlighted the need for the increased capacity. The commercial launch of Kimbell will help to address the glaring need for capacity in North America as it scales up over the next 12 to 18 months. We are confident that our incinerators and our entire disposal network will benefit from today's favorable market dynamics and future outlook, whether that is additional reshoring, government spending on programs including the infrastructure bill, the CHIPS Act, and the Inflation Reduction Act, or upcoming regulations in areas like PFAS. Regarding PFAS, customers are seeking permanent solutions and assured destruction of these forever chemicals whether in concentration form like AFFF firefighting foam or mixed in with contaminated soil, sludges, or water. Clean Harbors offers commercially scalable options today that can provide a full solution for this emerging multibillion-dollar marketplace. From testing and remediation to filtration and disposal, whether incineration or through landfill sequestration. In November, we will advance our next round of testing to meet the EPA's more stringent emission standards for PFAS incineration. Both the EPA and the DoD have committed to onsite participation at our incinerator during our scheduled testing. We are confident in the outcome of that testing. We believe the data will continue to support our previous testing results that clearly demonstrated that PFAS can be safely eliminated in our incinerators up to six nines of destruction efficiency. We are hopeful that our testing will help shape the regulatory framework expected to be issued next year by government agencies. With that, let me turn things over to Mike.

Thank you, Eric, and good morning, everyone. Turning to Slide 6, the SKSS segment's revenues increased by 6% and EBITDA increased by 32%. However, as Eric mentioned, the difficult seasonal momentum we see in the summer months did not translate into improved demand and better oil pricing in Q3. In particular, we saw a softening demand in the market in September. Pricing significantly deteriorated as we closed out the quarter, and that has carried over into Q4. With this market backdrop, we ultimately missed our expectations in this segment this quarter by about $11 million. The acquisition of Noble Oil helped drive waste oil collections up 17% to 69 million gallons. Average collection cost was at a small pay-for-oil level in the quarter. We are balancing our feedstock with our re-refinery's need with collecting oil at the best possible price. Our strategy for SKSS has been to minimize volatility through various initiatives including selling more blended gallons, producing more Group 3, and capitalizing on our capital partnership and opportunities to differentiate our low-carbon footprint products. In Q3, our blended volumes were 21% of our total volumes, up sequentially from 19% of the total in Group 2 in Q2. Our Group 3 program is moving forward, and we have selected our next re-refinery for full-time Group 3 production. As it relates to our multi-year closed-loop partnership, we're excited to support BP Castrol in this program. We are confident that their sales and marketing prowess will advance the standing of more sustainable oil in large fleets. We remain optimistic about the potential of this partnership. Turning to capital allocation on Slide 7. Our strategy for the growth of the business remains driven by ROIC, and we are well-positioned to execute it. Given our cash balance, low leverage, and the strong cash flow expected in Q4, we continue to look for areas to invest in this business directly with the Kimbell incinerator being the best example of that. But we also see smaller expansion opportunities like what we're doing in Baltimore, which we believe we can replicate at other locations in the coming years. On the M&A front, we are happy with the early returns of the HEPACO and Noble deals we completed this year. Our pipeline of acquisition candidates is robust as we continue to evaluate numerous opportunities, both large and small. We are seeking acquisitions that bring permanent facilities or unique assets, drive margin improvement through economies of scale and synergies, and can increase cash flow conversion and ultimately generate the best shareholder returns. We also intend to pursue our buyback plan as we effectively have for the past decade. Entering the final quarter of Q4, it was an overall healthy demand environment in North America and a positive outlook for our ES segment. Customers have come to rely on Clean Harbors for their environmental and industrial needs and opportunities to continue to grow through favorable price dynamics, including reshoring, infrastructure spending, PFAS, and potential plant closures. On the services side, we remain enthusiastic about the potential for the fields for field service growth through the addition of HEPACO and its emergency response capabilities. We expect technical services and SK Environmental businesses to continue to steadily grow and feed volumes into our network. Within industrial services, we're taking actions in response to a weak fall turnaround season and expect to return to revenue growth in that business in 2025. Within SKSS, we will continue to focus on stabilizing this business given the current demand environment for base oil and blended products. We're also taking steps to reduce our cost structure, including idling our California re-refinery here in Q4. We also plan to aggressively bring our collection cost down as we manage our refining spread in an uncertain pricing environment. Despite some market challenges related to base oil and refining customers, we expect to end 2024 with strong momentum across our network of disposal facilities and service offerings, giving us a positive trajectory for profitable growth in 2025. With that, let me turn it over to our CFO, Eric Dugas.

Thank you, Mike, and good morning, everyone. Turning to the income statement on Slide 9. We delivered strong year-over-year results this quarter, achieving healthy revenue and adjusted EBITDA growth along with continued margin expansion. As Eric mentioned, we had some challenges in our Industrial Services business, but overall, demand trends for our core business lines continue to be strong. Within SKSS, we were disappointed that the promising Q2 we delivered did not carry over into Q3 as demand began to wane and the typical seasonal strength in summer pricing deteriorated, particularly late in the quarter. On the top line, similar to Q2, we achieved a good mix of organic and acquisition-related growth as we grew total revenues by 12% or more than $160 million year-over-year. Adjusted EBITDA of $302 million was up nearly $47 million from a year ago. Our adjusted EBITDA margin in the quarter was 19.7%, up 100 basis points year-over-year as margin improved in both operating segments. The continued margin expansion reflects the leverage in the business given the higher revenues generated from our disposal network and SK branch, as we again received a record level of drum waste into our facilities as well as the sizable growth in field services that Eric noted. SG&A expense as a percentage of revenue was 11.6% in Q3, which is 90 basis points better than the year-ago period. Combined with our revenue growth, the primary factors behind this improvement on a percentage basis were synergies from acquired businesses and lower incentive compensation. For full-year 2024, we continue to anticipate our SG&A expense as a percentage of revenue to be in the mid-12% range. Depreciation and amortization in Q3 came in as expected at $100 million, up from a year-ago due to acquisitions. For 2024, we continue to expect depreciation and amortization in the range of $395 million to $405 million. Income from operations in Q3 was $192.3 million, up 25% from the prior year. Q3 net income increased 26% versus the prior year to $115.2 million, resulting in an earnings per share of $2.12. Turning to Slide 10 and the balance sheet. Cash and short-term marketable securities at quarter end were $595 million, up $100 million from the end of Q2 and $44 million since the year began. Our receivables increased by $28 million in Q3 sequentially from Q2 and after growing $186 million in the first half of the year largely due to acquisitions. We had expected to cut into that balance in Q3 rather than increasing it, but the delayed transition of HEPACO onto our billing system added to our receivables balance. The HEPACO integration onto our billing platform is now complete. However, the transition and associated billing delays will impact the timing and extent of cash flows for fiscal year 2024. Another item on our balance sheet I wanted to speak to is our buildup in inventories, particularly as it relates to SKSS. Since the start of the year, overall SKSS oil inventories have increased by $31 million, with $10 million of the increase occurring in Q3, as demand has softened and volumes sold are less than what was expected. Given this inventory growth and expectations looking forward, we made the decision to idle production at our California re-refinery, as Mike referenced. We expect our inventory balance in this business to be reduced in the quarters ahead as we work off the excess levels currently on hand. We ended Q3 with just under $2.79 billion in debt. The increase you see on the slide since the beginning of the year reflects the $500 million in incremental term loan we issued to finance HEPACO and Noble acquisitions earlier this year. Our balance sheet remains very healthy. Our net debt to EBITDA ratio was 2.1 times at quarter end, with no material debt amounts coming due until 2027. We also announced in mid-October that we repriced our term loan, which will result in approximately $2 million in annual interest savings going forward. Our overall interest rate at quarter end was 5.65%. Turning to cash flows on Slide 11. Net cash from operating activities in Q3 was $239 million, up 9% from prior year. CapEx, net of disposals was $94.7 million, down from the prior year and in line with our expectations. That number includes $20 million in Q3 spent on the new Kimbell incinerator to complete its construction for commercial launch. Total year-to-date spend now sits at just over $60 million for Kimbell. For the quarter, adjusted free cash flow was $144.5 million, which was $30 million ahead of the prior year but fell short of our expectations due to working capital impacts related to unbilled accounts receivable and increased inventory levels in SKSS that I mentioned a moment ago. For 2024, we continue to expect our net CapEx to be in the range of $400 million to $430 million. This range includes the spend related to Kimbell and $20 million for the purchase and expansion of the Baltimore facility. During Q3, we bought back 85,000 shares of stock at an average price of $236 a share for a total of $20 million, bringing our year-to-date total to $30 million. Moving to Slide 12. Based on our Q3 results and market conditions, we are revising our 2024 adjusted EBITDA guidance to a midpoint of $1.11 billion, which represents a 10% increase from 2023. This guidance assumes approximately $40 million in contributions from HEPACO and approximately $5 million from Noble Oil. We now expect our full-year 2024 adjusted EBITDA guidance to translate to our segments as follows. In Environmental Services, we now expect adjusted EBITDA in 2024 at the midpoint of our guidance to increase 13% to 15% from 2023. Most of our core ES businesses will close out the year strong with healthy volume growth. For SKSS, based on the current market conditions around lubricant and base oil demand corresponding pricing, we are now guiding full-year 2024 adjusted EBITDA to decrease 12% to 14% from 2023 at the midpoint of our guidance. While we have some promising initiatives underway and are taking the actions that Mike highlighted, we expect the softer demand and pricing pressures we experienced in Q3 to continue into the seasonally weaker fourth quarter. Within corporate, at the midpoint of our guide, we expect negative adjusted EBITDA to be up 12% to 13% compared to 2023. The year-over-year increase in corporate primarily relates to costs related to the acquisitions and insurance costs. For 2024, we are lowering our adjusted free cash flow expectations for the year based primarily on two factors: the higher inventories we are carrying in our SKSS business and delayed timing of accounts receivable cash generation stemming from the integration of HEPACO into our billing system. In both instances, we are confident that these impacts are temporary and just a matter of timing. We estimate the impact of these issues in this year's cash flows to be worth approximately $70 million and as a result, we are lowering our 2024 free cash flow range to $280 million to $320 million or a midpoint of $300 million. In closing, the ES segment continues to experience positive market dynamics that drive waste into our network, and we are on the cusp of Kimbell coming online. Our SK Branch business is performing well as is our field services business with the addition of HEPACO. While the fall turnaround season is limiting the growth in industrial services to close out this year. We believe we are well positioned in that business as the industry leader for SKSS. We remain focused on stabilizing that business after another challenging year and having the right long-term strategy in place. Overall, 2024 will be a year of strong, profitable growth and we are optimistic about our prospects for continued growth into 2025. And with that, Christine, please open the call up 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.

So can we first just talk about Q3 the implied Q4 guide? I mean both seem weaker, but it feels to me that the corporate here is really SKSS. I mean it seems that the core ES business is actually tracking almost dead on with your expectations. SKSS is weaker, you have weakness in base oil markets. I mean, is that a basic fair characterization? Is the entire kind of guide cut, if you will, just basically on SKSS?

Yes, Tyler, I'll start. This is Eric. Absolutely, what you just said is consistent with the way we looked at the quarter. The ES business across the board was very strong. Volumes into our network of containers, the needs from those customers, the SK Environmental business continued to really meet our expectations and growth both from a margin and a volume standpoint. Our facilities network really did an awesome job of handling record volumes of containerized waste once again in our quarter. So that core business is really strong. Field services, just another great quarter that they put together with the addition of HEPACO working with our legacy field service branches was just outstanding, and we managed to continue to manage some good projects. So that was great. It was a little challenged as we talked about when you look at the Industrial Services group for the quarter. Really what happened is the turnarounds we have the same number of turnarounds that we expected for the quarter and expect for the full second half of the year. However, the scope and size of those turnarounds were less, but that refinery market is challenged. The crack spreads are down. They're cutting back, and they really only wanted to do the work that they needed to do to continue to run and close out the year. On the SKSS side, as we all talked about in the script, that was really challenged by how base oil declined. And so we took some aggressive actions there on reducing the throughput of our refinery network by closing and reducing the throughput of Newark to make sure that we manage down our inventory, but also correct the pricing environment. And the team has engaged rapidly on changing our pricing structure to adjust to that. So we're really confident we're at the low there. The items that we're implementing across the board to manage the cost of that network and go forward, we're all engaged in doing that.

Yes. The only thing I'd add, Tyler, is that you got it right. From where we were in July, nothing really changed. I mean, as Eric said, some parts of the ES business did better, some parts did a little worse, but the guide is the guide who wouldn't have changed it. That was just the answer. It really is isolated to SKSS.

So, I'll ask a bigger-picture question about SK. Do you really need to collect 69 million gallons? I guess, wouldn't it just make sense to push harder to a CFO position, scare some volumes away because right now you're effectively oversupplying your own needs and probably having to sell those into the RFO market? And then just big picture though, do you think that the actions you're taking, you'll be trending back towards that $200 million in ’25 in SKSS? Is that a good way to think about it or will it take longer than that?

Yeah. First on the collected gallons, you're dead on, Tyler. The actions that were taken is to aggressively push on our pricing structure and that will be at the risk of some of those gallons, and we understand that. And obviously by the reduced production through our Newark refinery, that helps to readjust the network accordingly. So we're taking that action. As we go forward into 2025, we're still in the early parts of establishing budgets for our network. The $200 million number is a little bit aggressive to think that we're going to be back at that number, but we're certainly taking aggressive actions to restabilize and grow our EBITDA from 2024 results into 2025.

Yeah. And let's all remember that the pricing declines that we saw happened late in the quarter, and so that's kind of where it is now. I agree with Eric and with your comments, Tyler that we got to get after that. But the pricing declines happened kind of late. And it does take time to kind of adjust the pricing, and we talked about that many times and we're doing that as we speak, just have to work its way through the system.

Okay. So there's a lot going on in SKSS, but there's a lot to the story. So I know you guys talked a little bit about ‘25. I think you used the words positive trajectory into 2025 profitable growth if I go back to Eric Dugas, I think. But as we start to sketch out 2025, can we talk at a high level some of the key drivers there? It feels like we've got a decent backdrop in ES. You've got Kimball coming online. You should stabilize SKSS. Maybe turnarounds are up. PFAS is a tailwind. So I threw out some things, but can you guys give us any shape at all around ‘25? Just any broad comments would be super helpful. Thank you, guys.

Yes, Tyler. This is Mike, and I'll start. So, obviously, as Eric may have to go through a formal kind of front-end budget process. And it was said in a couple of analyst reports kind of prior to quoting, nothing and you read the reports, nothing has changed in the back half of the year that changes our positive view of the business and its growth trajectory. Assuming kind of no change in the macro environment, we expect to deliver mid-single-digit organic revenue growth in this business and adjusted EBITDA growth in the mid to high single digits, which is very consistent with what we've said in our Investor Day presentations and other comments we've made publicly, right. So, nothing changed there. And when you think about the breakout between kind of ES and SKSS, and Eric tried to answer the question a minute ago, ES will probably be higher than that and maybe SKSS, we got to get that stabilized and probably lower than that and maybe corporate stays as a percentage of revenue flattish to kind of where it is today. And so all those things you mentioned, whether it be PFAS, whether it be the rollover effects from M&A, whether it be kind of the catalyst that we've seen in this environment, that's all very real and very consistent with what we've said publicly many times. Nothing has changed there. It really is we really have to and you see it in the refining space of all the companies we're announcing now. Mean oil pricing has been very, very under incredible pressure and that's putting us under pressure. We have to be faster than that; we will be faster than that and adjust our input pricing on our used motor oil gallons to get that profitability up.

Okay. One last one real quick. But shouldn't cash flow in ‘25 be a really good story? Kimball drops off, Baltimore drops off, working capital gets better on accounts receivable and inventory work down?

I couldn't agree more. So you're going to have some natural things happening. You're going to have Kimbell spend getting back down to normal levels, right? So that CapEx is going to go down. We're going to obviously grow the business, which is also very positive. But then the things that Eric Dugas has mentioned around some of the billing challenges and unbilled and some of the inventory challenges, they'll be a good catalyst whether we get them done Q4 or 2024, they roll into 2025. We're going to get those fixed working on it. We meet regularly on working those numbers down and so that should also be a great catalyst into 2025. So I'm really bullish about capital. I mean it's hard to budget; it's even hard to budget cash flow. We got to see where we land here in 2024 before we get to that answer. But again, I feel good about it, continue to feel good about our cash flows and even a little better if there's some rollover of some of these working capital challenges Eric Dugas just mentioned.

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

Thanks for taking the questions. I just want to proceed in a similar spirit to Tyler here and start with the fourth quarter. If we think about ES kind of continuing to have a generally positive outlook. It looks like we got about 40 bps margin expansion here in 3Q. Any reason why margin shouldn't be up year-over-year for 4Q? I mean, if the mix is generally favorable, will the softness in IS? We think you would get some decent operating leverage in 4Q.

We absolutely will. We absolutely will know. I mean, we had year to date, it was up 100 basis points of margin expansion. If you look at kind of ES in total, so 40 is a bit of a misnomer because of the IS challenges that we just talked about. I would say though that if you backed out some of the IS challenges that Eric Gerstenberg mentioned a minute ago, the IS margins in Q3 would be up 100 basis points. So I think that's kind of a good story and I think that continues into Q4.

Yes. Just one other point to add to that too Noah that as we've talked about we're starting up Kimball this quarter. So with that comes along some start-up costs. As you see from our deferred inventory, we still have a lot of inventory to work off, but we do have that as we move forward through the fourth quarter.

Yeah. And I think that flips over to SKSS that there's just a challenge you got to work through here over the next quarter plus and I'd love some comments around the timeframe to kind of work through this inventory. It sounds like the inventory is just going to be a little bit higher priced versus the market. So you should take a hit on margins in 4Q. But just kind of in your base case plan now, how long does it take to work through the excess inventory and kind of get margins in the segment right-sized?

Yeah. Noah, this is Eric Dugas. Good question. I think when you look at the inventory in SKSS, as Eric Gerstenberg mentioned and Mike mentioned as well, we did make the decision to close down that California re-refinery. And so that's going to help us right size the inventory right there. It's probably going to take into 2025 to get it back down to the levels that we see demand at. But you're right, that is the unit cost at that plant is a bit higher than our overall network. So we'll see a little squeeze here in Q4 as we run that inventory through which that should improve next year. So a lot of different reasons we did that move, but we should see benefits into 2025 there.

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

Can you explain the $200 million SKSS EBITDA expectation? You achieved that in 2021 and 2022, but you've only met the run rate in two quarters since then. You mentioned revisiting your budgets. Is the $200 million figure still a valid expectation in that area? It seems you're making progress with Group III and some of the initiatives you've implemented, but I want to ensure our expectations are aligned.

David, you're probably right in your observation. We're under the year to get the midpoint of our guide. We're about $150 million range of EBITDA. We're doing a lot of things, as you noticed with Group III, with more blended gallons, with the partnership. We got to go harder on the pricing for our gallons. We have to really look at our cost structure as well. I think that's going to take time to get that profitability up. We're doing a lot of good things around transaction costs in other areas. But inflation is a bad guy there. We are a price taker in the marketplace. So that's something we just got to work our way through. I'm assuming in 2025, we get modestly better. I think that's a fair assumption, but modestly is the word underlying there.

Sure, Dave. It's really a matter of timing. The integration into our billing system began in June, and there was a learning curve involved. By August, we noticed that a lot of the billing processed during the integration needed corrections. We had to allocate resources from other parts of the business to address this. As a result, there was a delay in sending the bills out. Additionally, last quarter we mentioned some large emergency response jobs that added complexity and affected timing as well. To answer your question, it actually took us until late July to start seeing this issue, which became more apparent in August. I'm pleased to report that we quickly assembled a team to address it, and we are making progress now that we're fully integrated. Experts from other areas of the business are assisting the team to catch up, and we expect to resolve the unbilled levels as we move into 2025. However, this will delay our cash generation related to it. I want to stress that we do not see any bad debt risk associated with this situation.

Okay. And then just finally, a quick one. By my calculations, you still have over, what, $500 million on the share repurchase. Do you have an exact number for us there?

$545.5 million.

Our next question comes from the line of Jerry Revich with Goldman Sachs.

This is Adam Bubes on for Jerry today. Can you just update us on how your internal inflation is tracking? And how are you thinking about incinerator and hazardous landfill pricing? And what is a more normalized inflation environment?

Hi, it's Eric Dugas. So I'll take the inflation question, and I'll kick it over to Mike and Eric to talk about generally kind of pricing methodologies. But I think on the inflation side, obviously, the biggest piece of our cost structure being labor, we're still continuing to see probably 3% to 4% inflationary labor there, a little more stubborn than what we'd like to see, but that's what we're seeing. And then across the rest of the P&L, I think we continue to see inflationary pressures on things like maintenance while maybe there's some other areas where it's softening. So I think that wage inflation is probably a pretty good proxy of the entire P&L, but probably 3% to 4% is a good number to work with and that's what we're kind of anticipating here for the next quarter. I'll turn it to Eric maybe for pricing.

Yes. And then Adam, just to talk about incineration and landfill. We continue to have a very regimented program to drive price improvement across the network. As we just talked about on the incineration side, we were able to have a 6% price increase across the board. We're going to continue to grow at those same single to high-digit rates across both landfill, incineration, and our disposal network continues to be robust as we've talked about. So we fully expect our pricing to continue to hold.

Yes, Adam, I believe we will keep achieving margin expansion in that business. We will see some rollover from HEPACO for the three months we didn't own it, along with the new incinerators Eric mentioned. We experienced significant growth in EBITDA this year due to strong pricing and effective use of our network, which we expect to continue into 2025. One point to highlight is that with record levels of containerized waste, we gain considerable leverage in this business because adding just one more unit to our network comes with a very high margin. This has been a key factor in our success over the past year or so, and it will continue into 2024 and 2025. This leverage and our ability to increase output are significant differentiators.

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

I have a few follow-up questions. Regarding the ES segment, you touched on this briefly, but I would appreciate a bit more clarification. The EBITDA margin has increased, though not as much as in the first half of the year. Was this primarily due to the shortfall in the industrial sector? It seems like you're recovering from that since your guidance was only adjusted down by 100 basis points on the high end of growth. That’s my first question.

Yes, Larry, Eric here. You're right. The IS and kind of the slowdown and less go turnarounds, that definitely drove the marks and IS down. As Mike alluded to, I think, a few moments ago, if you kind of estimate what the margins would be if you kind of normalize IS, the rest of the business is close to triple digits or 100 basis points of margin improvement. So certainly, IS was the major item there.

And on Kimball, I think you mentioned a little bit of startup cost in Q4. Could you just remind us sort of the ramp? I think you had sort of not actual guidance, but you had sort of projected a $25 million to $30 million EBITDA contribution in 2025. Is that kind of still in the ballpark? And how does it look as you go out to '26, would you get that continue to rise at a nice pace.

Larry, this is Eric Gerstenberg. No. To clarify, the number that you just referred to was our expected tonnage throughput of the unit. We plan to manage through that unit about 30,000 tons next year. That's our target and EBITDA contribution there, probably in the $8 million to $12 million range.

So a peak would be $25 million to $30 million, that's a peak number, I guess, right, 70,000 capacity, plus or minus?

No, that would be over as we continue to start up the incinerator and continue to leverage the capabilities there over the next 3 years, we will get to that production capacity of 45,000, 50,000, 55,000 tons plus.

And then on HEPACO, just outside of the integration on the billing platform, it feels like the business itself continues to run at or ahead of expectations. Any sort of change in the trajectory of the integration on the synergy side? I know you had kind of thrown out some numbers when you first made the acquisition. Is there any change there?

Sure, Larry, it's Eric. I'll take that one. The HEPACO acquisition so far has gone great. We're ahead of schedule and synergies probably quicker to internalize some work, as we've talked about in the last couple of quarters. So the business really is kind of ahead of schedule. We've seen some larger jobs, as we talked about in Q2 that kind of led into Q3 as well. So we've talked about the two businesses almost being hand in glove, and we continue to see that. They're working well together and performance has been better. It's the integration of the unbilled accounts receivable, that's probably the one sore spot, and as I said a moment ago, we after that, and I totally expect that to be corrected. But other than that, kind of five-star so far.

And if I could just say a couple, just housekeeping ones. On the lower corporate, mostly due to just lower incentive comp. I know you lowered that a little bit for the year in your guidance. Is that just the intent of compensation coming back?

Yes, that's correct, Larry.

Got it. And lastly, can you confirm the capital expenditures? I believe you mentioned $60 million year-to-date. Eric, is that still in the range of $65 million to $70 million, with about $20 million in Baltimore? Is that correct?

Yes. So $60 million, $65 million at Kimball this year and then add $20 million for Baltimore.

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

So I just wanted to go back to some of the commentary in the IS portion of the business. So the difficulty there, it's mainly in the refinery area? Or are you seeing some other pockets of any kind of softer demand in other market sectors. And I wonder if you could just elaborate on some of the actions that you're taking in this part of the business?

Yes, Jim, I'll start. So on the IS, it really was around the scope and extent of our refinery vertical that we're servicing. As I mentioned earlier, the number of turnarounds continued to be the same that we expected going into the second half of the year, and we still have turnarounds that obviously we've been working on through the start of Q4. In addition to that, some of those refineries just really held back on what the scope of the turnaround, the length, the size, things that they originally planned, they held back on to manage their costs. So that's the real area that's been affected. Our strategy within Industrial Services is really to cross-sell into our other environmental customers and really leverage the chemical vertical that we service, customers such as 3M. That's a great example of a customer that we've gotten embedded with on the traditional T&D side, but we're getting embedded on the industrial side. So we're really focused on being a little bit less dependent on that turnaround season in that refineries and cross-selling across our traditional environmental customers. A lot of work being done there. The teams on it, some of the specialty services that we've developed, applied to those more complex industries such as chemical that we're really trying to diversify that portfolio.

When considering the actions we are taking, cross-selling is extremely important, as Eric mentioned, by utilizing our other verticals that we support with industrial services and also addressing pricing. Labor rates have increased by about 3% to 4%, so we need to ensure that we stay ahead of this with our pricing and cost structures for our industrial services. This is certainly a labor-intensive business, and such wage inflation significantly affects our margins. Therefore, focusing on pricing in this sector is vital to our success.

And you sound – and you guys sound fairly positive about the opportunity as it relates to the PFAS situation. What kind of run rate is that business at right now? And is there any way to think about that business from where we sit today looking out to '25?

Yes, Jim, Eric here. Our pipeline across the board, as we've talked about, continuously grows anywhere from 15% to 25% quarter-to-quarter. We are continuing to see robust demand. And what's really good to see is that even though there is not yet really solid regulatory environment about PFAS on the disposal side, in particular, and the levels, we still see an increasing demand. So customers are reacting as if there's already those regulatory parameters in place and that's why our pipeline is growing. So in the last quarter in Q3, we've had some nice PFAS opportunities, projects into our incinerators into our landfills, our media group on water treatment. It's really been across the board. And we're seeing samples now upfront for PFAS opportunities and getting embedded in that. So really a good, strong, solid pipeline, and customers are interacting with us as if regulations are in place to manage whatever they're going to do the proper way into the future here. So we feel pretty solid about that.

Next question comes from the line of Brian Butler with Stifel.

First one on SKSS. Just was there a much larger discount that you were selling Group II versus spot prices because when I look at the spot prices, they are down, but not to the level that would warrant kind of the impact that we saw in the third quarter. And I'm just curious if you're selling at a discount and if that's kind of changed over the last couple of quarters.

I would say that the market price versus the published price is completely disconnected. The market price, or spot price, we are receiving for that oil is not aligned with what you see in published reports. While the direction is similar, the levels are certainly different. This became evident as we moved into September, and we are working to understand it better. As you can see from the results of many refineries and the pressure they are experiencing, there is significant oversupply of base oil, which is impacting both our spot and contracted customers, as both are requesting discounts based on the current market prices. This situation complicates things for us and for you. It is not an encouraging sign, but it is what we are facing.

Okay. And then when you look at the cash flow on the Group III opportunities, when does that become a material contributor or have an impact? Is that really 2026, and it's going to take that long to kind of ramp up, or do we start to see something that we can actually measure sooner than that?

We see a clear benefit from Group III as we currently have one plant producing it. We're using it internally for our own lending gallons, which has resulted in significant cost savings. This is a positive development that is well within our control, and we are experiencing its advantages today. However, the benefits are not as substantial as they used to be due to pricing pressures on Group III, similar to what we're seeing with Group II. This has certainly been advantageous for us in 2024 and will continue into 2025. Regarding our partnership, it requires time as the sales cycle is lengthy when it comes to fleets transitioning. Their marketing and sales teams are strong, and we meet with them regularly. They are optimistic about their selling capabilities. We have had some small successes, but nothing significant enough to impact our results yet. However, this will aid us as we look towards 2025 and 2026. I don't anticipate it taking until 2026 or 2027; I believe we will see real momentum in 2025.

Okay. And then maybe 1 last one, just on PFAS. Do you have a year-to-date kind of revenue number on where that is for '24 and what that looked like again, I guess, a year ago?

Yes, Brian, we're trending probably around that $80 million to $90 million run rate this year.

So run rate for the full year run rate for the full year, that's correct.

Yes. I think we exited the year at $100 million. I think that's kind of a fair as you look into 2025, that's probably a fair estimate. It ran in the course of the year with the progress we've made, I think quarter-over-quarter and year-over-year.

Our next question comes from the line of Timna Tanners with Wolfe Research.

Just had 2 lingering questions related to base oil, if I could? So one is, if you could please elaborate a little bit on the flip from pay for oil to charge oil? I know you mentioned it doesn't flip on a dime, but how long does it take to do that? And is there any way to kind of speed up that process in light of changing market conditions?

No, I appreciate your question. We were actually been discussing that quite a bit as far as kind of how fast we change. The challenge you have is this; pricing moves on the base oil prices immediately. It gets announced, and they negotiate, pricing is there, and that's the price we take. On the charge oil paper oil, you lower your process, even if we change that day, it takes 6 to 8 weeks to work its way through the system. I go buy oil from tender’s auto body shop. Well, I got to ship it, I got to process it and also we got to sell it. So there's a natural lag there, and we're going faster lowering inventory helps and being better, being more thoughtful about transport and will help. But we need to be fair, we need to be faster in that decision-making and moving pricing, whether it be people or CFO quicker, but there is a natural lag there that's very difficult to get around just because oil is in our network as it works its way through, it gets re-refined in backing to the base oil and ultimately sold, there's a lag there that you can't get around.

Okay. That's helpful. And then just the second part is on the California re-refinery. Makes sense to add that one. Imagine, I might be a higher-cost facility being in California. But could you talk a little bit more about how long it might be down, or are there any exit costs or other implications or remediation you need to do there to keep in mind?

No, really no additional costs. We really just idled the refinery from producing the base oil. So no additional costs there. Actually, it's a cost savings throughout the fourth quarter as we move forward here. And long term, that really depends on market conditions, how they continue to look. But certainly, for the next 6 months to a year, we plan to remain having that refinery idle.

And Timna, just so you know, from an environmental standpoint, we're still using the facility. We still use it as a distribution center; we have a kind of waste charge with other things we can still do kind of at the site. The site still remains as an active site, so it's not going to be re-refining to use more oil.

Our next question comes from Tobey Sommer with Truist.

I'll start with the re-refinery. Is this an industry-wide overstocking problem? Can you describe what other industry players are doing? Are you the only one reducing some capacity, or are other market participants also moving in that direction?

Yes, Tobey, this is Mike, and I'll begin. I don't know if you noticed, but P66 has closed the re-refineries and is also in the process of closing a refinery in California. As Kimball mentioned, the cost structure there is actually the highest in our network. What I'm observing reflects the use case where the large refineries are reaching all-time lows. BP's cash flow, for instance, is at an all-time low in terms of profitability within their refining sector. This illustrates the market dynamics we are all facing. It's a tough environment for public refinery companies, and while I can't speak specifically about their situations, I'm sure they are experiencing similar challenges.

With respect to Kimball and other new capacity coming to the market? What's the overall increase in North American capacity as we look into 2025?

As we look ahead to 2025, we expect additional capacity due to the timing of new units coming online. Specifically for Kimball, we anticipate approximately 70,000 tons of practical capacity. Additionally, another unit in Arkansas is expected to add around 70,000 to 90,000 tons per year. Therefore, in total, we’re looking at an increase of about 140,000 to 160,000 tons.

We're going to be at 12% in our capacity, let me put that. We're fully operational total to deliver that waste.

Appreciate that. Last one for me. What does the customer churn look like in ES or customer retention you can take either a or you like, and how would you describe price sensitivity as the company seeks to raise prices in exchange for value you provide?

Yes, Tobey, Eric here. So customer churn is very low. The demand for our services has been very high, and we think we've done a great job of actually growing our market share across the board. The receptiveness to pricing. It's sticking as you see from our financial results, and we expect that to continue really robust demand. And I think the team out there, the field, has done a great job of grabbing opportunities, closing on them quickly. We had a great service network that's able to service customers quickly and get that waste into our network. And because of though, that our ability to service them and our network of our disposal facilities that allows us to give that great service but continue to command price improvements across the board. So, thanks for joining us today, everyone. We'll be participating in several investor events in the coming weeks, including the Stifel event in Baltimore and the Baird event in Chicago. We look forward to seeing some of you there. Please enjoy the rest of the day, and above all, please keep safe out there.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.