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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, 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.
Starting on Slide 3.
I want to start today with a focus on safety, which is a key component of our corporate strategy and culture.
There's nothing more critical to the success of our company than making sure that every night, every employee goes home to their family uninjured.
Safety is important not only for the well-being of our workforce and the costs associated with industries -- injuries and lost time, but it's a competitive differentiator and a critical selling point with our customers.
You can see on this slide the tremendous progress we have made as an organization over the past two decades, reducing our total recordable incident rate, or TRIR, by 74% since 2002.
It's a metric we take a lot of pride in.
As part of our continuous improvement approach to safety, we relaunched our highly successful Safety Starts with Me: 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.
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 stand-alone organization.
This should enable us to collect more used motor oil and supply our rerefineries 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 nonautomotive 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 rerefining 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 rerefining 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.
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 first -- 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 1.8 times.
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 just -- 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 refinery -- 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 5-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 one to two 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 5-year outlook excludes any future acquisitions or divestitures and is based on current market conditions.
In closing, we're 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're excited about the bright future of Clean Harbors, both near and long term.

user
q1 revenue fell 6 percent to $808.1 million.
sees adjusted ebitda in range of $560 million to $600 million for fy 2021.
sees adjusted free cash flow in range of $230 million to $270 million for fy 2021.
for q2 of 2021, expects adjusted ebitda to increase 15 to 20% from prior-year period.

assistant