Greetings, welcome to the Clean Harbors Inc. Q1 2020 conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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, 29 April 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. 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. Now, I'd like to turn the call over to our CEO, Alan McKim. Alan?
Thanks, Michael. Good morning, everyone. Thank you for joining us. Starting on slide three, before discussing our Q1 results, I'd like to address the coronavirus pandemic and how we're responding to it. Obviously, the outbreak has created a healthcare crisis and caused economic disruption around the globe, and I hope that all of you and your families are staying safe. Here at Clean Harbors, the safety of our employees is part of our culture and the top priority during this pandemic. As an essential services provider with teams on the front lines of the COVID-19 crisis, we have instituted rigorous safety protocols and work closely with suppliers to make certain we have the necessary equipment to protect our employees. During the crisis, our workforce has remained out in the field and at our plants, supporting our customers' needs across North America. I'd like to acknowledge their hard work and dedication.
The workforce representing critical administrative functions has supported our field teams from home, and the strength of our systems has allowed that transition to be virtually seamless. Overall, the pandemic had a limited impact on our Q1 performance, but its effects worsened towards the end of the quarter with the commencement of more shelter-in-place orders in the U.S. and Canada. We expect the virus to impede our business in the Q2, particularly within Safety-Kleen. In addition to limited driving and business activity across North America, Safety-Kleen also had been affected by the sharp downturn in the value of base oil. In short, we are faced with some difficult near-term market conditions, and we are taking significant actions in response. Let me touch on some of those actions.
Starting with alignment of our cost structure with the demand environment, we are rightsizing our workforce through furloughs and other reductions. We implemented a non-billable hiring and wage freeze. We've restricted all travel. We've also gone back to many of our vendors and suppliers to negotiate for savings or improved payment terms. In addition, we've temporarily shuttered nearly half of our refining capacity to reflect the current demand for base oil, as well as the likelihood of less available used motor oil in Q2 and beyond. From a liquidity perspective, we drew down $150 million on our revolver to strengthen our balance sheet in the event that crisis worsens. We have reset our net CapEx spend plans for 2020. We've lowered our expected spend by more than $50 million to preserve capital and support our adjusted free cash flow for the year.
As noted in this morning's earnings release, given the current market uncertainty, we're withdrawing our annual guidance for 2020. That said, I believe our strong balance sheet leaves us well positioned to succeed. Turning to Q1 financials on slide four, revenues rose 10% from a year ago as both operating segments recorded solid growth. At the same time, our adjusted EBITDA increased to a record $122.6 million, driven by our mix of high-value waste streams and high utilization, augmented by projects and emergency response work. Our adjusted EBITDA margin increased 130 basis points to 14.3%. Looking at our segment results beginning on slide five. Environmental Services revenue grew 11%, paced by contributions from our facilities network and field services group and aided by warmer weather nearly all quarter. Adjusted EBITDA growth of 22% was driven by business mix, disposal volumes, and emergency response revenue.
Emergency response work totaled $21 million, representing COVID-19 decon work and a cleanup of a chemical plant fire. Our disposal facilities saw impressive volumes this quarter as incinerator utilization increased to 86% and landfill tonnage grew 39%. Our average price per pound for incineration in Q1 was up 11%, reflecting the record level of high-margin direct burn streams that we gathered. Another terrific quarter for our Environmental Services segment. Moving to slide six. Safety-Kleen revenue was up 8%, primarily by growth in the SK Oil business. Adjusted EBITDA and margin improved on lower SK Oil transportation costs and higher re-refining production compared with a year ago, when volumes were disrupted by frozen rivers and flooding. Within the SK Branch business, core services performed well. While parts washer services were flat with the prior year, waste oil collection was up slightly to 55 million gallons.
Blended products accounted for 25% of volume in the quarter, and our direct volume was 7%. The Q1 began with positive signs that IMO 2020 was going to enable us to expand our re-refining spread as high sulfur fuel oil values had fallen and base oil prices were up in early January. With the oil shock sparked by the global outbreak of the coronavirus, IMO 2020 has largely been sidelined, and base oil has fallen by $1 a gallon. We entered Q2 with significant pressure on our re-refining spread, and in this environment, the value of used motor oil is in a charge-for-oil state. In response to the current market conditions, we've significantly raised our charge-for-oil program. Driving in the U.S. and Canada needs to normalize before our spread and lubricant demand can rebound.
When we see conditions improve, we'll consider reopening our closed re-refineries. Turning to slide seven. Given the current environment, our capital allocation strategy is critical as ever. As I mentioned earlier, we are reducing our planned net CapEx by more than $50 million. We divested two businesses in Western Canada in the Q1 as we continued to steadily shrink our direct exposure to energy. Since we began executing our divestiture program several years ago, we've sold seven businesses for approximately $120 million in proceeds. In terms of M&A, we're not likely to be active near term. Long term, we believe we'll emerge from this market downturn stronger, both financially and operationally, than some of our peers, which will allow us to be opportunistic. For our buyback program, we'll likely hold off until we are certain that the domestic economy is on a clear path to recovery.
We'll look to repay the $150 million on the revolver as soon as this crisis shows signs of nearing an end. Looking ahead to our segments, although we have seen some cancellations and project delays due to COVID-19, we expect our Environmental Services segment to weather the current downturn well. We expect our decontamination work and growing volumes of infection waste to help offset what would certainly be a larger decline. Within Safety-Kleen, we expect both our branch business and our SK Oil to be hit fairly hard, particularly here in Q2, as stay-at-home orders greatly reduce vehicle travel and generate less used motor oil. Our SK Branch business should rebound as shelter-in-place mandates are lifted and low gasoline prices encourage a rebound in driving.
In SK Oil, our re-refining spread has contracted with a drop in crude, and we have aggressively increased our charge-for-oil pricing, but volumes are off and near-term demand for base oil has fallen. In summary, our Q1 results demonstrated the strength of our business model, the value of our assets, and our frontline role in emergency response. Our market leadership, financial liquidity, and positive adjusted free cash flow will enable us to navigate this global crisis. With that, let me turn it over to Mike Battles. Mike?
Thank you, Alan, and good morning, everyone. Let me echo Alan's comments about the outstanding work of our team and everyone on the front lines of the crisis. Through the unprecedented events we've experienced in just a few weeks, I think we all have a deeper appreciation for the professionals, especially healthcare workers, who put themselves at risk every day to help those in need. Turning to slide nine in our income statement. As Alan indicated, we delivered record Q1 results. Revenue grew nearly $78 million, while adjusted EBITDA grew by nearly $21 million. This reflects the mix of business we achieved in the quarter, project work, and favorable weather. From a gross profit perspective, we saw a sharp increase in both absolute dollars and on a percentage basis due to higher utilization, pricing, and a favorable comp with prior year.
Our gross margin increased by 160 basis points from a year ago. SG&A expenses were up $14.5 million in the quarter due to the higher revenue, investments in our employees, and some one-time items from last year. As we move forward, we are focusing much of our cost reduction efforts in this area to bring expenses in line with our revenue. Depreciation and amortization in Q1 was down slightly to $47.5 million. We completed two small bolt-on acquisitions in 2019 while also divesting several businesses. For 2020, we expect depreciation and amortization in the range of $285 to $295 million, which is a little lower than last year. Income from operations increased 92% to $45.5 million, our Q1 record, reflecting the combination of our revenue growth and improved gross profit. On a GAAP basis, EPS was $0.21 in Q1 versus $0.02 a year ago. Our adjusted EPS was $0.28.
Turning to the balance sheet on slide 10. As Alan mentioned, we drew $150 million on our revolver during the Q1, which increased our cash and short-term marketable securities to $494.3 million at quarter end. We saw reasonable AR collections late in March, which led to a healthy cash balance. Our strong liquidity position further protects our company and adds financial flexibility should we need it. Our balance sheet remains in good shape. Current and long-term debt obligations at quarter end rose to $1.7 billion, reflecting the drawdown on our revolver. Our weighted average cost of debt is now 4.3%, with a healthy mix of fixed and variable debt. Leverage on a net debt basis was 2.2 times for the trailing 12 months ended March 31st. Looking at our most recent cash balance from yesterday, our cash remains essentially flat from where we ended Q1.
The team has done a nice job maintaining its focus on collections and managing our spend. Turning to cash flows on slide 11. Cash from operations in Q1 was up slightly to $33.7 million. CapEx, net of disposals and the purchase of our headquarters, was $59.9 million, up from a year ago, resulting in adjusted free cash flow in the quarter of a negative $26.2 million, which is consistent with prior year and our expectations. For the year, we are now targeting CapEx, net of disposals and purchase of our headquarters, in a range of $140 million-$160 million. During the quarter, we repurchased approximately 300,000 shares of our stock at an average price of $57.41 a share for a total of $17.3 million. As Alan mentioned, we'll be cautious in our approach to buybacks until we see evidence that markets are well into their recovery stage.
As Alan also noted, given the uncertain market environment, we are withdrawing our 2020 guidance. We're hopeful we'll be able to reinstate guidance with our Q2 earnings announcement, provided markets have stabilized. In summary, Q1 was a strong quarter highlighted by several financial records, including adjusted EBITDA. Were it not for COVID-19, our Q1 results would have positioned us for the fourth straight year of profitable growth. We have taken significant actions in response to the pandemic and are prepared to take additional steps in the event of a prolonged recovery. We are focused on things we can control, including carefully managing our costs and pursuing new waste streams to feed our landfills and incinerators. With that, Christine, please open up the call for questions.
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question comes from the line of Tyler Brown with Raymond James. Please proceed with your question.
Hey, good morning, guys.
Morning.
Hey, Ty.
Hey, Mike, just real quick, can you parse the $21 million of revenue that came from the chemical plant and the decon work? Just how much from each?
Yep. It is about $10 million for the decon work, Tyler, and about $11 million for the chemical spill, chemical fire.
Okay. Would you expect both of those to continue in Q2, or is the chemical plant cleanup largely complete?
The chemical plant is essentially complete. The decon work will continue into Q2 and beyond.
Yeah. Okay. Alan, I know these are just unprecedented times, but in the SK branch business, how should we think about revenues there versus the 50% drop in gas station pump volumes that I think we're seeing here in April? Is that a really good KPI to be watching for the SK branch sales? I assume that that correlates very high with vehicle miles driven.
No, I think as you know, a lot of the Safety-Kleen business is a subscription-based business where we go out and perform these repetitive services, and we're seeing about a 25%-30% turn away because of the closures. I think that would probably be a good number to think about in the Q2 for the Safety-Kleen branch side of the business.
Okay, quickly on the SK Oil side. Alan, if I recall back in 2015, you guys talked about having a two-month lag on your UMO inventory, and that precipitous drop in base oil prices, or the precipitous drops make it really difficult to manage the spread as you kind of flush out those inventories out of the system. If we couple together the shuttering of half the capacity, it seems like you're going to have an inventory lag issue. Is it reasonable to assume that SK Oil, that piece of SK loses money in Q2? Based on my old model, I think you lost money in Kleen Performance back in Q1 of 2015.
That's not our expectation right now that our forecast, or at least our discussion certainly is that it'll be making money in the Q2 as a result of all the effort that we're putting in on both the front-end collection side, as well as obviously going back to our suppliers on our additive side and some of the other costs that go into that business. We are not expecting to lose money in SK Oil in the Q2.
Okay, that's extremely good to hear. Maybe my last one, Mike, was there an incentive comp accrual in the quarter? If so, what percent of normal?
Yeah, Tyler, it was about a $7 million advantage versus our forecast. That is in the $122 for the quarter, there's probably a $7 million reversal of a run rate based most of it's in SG&A, some of it's in COGS, depending on the person involved, because the targets are much lower.
Yeah. Okay. All right. Thank you. Appreciate it.
One point I want to mention before we take another call is that, in the script I read, depreciation for Q1 is down slightly to $74.5 million. I misspoke and said a wrong number. Just FYI.
Our next question comes from the line of Noah Kaye with Oppenheimer. Please proceed with your question.
Thanks. thank you, Mike, for that D&A clarification. Appreciate that. Can we talk a little bit about the pipeline for the base business? You said in the release, your large quantity generators generally are not really giving you much of a slowdown yet. Just talk a little bit about the trends that you are seeing now here at the end of April. What are you seeing from petrochem customers, from chemicals customers generally? How much of a volume reduction are you seeing from them? How are you thinking about price mix trends in the Q2 so far?
Yeah. Noah, this is Mike. I'll start now and feel free to jump in.
Yeah.
What we're seeing, to your point, Noah, is that we're waste, and we had a healthy backlog going into the Q1, and we exited the quarter with still a very healthy backlog. The incinerators are running very well, and the large quantity generators continue. Are we seeing signs of a slowdown? We absolutely are. As I sit here today, I think that the plants still are kind of running well, with a healthy backlog of waste streams and many of the things that we deal with in the large quantity generators, whether it be chemical manufacturing, petrochem, agriculture, agrichem, we're still seeing a lot of that waste streams coming into the network. I'm hopeful that the incinerators continue to do well here and carry us for a bit, through Q2 and beyond.
Predominantly, I would say the industries that support automotive are the ones that we've seen impacted from a volume standpoint.
Absolutely.
For the most part, our volumes have been pretty good and, like you say, our backlog is still strong.
Yeah. That's helpful. If I could just follow up on the prior question around the COVID decon work. I think you said in prepared remarks, unless I misheard, that that will help offset or cushion, maybe softness elsewhere. I don't think you talked too much about the industrial services side of the business, but can we just understand generally what your expectations are based off of current orders and requests for information? I mean, how big do you think the decontamination work has the potential to be this year from a revenue perspective? Are we talking another avian flu or are we talking something much less than that? Can you dimension it out for us a little bit?
Yeah, I don't think it would certainly be at that level. We've done about 2,500 or so decons at this point, and some of them are significant, some are small. Probably in the $50 million range would probably be a good estimate right now in what we'd be thinking. Clearly, the amount of demand has been significant. We've certainly not been able to meet all the demands. We have shifted quite a bit of our workforce. We've brought people out of the Safety-Klee n business. We've brought people out of our industrial services business to bring them over into our emergency response teams and help complement the field services organization. That's worked quite well and continues on as we speak.
Hey, Noah.
Right.
One add to that point. I think that's a fair estimate, $50 million is as good as anything. Really, it does depend on the level of where the economy goes and where this virus goes, right? I think we have a pretty decent line of sight to that number for 2020, but who knows if this may become a line of business for a long period of time, right? We're treating it like that. We, certainly at first, as I think about Q1 and maybe even Q2, it's more like an ER type of an event. As I think going forward, perhaps it becomes a longer-term line of business, because frankly, it's probably going to be here for a while.
Sure. That's very helpful. Maybe just to clarify then, I may have heard the word offset, but I think about this relative to maybe some softness in past industrial downturns. Obviously that legacy industrial services business was pretty hard hit. Is $50 million enough to offset delays or weakness, do you think, in industrial services? Is that sort of a net negative in your view when you think about industrial and field?
Yeah. Noah, and I'll start here. I think that, as Alan said in his remarks, when I think of ES, the segment, I think there's going to be softness in industrial services as turnarounds get pushed out, and I think that this is going to help out. Is it going to counterbalance all that? It remains to be seen, right? Because in the fall, when the turnaround schedule, let's say, everything's fine, I'm making that up. Who really knows? There's going to be a higher turnaround activity in the fall and maybe larger turnaround.
We may get some of that back. It's kind of hard to say right now, right? I think in the short term, I think the decon work that Alan's mentioning, it'll be really busy here in Q2, will offset some of the softness in the ES business. Maybe it's okay, but it's tough to say long term.
I appreciate that. I'll turn it over.
Thank you.
Our next question comes from the line of Brian Maguire with Goldman Sachs. Please proceed with your question.
Hey, good morning, everyone. Hope everyone is doing well, okay, and all your families are safe and healthy.
You too, Brian.
Just a couple questions. One on sticking on Safety-Kleen. I know the SK Oil business, I think you used to talk about in a good year it might do $100 million in EBITDA, bad year $70 million, catastrophic year maybe $50 million, $60 million. I don't imagine you ever contemplated the kind of environment we're necessarily in right now. just wondering if I know you're not giving guidance per se, but do those sort of rough guideposts still apply here, or do you think we're maybe just in uncharted territory?
Uncharted territory, Brian. I would say that theory was predicated on us being able to sell everything we made, and that was always predicated on the fact that we could sell everything we had, and there was a spot market for that somewhere in the world. As you well know, and everyone well knows that oil is, there's a glut of oil, and so that is putting us into unprecedented territory. That's part of the reason why we had to withdraw guidance, because we just don't know what that number is going to be. It seems like the old theories-
Just sticking on that, I was just wondering, thinking about 2Q here with the amount of downtime you'll take in SK Oil, how should we think about the fixed cost absorption on that? Maybe bucketing it, you could talk about just how COGS flex in a down volume environment like this, how much of the costs are fixed, and you'll be stuck with them. I think you said that you think it'll still be breakeven or slightly profitable, so that helps guidepost it a little bit. Just thinking about the mix of fixed versus variable costs in that business.
Yeah. What we've done is, as Alan said in the call, we have shuttered about half our capacity, and so that's really predicated on demand coming back. That's really helped us from a fixed cost perspective. There's been some furloughs associated with that, so that has helped us a bit. We also are looking at every cost, and with the lower cost of oil, the additives that we blend with our base motor oil to make blended oil has gone down quite a bit as well. All that's going to be kind of in the stew and what the exact percentage is in the SK Oil business between fixed and variables, I don't have that in front of me. That's directionally what I'm seeing.
Okay, just last one for me. This is maybe more of a longer-term question. I guess some of it depends on how quickly we recover here, but the price and mix in incineration has benefited a lot over the last couple of years from some of the higher value waste streams. I think a lot of those have been tied to the petchem projects that have come online in the U.S., and obviously, a lot of those were predicated on the U.S. being advantaged from a cost point of view, nat gas and NGLs versus global oil prices. Oil, where it is today, seems like it's taken that advantage away. Obviously, the plants are still there. They haven't gone away, but their ability to be competitive globally might be a bit impaired for the time being.
Just wondering if that is part of your thinking or if you're seeing any kind of already signs of the backlog in those petchem waste streams starting to dry up or signs that the backlog might be shifting back towards some lower value waste streams.
I think our direct burn business continues to be very strong, and we actually have quite a backlog in that space that continues today. I would say that our competitors as well as ourselves are, I think, very strong from a volume and utilization standpoint. We know that there are several captives that are shutting down for an extended period of time. Some of those are the result of the COVID-19 where their manufacturing may be impacted, and therefore it ultimately makes sense for them to shut that capacity down instead of having sort of a 25%-30% operating utilization. We are getting more business from former captive operations out there, and that's something that we hope will continue.
We've had some ongoing discussions with some of our customers who have captive plants on whether that would be a three to six month kind of project or whether that might be something permanent. as we've said for the last several years, part of our expansion of our El Dorado plant was because of anticipation of an increase in volume with a lot of the chemical manufacturing expansion due to low price of natural gas. we think that model is still intact even regardless of where crude oil is today.
All right. Thanks very much. Good luck in the quarter.
Thank you.
Thanks, Brian.
Our next question comes from the line of David Manthey with Baird. Please proceed with your question.
Hey, good morning, everyone.
Morning David. How are you doing?
Yeah. Good morning. On the ES strength, is there any possibility that you're starting to see or that you may see in future quarters a pull forward of customer turnarounds because of the economic cause? Customers taking the opportunity of low demand to take their facilities down, which could actually lead to a surge in volumes for you, but then again, maybe a more lackluster turnaround season in the fall. Is that something you're hearing about possibility?
We're not, David. I think the concern that we hear and somewhat the reason why people are delaying turnaround is the fear of bringing 500 or 1,000 contractors from all over the country into their plants and the potential of having a significant outbreak in the middle of a turnaround, which would be catastrophic, as you know, if you've got halfway through one of these turnarounds at one of these major refineries, for example, and then couldn't get it completed. I think more of the delays from what we're hearing is just a concern about the virus rather than the business environment.
Okay. That's good to hear. Thanks for that. On Superfund cleanups, if the feds are allowing delays for projects that don't produce imminent danger, have you seen any impact there yet on your field services business? Could there be a drag on the project work and landfill volumes through the H2 if that situation continues?
Yeah. We definitely saw early in the beginning of the quarter, the Q2, a number of projects get pushed out to the Q3 or even to the Q4. You're absolutely right. If there's some discretion, and again, I would say it's as much to do with the concern with the virus than it is anything. Getting into one of these projects, mobilizing a lot of people from across the country into some of these projects, I think, and just getting kind of halfway into it and then having sort of a problem with a virus outbreak is more of the concern rather than the spending of the dollars.
Dave, just to add to that, we've had a couple customers say they don't want people from certain states coming to their location. That's been a challenge for us from a staffing perspective on some of the projects that are going on.
Got it. Okay. Last quick one here. Alan, you mentioned aggressively adjusting your charge for oil. Is that referring to an increase greater than $0.70 that you announced in March or not?
I'm not sure if I heard the first part of the question.
Well, in your monologue, I think you mentioned aggressively adjusting charge for oil prices.
Yes.
I'm just wondering, relative to the $0.70 you announced in early March, is aggressively greater than $0.70 or up to $0.70?
Well, again, we're modifying some of our contracts as well because as we look at both WTI and some of the base oil indexes that we use, those contracts that we have allow us to significantly change how we price those products or price those customers on the incoming waste oil side. We're certainly working both ends and communicating those challenges to our customers out there. We did have a second increase, to your point, that was put in place at the end of April, and that will be going out between the 1 and 15 May. We definitely are communicating with our customers to let them know sort of the real challenges. Obviously, when you see crude oil trading at $11 a barrel, you see diesel and gas at historical lows.
Most of the customers that we're servicing, the automotive customers, they certainly are seeing it at the gas pump price. They've been working with us, and we continue to really manage the spread there as best we can.
Thank you. All the best, guys.
Okay.
Thanks, David.
Our next question comes from the line of Michael Hoffman with Stifel. Please proceed with your question.
Hi, thank you all for taking this and again, wish everybody that's being safe. Alan and Mike, on the emergency response, when you look back to the avian flu, if I remember correctly, there was about $170 million was tied to that, but it was with the USDA, so it was okay margin, but not wow. I'm assuming this margin's much better because you're doing it with private companies.
Michael, this is Mike. It was $300 million for the avian flu, not $170. To answer your question, the margins are pretty good. Certainly, we had kind of what I would say first-mover advantage. We did get out in front of this pretty quickly and mobilize the teams. As I look here in kind of the current bids we're seeing, the margins have softened a bit because there's more people kind of getting into it and seeing the value there. I think we had some pretty good margins early on. I'm assuming they're going to soften a bit as we get into Q2 and Q3.
they're definitely better than the corporate margin.
Absolutely.
Yeah. Okay. when we think about looking at data that's telegraphing this opportunity in incineration, your unbilled receivables, can you talk us through how we should read through what that's telling us?
Unbilled receivables are just projects that are in the middle of a larger project, and sometimes they end at the end of the month, and we can't bill them until the project is complete, and that rolls into the next month. In my mind, that's simply a timing item, Michael. I wouldn't read much further into that.
Okay. It looked like a good number, so I was just thinking maybe that helps me support why incineration's going to stay full.
The answer is that deferred revenue is still pretty high, and as Alan said in his remarks, that the pipeline coming into it is still pretty strong here in April.
Yeah, I think when you think about deferred revenue, Michael, it's only down a couple million from the end of 2019. That is typically both the backlog in waste disposal as well as the parts washer services for Safety-Kleen because they're in a reserve basis as well. I think that deferred number is sort of.
A good number to go by, yeah
Considering what we're talking about.
The other thing, Michael. We're getting some infectious waste as well, right? that's also kind of coming online here in April.
Right. are we in a position to talk about what kind of dollars of cost have been affected so far? I remember on a call we did together about a month ago, $35 million of incentive comp was in the budget. There was $20 million of T&E. if you've done some furloughing or shuttering capacity, it sounds like these numbers are adding up to $70, $80 million potential offsets, and then you deal with the lack of activity as the counter to that. Is that the right way to think about it?
Yeah. Michael, I'll start now and feel free to jump in. To incentive comp, you're right. Maybe of the $35 million, maybe $30 of it comes back in. I think that's a reasonable expectation. T&E is down quite a bit. When shelter-in-place laws are removed, we'll be judicious in trying to get back to travel, and that T&E number probably stays pretty low for the rest of the year. When thinking about furloughs and other actions that we're taking, and we're in the middle of that right now, and I'd hate to speculate as to what that ultimate number will be. I think what's going to happen is that we're going to try to adjust our cost structure to the lower revenue, and we're trying to be very smart about that. Michael, as you know, you've been following us for years and years.
We're a cost-conscious organization. We're an industrial services business. We manage our margins tight, and we'll take aggressive actions when needed, and we're hopeful the actions we're taking will be sufficient, and if they're not, we'll continue to do it. It's unfortunate that that has to come to be, but that's where we are.
Okay. based on the comment made earlier that you, Alan, expect SKO to be profitable in Q2, that's going to probably be your worst quarter. Therefore, it's reasonable to conclude you'll be profitable for the year. I get it. It's going to be a low number, but that you expect SKO to be profitable for the year based on the actions you're taking. Okay.
Yes.
Okay. Free cash flow has been a key focus of the company. There's depth to which you've cut the capital spending, sort of starting at $225, less the $25 for the headquarters, then pull out the $50, $60 million. There's your $140, $150. We're going to end up with a pretty decent free cash flow number too then.
Yeah. Michael, I would say that the two things that are happening in the cash flows that are going to be offsetting the lower earnings will be the lower CapEx, as Alan mentioned, as well as the CARES Act does provide for payroll tax withholds, and I'm sure your other companies are doing the same thing. We don't have to submit in 2020 our component of employer tax, and that, for a big U.S. company with a lot of U.S. employees, that's actually a pretty material number. That's probably going to be a $30+ million winner from a cash flow standpoint in 2020. Now, don't get too excited because that needs to be paid in 2021 and 2022. We've got to pay it back.
Certainly, in the short term, from a liquidity standpoint, to help companies like ours make sure that it's lower for longer, we can still do well. That payroll tax provision will be a cash flow winner for us here in 2020.
I think, obviously, just to add to that point, though. We realize that a lot of customers are hurting out there. A lot of our customers are in tough shape. We're really focusing on receivables, making sure that we are getting our bills out the door faster. That's one of the reasons why unbilled actually went down about $5 million in the quarter. We're doing everything we can to really stay as tight as we can on our receivables. Our DSO has not improved. We're roughly around 80 days. That's a top focus of us to make sure that we get our cash in the door.
Absolutely.
That leads me to my last one, and then thank you. Bad debt allowances, how are we thinking about that in the context of historic trends?
Yep. Normally, Michael, we have $8 million-$9 million on a normal year. Q1 was a little higher because we are concerned about some of our small quantity generators, some of the small automotive shops and their long-term capital structure and whether or not they can withstand this. We did raise it up a little bit. I'm not sure what the end number's going to be. It won't be double the normal run rate. Will it be a little higher? Sure. In Q1, we tried to cover off on some of that, and so our bad debt expense normally runs $2 million-$2.5 million a quarter, was $4.5 million here in Q1.
Okay. Thank you so much.
Thanks, Michael.
Thanks you .
Our next question comes from the line of Larry Solow with CJS Securities. Please proceed with your question.
Great. Good morning, guys. Good to hear your voices and echo the well wishes.
Same here, Larry.
Absolutely. Just a few follow-ups, if I may. On the cleanup side, on margin, on the closed-loop cleanup, sound like they're north of the corporate and maybe somewhere in that Superfund agent, Superfund range. maybe the opportunity is less, and is that competitive reasons? because it seems like we're still somewhat early in the opportunity for cleanups, I would imagine, right? any thoughts on that?
Yeah. Larry, I'm glad to hear your voice as well. We have just competitive rates, and what those rates are, I'd rather not give those out. We battle every day with other companies that are out there in our space, and I think we offer kind of very competitive rates.
Got it. On the furloughs, and I know too early to quantify, but it sounds like it's certainly biased towards the SK side or even significantly biased towards the SK side. Is that fair to say?
Not necessarily. I'd say that it's across all three pieces of our business, both the SK side, the corporate section, and Environmental Services.
Okay. CapEx, any particular projects, is it more growth projects, I assume, that are being pushed out a little bit? Any more color on what you're sort of postponing or delaying?
Yeah. As Alan mentioned, we took off about half of our re-refining capacity. There was some CapEx there that they had invested. We also, as the business with lower revenue needs less vehicles, and so we had some vehicle upgrades and new trucks we were going to put online, and we've slowed those down. My view on that is if there's a recovery in the back half of the year, we feel we come back in the end of June, and we think that things are looking a little better. Maybe it goes a little higher. I think for now, I think that's the right and prudent thing to do. As you know, Larry, we give out CapEx numbers. We hit those CapEx numbers. The team is really good about managing that spend. We look at it every week.
Right. Okay. On environmental services, this is a little bit of a higher level question. Obviously, I think coming into this year, it seems like your business is as well positioned as it's been in several years. Clearly, the Q1 performance demonstrates that. Very strong backlog. How about if this COVID runs for another quarter where it's full blown out, and then we slowly come back. Is there a scenario where some of your customers begin to operate at a much lower utilization, so they give up much lower waste volumes and your backlog starts to get worn through that we could actually see a much lower latter part of the year, even into 2021, even if COVID is sort of somewhat under control?
I think particularly in the environmental side, where a lot of customers have to move waste every 90 days. We will continue to see the services perform for the majority of those customers. They've been open. A lot of our environmental services customers have been open. Our utilities, our refineries, our chemical companies, the pharmaceuticals. The businesses that have really been more shuttered that impact us is on the Safety-Kleen side. although that also brings in other containerized waste, volumes would be less coming in from Safety-Kleen into the Clean Harbors disposal network, the TWS waste. overall, just based on generation cycles and the need to move waste every 90 days, we anticipate to continue to see volumes coming out of our customers, although maybe if they are doing less, there'll be less volumes down the road here.
we've been really pleased in listening to our operating teams report in how much our customers have stayed in business during this shutdown where all the states have basically been in a shutdown mode.
Right. Okay. How about just last couple, just on the price of oil. Obviously, the precipitous drop, not a beneficiary to SK in the short term, but in a vacuum, just on the environmental side, got to suppose that's a net benefit, much greater drop in cost for you. Is that fair to say?
Larry, we have a fuel surcharge, and so as oil prices go up, we can charge our customers a little more. it's not necessarily Obviously, lower fuel prices spur a lot of maybe further investment in the U.S., but that doesn't necessarily mean that short-term winter flow.
Okay. IMO 2020, obviously still early in the game there, too. With the shipping industry under obviously some significant stress. Is there a possibility that the restrictions, the regulations on that get laxed for even several years?
Don't believe so. I don't think we've heard any rumors at all on that being particularly a UN-sponsored initiative. We saw it coming in January, like I mentioned in my notes, but just no visibility right now, Larry.
Yeah, that makes sense. Okay. Listen, I appreciate it, guys. Thank you.
Okay.
Thanks, Larry.
Our next question comes from the line of Hamzah Mazari with Jefferies. Please proceed with your question.
Hey, good morning. Hope you guys are safe and healthy. The first question is just around. If you could give us April trends. A lot of companies have been pulling guidance for talking about what they're seeing in April in Environmental Services and on Safety-Kleen. Just how April compares to Q1 or March or however you want to answer that question.
Sure, Hamzah. I'll start, and Alan, feel free to jump in. We had a great kind of pricing quarter for Q1. We had 11% on price in Q1, and I think that would really kind of amid the high-value waste streams that we had in our network and continue to do well. That has continued through what we see as of yesterday. As I mentioned in my call, Hamzah, our cash balance was flat to quarter end. We're kind of the same where it was last year, kind of April versus March. Again, I'm really pleased with our cash collections. As Alan mentioned, we're concerned about receivables and our ability to collect those receivables, especially from our smaller company generators.
The fact that cash collections have been stabilized and still decent, is such a great answer for us from a strength of a balance sheet standpoint is really positive news. On the SK side, we've seen, as Alan mentioned, a 30% turn away. That's what's happening. The oil prices, and the impact on our ability to both collect and to sell oil in the SK business has been impacted dramatically, as Alan mentioned.
Great. You had mentioned the Environmental Services business, clearly it's performing very well. Could you maybe talk about how it did in the last downturn and how the business is different today?
Yeah, I think that in the environmental services business, right, what happened back in 2008, '9, '10, industrial services really struggled. That business is a big part of ES, but the margins are much lower. We used to have margins in the mid-teens, and now they're in the single digits. if that business were to slow down, and it will slow down in Q2 with a lack of turnarounds, I don't think it's going to have as much of a material impact on earnings as it did kind of, let's say, back in the day. The tech service business continued to do well, and that business, that slowed down a bit, some pricing pressures, but that continued to do well. I think field service is going to get a huge benefit from the decon work, and that's going to do well here in Q2.
Great. just last question, I'll turn it over. Coming out of this, when we come out the other side, where do we sort of stand on the closed-loop strategy? Just any update there coming out of this would be great. Thank you.
Yeah, we continue to build out our network, our e-commerce platform to support our closed loop. We continue to see broad customer acceptance to that initiative, and we'll continue to drive that initiative. Certainly, that's been disrupted here during this closure. We'll see how customers do coming back as the states start opening up.
Great. Thank you.
Okay. Okay, Hamza.
As a reminder, if you would like to ask a question, press star one on your telephone keypad. If you are using a speakerphone, you may need to pick up your handset before you press the star keys. Our next question comes from the line of Jim Ricchiuti with Needham. Please proceed with your question.
Hi, thank you. Question on M&A. Sounds like things are on hold right now, but I'm wondering how you're thinking about maybe the funnel of opportunities as we start to come out of this. Do you anticipate any potential changes out there in terms of what might be available to you?
I would think that there are companies out there that have heavily leveraged. We see some competitors at a five, six times leverage and not knowing where their new EBITDA numbers are going to come out. There may be some opportunities for us to look at both some smaller or larger deals where we might be a good partner with them. We certainly had passed on a lot of transactions over the last couple of years, as you know, because of the leverage that a lot of PE firms were putting on some of our competitors and the prices they were paying. Maybe that world is going to change. We just don't know until things settle out here in the next two or three months.
Got it. Just a question on the SG&A. Was there anything unusual in that number that maybe you haven't talked about that you can call out from the quarter? Anything that we need to be mindful of?
Yep. Yeah, Jim, this is Mike. Last year, if you recall, we had about $10 million, a little over $10 million of kind of one-time, let's say, good guys, if you will. We got a settlement of a lawsuit for about five and a half million, then we sold some receivables that had previously been fully reserved for about $5 million. Both those items came in, which we talked about, they're not a secret. We talked about last year. When you look at a year-over-year SG&A increase of $14.5 million, about $10 of that or 10 and a half of that is due to these kind of one-time items, which we talked about in the call last year.
Got it. Thank you.
Our next question comes from the line of Scott Levine with Bloomberg. Please proceed with your question.
Hey, good morning, guys.
Morning.
Hey, Scott.
I was hoping to elaborate a little bit, or you could elaborate a little bit on the cleaning and disinfection work that you're talking about. Can you give us a sense of what some of maybe those types of mandates are, those kind of cleanings of commercial facilities, that type of activity? If you're willing to maybe discuss with the margins that you guys expect to earn on that or are earning on that, are those kind of comparable to either segment or corporate? Just a little bit more color regarding the type of activity there.
Yeah, Scott, I'll start in. Our decon work is really kind of three different areas where we can either disinfect, we can decontaminate, and then we dispose, right? We call it the D3 system. Again, we're really proud of that, and depends on what you want. To answer your question, what do we do? We do it all. Anything from large arenas to small office buildings. It depends on what you want and how fast you want it, and what level of clean do you want to get to it, right? There's a difference between just someone wiping down some handrails versus bringing in a team with the foggers and really doing it at a very detailed level. It depends on what level. If it's just the building that's been idle, maybe you do a lighter touch.
If the building has some people who've been sick, maybe do a heavier touch, and that's something we just offer. Again, I don't want to talk about margins. I mentioned that on an earlier question. I think with the very competitive margins, in the space, I think that we are nationally recognized. I'm really proud of what we do there. I really think it's great that our employees, as Alan said, have been able to take people and keeping them busy in other parts of the business that have been maybe a little slower, and getting them engaged, and making sure we're doing it safely, in compliance with laws. Again, I'm really proud of that.
Fair enough. To clarify, you said $50 million in revenue potentially for the year is a decent bogey to think about?
Yeah, if you ask me to pick a number out of the air, I can do that. It really is completely dependent upon the level of infection, what happens, how fast the economy starts ramping back up again, shelter-in-place laws get reversed, infection rates. There's so many variables out there to kind of put a number on it. I'm happy to try to take a shot at it. That's fine. Anything beyond that is just so difficult to do at this time.
Fair enough. One last one for you. We have seen some decent-sized consolidation activity within the space generally with the Harsco-ESOL deal and some of the activity with U.S. Ecology. Do you expect any changes in the competitive landscape over the next year or two years, maybe opportunities to gain share, or just any other thoughts around the general landscape from an industry standpoint?
I think the consolidation is good for the industry. Certainly having stronger competitors, rational competitors, I always found is really good for the business. From that standpoint, when you look at how much money is being paid for those acquisitions that you mentioned, they got to get a return on that investment. Our hope and expectation would be is that they're going to be rational, and that's going to be good for the industry.
Got it. Great. Thanks, guys.
Okay.
Thanks, Scott.
We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.
All right. Thanks for joining us today. We are participating in several virtual investor conferences in the coming weeks. We look forward to connecting with many of you then. We hope you all stay safe out there. Thanks for joining us.
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.