Greetings, and welcome to the Clean Harbors, Inc. First Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Michael McDonald, General Counsel for Clean Harbors, Inc. Thank you. Mr. McDonald, you may begin..

Thank you, Christine, and good morning, everyone. With me on today’s call are Chairman, President and Chief Executive Officer, Alan S. McKim; EVP and Chief Financial Officer, Mike Battles; and SVP of Investor Relations, Jim Buckley. Slides for today’s call are posted on our website, and we invite you to follow along.

Matters we are discussing today that are not historical facts are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Participants are cautioned not to place undue reliance on these statements which reflect management’s opinions only as of today, May 5, 2021.

Information on potential factors and risks that could affect our actual results of operations is included in our SEC filings. The Company undertakes no obligation to revise or publicly release the results of any revision to the statements made in today’s call other than through filings made concerning this reporting period.

In addition, today’s discussion will include references to non-GAAP measures. Clean Harbors believes that such information provides an additional measurement and consistent historical comparison of its performance.

Reconciliations of non-GAAP measures to the most directly comparable GAAP measures are available in today’s news release, on our website and in the appendix of today’s presentation. And now I’d like to turn the call over to our CEO, Alan McKim.

Alan?.

Live It 3-6-5 program this year. The program really personalizes safety for every employee and includes each employee’s five personal reasons why they choose to be safe at work, on the road and at home, and we believe this relaunch will allow us to sustain this successful journey on safety. Moving to Slide 4.

As we outlined in this morning’s release, we have updated our reporting segments to better reflect the operations of the company today. After a detailed planning process, we took a new approach to our Safety-Kleen organization that we believe will be beneficial to the company and our shareholders alike. This approach is based on two critical changes.

First, we consolidated the core Environmental Services of our Safety-Kleen branches into the legacy Environmental Services sales and service regions. We expect this change to strengthen our allocation of resources, whether that is people, trucks or equipment.

We also expect this to reduce third-party spend, generate even greater cross-selling opportunities across all our environmental lines of business and it also enables efficiency gains in routing and network consolidation. The second change we made was to combine all the pieces of our sustainable lubricants business.

Our newly formed Safety-Kleen Sustainability Solutions segment or SKSS consists of both sides of the spread we manage in our Re-refining business. It will be focused on providing the best, most environmentally friendly and sustainable lubricant products to our customers.

The collection of services for waste oil, used oil filters, waste antifreeze and other related items will all be tightly managed under a standalone organization. This should enable us to collect more used motor oil and supply our re-refineries with the best available feedstock.

Overall, we believe this new structure better aligns the legacy Safety-Kleen operations within our company and will enable us to maximize the value of those assets. Turning to Q1 performance. We kicked off 2021 with a strong start as our results exceeded our expectations.

Our Environmental Services segment, after a difficult February due to the deep freeze in the South, rebounded with an outstanding March, driven by greater volumes of high-value waste streams and the ongoing recovery in many of our service businesses.

Our newly formed SKSS segment delivered better-than-expected profitability due to ongoing base oil pricing gains driven by market conditions. Adjusted EBITDA in Q1 was $129.5 million, which included $5.4 million in benefits from government assistance programs.

Our margin grew by an impressive 130 basis points to 16%, reflecting the benefits of our cost controls, along with productivity and pricing initiatives. We also generated strong adjusted free cash flow of more than $62 million. Turning to our segment results, beginning with Environmental Services on Slide 5.

Revenue was down year-over-year due to the lingering effects of the pandemic both on project work and certain service offerings as well as the effect of the February storm, but we closed Q1 with revenues on an upward trajectory. Adjusted EBITDA was down 4% from a year-ago, mostly due to the lower revenue.

Even so our margins were up 70 basis points and this was driven by a combination of pricing, cost savings, revenue mix and $4.5 million in government assistance. Revenue from our COVID-19 decon work totaled $28 million in Q1, which was higher than we anticipated.

We’ve now completed well over 17,000 total COVID responses since the program began a little over a year ago. In Q1, our incineration utilization dipped to 80%, entirely due to the lost days in February at both our Deer Park and El Dorado incinerator as a result of the storm.

At the same time, we continue to gather a lot of high-value waste streams and record number of drums, which pushed our average price up 8% from a year-ago. The adverse weather and strong volumes drove our deferred revenue to the highest level in our history at $83.2 million, providing us with a terrific backlog heading into Q2.

Landfill volumes were down 29% due to less projects, while average pricing rose 24%, which helped to offset a portion of that volume decline. The pace of parts washer services picked up nicely in the quarter, growing 6% from Q4 to 235,000 services. In Q1, we saw most of the Safety-Kleen Environmental branch core offerings in the U.S.

trending up from a year-end as people began driving more with the rollout of vaccines and SK’s non-automotive service customers also beginning to rebound. Moving to Slide 6.

Revenue for Safety-Kleen Sustainability Solutions was essentially flat with the prior year as higher base oil pricing and charge for oil rates were offset by slightly lower volumes, particularly on the waste oil collection side. On a sequential basis, SKSS revenue increased 19% from Q4, fueled by stronger demand and higher pricing.

Adjusted EBITDA in this segment climbed 31% to go along with a 480 basis point margin improvement, which reflects the widening of our re-refining spread. The SKSS margin was driven higher by the productivity and cost initiatives we implemented as part of our organizational changes over the past year.

Government programs accounted for $800,000 of contribution in Q1 in this segment. Waste oil collections were modest at 47 million gallons. Our percentages of blended products and direct volumes came in as expected in Q1 and consistent with the prior year.

Given the market environment, we prioritized opportunities to move larger volumes of base oil at higher than normal margins. Turning to Slide 7. Given our cash balance, low leverage and 2021 cash flow, we remain in excellent position from a capital allocation standpoint.

We expect to focus on internal growth capital on our plants and other assets that will generate the best returns. Our M&A pipeline is robust. And as the U.S. emerges from the pandemic, we see more acquisition candidates are coming to market. We intend to be active on this front.

We also will continue to – with our share repurchases program as we believe our stock represents a great value at the current levels. Our focus in recent years has been on increasing our return on invested capital. Our adjusted ROIC has more than doubled since 2016.

Every year since then, we’ve grown our annual EBITDA, while also acquiring companies that support our core businesses and pruning our portfolio by divesting some energy-related assets. Our adjusted ROIC today exceeds our cost of capital. In summary, we are excited about our prospects for this year.

We see a promising environment as North America reopens from the pandemic. We believe both our segments have favorable outlooks for the remainder of the year. Within Environmental Services, we began Q2 with a substantial backlog of waste at our plants and significant waste stream opportunities for us to pursue.

We would expect our incinerators, landfills, TSDFs and other permitted disposal and recycling facilities to deliver strong performance in 2021. In the quarters ahead, we also expect many of our service offerings, including industrial, technical and field services, along with the SK Environmental branches to grow from last year.

Given our Q1 results, we now expect $30 million to $40 million in COVID-related revenues for the full-year 2021. Within SKSS, we intend to capitalize on the positive market conditions, particularly as demand in the base oil market returns to more normalized levels.

We expect our re-refining production levels to remain strong over the next several quarters, and we will continue to actively manage our spread. We intend to grow our used motor oil gallons collected in the months ahead, in conjunction with the ongoing vaccine rollout and the pent-up travel demand.

Overall, we expect a year of profitable growth in 2021, generating healthy free cash flow to support our capital allocation strategy. And so with that, let me turn it over to Mike Battles.

Mike?.

Thank you, Alan, and good morning, everyone. Turning to our income statement on Slide 9. As Alan detailed, we began 2021 with the same upward trajectory we saw in the back half of 2020. In fact, we concluded the quarter with the best March performance in our history in terms of both revenue and adjusted EBITDA.

Our Q1 adjusted EBITDA results exceeded the guidance we provided on our last call. As expected, revenue declined 6% year-over-year, but was up sharply in March versus the same month last year. Adjusted EBITDA grew 3% to $129.5 million. We recorded our 13th consecutive quarter of year-over-year margin improvement.

Our cost reduction programs, productivity initiatives and mix of revenue, combined with $5.4 million of government program assistance, resulted in 130 basis points improvement in gross margin. If you back out the government monies, our EBITDA margin improved a healthy 60 basis points.

SG&A costs declined year-over-year in the quarter, reflecting our lower revenue and were flat on a margin basis due to our effective cost control measures. For the full-year, using the midpoint of our guidance range, we would expect SG&A to be up in absolute dollars from the prior year and essentially flat on a percentage basis.

Depreciation and amortization in Q1 declined to $72.2 million, in line with our expectations. For 2021, we continue to anticipate depreciation and amortization in the range of $280 million to $290 million. Income from operations increased by 12%, reflecting our cost controls and revenue mix in the quarter. Turning to Slide 10.

Our balance sheet remains in excellent shape. Cash and short-term marketable securities at March 31 were $570.7 million, flat with year-end and up more than $76 million from the same quarter a year-ago. Our debt was $1.56 billion at quarter end, with leverage on a net debt basis at 1.8x.

Our weighted average cost of debt is 4.2% with no debt maturities until 2024. Our strong balance sheet puts us in an enviable position to execute on our growth strategy. Turning to cash flows on Slide 11. Cash from operations in Q1 was extremely strong at $103 million.

One of the drivers behind this performance was improved working capital management from stronger accounts receivable collections and lower AP expenditures driven by cost initiatives. CapEx, net of disposals was down year-over-year at $40.7 million, which was slightly below our expectation, mainly due to timing of some projects.

The result of these two items, along with some other smaller factors, was a record Q1 adjusted free cash flow of $62.3 million. For 2021, we continue to expect net CapEx in the range of $185 million to $205 million, which is higher than 2020. During the quarter, we bought back 300,000 shares at a total cost of $26.5 million.

Of our $600 million authorization, we now have just over $180 million remaining. We remain committed to our repurchase program. Moving to Slide 12. Based on our strong Q1 results and current market conditions, we are raising our 2021 guidance. We now expect adjusted EBITDA in the range of $560 million to $600 million with a midpoint of $580 million.

Looking at guidance from a quarterly perspective, we expect Q2 adjusted EBITDA to be 15% to 20% above prior year levels based on the positive momentum we are experiencing in our business and the pandemic-related slowdown in Q2 a year-ago. At the midpoint of that range, our adjusted EBITDA would be 6% higher than Q2 of 2019.

Here is how our full-year 2021 adjusted EBITDA guidance translates to our new segments. In Environmental Services, we expect adjusted EBITDA to decline in the mid-single digits on a percentage basis from 2020.

We expect to benefit from the growth and profitability within incineration, a rebound in the SK branches and other service businesses and our comprehensive cost measures.

However, these benefits will not offset the decline in high-margin decontamination work, and more significantly, the large contribution from government assistance programs in 2020 that totaled $35.6 million in this segment. For Safety-Kleen Sustainability Solutions, we anticipate adjusted EBITDA to increase in the range of 50% to 60% from 2020.

We expect our Re-refinery business to have an outstanding year as the spread we manage in that business is extremely wide due to supply driven price increases in base oil and blended products. As miles driven and lube demand rises in the second half of this year, we expect that spread to begin to normalize.

At the same time, however, our ability to collect more waste oil and cross-sell our other products to those same customers should increase. These improvements in the SKSS segment in 2021 will more than offset the $3.7 million in government assistance that SKSS received in 2020.

In our Corporate segment, we now expect negative adjusted EBITDA to be up low to mid-single digits from 2020 due to higher incentive comp. For 2021, our adjusted EBITDA guidance now assumes receiving a total of $7 million to $9 million of government program assistance, primarily from Canada.

Based on our current EBITDA guidance and working capital assumptions, we now expect 2021 adjusted free cash flow in the range of $230 million to $270 million or a midpoint of $250 million. Turning to Slide 13.

As we emerge from the pandemic and start a new year in 2021, we thought it would be a good time to formalize some longer-term targets for the company. We review long-term strategic plans and five-year outlooks with the Board on an annual basis.

We’d like to share some of those longer-term objectives with you today based on our current view of opportunities within our markets. First, we expect our organic growth each year to be 1 to 2 percentage points better than the U.S. GDP.

Second, we expect to improve our adjusted EBITDA margins between 30 to 50 basis points annually, excluding extraordinary items such as government assistance programs. Third, we are targeting more than $300 million of adjusted free cash flow by 2025.

This five-year outlook excludes any future acquisitions or divestitures and is based on current market conditions. In closing, we are off to a great start to the year. We see a clear path to continued positive momentum through the remainder of 2021 and also see macro trends that should support further profitable growth in the years ahead.

We are excited about the bright future of Clean Harbors, both near and long-term. With that, Christine, please open up the call for questions..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Noah Kaye with Oppenheimer. Please proceed with your question..

Good morning, everyone. Thanks for taking the questions. And guys, really nice job in the execution this quarter. Well done..

Thanks..

Thank you..

Maybe we can just start with the quarter ahead outlook. The guide for EBITDA of 15% to 20%, Mike, if I’m not mistaken, I think last year, you had a lot of government benefits in the second quarter of 2020, maybe more than $20 million. It sounds like we might get a little bit of government money this quarter.

But basically, if I just do apples-to-apples, I mean, and back out the government money, it really sounds like you’re up more like 30% to 35%.

Am I thinking about that right?.

Yes. That’s a good way to think about it. I mean, really, Q2 last year we had $23 million of government assistance in Q2. And so to get kind of an apples-to-apples basis, it really is quite a good growth. And look at Q2 last year, everything was a sharp download. I mean this time last year, we pulled guidance, we drew on the revolver.

I mean it was crisis mode, right. So it’s not surprising, we’re up that much..

Yes. So I mean your comp to 2Q 2019 is, in some ways, maybe more illustrative.

I guess, what can you call out in terms of the major bridging items that are reducing – that are translating to improved profitability? Is it just structurally lower OpEx? Is it some of the pricing initiatives? Is it spread? If you kind of compare this business to pre-pandemic, what’s improved really?.

Yes. No, that’s why we put in the prepared remarks our comment on 2019 because that’s really kind of – Q2 of 2020 was kind of a crazy comp.

But to your point, though, as we said last year, and we’re sitting around here like January and February, kind of pre-pandemic, Alan and Jim and I and others were talking about what a good year we were going to have, how spreads were widening, how the plants are running well. I mean it really was kind of all systems go.

And then the pandemic hit and everything kind of went sideways, and we all reacted. I think the management team did a great job of working their way through the pandemic.

But this is, in my mind, and I was talking to some of the guys yesterday about it, this feels like it was kind of pre-pandemic last year where all the things were – that were going real well last year are kind of back online.

Whether it be high-volume waste streams into – all the things you just mentioned, Noah, high-volume waste streams into our plant, the spread being wide, our cost control is being maintained, our ability to drive price in other parts of our business like in parts washers and other areas.

I mean it really was a lot of good things were going on way pre-pandemic. Pandemic hit, everything went sideways. And now we’re back online, and that’s how I feel about it. And that’s why we added that. I do think that’s all the reasons you just mentioned, plus..

Yes. If I can sneak one more in for Alan. I did see there was some M&A spending in the quarter. First, could you just touch a little bit on what you bought? And then actually, you sound pretty optimistic on the pipeline.

Just give us some color on the kind of assets you are maybe seeing coming to market or areas where you see opportunity to really complement the existing portfolio..

Sure. I think both segments of our business have great opportunity to grow through acquisition and we’ve been looking at potential acquisitions on both sides. And I would be very disappointed if you didn’t see us do a deal or two of substance this year because we’ve certainly been, I think, patient.

We certainly had to go through the pandemic and it made it very difficult to do a normal M&A deal the way that we typically would do it from a due diligence and integration standpoint. But we are optimistic. We did a small kind of tuck-in down in the Gulf as part of our Safety-Kleen business.

But I do think there are opportunities really on both sides to grow our business. And we are pretty excited about some of the things that we are seeing out there now..

All right. We are looking forward to that. Thank you for the questions guys..

Thanks, Noah..

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

Hey. Good morning, guys..

Hi, Tyler..

Hey, Alan, I just want to come back and make sure I have it on the reorg. So going forward, so branch work like part washers, that’s going to get folded into ES and then it’s basically waste oil collection and re-refining, that’s kind of the crux of the new SKSS.

Is that right?.

Yes. Essentially, there are a lot of lines of business that go along with that. We actually moved SK Environmental under Clean Harbors in the second quarter of last year.

And I think what we – now that we’ve basically eliminated that segment and created this new SKSS, I think it now gives us clear visibility on the remaining sort of pieces that we moved out of Safety-Kleen, which is all of the used motor oil collection, the industrial oil, the waste antifreeze recycling side of our business, the sale of all of our re-refined products.

It’s all sort of all tightly managed under one group. But I would tell you that I believe the record drum volumes that we are seeing on the environmental side of our business, were very much driven by our penetration to the small quantity generator side of the business through the merger of Safety-Kleen Environmental and Clean Harbors Environmental.

So I think a good – a great story there. It’s one of the reasons why deferred is at $82 million. We’re just very, very busy in bringing in new customers and new waste streams..

Okay. That’s helpful.

And then Mike, and maybe you gave it somewhere, maybe even in the prepared remarks, but what was the new segment EBITDA in 2020 for the full-year? Do you have that?.

Yes. Around 8:30, we filed the 8-K. Tyler it has all the re-casted numbers by quarter for 2020 and for the full-year 2019. Safety-Kleen Sustainability Solutions for 2020 was $83.2 million. That was the EBITDA..

Okay. Yes, I’ll check out that 8-K. Okay, perfect. And then – so Mike, I kind of want to just kind of come back and make sure I’ve got it here. So you raised guidance for the full-year by, call it, $15 million, which is great.

But if you take Q1 actual and the Q2 implied guidance and subtract that from the full-year midpoint, I mean, it appears that you are guiding for less EBITDA in the second half than the first half, and that would be wildly outside of normal seasonality.

I totally get being conservative, but is there something that is giving you a lot of caution in the back half? It just frankly doesn’t sound like it. I’m just trying to work that out in my mind..

Yes, Tyler. So you know I’ve been doing this for five years now, and we try to make sure we hit, meet or exceed our guidance expectations. The pandemic is a big unknown. Normally, we don’t even raise guidance in Q1, as you know. And so the fact we did that should be comforting to the – that we feel we’re going to hit that number.

And I’m hopeful that we come back in 90 days and say we’re going to raise it again, but I don’t know that. And we don’t know about pandemics and we don’t know about kind of the rollout across the world. And we have a pretty wide spread in the SK Sustainability segment.

And is that going to continue and for how long? There is a lot of open questions around that. So that’s where we are. And we talked about it with Alan and the leadership team and with the Board, and that’s where we land..

Okay. All right. That’s helpful. And then my last one, I appreciate very much the five-year target, very helpful. But I am curious a little bit about some of the assumptions in there, particularly around free cash. So I think you just guided to, call it, $250 million of free cash flow here at the midpoint in 2021. You say you’re looking for $300 million.

I guess you do use the word exceed, but let’s just say, $300 million in four years. But that implies less than a 5% CAGR. And maybe CapEx is planning to rise. I’m not sure. I’m kind of curious about what’s in there for that.

But it just doesn’t feel like there’s a lot of free cash flow leverage embedded in there, given that it appears, and again, this is my own math gymnastics, but call it, slightly half maybe of your longer-term EBITDA growth is going to come from margin. So I would expect that would flow through pretty well for free cash flow.

But just any broad thoughts there, that would be helpful..

Yes. No, you got it right, Tyler. That was pretty good quick math for you. We are going to probably grow CapEx as we grow revenue. I think that makes sense as we try to replace our equipment. The other thing that we said is more than $300 million, right? As I said in my prepared remarks, I think we’re going to do better than that.

But again, I want to give numbers that I – that we feel good about. And that’s where we landed. I’m not going to dial in, it’s going to be $330 million or $320 million or $323 million. I mean it’s just more than $300 million. We feel good about that. We’re hopeful that we do much better than that. I think we will.

If you look at our past, we certainly have. So that’s where we landed..

Okay. So not a finer point, just more of a broad statement. Okay, awesome. Thank you guys so much..

Thanks, Tyler..

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

Hi. Good morning, guys..

Hi, David..

First off on the reorg, is there physical changes to the branch operations? Clearly, the oil collection business is a tanker truck. I was under the impression that things like oil filters certainly were something that was collected on a box truck and those boxes also might transport parts washers.

I’m just trying to understand functionally at the branch level, are there changes to the operations there?.

Well, we have an oil recycling group here that has about 19,000 bins out at customer sites that basically gather oil filters as part of that service that we do on both automotive and heavy industry. And so that moved over to Sustainability as well.

We do still periodically pick up drums of oil filters as part of SK Environmental, which is part of their containerized waste service offering. But it’s a small percentage compared to those services that we do to those 19,000 customers.

I think overall, when you look at the BPS structure, we’ll probably show this in the second quarter, earnings release, we’ll kind of articulate where all the locations are and all the different assets.

But we have substantial terminals, rail facilities, service locations that are all stand-alone bulks and product service organization that are throughout the U.S. and Canada.

And there are still some interactions with the SK branch business, the Environmental branch business because there may be a small number of branches that still have storage facilities at them. But for the most part, this is all stand-alone.

And it really allows our environmental – SK Environmental business to really focus on containerized waste, VAC services. We’re adding probably 30 more VAC trucks in that business. We have several 100 – we have 600 overall companywide, but just in that division.

And then a lot of our parts washer services, both our company-owned assets as well as our customer-owned assets. There are about 200,000 of those. So we really think they can now focus on those lines of business. And really help grow those now with. And as part of this, we actually added about 100 salespeople.

So we expect to really accelerate the growth in our business and I think coming out of this pandemic, like Mike says, there’s still uncertainty, particularly in Canada, Alberta and Ontario is really hurting, which is part of why we’re getting government assistance, as you know.

But Canada, between Alberta and Ontario, really been shut down and really, those businesses have really been hurting there. So we think those will come back soon, but time will tell..

Okay. And you touched on it a bit, Alan, in terms of what you expect to derive from this change. A couple of questions.

Is there a change in leadership for any of these organizations? And then as far as – I think you said you expect stronger growth because of the focus, is there any targeted cost savings or EBITDA benefit from this change that you’d like to talk about?.

Well, I think you’re going to have, obviously, a much better focus on, let’s say, the 600 used motor oil trucks that we have up there which we are growing. We put a refurbishment facility up in Elgin, Illinois, and we’re actually building out 35 new trucks a year now to support this business.

We expect to continue to expand our fleet, but also to create more dense – route-dense markets out there. And I think you’re going to see just a natural improvement in our margins because of that focus.

And I think also the closed-loop offering that we’ve been talking about here on the call, bundling our services together, offering those customers, both the collection of all these different types of waste materials as well as the purchase of all of our rerefined products like our waste, like our antifreeze, like our oils, our blended products, our hydraulic oils.

So I think that offering is going to be well received. And I think the overall consumer really is, I think, more going to be looking for that recycling and sustainability message that I think you’re going to start seeing more and more come out of our company here..

Okay. Thank you..

Okay..

Thanks, David..

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

Yes. Hi, good morning, everyone..

Hi, Jerry..

I’m wondering if you could talk about the margin improvement targets that you folks have laid out in a bit more granularity.

Can you talk about how much of that is pricing? And I’m sure you’ve got operating efficiencies dialed in as well, maybe just up through the one or two most significant areas for improved efficiencies from here relative to that margin bridge. Thanks..

Yes, Jerry. This is Mike. I would say that when we did this analysis, we did it at a pretty high level. We didn’t go back and look at kind of what is SKSS versus ES and how we get there. What we did do is I’ll look at where we were in the past three or four years, and if you go back to 2017 and start – I mean, the math kind of hangs together.

So that’s why we felt pretty good about that, both on the margins, on the revenue and on the cash flows. And so I thought that was a pretty good trend to kind of rely upon going forward. All the things, though, that we have been doing over the past few years, working on price, taking costs out.

I mean as 13 straight consecutive quarters, we have year-over-year margin growth. I mean this is a – we know how to manage our margins and manage our cost structure. And we’ve proven that in our history. And so there’s no reason to think that we can’t continue.

How much of that specifically is price versus regulation versus new opportunities? I mean that’s all kind of stuff we’re working on and that we work on every day..

And you folks obviously have a pretty clean balance sheet and strong free cash flow.

I’m wondering how you folks are thinking about potential for larger-scale M&A earlier in this economic cycle? How active is the pipeline? And any updated thoughts on what would be a reasonable fit beyond bolt-ons to your business?.

Yes. I think our last deal – last large deal, which was, I think, about $1.3 billion that we did when we acquired Safety-Kleen back in 2012, that was probably the most sizable deal that we did most recently. But there are deals available like that, that we are seeing and looking at.

Obviously, we seem to be in more competition with other private equity companies where some of these are sponsored back. And so sometimes we see private equity just selling off the private equity again, and that’s been discouraging a little bit because we think as a strategic buyer, we offer a lot more and can get a lot more synergies, quite frankly.

But we do see opportunities in that size, and we are looking at those deals..

Okay. Perfect. And lastly, nice to see the really strong incinerator ASP.

I’m wondering as utilization rates come back online for you folks, what does that mean for mix? And can you sustain that level of pricing gains as we head into 2Q?.

Yes. We’re really trying to drive further capacity. We made an approximate $10 million capital investment into our Aragonite plant over the last two years, and that came online this past month. And so we hope to gain another 6,000 tons this year and hopefully, additional tonnage next year through that investment.

And so adding new technology, debottlenecking and even looking at further expansion is something that we are doing. We do see growth from the captive markets, we’re seeing new volumes coming in and we were implementing an 8% price increase pretty much for all of our incineration business.

And I think customers are receptive to that because last year, we didn’t really raise any prices. In fact, we gave a lot of concessions on pricing last year to a lot of large corporations. And so we’re going back now and getting those concessions removed and driving price improvement to improve our margin. So those are some of the things we’re doing..

Okay. I appreciate the discussion. Thank you..

Thanks, Jerry..

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

Thanks for taking my question. Mike, if I can dig into a couple of your assumptions.

The up 3% to 5% in corporate overhead, that’s on the $175 million that shows as corporate overhead in the revised segment EBITDA calculation? That’s what I’m multiplying that 3% to 5% against?.

Yes, sir..

And then in 2021, are we assuming working capital is neither – not a benefit or a neutral? It’s either use..

Flat..

Flat. Okay. And then on the five-year, my esteemed colleague’s observations alone, I mean, if your 2% to 3% is GDP and your 1% to 2% better than that, that’s sort of a 4% on the top.

To get 40 basis points, you do sort of 5% growth at EBITDA, which – unless capital spending is doing something silly, then you’re at 6% compounding on free cash flow in the assumptions to the $300 million.

So I guess the big question is, are we going to stay at 6% to 6.5% of revenues as CapEx is part of that underlying assumption?.

So we’re going to grow CapEx as revenue grows. Outside of any events, new incinerators are beyond that growth capital. I would say $300 million’s our floor, and we go from there. That’s what you’re looking for..

Well I mean as a percentage of revenues, CapEx has been trending at around 6%, 6.5%..

That’s right..

So that holds – I mean you can grow revenues as much as you want, still going to have – the 6% to 6.5% of that is the underlying CapEx is what I’m trying to get at..

Yes, I think that’s fair..

Okay. All right.

And then the last thing from my side is in the current year assumptions, what is the presumption about getting back to a pre-COVID on sort of the pieces, like in technical service or industrial service or the industrial – adjusted new version of SKE? What’s the – what are the underlying assumptions about pre-COVID recovery?.

Yes. So as you know, Michael, the tech service business didn’t really suffer. It actually had a pretty good year, kind of top line kind of for the full year. And it was flat here in Q1. And I think that this is going to continue. As Alan said, we have a large backlog of work to do, and we’re going to get after that in the plants.

And I think that’s going to be a – kind of tech service kind of continues to do well. In field service, we had a great year in 2020 because of the pandemic and because of the decon work that we did. And as we said on the call, that we see that’s a long way down.

We did about $28 million here in Q1 of decon work, but we said $30 million to $40 million for the year because as we see here in May, that number is going down to a trickle.

And so – which is actually a good thing, frankly, for everyone sitting in the room here, we’re happy that, that speaks to a broader societal issue that seems to be turning into a win. So the last thing I’d say is that on the SK oil side, I mean, that’s all – that’s always decimated.

The SKSS business was decimated in Q2 and Q3, and I think that’s going to come back here in 2021..

Okay. That’s very helpful. Thank you, Michael..

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

Hi. This is John Mazzoni filling in for Hamzah.

Could you just give us an update on the PFAS opportunity and what you’re hearing from the regulators there?.

Yes.

Alan, why don’t you take – why don’t you – the PFAS opportunity, talk a little bit about that?.

Yes, absolutely. I think this administration, obviously, is going to be driving, we believe, this issue and coming up with a final conclusion on how to address this in the environment. And so we continue to watch and see what is happening in Washington.

And certainly, from a technology standpoint, most of our focus has been on groundwater treatment at this stage. And we’ve been hoping that as these regulations develop, we’ll be able to drive some substantial volumes into our plants when this gets under way..

Yes, still a lot of questions, a lot of Q&A, not – a ton of volumes. People asking a lot of questions, a lot of lunch and learns as we are at this juncture..

Yes..

Great. Thank you. And then for my follow-up, could you just remind us how many captive incinerators are out there in the marketplace today? And what you’re seeing in terms of closures? Is there any catalyst that accelerates those closures? Or any comments on the pace picking up or slowing down. Thanks..

Sure. There was certainly well over 100 at one time. And then over the past 15, 20 years, we’re now down to about 55. Of those 55, a number of them are large rotary kiln-type incinerators rather than industrial fuel facilities or liquids-only facilities.

But we continue to see a reduction in captives, companies looking at outsourcing and realizing maybe that’s not their core competency of running incinerators.

And so we’ve been, for the last 15, 20 years, talking to the captives routinely and certainly part of the reasoning for the new incinerator that we built in El Dorado was a result of anticipated new volumes coming in because of the closures.

And we’re taking a hard look right now at whether we need more capacity because we think captives will continue the strength..

Got it. Thank you..

Yes..

Our next question comes from the line of Jim Ricchiuti with Needham & Company. Please proceed with your question..

I just wanted to go back to the – good morning, SKSS reorg. You talked about cost savings.

And I’m wondering, has that played in at all to the change in guidance? Or is that something that you’re thinking about longer-term from the standpoint of the EBITDA benefit?.

Hi, Jim, this is Mike. That hasn’t played – what has played into the guidance raise is obviously the big results – the good results we had here in Q1, the spread being wide in the SKSS business, as well as kind of high-volume waste streams and better-than-expected decontamination work. So all those things played in.

I think that the cost actions we took last year, Jim, whether it be kind of lowering our headcount, lowering our rentals, consolidating sites, working at overtime, working on rental assets, all the good things we did last year are all paying dividends here in Q1, and we’re seeing it. And as such, that felt us to comfortably raise guidance..

And just with respect to Q1, obviously, earlier in the quarter in February, you had the issues that were going on in the Gulf, but it sounded like you really exited at a pretty strong level.

So net-net, I mean, was it – how disruptive was it for the quarter? It sounds like it was maybe not a wash, but it sounds like you ended fairly strong, and it came back fairly strong.

And is that the right way to think about it?.

Yes. Jim, it was interesting because as we gave guidance on the 24 of February, the event in – the winter event, winter storm event was the 13 through the 17. So we knew as we gave guidance for Q1, the weather impact, at least had a good sense of what the weather impact was going to be in our plants and landfills and other areas.

So certainly, we were impacted by it in that area. What we didn’t experience is – we didn’t expect is that the spread, as our plants were down, so were other – our competitors in the refinery space. And as such, that increased the price of base oil quite a bit over the past quarter, and we’re the beneficiary of that.

So that was probably an upside surprise that kind of counterbalanced any lost business because of the plants being down. As we said in our prepared remarks, we had a great March. And the question was, is that just a rebound of a bad February. And as we’re looking here in April, we’re going to have a good April, too.

And so I really feel like it’s not – that really wasn’t just a catch-up of bad February. That was more like the trends are really going the right way..

Yes. And maybe to that point, Mike, we’re just hearing about rising commodity prices, increased prices for resins.

And yes, I’m just wondering, as you look at, say, the petrochemical vertical and just what you’re seeing broadly in the market, how significant is – are you seeing this pickup in industrial activity playing into the business outlook?.

Yes. It’s been great. The pipeline looks really strong, and we’re really bullish about Q2 and the rest of the year versus 2020, of course, and even versus 2019. As Alan, said in his comments on a question he answered, is that customers are receptive to pricing has to go up, and they’ve been receptive to that pricing.

Us and our peers, we all see inflation, that’s here. We’re feeling that, but the customers have been receptive to price increases and we’ve been working through those..

Okay. Thanks a lot..

Our next question comes from the line of Jeff Silber with BMO Capital Markets. Please proceed with your question..

Thank you so much. I wanted to go back to your five-year financial targets. I know the adjusted free cash flow target is a new target.

But can you remind us on the top line growth and margin expansion targets? How that might have compared to prior long-term targets?.

We go back and look – went back and looked to our five-year model for the past four or five years, and they’ve all been about this type of trajectory, to answer your question, Jeff. I think that we’ve kind of held on to this and the history over the past four or five years has kind of spoken to that.

So I think that we’ve been able to – we get measured on these longer-term targets in our incentive compensation plans, and we’ve been able to pay those out, which has been great because we’ve been able to hit these targets..

Okay. That’s great. Follow-up question. I know the infrastructure plan that was rolled out in Washington a couple of weeks ago, is still just a plan. Who knows what eventually will happen.

But is there anything in there that if it does pass might be beneficial for your business?.

I think certainly, when the government starts putting money out to do some of these major projects that we tend to see remediation opportunities, contaminated soils and other sort of related cleanup work that gets led as part of those infrastructure spending. So we would look at that as a positive thing..

Okay. Fantastic. Thank you so much..

Yes..

[Operator Instructions] Our next question comes from the line of Alexander Leach with Berenberg. Please proceed with your question..

Good morning, guys. Congrats on the quarter. In terms of the margin expansion you guys saw in SK, how much of that is sustainable? Meaning – I know there were some shortfalls in supply leading into the year, which I believe is partly why you saw some favorable pricing.

Do you expect any of that margin benefit to reverse through the year as supply normalizes? Or will volume increases offset that? Am I thinking about this correctly? Or what are the moving parts there?.

We’re conservative in our thinking about our spread management. But one thing we would say is when we first went into 2020, there was certainly a big opportunity we thought because IMO and what that was going to do to the recycled fuel oil market.

And it’s really difficult right now to kind of pinpoint exactly why, but the recycled fuel oil market, which is basically the market that we compete in or sell product into versus our rerefining business, has not really, from a pricing standpoint and margin standpoint, has not really done well at all.

And there’s really a lack of outlets for a lot of this oil that otherwise in the past, might have gone to bunker fuel. We don’t know how much of the jet fuel market has impacted that side of the business as well. A lot of kerosene coming out of the fact that aviation is so much under pressure.

So there’s a lot of moving parts that we see this year, and we’re sort of being conservative and we’ve got to where we think the spread will be by the end of this year. But we are feeling that, IMO is certainly having some impact on the outlet of materials in the bunker market..

Okay. Great. And sorry if I missed the Q&A earlier, my line was cut out slightly.

Can you talk a bit about potential future inflation and how it could impact the business? And then how it would specifically impact Environmental Services versus Safety-Kleen? Would it offset any incinerator pricing power you’ve had? And how will it impact the rerefining spread in SK?.

Yes. So first of all, Alexander, I think that we’ve had 13 straight quarters of year-over-year margin expansion. So I’d like to say that we know how to manage our margins, and we’ve done a good job with that, through the pandemic, before the pandemic. And we made some hard decisions on cost last year, and we’re glad we did.

Cost actions in SG&A, whether it be headcount, location, gross margin, site consolidation, overtime, management. They bring dividends down. And so the extension that – you said that fuel is going up, we have fuel surcharges to cover off on that.

So I feel like the plan has been, and with pricing in other areas to – and the receptivity of that, I think we’ve been able to manage inflation pretty well..

Okay, great. Thanks, guys..

We have reached the end of the question-and-answer session. I would now like to turn the call back over to Mr. McKim for closing comments..

Okay. Thanks for joining us today. Our Investor Relations calendar remains very active in the coming months, and so we look forward to connecting with many of you there. And we hope you all have a safe day. 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..