Clean Harbors Inc Q3 FY2025 Earnings Call

Greetings, and welcome to the Clean Harbors Third Quarter 2025 Financial Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael McDonald, General Counsel for Clean Harbors. 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; our EVP and Chief Financial Officer, Eric Dugas; and our 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 29, 2025. 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 performance. Reconciliations of these measures to the most directly comparable GAAP measures are available in today's news release on our IR 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 always, let me start with our safety results. Through September 30, we were at a TRIR of 0.49, putting us on track for another record year. We are extremely proud of that performance. The only way you achieve this level of excellence is with constant operational focus from the whole team to protect themselves and each other. Safety performance delivers measurable benefits across multiple dimensions from enhanced operational efficiency and productivity to stronger employee retention and company reputation. For any team members listening, congratulations on these great safety results, and let's finish strong in Q4. Turning to a summary of results on Slide 3. Our Q3 performance reflected year-on-year growth from an increase in overall waste volumes into our network. Pricing gains and increased productivity even in an environment where softer conditions resulting from macroeconomic factors have impacted some customers. Our ES segment grew on strength in Technical Services and SK branch. Our Safety-Kleen Sustainable Solutions segment performed in line with expectations, mainly due to our charge for oil program and product mix. Driving margin growth continued to be a focus for us as we were pleased to see our consolidated adjusted EBITDA margin increased by 100 basis points from a year ago to 20.7%, demonstrating the effectiveness of our pricing, the leverage in our network of permitted facilities and cost-saving strategies. Within all of the underlying ES businesses, we drove pricing gains and improved productivity while lowering costs, driving better margin contributions. Corporate segment costs were up from a year ago, primarily due to higher insurance expenses and health care increases, offsetting partially by cost-cutting actions. Overall, Q3 results fell slightly short of our expectations due primarily to slowness in field services and industrial services, combined with some higher-than-anticipated employee health care costs. We remain optimistic with the continued growth and momentum in our waste collection and disposal assets. We believe that the productivity and margin enhancement initiatives undertaken throughout 2025 and across our businesses put us in a position to benefit as some macroeconomic conditions improve. Turning to our segments, beginning with ES on Slide 4. Segment adjusted EBITDA margin grew year-over-year for the 14th consecutive quarter, with revenue up 3% and adjusted EBITDA up 7%. Our waste volumes, PFAS work, remediation projects, and pricing drove our revenue increase as that more than offset the slowdown in Industrial and Field Services. Looking at revenue by the segment components. Technical Services led this quarter with 12% growth as demand was steady. Incineration utilization remained high and our landfill volumes were up 40% from a year ago. Incineration utilization was 92% versus 89% in the same period of 2024. For comparison purposes, our utilization excludes the new unit in Kimball as we continue to ramp up. With Kimball included, our utilization rate was still high at 88%. As we've seen in the past several quarters, incineration demand has remained high due to the diversity of our end markets as well as projects underpinning our growth. Our sales teams have done an excellent job winning volumes in an environment where some of our customers have been impacted by current economic conditions. That sales effort includes our SK branches, who have consistently driven significant containerized waste volumes into our network. In Q3, Safety-Kleen Environmental Services rose 8% through a combination of pricing gains and growth in our core service offerings. The number of parts washer services was 249,000 in the quarter with a larger average service ticket per stop. The consistency of that business has been a key element to our profitable growth over the past 5 years. Field Services revenue declined by 11% from a year ago, more than we anticipated in our guidance. This shortfall reflects the absence of medium to large response projects. While we responded to more than 5,900 ER events, demonstrating consistent baseline demand, the revenue impact came from having no substantial projects. Within Industrial Services, we continue to see customers in both the chemical and refining verticals limit their spending on turnarounds as they remain under significant cost pressure. As a result, revenue was down 4% from a year ago. In light of these market conditions, we focused on cost management, including workforce and equipment utilization. While we are hopeful that maintenance deferrals from IS customers we've seen for the past few years improve, we do not expect any meaningful recovery in revenue opportunities for chemical and refining customers before the spring turnaround season. Based on our service platform and extensive lines of business we provide, we are focused on growing our wallet share with these customers. Turning to Slide 5. We want to highlight our recent successful PFAS incineration study done in partnership with the EPA as well as the DoD. This study, which we completed in late 2024 in our Utah facility, was a milestone achievement for the company. The study published by the EPA in September provided the type of scientific data sought by customers and regulators. The study was conducted using the EPA's most recent and rigorous emission standards. The study confirmed what we already know. Our RCRA-permitted high-temperature incinerators cannot only safely destroy these forever chemicals in various forms, but can do so at a cost-effective commercial scale. In addition, our total PFAS solution has continued to gain traction in the marketplace with offerings ranging from lab analytics to water filtration to site remediation to disposal. We are in active discussions with customers on projects across many of these fronts and expect PFAS to generate $100 million to $120 million of revenue this year, up 20% to 25% from a year ago. Moreover, based on our pipeline and our momentum in the marketplace, we expect PFAS-related sales to further accelerate in the years ahead. With that, let me turn things over to Mike to discuss SKSS and capital allocation. Mike?

Thank you, Eric, and good morning, everyone. Turning to SKSS on Slide 6. This segment delivered results in the third quarter that were in line with our expectations. Despite pricing headwinds in the base oil market all year, we effectively managed our re-refining spread and drove value from other initiatives. During the quarter, we dramatically lowered our waste oil collection costs versus a year ago as we advanced our CFO program. It is clear that our used oil customers understand that we are collecting waste from them and providing value and reliable services. The team continues to manage costs while still collecting the volumes we need to run our plants. In Q3, we gathered 64 million gallons of waste oil, which is consistent with the second quarter. On the top line, our revenue decreased as expected. In terms of profitability, our adjusted EBITDA was essentially unchanged. The result was a 100 basis point margin improvement, largely stemming from the CFO increase, cost reduction initiatives, and efficiency gains. We also increased our direct lubricant sales, which are among our highest margin gallons to 9% of our total volumes, which also contributed to that margin improvement. During the quarter, we continued our partnership with BP Castrol to support their more circular offering for corporate fleets. Additionally, we are growing our Group III production as those gallons carry a premium to our traditional Group II volumes, and we remain on track to add several million gallons of Group III this year. Turning to Slide 7. Today, we announced plans to construct a state-of-the-art processing plant that we refer to internally as the SDA Unit. By using an industry-proven Solvent De-Asphalting process and combining it with our existing hydrotreating capabilities, we can unlock incremental value from an everyday product, VTAE, generated today in our re-refineries. This new plant will upgrade VTAE into a high-value 600N base oil. 600 neutral is a high-purity base oil that is typically used in heavy-duty industrial applications due to its durability and high-performance characteristics. Total spend on the SDA Unit is expected to be $210 million to $220 million with commercial launch anticipated in 2028. We spent approximately $12 million on this project year-to-date with a total of approximately $30 million expected in 2025. As a result of the project, we expect to generate annual EBITDA in the range of $30 million to $40 million, a 6- or 7-year payback on the investment once completed. Such return will rival what we've seen from similarly sized incineration projects and represents an additional growth opportunity for SKSS. Turning to capital allocation on Slide 8. We remain active in seeking opportunities to generate strong returns for shareholders. We also remain well positioned to execute our strategy with record cash flows in Q3, low leverage and a terrific balance sheet. On the M&A front, we're evaluating both bolt-on transactions and larger acquisitions that would provide leverageable assets with high synergy potential that support our market position in a particular business or geography. We believe that in our space, it is best to be patient and prudent in pursuing the right transactions. We've also been evaluating a series of internal investments, including today's announcement of the SDA Unit. Including that facility, we currently see a path to potentially investing over $500 million in internal projects over the next several years, ranging from greater processing capabilities within our network, additional hub locations, fleet expansions, and additional incineration capacity. We look forward to sharing more of these plans with you in the coming quarters as plants for individual projects get finalized. We also view share repurchases as an attractive capital allocation opportunity to generate strong shareholder returns as demonstrated by our $50 million in repurchases in Q3. Looking ahead, while we believe that the challenges we faced in Q3 are temporary and market-driven, with year-over-year growth illustrating our resiliency, we expect our incinerators to run strong through year-end and waste projects to continue to feed our entire disposal and recycling network. Tariff-related uncertainty and other macro factors in the North American economy have ripple effects through some of our customers over the past 2 quarters, but we believe the overall economic outlook remains promising. Based on conversations with customers, we anticipate incentives to reshore and the benefits of the recent U.S. tax bill will drive meaningful lift in American manufacturing and continue to support remediation and waste projects. We expect that spending constraints related to Industrial Services and Field Services in our key verticals, including chemicals and refineries, will loosen in the coming quarters as economic conditions improve. Overall, our project pipeline remains substantial with growing PFAS opportunities expected to contribute meaningfully to future activity. We also remain excited about the steady ramp-up in production and mix in our new Kimball incinerator as it works towards full capacity. For SKSS, we believe we've stabilized this business with our efforts around CFO, partnerships, and Group III production and are looking forward to the new SDA Unit. We expect to achieve our profitability targets for this business in 2025.

Thank you, Mike, and good morning, everyone. Turning to our Q3 results and the income statement on Slide 10. While our quarterly performance came in below our expectations due to the factors Eric outlined, primarily a shortfall in Industrial and Field Services plus elevated health care costs, I want to highlight the underlying strength in our business. Total revenue increased to $1.55 billion in the quarter, with Environmental Services growth stemming from our wide range of service offerings and diversified customer base. Adjusted EBITDA increased 6% to $320 million, demonstrating our ability to drive profitable growth through a steadfast commitment to margin expansion. Our consolidated Q3 adjusted EBITDA margin expanded to 20.7%, led by a 120 basis point improvement in Environmental Services. This margin expansion reflects our strategic focus on pricing initiatives, cost reduction efforts, and productivity gains as we see evidence of margin improvement across each of our business units within the ES segment. Within Environmental Services, demand in our disposal network and collection businesses remained solid, driving revenue growth despite macro headwinds in some verticals like chemical. SKSS delivered more than $40 million in EBITDA, its strongest quarter in the year demonstrating operational resilience in a soft base oil market. SG&A expense as a percentage of revenue increased from a year ago to 12.2%, reflecting higher health care costs, professional fees, and compensation. We are maintaining our full-year SG&A guidance as a percentage of revenue in the low to mid-12% range. Depreciation and amortization was approximately $115 million, reflecting our continued capital deployment, including Kimball operations and increased landfill amortization related to greater disposal volumes. We've raised our full-year depreciation and amortization guidance to $445 million to $455 million, primarily due to strong landfill performance. Income from operations in Q3 was $193 million, flat versus the prior year as our 6% adjusted EBITDA growth was offset by higher depreciation and amortization, as I just mentioned. Net income grew modestly year-over-year, delivering earnings per share of $2.21. Turning to the balance sheet on Slide 11. With continued focus on cash flow generation and a record level of free cash flows in the quarter, we ended Q3 with cash and short-term marketable securities of $850 million, providing substantial flexibility for our capital allocation strategy that Mike just outlined. Our recent refinancing was executed at favorable terms as we replaced our 2027 senior notes with 2033 senior notes and replaced our term loan at a more favorable rate of SOFR plus 150 basis points. This refinancing provides us with more surety, extends the maturity of the debt, increases our flexibility, and demonstrates market confidence in our credit profile. With net debt-to-EBITDA below 2x and a blended interest rate of 5.3%, we maintain a conservative capital structure. Our credit profile remains strong, just one notch below investment grade on our overall debt rating, while our secured debt carries an investment-grade rating, reflecting the quality of our asset base, cash flow stability, and overall capital policies. Turning to cash flows on Slide 12. Our Q3 cash flow performance was exceptional. Operating cash flow of $302 million and a Q3 record adjusted free cash flow of $231 million, which was up $86 million year-on-year, underscores the cash-generative nature of our business model. CapEx net of disposals of $83 million was down from the prior year, reflecting disciplined capital allocation. As previously highlighted, we began construction of our high-return re-refinery project, investing more than $10 million in Q3 to launch this exciting initiative that we expect to deliver excellent shareholder value. We also continued advancing our strategic hub facility in Phoenix, further strengthening our network capabilities. For 2025, excluding the SDA Unit and Phoenix Hub project, we now expect our net CapEx to be in the range of $340 million to $370 million. This is slightly down from our previous range as we expect asset sales to be closer to $15 million this year instead of the $10 million previously thought. We bought back more than 208,000 shares of stock for a total spend of $50 million in Q3. We currently have roughly $380 million remaining under our authorization. We continue to view our shares as attractively valued at current levels. Turning to our guidance on Slide 13. Based on Q3 results and current market conditions for both of our operating segments, we are revising our 2025 adjusted EBITDA guidance to a range of $1.155 billion to $1.175 billion or a midpoint of $1.165 billion. This adjustment reflects the Q3 EBITDA results factored into our annual guide. Importantly, we anticipate any Q4 carryover effects in the Field Services or Industrial Services will be offset by our facilities performance, project pipeline, and PFAS opportunities. The long-term trends of PFAS, remediation, and reshoring create substantial upside potential with recent developments like our EPA incineration study further validating our strategic positioning. For the full year 2025, our revised adjusted EBITDA guidance will translate to our reporting segments as follows: at our guidance midpoint, we now expect 2025 adjusted EBITDA in Environmental Services to increase by more than 5% from 2024. While recent economic turbulence has impacted some aspects of our business, we're optimistic about our future and ability to navigate the current landscape. SKSS is stabilizing effectively, and we continue to expect full year 2025 adjusted EBITDA at the midpoint of our guidance to be $140 million. The combination of our operational improvements, CFO strategy, and initiatives that Mike outlined have established a stable foundation for this business. Within corporate, at the midpoint of our guide, we expect negative adjusted EBITDA to now be up 3% to 5% compared to 2024, driven by growth-related expenses, higher wages and benefits, and rising insurance costs. We continue implementing multiple cost savings initiatives to partially offset these increases. We are raising our full-year adjusted free cash flow guidance to a midpoint of $475 million based on year-to-date performance and favorable provisions passed in the U.S. Tax Act this summer. This represents more than 30% growth from 2024, underscoring our focus and ability to convert earnings into substantial free cash flow returns. While Q3 presented near-term challenges, our highest margin businesses continue to grow and demonstrate competitive strength. Our incinerators, landfills, and other permanent locations drove our profitable growth and supported our margin improvement. The slowdown in Industrial Services reflects deferred maintenance and projects that will return to market, positioning us well for recovery. Within Field Services, we remain confident in our prospects despite the absence of medium and large event work in the third quarter. SKSS appears to have leveled off, and we expect this segment to deliver greater consistency moving forward. We look to finish the year strong and carry that momentum into 2026 and are excited about the many growth and margin increasing initiatives undertaken this year, which place us in a solid position for profitable growth as macro conditions improve and we execute on longer-term goals. With that, Christine, please open the call for questions.

Our first question comes from Tyler Brown with Raymond James.

So it feels like there's a lot of puts and takes out there. The industrial malaise, I guess, continues to march on a bit. But Eric Dugas, just it looks like you brought the midpoint down, call it, $15 million. But if you had to bucket the culprits, would you say it was really the field and industrial shortfall? And then how big was the health care issue? You brought it up a few times. Was that onetime? Or is that a go-forward step-up in cost?

Sure, Tyler. So in terms of the total takedown, the $15 million, a lot of that is reflected in our Q3 results. Industrial Services being the most predominant piece of that, we estimate maybe $7 million. Field Services, really just the lack of those medium and large projects that we've seen a good chunk of in earlier quarters, probably about $4 million. And then the healthcare in the Environmental Services segment is about $4 million and probably about $6 million overall to the entire company. So I think you're absolutely right in terms of a lot of puts and takes. We still see really strong momentum and good volumes in more of our waste disposal-related businesses of tech services and SKE and think those will perform quite strong kind of here into Q4 and into 2026. I guess the last point on healthcare, Tyler, it is a trend I think a lot of companies are combating. We have built in the increases into our Q4 guidance, and we're in the process of doing some things to make sure that we can offset some of the increases we're seeing there. But probably not entirely unusual, but certainly higher cost than we would have liked here in Q3.

Tyler, this is Mike. The one thing I'd add to what Eric said, we did have a fair amount of high-cost claims. That's much higher than, let's say, averages for the past 2 or 3 years. Hard for me to say if that's the new normal. It doesn't feel that way. But as Eric said, we're trying to make sure we're changing some of our plans to make sure we cover off on that in 2026.

Okay. That's helpful. And then I appreciate that you guys aren't giving '26 guidance. But conceptually speaking, should we think about EBITDA on a more consolidated basis kind of flattening out year-over-year just into maybe the first part of '26. It sounds like maybe, Eric Gerstenberg, you're not looking for an industrial pickup really until the spring turnaround season? Or are there enough internal levers to kind of drive the EBITDA growth even in the first half without a whole lot of economic help?

Yes, Tyler, I'll start. And certainly not expecting a real rebound of industrial turnarounds until the spring. However, we're going to continue to grow our EBITDA across our waste collection businesses and our service businesses as well. So we're looking at next year, preliminary. We're still of a budget process to go through. But 5% EBITDA growth, I mean, we're really still targeting that. We think we can do that based on the demonstration of cost-cutting initiatives and volume and pricing growth in those waste businesses.

Okay. That's extremely helpful. And then I do just want to come back to capital allocation, Mike and Eric, just obviously, you guys announced a very sizable organic growth project. I'm sure someone will go over all of that. There was another decent buyback in the quarter. But just realistically, what should we be expecting on the M&A front? I mean, how does that pipeline look? Are you looking at bigger deals? Are you looking at smaller deals? Do you think you can get something across the line this year? Or is that something maybe more into '26?

Yes, Tyler, the answer to that question is yes. So we are looking at larger deals. We're looking at smaller deals. I think that we obviously, we talk about the SDA and happy to go into that and maybe other projects we're thinking about. But in the interim, we want to remain prudent. We want to remain disciplined, like we have for the company's history, frankly. But certainly in the past couple of years, we certainly try to be very thoughtful about it and make sure we're getting a good return on our shareholders' investment. And I think there's plenty of things out there, both large sizes, publicly available and smaller things that are out there. And so we remain very active. In the interim, we did buy back some shares. I don't think that's a change in trends. That's more like we saw opportunities there to take advantage of some market dislocation, and we took advantage of that, and we bought back over $115 million worth this year. And so I think that's a good return on our shareholders' investment. So we'll continue down that path. I don't think that's a change in strategy. But we see ourselves as a growth company. We see ourselves as an M&A company, and we'll continue to do things like that.

Okay. Perfect.

And one follow-up, Tyler, regarding the 5% that Eric mentioned, the budget processes are related to that figure. Most of it will likely be in ES, with a small portion in SK and a little in corporate, as I consider the various components involved.

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

Let's kind of continue along the capital allocation theme. Made some really nice progress this year on free cash flow conversion and free cash flow generation, as you talked about, Eric, with Kimball rolling off and the underlying growth. Mike, when you talked about potentially up to $500 million of organic investments and obviously, this SDA investment might be part of that. Can you give us some guardrails around where you want to convert free cash flow to EBITDA within the business broadly over the next couple of years? Is there a baseline we should think about? And I know it's a little bit path dependent on what kind of M&A you do. But just kind of try to give us a baseline level that we should be underwriting here?

Sure, Noah. So this is Eric Dugas. And I think you're absolutely right. The free cash flow generation has been fabulous this year, a lot of initiatives on that front. As we look out into the future, I think we're going to continue to target kind of that 40% free cash flow generation, 40% of EBITDA. I think there'll be pluses and minuses to that along the way for the minuses would be these accretive capital investments that we mentioned that will be adjusted out of that, and we'll call that out and explain those clearly. But those are really growth projects that we see, and that will be a detriment to the 40%. But normal baseline guardrails, I'd say 40% conversion and each year trying to grow up from that.

I think the team under Eric's leadership has done a great job with cash collection. The organization has done a great job with cash collections, managing our spend, and you really see it in the margin improvement, and that's really been helpful trying to get to that 40% and hopefully beat that over the next few years.

Okay. And just so we're clear, you do intend to formally adjust this SDA investment out of free cash flow because that was not the case with Kimball, right? So is that kind of the practice going forward that these extraordinary organic investments would be excluded?

Yes, you got it, Noah.

Okay. And then I guess to double-click on this specific investment, I think just help us understand some of the key assumptions you made in underwriting this. I mean you talked about the 6- to 7-year payback. Obviously, we've seen the value of base oils fluctuate a lot over the company's history. What is it sort of dependent on to hit those target returns from a commodity value, if at all?

Yes, Noah, this is Eric. I'll start. It's really a great investment for us. It's a bolt-on technology at our East Chicago refinery, upgrading a product we already produce called VTAE, Vacuum Tower Asphalt Extender. This technology improves the product by utilizing over 30 million gallons of what we already generate and sell, enhancing its market value. There are some fluctuations in the price of the 600N product, but it doesn't vary as much as base oil and is intended for heavy-duty applications, so it offers a more stable pricing outlook. Overall, this is a straightforward upgrade of that 30 million gallons, elevating it in value and making use of proven technology with a hydrotreater at the back end. We're excited about the potential for an additional $30 million to $40 million of EBITDA once we begin operations in 2028.

And Noah, I want to add that, as Eric mentioned, we are using the byproduct of the re-refining process, VTAE, to create a higher-value product. However, that 30 million gallons won't completely satisfy the demand for the new product, giving us room for growth. We're not counting on any additional VTAE from third parties, which would be an added benefit. I highlight this as our model indicates potential earnings of $30 million to $40 million that we discussed in the live call, with ample opportunity for further growth. Eric and I, along with the team, have conducted a thorough analysis and established reasonable assumptions regarding the price of VTAE, the price of 600N, the costs of building the plant, and the timeline for construction. We've had extensive discussions with the team and the Board to ensure our approach is well-considered. We aim to execute this, like every major project, on time, on budget, and deliver the results we've promised.

If I could sneak one more in. I think you're clear now on sort of the delta versus expectations in Industrial and Field Services. I guess just from a forecasting perspective, I know usually, IS tends to gather steam into September, and then October is kind of the big month. So with that particular line of business, was it just the case that these deferrals really started to manifest late in the quarter and kind of continued through October here, and that's what we're seeing? And is there some way to think about normal seasonality in the future perhaps being different at all than what we've seen in the past?

Yes, I'll start. This is Eric. Looking at what happened in the quarter, the number of turnarounds has remained fairly stable. There have been some delays, but overall, when we work on turnarounds at our customer sites, the scope tends to be less than what we initially quoted or agreed upon. Customers really want to have their units cleaned and operational again as quickly as possible. Heading into the fourth quarter, we took this into account when shaping our guidance. We are still engaged in turnarounds as we move into October, and that's positive. However, we slightly reduced our expectations based on third quarter performance. As conditions stabilize, we anticipate that by 2026 we won't be losing turnarounds to competitors. We are handling all turnarounds and expect to see improved growth as the economy recovers, especially in the chemical and refinery sectors.

Yes, I would like to add to what Eric mentioned. We are positioning ourselves well for when the market improves. Looking at the Industrial Services performance, I see improved labor management. Labor costs as a percentage of revenue are in a better position, and overtime costs are declining as a percentage of revenue. We are also reducing our reliance on subcontractors and handling more work internally. Despite the financial results in the third quarter and what we expect in the fourth quarter, which have been affected by cost pressures in the chemical and refinery sectors, we are well-prepared for future changes. I believe our investments, especially in labor and other areas, will yield benefits hopefully next year and certainly in the years to come.

Our next question comes from the line of Jim Schumm with TD Cowen.

So maybe just help me understand, I'm sure other people don't know the 600N base oil market very well. Can you just help us with like what is the market pricing right now? What is like peak to trough pricing for this market? What's the total demand? Just how should we think about this? Like what's the total demand this year? What was it 5 years ago? Is demand expected to grow? Why? What's the end market? Just help us understand this is a fairly big investment for you guys. So I just want to understand this market a little better?

Yes, Jim. We have an hour for this call, but we won't spend the entire time discussing the 600N base oil market. I can tell you that this oil is mainly used in industrial applications which are generally more stable compared to passenger car engine oils. There's been significant interest from customers in purchasing this high-value 600N oil, and we've provided them with samples that have been well received. Although we would be a small player in a large market, its trends usually align with Group II base oil, which has decreased in price over the past few years but remains at a higher premium. Most of the country imports 600N, notably from Korea and other sources. It's challenging to project what the market will look like in three years. Our modeling anticipates some reductions over that period, but we expect the plan won't be operational until 2028, giving us some time. We’ve approached this situation from various angles; if Group II 600N pricing declines, there are other options available, such as taking on additional VTAE from other customers to mitigate the impact. The model we've proposed is well-balanced. Although it's difficult to predict fluctuations in either base oil or 600N, we believe we have sufficient strategies in place to address any shortfalls. We've consistently delivered large-scale projects on time and within budget, achieving or exceeding our stated EBITDA figures, and I expect this will be no exception.

Mike, I wanted to clarify something. Were you suggesting that you expect consumption of this oil to decline over the next couple of years?

No, no, no. It is more about the assumption that pricing will decrease slightly during the modeling period, not the demand itself. I think I may have misspoken when I said that when we produce this 600N oil, we will still be a very small player in a very large 600N market, which is what I'm trying to convey.

Okay, let's discuss the SKSS guidance. My understanding was that the figure referenced was around $140 million. You mentioned a midpoint, but can you clarify the range for SKSS this year? Additionally, what is the confidence level in achieving that $140 million midpoint?

Jim, Eric here. I'd say that as we sit here today, we're very confident in that $140 million mark. To range bound that, I hesitate to do so. You might have to force me into a range, maybe it's a few million on either side. But the way the business is performing right now, particularly around our initiatives of CFO and our ability to continue to drive CFO pricing due to market conditions. The catalyst of that is obviously the high level of service we continue to provide and the fact that we haven't lost customers. I mean that really is the area that the team has done excellent on this year, and that gives us the confidence that we'll be able to meet that $140 million of EBITDA. So hopefully, that answers your question. Range bound, we haven't really looked at it that way, but high confidence in that number right now.

We feel the $140 million is the new low watermark, we grow from there.

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

My first question is on incinerator pricing. I didn't see a number in the slide deck. Could you talk about what that was? And then somewhat related, I know you gave the data specifically in the 10-Q later today, but could you talk about specific growth rates for Industrial Services, Field Services, SKE and tech services?

Sure, it's Eric. I'll take that, and I'm sure the team will add on. Regarding incineration pricing, we see some variation, but overall, we're expecting mid-single-digit growth, which is consistent with previous quarters. In terms of the different sub-business lines under Environmental Services, our tech services business has shown excellent revenue growth with strong volumes and good pricing. Waste remediation projects, which we mentioned earlier, have performed particularly well, resulting in double-digit growth. The Safety-Kleen branch is also doing well, with good initiatives leading to approximately 8% growth. As for Field Services, we're seeing a revenue drop, likely around 9% or possibly 11%. This is mainly due to some medium and large-scale projects that did not materialize. However, we're not overly concerned as these fluctuations can be episodic, and looking at the business over the long term, you’ll see solid organic growth. Lastly, for Industrial Services, there’s been around a 3% to 4% decline year-on-year, mostly related to turnaround services.

That's great. And I know we've talked a lot about capital allocation here this morning. But does the investment you're making in this SDA Unit say anything about your M&A outlook? And I was also wondering that since you put out these Vision 2027 goals, we're a little bit past half time here. I think HydroChem was already in that 2022 starting point, and you've added Thompson and HEPACO basically. But could you maybe talk about how things have played out since that update and kind of how you're thinking about the market in general?

Yes, this is Mike, and I believe Eric has some insights on this as well. The SDA Unit does not impact our M&A intentions. This has been a planned investment we've discussed internally for a few years. Now that we have Board approval, we're beginning to allocate funds, and it's important to communicate this to our investors as it's a significant asset that we will monitor. The main purpose of discussing the SDA is to keep our investors informed. Regarding the $500 million mentioned, those are other prospects we are considering, such as adding more hubs or investing in additional incineration capacity. We're reiterating that these have been ongoing topics, and we're highlighting them as solid capital investments with favorable returns, as reflected in our calculations. By the end of the year, we will have $1 billion in cash available and expect to generate an additional high $400 million in cash flows in 2026, giving us ample resources to pursue various initiatives, including beneficial M&A opportunities. As Eric pointed out, our leverage is quite low, and there is strong demand from debt investors, which was significantly oversubscribed. The successful management of our debt by Eric and the team reflects the market's confidence in our high-quality asset. This does not alter our approach to Vision 2027; it remains a guide for our company's direction, and we will continue to be disciplined with our capital allocation, carefully considering both large and small opportunities. I want to emphasize that the SDA announcement does not change our strategy; it is simply a matter of timing for a project we've planned for years, which we want to share with the investing public due to its significance.

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

I have a question regarding the guidance. You mentioned the miss in the quarter was due to some industrial factors and a bit from Field Services. It seems like you've accounted for that miss in your projections for the year. Are you anticipating a rebound? Did you expect a stronger Q3 than what you're now forecasting? I'm curious if the turnarounds are turning out to be less consistent than you had hoped. What gives you confidence that we will reach the targets you initially set for Q4?

Certainly, Larry. As we reviewed our Q3 results and considered our projections for Q4, one aspect that makes us optimistic about Q4 is the 12% revenue growth we're experiencing in Technical Services, along with an increase in projects and stable waste volumes. Our diverse customer base is helping us counteract some softness in certain sectors like chemical and refinery by boosting volumes from other customers within our network. This segment of our business shows significant strength. Additionally, in Q3, we observed margin expansion, and our dedication to improving margins and generating free cash flow gives us confidence as we enter Q4, particularly in waste disposal-related operations. Regarding our services division, as Eric pointed out, we are not expecting significant increases in Industrial Services, and while we are seeing positive margin growth in Field Services, this can be inconsistent. We anticipate that both medium and large projects will return; it’s just a matter of timing and location.

I guess I would say one more thing, Larry, to that end. I'd say that all our lines of business that make up Environmental Services had good margin accretion year-over-year. And when you think about from where we were a year ago, where we were concerned about SKSS, when we stabilized that business. We're concerned about free cash flow conversion. While we're going to have great free cash conversion this year, we continue to grow. When you think about EBITDA margins and our mark to 30% margins, I mean, that's on ES, that continues on unabated. It's 14 straight quarters of year-over-year margin growth. So I mean, I feel like we're kind of hitting all our strides. Look, it's a miss. I get that. I get the point. But really, it really is, I think, very, very temporary, as I said in my prepared remarks.

Absolutely, I appreciate it. I'm looking to understand how this miss will affect our future outlook rather than just focusing on the miss itself. I want to ensure that moving forward, even though it's just one quarter, we have some clarity regarding the 5% figure you mentioned for next year, which I know may fluctuate. That's just a starting point, and I understand that. However, I want to confirm that it seems like there’s no significant improvement expected in Industrial and Field Service. If that wasn’t factored into this quarter, I’m trying to understand the reason for the miss. The additional context you provided is helpful. Shifting topics quickly to PFAS, it appears that things are going well internally. While 20% to 25% growth is impressive, it seems your queue is expanding much faster than that. To convert that growth into actual sales, we will likely need some sort of government legislation, perhaps involving the National Defense Authorization Act. It seems we are currently in a wait-and-see phase regarding that. The government shutdown doesn’t help, so any additional insights would be appreciated.

Yes, Larry, this is Eric. Getting the results from our test on our thermal units published by the EPA was a significant milestone for us. The market activity has been very strong and intensified even more with the release of those results. We've observed consistent growth in our pipeline at a rate of 15% to 20% quarter-over-quarter, and it seems we’ve experienced an even greater boost. We don't anticipate any major regulatory changes will hinder our growth; in fact, we're optimistic about the prospects and opportunities ahead. We believe this growth will continue to accelerate. Additionally, with the Department of Defense lifting their moratorium, that will serve as another boost for us, and we are positive about that as well.

Our next question comes from the line of James Ricchiutii with Needham & Company.

So outside of chemical, the refinery markets, are you seeing any choppiness, any other signs of weakness in some of the broad end markets that you guys service?

I’ll begin. No, we haven't seen any signs of weakness. Our volumes have been growing across our waste businesses, and we had strong results through Q3. We're starting Q4 off very strong. Although there's been a slight pullback in IS spending related to turnarounds and chemical spending, the waste side of the business remains strong with good volumes, pricing, and growth in projects related to PFAS, as well as other projects across the board. We are feeling positive about what we’re seeing from manufacturing, retail, and various other sectors we serve. Our waste collection business is resilient, driven by the diverse verticals we support. Every sector is generating hazardous waste, and we are benefiting from driving those volumes into our network, which continues to grow along with ongoing projects.

Okay. Maybe just turning to Kimball, and I know you touched on it a little bit, but how should we be thinking about how the scale-up of Kimball is going, maybe discussions you're having with customers? And you've talked in the past about better network efficiencies that come as a result of this and then potentially some lift to margins. And just talk to us about maybe how Kimball plays out in 2026?

In the third quarter this year, the new Kimball incinerator Train 2 unit processed over 10,000 tons. Our initial plan was to burn an additional 28,000 tons within our network, and the Kimball expansion is facilitating that. The ramp-up has been solid, typical start-up challenges aside. We anticipate that tonnage will continue to grow as projected. We are on track to meet our ramp-up objectives for that new unit as we approach 2026. The efficiencies in our network are performing well, particularly in managing waste routing for our customers and improving transportation efficiencies. We are optimistic about the benefits Kimball brings to the network in various ways. Regarding our customer interactions, the trend remains positive as our network offers them reliable service with multiple units meeting their needs, complemented by geographical advantages and transportation efficiencies. Our engagement with captive customers is strong, as they evaluate their cost positions, leading to active discussions. Integrating Kimball into our network continues to demonstrate to these large hazardous waste generators that we have the capacity and capabilities to meet their needs.

Got it. Last question, just on M&A. And again, you touched on this, but is valuations or is that the main challenge with respect to the potential for larger opportunities that might be out there? Just wondering how we might think about the pipeline for larger deals?

When considering larger deals, Jim, this is Mike. Valuations have definitely increased from previous levels. The entire industry, including our stock, has seen some valuation growth, which is deserved and likely to continue. We believe that larger deals offer the most potential for synergies, leading to valuations that are reasonable and beneficial for our shareholders post-synergy. In response to your question, we aim to stay within our strategy. We frequently evaluate deals, and while price is certainly a factor, we want to ensure we achieve a solid return. The synergy aspect is significant in some of the deals we assess, and we believe we can generate considerable synergies from the larger opportunities we are exploring.

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

I have another question regarding capital allocation, but I’d like to view it from a broader perspective over the next couple of years. Reflecting on your Investor Day from 2.5 years ago, you mentioned that you would potentially have about $3.4 billion available for acquisitions. Now, you've indicated there are $500 million in internal investments, and possibly even more. Could you compare today’s capital allocation approach between acquisitions, share repurchase, and internal investments with what you anticipated 2.5 years ago? What differences do you see in that spending mix?

Tobey, this is Mike. I'll begin, and Eric can add his thoughts. There has been no significant change in how we allocate capital regarding internal investments or buybacks. When considering our overall strategy, which includes debt repayments, we've maintained a consistent approach to both internal growth projects, such as the Kimball incinerator and the SDA Unit, as well as buybacks, which have shown steady growth this year, perhaps even slightly higher than usual. We buy back shares based on market conditions, and we still have more than $350 million available under our current authorization. Regarding mergers and acquisitions, it's important to note that they can be unpredictable. We need to ensure that any investment yields a good return. We have always acknowledged that our path to growth won't be straightforward, and our intent to pursue M&A has been clear. However, it must make financial sense. There have been instances where we chose not to proceed with certain deals after evaluating them, and we've communicated openly with our Board about these decisions several times. This approach ensures we remain disciplined with cash and aim for favorable returns, which I believe will please our long-term shareholders.

And if I could ask another question about health care expense. Do you anticipate health care expense growth increasing or accelerating again next year? Some of the surveys out of the big health care consulting firms suggest that next year is going to be even tougher.

Yes, Tobey, it's Eric here. I think difficult to project, kind of read the same news you do. I think at a gross level, certainly, I don't think one could say that health care costs in general won't increase. However, I think some of the reasons for our increase this year that Mike mentioned around the preponderance of high-cost claims. The frequency of those this year just seems to be higher than normal, and I don't necessarily see that impact continuing. It could, but I think the law of long-term averages would get that back down to a normal level. So I think in short, yes, they'll continue to increase. I don't think they'll increase at the same level that we saw this year at the gross level. However, as I mentioned earlier, we are doing some things internally to try to mitigate the increase. And I think it will mitigate the increase in health care costs going forward.

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

Thanks, Christine, and thanks, everyone, for joining us today. Our next investor event will be at the Baird Industrial Conference in Chicago in a few weeks, followed by a Stephens event that Jim will be presenting at in Nashville. Also, have a great day today. Keep it safe and enjoy the upcoming holiday season. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.