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Text: Slides for today's call are posted on our website and we invite you to follow along.
Participants are cautioned not to place undue reliance on these statements, which reflect management's opinions only as of today, November 4, 2020.
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.
Starting on Slide 3.
We delivered exceptional results in Q3.
And I can't say enough about the efforts of our team in driving these outstanding performance.
Since the outset of the pandemic in March, everyone from really the top levels of the organization to our frontline workers have excelled in response to this challenge, and it's truly been a team effort.
At its core, Clean Harbors is a crisis response company and we can still thrive in difficult environments like the one we have all faced over the past eight months.
And the resiliency of our organization and the versatility of our business model clearly were evident here in Q3.
Revenue, while down year-over-year due to the unprecedented market conditions, was up nearly $70 million on a sequential basis.
This growth was driven by an accelerated recovery in several core lines of business in our Environmental Services segment.
At the same time, we also saw a strong sequential pick up within Safety-Kleen.
Adjusted EBITDA of $161.2 million included $13.3 million in government programs, primarily from the revised CEWS legislation in Canada.
The high level of EBITDA supported by controlled capital spending resulted in adjusted free cash flow of $123.5 million, a quarterly record for the company.
Mike will review the P&L in more details in his remarks.
Turning to our segment results on Slide 4.
Environmental Service revenues declined 10% from a year ago but were up 6% from Q2.
As many of our service businesses bounced back from the early days of the pandemic, adjusted EBITDA grew 16%.
This increase was attributable in part to our cost reduction efforts, productivity improvements and a healthy mix of higher margin work.
The two government programs accounted for $10 million of adjusted EBITDA in this segment.
Revenue from our COVID-19 decon work totaled $29 million and our team has now completed a total of more than 9,000 COVID-19 responses.
Though incineration utilization dipped to 80% due to the timing of turnarounds and a production lag from some of our customers, we continue to execute on our strategy to capture high-value waste streams across our network.
This resulted in an average price per pound increase of 5% from the year earlier period.
Landfill volumes declined 6% as strong base business largely offset the lack of remediation and waste project opportunities.
Moving to Slide 5.
Safety-Kleen revenue was down 18% from a year ago, but up 17% sequentially due to the recovery in both the branch and the SK Oil businesses.
The lifting of local restrictions across much of North America led to a sharp increase in vehicle miles driven, generating higher lubricant demand.
The recovery in demand for base oil and lube products enabled us to restart three of our rerefineries during Q3.
Given the declining market value of waste oil, we maintained high charge-for-oil rates used for motor oil and increased our collection volumes to 50 million gallons.
That is 16% ahead of Q2.
Safety-Kleen's adjusted EBITDA declined 15%, mostly due to the lower revenue.
This decline was partly offset by our cost reduction initiatives, as well as the government assistance programs that provided $2.5 million to this segment in Q3.
Parts washer services we're off 10% in the quarter, which was promising given that we originally expected the SK branch business to be at 85% of normal levels in Q3.
Percentages of blended products and direct volumes came in as expected, but at lower volumes overall.
Turning to capital allocation on Slide 6.
In light of the pandemic, our strategy has been more about capital preservation to ensure that we exit this global crisis well positioned for growth, and I am confident that we will.
Capex spend was extremely low in the quarter and we will continue to proceed with caution on every internal dollar spend.
That being said, we continue to invest in certain projects, particularly at our plants that we believe will generate a strong return.
In terms of M&A activity, opportunities are available, and we have been exercising patience, though, as we believe that we can be more opportunistic going forward in light of the pandemic.
In terms of share repurchases and debt repayment, we are active on both fronts in Q3.
Looking ahead, we enter the final quarter of 2020 in great shape.
On the sales side, we are working closely with customers to help drive a measurable recovery in many of our core businesses.
Our national footprint, reputation for safety, and emergency response capabilities have been competitive differentiators for us.
On the bottom line, our prudent cost actions and careful capital spending have helped us generate record margins and cash flow -- free cash flow in the past two quarters.
Our decontamination business continues to serve as a natural hedge against further slowdowns in other parts of our company.
Within Environmental Services, we expect strong incineration utilization in Q4 based on the lower planned turnaround days and the availability of waste in the marketplace.
We anticipate our offerings within Industrial Services and Tech Services to close out the year on an upward trajectory.
Field Services remains on track for a phenomenal year due to the COVID-related revenues, which we expect to exceed $100 million.
Within Safety-Kleen, we remain below normal demand levels, but we've seen a vast improvement from the lows of the April-May timeframe.
We're continuing to monitor and manage the impacts of localized COVID outbreaks.
Obviously, new shelter-in-place mandates could derail our recovery in the Safety-Kleen branch business, but to-date, we have seen nice steady recovery since both the U.S. and Canada reopened.
For Safety-Kleen Oil, our primary rerefineries are all back online, and base oil pricing is stable due to the supply conditions brought about by recent hurricanes along the Gulf Coast.
We continue to actively manage our charge-for-oil rates as we seek to further grow our collection volumes to supply our network.
So in conclusion, we are encouraged about our overall prospects as we enter the final quarter of 2020.
Our Q3 results confirm the resiliency of this company.
Despite the economic uncertainties that all companies are facing in today's environment, we are confident that we have put our company in the best position possible to succeed as we close out 2020.
Our company clearly delivered outstanding results this quarter.
I want to echo Alan's remarks about the organization.
We have an outstanding team that is able to meet the needs of our customers during a crisis like the pandemic in ways most companies cannot.
It's not just the decontamination work where we are heading into locations that others have evacuated for safety reasons.
It is the fundamental DNA of Clean Harbors and how this company measures up to challenges.
We excel at generating new revenue streams, meeting customer needs during times of disruption and improving operational efficiencies, all while doing it safely and under rapidly evolving health protocols.
I said it to open my remarks last quarter and they're worth repeating.
I couldn't be more proud of the way our organization had met the challenges of this pandemic head on.
Turning to Slide 8 and our income statement.
Our third quarter results exceeded the expectations we set when we resumed guidance in August.
Revenue declined 13% year-over-year, but on a sequential basis, was up nearly $70 million.
Preparing for the possibility of a protracted downturn, we have continually -- we have continued to aggressively manage our cost structure.
These comprehensive efforts, combined with assistance we received from government programs, mostly Canada this quarter, resulted in a 310 basis point improvement in gross margins.
Adjusted EBITDA increased to $161.2 million from a year ago.
Excluding the government assistance, adjusted EBITDA would have been $147.9 million, down only 6% year-over-year, despite revenues being 13% lower.
Adjusted EBITDA margins of 20.7% was 310 basis points -- was up 310 basis points from last year's third quarter, which speaks to the effectiveness of our actions.
We have now improved our adjusted EBITDA margins on a year-over-year basis for 11 consecutive quarters.
Given our lower revenue, our SG&A total was down in the quarter, but our performance also demonstrated the benefits of our cost reduction and productivity efforts.
We lowered SG&A by nearly $16 million or 13% in Q3.
Of that total, $2.8 million was related to the impact of CARES and CEWS.
I would like to point out that these programs have been critical to support headcount levels higher than they would have otherwise been both here and in Canada.
In the quarter, we saw the full impact of the series of productivity programs and cost actions we initiated in Q2.
Our ability to rapidly flex down our structure and maintain expenses at a lower level, even as revenues were coming back, was a key factor in our strong third quarter results.
For full year 2020, we are targeting SG&A of approximately 14.5% of revenue, continuing a positive trend that began several years ago.
Depreciation and amortization in Q3 was up slightly at $74.5 million.
For the full year, we continue to expect depreciation and amortization in the range of $285 million to $295 million, which is slightly below last year.
Income from operations increased by 4%, reflecting the higher gross profit and our overall effectiveness at managing the business.
Earnings per share was $0.99 in Q3 versus $0.65 a year ago or $0.90 versus $0.72 on an adjusted basis.
Turning to Slide 9.
We concluded Q3 with our balance sheet in great shape.
Cash and short-term marketable securities at September 30 exceeded $530 million.
Our liquidity increased even though we paid back the remaining $75 million of funds we had drawn on the revolver under the abundance of caution when the pandemic began.
Our payables and receivable balance grew in the quarter, along with the business, but both categories remain well below last year levels and our collections team is doing an outstanding job keeping cash coming in the door.
Our debt obligations decreased to below $1.56 billion with the paydown of the revolver.
Leverage on a net debt basis now sits at 1.9 times for the trailing 12 months ended 9/30, which is our lowest level in nearly a decade.
Our weighted average cost of debt remains at an attractive 4.2% with a healthy blend of fixed and variable debt.
Last week, we renewed our revolving credit facility with our lending group, led by Bank of America, and we're grateful for their continued strong support.
We put a new five-year $400 million lending facility in place.
We typically uses asset-backed loan agreement only for letters of credit.
Turning to cash flows on Slide 10.
Cash from operations in Q3 was nearly flat with prior year at $143.9 million.
Capex, net of disposals, was down more than 60% to $20.4 million, reflecting our COVID response plan to be extremely cost prudent with our capital.
The result was record adjusted free cash flow in Q3 of $123.5 million, which is 35% ahead of 2019.
For the year, we continue to target capex, net of disposals and excluding the purchase of our headquarters, in the range of $155 million to $175 million.
During the quarter, we stepped up our share repurchases as we bought back 400,000 shares at an average price of just over $55 for a total buyback of $22.2 million in Q3.
Year-to-date, we have we repurchased slightly above 700,000 shares.
Of our authorized $600 million share repurchase program, we have $245 million remaining.
Moving to guidance on Slide 11.
Given our performance, and based on current market conditions, we are raising our 2020 guidance.
We now expect 2020 adjusted EBITDA in the range of $530 million to $550 million.
While this guidance assumes continued localized outbreaks of the virus, it does not assume a national shelter-in-place order due to COVID-19.
This also -- this guidance also assume $3 million to $5 million of government subsidy money in Q4.
Here's how our full-year 2020 guidance translates from a segment perspective.
In Environmental Services, we expect adjusted EBITDA to grow in the low-teens percentage above 2019's level of $446 million.
Growth and profitability within incineration, contributions from the expected $100 million-plus of decontamination work, government assistance programs, and a rebound in the majority of our services business and comprehensive cost measures, are driving this positive result.
For Safety-Kleen, we anticipate adjusted EBITDA to decline in the high-teens percentage from 2019's $282 million.
We expect the branch business to remain below pre-COVID levels in Q4, but we -- but continuing to improve from Q2 levels as it did in Q3.
At the same time, we expect SK Oil to continue its recovery from Q2 where we temporarily closed our rerefineries.
We have continued to be successful at aggressively managing the front end of our rerefining spread.
In our Corporate segment, we expect negative adjusted EBITDA to be up a few percentage points from 2019's $188 million due to increases in 401(k) contributions, environmental liabilities, severance and bad debt, mostly offset by lower incentive compensation and cost savings.
Based on our current EBITDA guidance and working capital assumptions, we now expect 2020 adjusted free cash flow in the range of $250 million to $270 million.
We believe this puts us in an enviable position to execute the cost allocation strategy that Alan outlined.
To summarize, the company delivered an exceptional quarter both operationally and financially.
We enter the last quarter of the year with fairly strong momentum across our facilities network, including our rerefineries and within the majority of our service businesses.
For the most part, the macroeconomic end markets we serve continue to improve.
Chemical and industrial production, which paused a bit in Q2, began to resume in Q3.
As more parts of the economy have reopened in the U.S. and Canada, vehicle miles driven has increased.
We see a steady march forward to close out the year, albeit with normal seasonality in some of our businesses.
We also are beginning to see some project and turnaround work pushed out until 2021, along with new opportunities such as PFAS actually benefit us down the road.
But overall, we believe the short term and longer-term trends within both our operating segments favor us.
We look forward to closing out 2020 on a strong note and we are well-positioned as we head into 2021.

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q3 adjusted earnings per share $0.90.
q3 earnings per share $0.99.

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