Greetings. Welcome to Clean Harbors, Inc.'s second quarter 2019 conference call. At this time, all participants are in 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, Sherry, 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, July 31, 2019. 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. 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?
Okay, thanks, Michael. Good morning, everyone. Thank you for joining us. Starting on slide three, we delivered another strong performance in Q2. We extended our momentum by achieving our seventh consecutive quarter of profitable growth. Revenue this quarter, we're up about 2%, and we achieved adjusted EBITDA growth of 7% on the strength of our business mix, our cost savings initiatives, and pricing. We saw nice contributions from both Environmental Services and Safety-Kleen. These more than offset the increase in our corporate segment, resulting from investments in our workforce. Turning to our segment results, beginning with Environmental Services on slide four. Revenues were up modestly this quarter, largely because in Q2 2018, we benefited from an unusually strong turnaround season and several large projects.
Certain areas of the Environmental Services segment, particularly our facilities group, enjoyed robust growth in Q2 this year, which more than offset the lower industrial turnaround activities. Adjusted EBITDA increased 8%, which translated to a margin improvement of 120 basis points and put us above 20% for the segment. This business achieved greater profitability, primarily through better mix and increased efficiencies. In addition, we're continuing to realize the benefits of the regional organizational structure that we instituted in 2018, as well as enjoying greater results out of our El Dorado incinerator, which is now in its third year of operation. Incineration utilization came in at 82%, down from a year ago, but this was somewhat expected due to the high number of down days at our plants. We also pulled forward turnarounds of two incineration locations from July to late June.
We anticipate fewer down days in the back half of the year and have a strong backlog of waste in our network. This backlog is reflected in our deferred revenue, which increased $7.6 million in the quarter and more than $13.3 million since the year-end. In the quarter, our average revenue per pound for the incineration increased 15% due to our ongoing focus on driving a higher value mix of waste streams into our network. Landfill tonnage in Q2 was down 10%, but we view this as just timing as we have some projects kicking off here in Q3. This quarter, we generated about $5 million in emergency response revenue, primarily attributed to flood-related work in the Midwest and the Houston Ship Channel. Moving to slide five. Safety-Kleen revenues was up 4% in Q2 due to the growth in the branches, pricing, and higher production at our re-refineries.
Safety-Kleen's adjusted EBITDA rose 9%, and margins improved 120 basis points to 26% due to the higher revenue, our ongoing pricing improvement programs, and cost reduction initiatives within the branches. We're also beginning to reap more of the substantial benefits from the investment we made in 2017 into the Safety-Kleen's National Customer Care Center. parts washer services were down, but that was more than offset by other core lines of business. Used oil collection volumes were strong at 63 million gallons, with the charge-for-oil rate that was higher than a year ago. Direct lube sales accounted for 7% of total volume sold, up from 6% a year ago. Total blended product sales were 28% compared with 27% a year ago. Turning to our corporate update on slide six. As we look at the back half of this year, profitable growth remains our focus.
As I mentioned, we expect volumes to ramp up considerably starting here in Q3. We continue to pursue multiple avenues to increase our total blended sales in 2019. We've had reasonably good volumes during the first half in our direct program and like to see that momentum continue, as well as driving volumes on the distribution side. Not too much to report today on IMO 2020 or PFAS since we last spoke in early May. Each represents potentially meaningful opportunities for us, with one strengthening our Safety-Kleen segment and the other, the Environmental Services segment. With IMO 2020, it could materially widen one or both ends of the spread we manage in our Safety-Kleen Oil business. We should begin to see various markets respond to its impending implementation later in the year, and hopefully in a way that is going to be favorable to our business.
Turning to our capital allocation strategy on slide seven. We continue to execute across all four categories in 2019. As noted on prior calls, we're investing a bit more CapEx this year, but we remain selective in our investments. We're continuing to acquire companies this year that support our core businesses. We have continued to buy back shares and will repay debt opportunistically based on timing and market conditions. In summary, we crossed the midway point of 2019 in a strong position and anticipate an excellent second half from both of our segments. Overall 2019 should see significant profitable growth and margin expansion for Clean Harbors. With that, let me turn it over to Mike Battles.
Thank you, Alan, and good morning, everyone. Turning to slide nine in our income statement. As Alan highlighted, we delivered another solid quarter of profitable growth and margin improvement in Q2. We increased revenue by $19.5 million while growing adjusted EBITDA by $10.5 million, an incremental flow-through of more than 50%. Our profitability and margins in the quarter were driven primarily by pricing and cost initiatives, along with operating efficiencies within both our segments. From a gross margin perspective, we saw a 20-basis point improvement in Q2 from a year ago due to favorable business mix, pricing, and improved asset utilization. Those favorable areas more than offset the higher down days year-over-year within our incinerators that Alan mentioned. SG&A expenses were down both in absolute dollars and on a percentage basis, where we achieved a 50-basis point improvement, driven largely by Safety-Kleen.
Using the midpoint of our guidance range for full year 2019, we continue to expect SG&A to be down slightly in absolute dollars with an annual improvement of 40 to 50 basis points versus 2018. Depreciation and amortization in the quarter was up $1.5 million, which reflects assets we've added from tuck-in acquisitions and increased capital spending. For 2019, we now expect depreciation and amortization in the range of $290 million-$300 million, which is flat to prior year, resulting from increased capital spending offset by some existing assets becoming fully depreciated. Income from operations for the quarter increased 14% to $73 million, reflecting the improved operating margins as well as our revenue growth. On a GAAP basis, EPS was $0.55 versus $0.54 a year ago. Our effective GAAP tax rate was 30.7% in the quarter versus 30.8% in the previous year.
On an adjusted basis, our tax rate for Q2 was 29.4%. For the full year 2019, we continue to anticipate that our tax rate on an adjusted basis will be in the 28%-31% range. Before walking through the balance sheet items on slide 10, in June, we refinanced a large portion of our long-term debt, replacing $845 million of 5% and 8% senior notes due 2021 with a combination of $545 million in eight-year notes and $300 million in 10-year notes. This benefits us in multiple ways. We will save about $1.4 million in annualized interest expense. The tenor of the debt is pushed out by at least eight years, and it divides a large debt tower into two pieces.
On the balance sheet, cash and short-term marketable securities at quarter end totaled $259.7 million, up approximately $35 million from the end of Q1 and in line with our expectations. During the quarter, we acquired an Environmental Services firm based in the Pacific Northwest for approximately $15 million. The firm has locations in four states and serves a similar set of end markets, making it a complementary addition to our Environmental Services segment in the Western region. DSO at quarter end was 74 days, a four-day improvement from Q1 and two days better than year end. It's nice to see that number trending in the right direction. It remains a primary focus of our team who is driving a current refresh of our billing and collection process. We expect our DSO to continue to come down in the quarters ahead. Our debt balance was $1.57 billion, flat with year end.
Our weighted average cost of debt today is 4.7%, down slightly from prior year. Our balance sheet remains strong. Using a trailing 12 months adjusted EBITDA and our current cash balance, we were 2.5 times levered at the end of Q2 on a net debt basis. Turning to slide 11. Cash from operations in Q2 was up 40% to $108.7 million. CapEx, net of disposals, was $56.4 million, up about $8 million from a year ago. Adjusted free cash flow was up 76% for the quarter to $52.4 million. This was a strong follow-up to a seasonally weak Q1, putting us back on track from an annual perspective. For 2019, we continue to expect net CapEx of $190 million-$210 million, which represents a 12% increase from the midpoint as a result of growth in our business, landfill cell construction, and incremental capital investments to enhance our re-refining capacity.
During the quarter, we repurchased 74,000 shares at an average price slightly below $67 a share for a total of $4.9 million. Moving to guidance on slide 12. Based on our year-to-date performance and current market outlook, we raised our 2019 adjusted EBITDA guidance to a range of $520 million-$550 million. This represents a midpoint increase of $10 million from our prior range. The new midpoint would equate to 9% growth from 2018, while the top end of the range would represent 12% growth. Looking at 2019 in total, we continue to expect normal seasonality this year, where the back half of the year will be stronger in terms of absolute dollars than the first half. On a percentage basis, we currently expect adjusted EBITDA in both Q3 and Q4 to grow in the mid to high single-digit range compared with the prior year.
Here's how our current full-year 2019 guidance translates from a segment perspective. In Environmental Services, we now expect adjusted EBITDA to increase in the low teens percentage in 2019. This growth will be driven by higher value waste streams, overall performance in our facilities, and some project work in the second half. For Safety-Kleen, we continue to anticipate adjusted EBITDA growth in the low single-digit range due to growth in key lines of business in our branch network, including direct lube sales, effective spread management in Safety-Kleen Oil, and increased annual production in our re-refineries. In our corporate segment, we now expect negative adjusted EBITDA to grow by mid to high single digits from 2018 due to increases in salaries and benefits as we continue to invest in our people.
Looking at our adjusted free cash flow guidance, based on our current working capital assumptions and expectations for higher adjusted EBITDA, we have raised the low end of our range by $10 million to $200 million, which now gives us a midpoint of $210 million for 2019. In summary, Q2 was another strong quarter for the company. Adjusted EBITDA in the Environmental Services and Safety-Kleen grew 8%-9% respectively, with 120 basis points margin improvement in both segments. Looking ahead, we remain enthusiastic about our prospects. While we recognize there are some macroeconomic uncertainties, we have not seen a meaningful slowdown in any of our core lines of business. For the most part, it has been just the opposite.
We have a strong outlook for the back half of the year based on our backlog of waste in our facilities, new waste streams that continue to enter the commercial marketplace, the schedule of projects commencing, and the stability of the Safety-Kleen branch business. Our goal remains to deliver on our promises and consistently report predictable results, which is our expectation for the back half of 2019. With that, Sherry, please open up the call for questions.
Thank you. 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 your star keys. Our first question is from Tyler Brown with Raymond James. Please proceed with your question.
Hey, good morning, guys.
Morning.
Hey, Tyler.
Hey, Alan. Pricing was once again very strong in incineration. Based on my notes, it was a mid-teens increase off of a mid-teen increase comp. I know you mentioned mix, but is there a way to bifurcate that 15% increase between maybe mix and core price? Can you give us any thoughts on pricing as we get into the back half for incineration?
Probably think about one-third price and about two-thirds mix as we think of the margin improvement there.
Okay. Any thoughts as we move into the back half, should we see this momentum?
We continue to look at the mix. As we've now gotten our El Dorado plant up and running, as you remember, when we first started that plant up, we were burning some very low margin business just to get the unit up and running. Now we've been able to get a much more selective type of waste stream to feed that. We've also seen a lot of new waste streams coming online from some of the expansion in the chemical industry in the Gulf. I would say that we should continue to see that kind of improvement both in price and mix for the rest of this year.
Okay, that's great. Utilization in the first half is obviously in the low 80% range, which is well off last year's number. I know that there's a number of reasons, should we think about utilization in the back half of the year kind of improving? Into 2020, should we expect maybe a smoother utilization rate throughout the year? How should we think about that?
Yeah, we had major disruption in our Deer Park plant due to a catastrophic fire that was adjacent to our facility where we had to evacuate our plant. We had to shut our plant down for several weeks.
In the process of bringing that plant back online, we had to come offline again and bring it back online, and subsequently, we probably saw some impact to our refractory in that plant. Quite frankly, we had to move forward a turnaround in July into June in Deer Park. I would say that should not happen again next year, but that was probably a big part of our utilization issue there.
Okay. Yeah. It's a little funny this year. You mentioned that there were some large projects kicking off in the third quarter. Were you specifically talking landfill projects?
Predominantly, although we do have some waste coming into the incinerators due to those projects. Where our landfill business is about 10% off prior year, you're going to see that come back this year. Particularly on the West Coast, one of our landfills there was offline with one of its processing units, and that took us another three months longer than we had expected. That unit is back up and running as well. We have a 350,000 ton or so cap at that landfill, we have substantial volume there available, and we expect to fill it by the end of the year.
Okay. You mentioned $5 million of major ER work this quarter. Does anything linger into Q3?
Not anything substantial at this point.
Okay.
Clearly, we do a lot of events there, but that sort of number there kind of represents really two major kind of events that we aggregated together just to kind of give some color there.
Okay. No, that's helpful. Just my last one, just real quick on Safety-Kleen. At a very high level, are you guys kind of happy with where the spread is today? If so, is that business really kind of designed to do in the high $200 million of EBITDA, kind of no matter the base oil price on that 150 million gallons sold and produced? Is the opportunity to really grow EBITDA dollars in that business, really the long-term migration towards blended and closed loop sales? Again, all of this excluding IMO, is that the big picture way to think about Safety-Kleen?
Yes. I like to think that we have a much better control over that spread with the tools that we've given the team over the last three or four years. As base oil changes or as the price of crude oil changes, and as the price of number six oil has an impact on our waste oil collection business, we're doing a good job of managing that spread. The big opportunity, obviously, as you mentioned, is the more that we can convert our base oil into a blended product, we see some margin lift by doing that. We also see some opportunity if the market goes long because of IMO, that maybe our input costs will even go down further. That will improve the spread, too.
Okay. All right, guys. I appreciate the time.
Okay.
Thanks, Tyler.
Our next question is from Jeff Silber with BMO Capital Markets. Please proceed.
Thanks so much. In your prepared remarks, you mentioned that you haven't seen a meaningful slowdown in any of your core lines of business. Forgive me, but would your company be more of a lagging indicator there since you're kind of at the back end of the streams? I'm just curious how you think about that.
I guess I wouldn't think that we would lag too much. A lot of the waste that we bring into our plants is a result of manufacturing, whether it be making a chemical or making a car or making some other kind of product. A lot of the waste that we collect as we look at our drum counts, for example, that's sort of reflective of the regular waste streams that are being generated by industry, and I haven't seen anything. Mike, you want to color on that?
Jeff. Conceptually, I kind of see your point. Since we're waste, we would lag other industries. Our pipeline is very strong. We are very close to some long tenured customers, we are pretty close to them, we just don't see it. Your hypothesis is not inaccurate. I think that obviously since we're waste, we'll be on the back end of any type of slowdown. We have a pipeline that looks as strong as it's ever been. That's how we got to the comments we got in our prepared remarks, just so you get some context on that.
Typically the customer only has 90 days to store waste before they need to move it from a regulatory standpoint. I would say that the drum volumes, which is really reflective of the health of our customer base, continues to be very strong.
Yep.
Okay, great. That's really helpful. As a follow-up, you mentioned the comparisons to last year with the heavy turnaround activity. How much visibility do you get on that? Do you know quarter to quarter how volatile that is going to be? Thanks.
What happened in Q2 last year is there was a bunch of turnarounds, especially in Western Canada, that we end up winning, let's say, more than our fair share. That really became a good spike for us and a really good win for us in Q2 this time last year, Jeff. I think our turnarounds, we do get good visibility to it, but the turnarounds are going to be flat in the back half, I'd say, both in the U.S. and Canada as far as this year versus last year. It was very unusual in Q2 last year. There were a lot of turnarounds, especially in Western Canada, and we won kind of, let's say, almost all of them. That was really kind of a great win for us then.
Is it possible to? I'm sorry.
Which made it a tough comp here in 2019.
Yeah.
Yeah, that was going to be my question. How tough was the comp? What was the order of magnitude that that impacted to Q2 2018?
June alone was $10 million.
Yeah
in Western Canada.
Yeah, it was a big number, Jeff. I don't want to put too fine a point on it. It was really The V was very high. All our regions did pretty well, year-over-year. The Western Canada region was down. Based on budget, they're doing fine. Versus actual prior year, they're way down, $10 million-$11 million.
Okay. All right. That's helpful. All right, I'll get back in the queue. Thanks so much.
Thanks, Jeff.
Our next question is from Michael Hoffman with Stifel. Please proceed.
Hey, thank you very much. If we could walk through the segments. Based on the way you're framing the guidance, it would suggest that you would return to a low single-digit 3%-5% kind of second half growth in ES. Is that the right way to think about what happens on the top line?
Top line. Well, we don't give top line kind of numbers, so it's hard for us to speak to that specifically. Certainly, we think the back half of the ES Business is going to be up 8%, as we said in our remarks, in the back half of 2019.
Okay. Within context of where this operating leverage is coming from, the industrial and field services, it had declined a lot a couple of years ago. That impacted profitability of its contribution to the overall margin. How would you frame those margins today, relative to where you'd like them to be? I'd like to talk a little bit about where the technical services margins are, sort of the mix of how you got the improvement in ES.
Answering your last question first. I think, Michael, it was a combination of higher margin waste streams, as Alan said, better pricing, again, as Alan mentioned, but also a lot of operating efficiencies. We put a new team in place a year or so ago, and they've done a nice job de-bottlenecking the plants and really driving operational efficiencies. That's really great. There's still plenty more to do. We're not out of juice there. Certainly, they've made some good progress in the back half of 2018 and into 2019, that really helped the operating margins. Back to your question on where industrial and field are. Certainly, those businesses, I'd say high single digit is a good place for them to be. Obviously, we want them to be higher.
Based on the level of events in field, that drives that margin in the mid-teens. As Alan mentioned, there was a couple, let's say, we call national events that we call out. It wasn't that big of a needle mover in the quarter, but it was certainly helpful. I think the industrial services business continues to do well. It had a tough comp, as I mentioned before, in Western Canada, but that business is still chugging along and producing, I'd say, kind of high single-digit EBITDA margins.
Okay.
We've continued to pull some nice waste streams from those.
Absolutely
businesses into our plants. In fact, one of the larger waste streams going into our Deer Park plant right now is the result of a significant incident that we've been working on. That really tends to show up in the ES business.
Got it. All right. How sensitive is your guidance to the sentiment around trade and tariffs related to your customer base? If it remains less favorable, how sensitive is your guidance to that?
Michael, as you know, we've tried to be reasonable in our guidance and trying to give ourselves a cushion so that if there is a problem, that we have that covered. We feel like if it's trade and tariffs affecting our customers, that could be a problem. It could be a weather issue, it could be a plant outage. We try to give ourselves, as we have for the past couple of years, an opportunity to meet guidance even if there's a problem. Obviously, if there's a massive problem, then that's a different animal. I think the guidance is structured so that if something were to go sideways, we'll still be fine.
Okay. Nice job on the DSOs. Is your thought that you could improve the year-over-year on a full year basis? You're at 76. You're going to stay below 76 days for the year in 2019?
Yeah, our goal is to drive working capital improvements. We see that as a key to driving free cash flow and not so much into the back half of the year into 2020. Now DSO, we talk a lot about that, but also inventory. We're trying to manage our inventory. We're trying to manage payables. We're trying to manage all the different areas that could affect operating working capital and ultimately free cash flow. We recognize the fact that that number has gone up. Obviously, in a growing business, it will go up. We're trying to manage that and keep that under control.
Okay. Thank you very much.
Thanks, Michael.
Thanks, Michael.
Our next question is from Noah Kaye with Oppenheimer & Co. Inc. Please proceed.
Thanks. Michael took my DSO question. I'll move on. I think just to go back to the point about visibility into this very strong pipeline in the back half. You've presented recently about the diversity of your streams. It'd be helpful if we could just get a little bit more color on the types of streams that you're seeing coming into the pipeline. You can speak to sector, region, just to give people a little bit more flavor.
Yeah. Noah, I'll take a shot, and Alan, please feel free to jump in. We see, Noah, more in the areas we've talked about, you and I have talked about before, in the chemical and manufacturing space. Alan talked about drum volumes, and that has really been a key in the first half, and we see that continuing as a key in the back half of the year. We've talked about the chemical renaissance in the Gulf and other areas. That certainly has continued to manifest itself. I'd say that growth is where we're getting kind of the high margin waste streams we've talked about, and also kind of the margin expansion that we've also talked about. The interesting thing is that we see that pipeline continuing to grow, and we're hopeful that those opportunities continue certainly in the back half of the year and into 2020.
We're seeing new plants starting up. Some of those take longer than they expected. Some of the things that were expected haven't yet materialized through sort of the first six months. Clearly, these plants are starting to go through startup, and we're dedicating capacity for them to make sure that we're going to be there for them.
Mm-hmm. Do you have any sense on what's pushing those start times out? Not that you would speak for your customers, but is it macro related or is it just sort of mechanics?
No, it's just engineering, mechanic. Starting up some of these significant plants are difficult to get them up and running sometimes, so no difference than any other plant like ours.
That's right.
Yeah.
Okay. On the SK side, I'm struck by how potentially dynamic a situation we could be getting into later this year or early next. As you pointed out with IMO 2020, there's still a fair amount of uncertainty. I think about the comments you made about the tools you've given your team to be able to respond. Obviously you're getting higher CFO now. Can you elaborate just a little bit more on those tools and how you think you've improved your ability to respond and capitalize on whatever the shift in the spread is as we get into the later this year?
Well, I think we monitor what's going on in the market in all areas. We have 200 branches, over 650 trucks collecting oil, and we're certainly very close in capturing local information that's going on in the market, as well as very close to understanding the outlets for oil that is available to some of our competitors, and how those markets are being changed. Potentially how those outlets are going to restrict flow of oil coming down the pipe here over the next 3, 4, 5 months or/and into next year. I would think that we have a much better source of information, and be able to take that information and put it into the hands of the team out who are running these different branches. Probably that's the most color I probably could share with you right now.
We're on top of it because we know it's critical that we maintain a spread in what sometimes can be a volatile business. Mike?
Yeah. No. Two things I wanted to add. First of all, we are making a small capital investment in our re-refineries to kind of have them run a little more efficiently, to crank out a little more base oil, which is going to be, hopefully, regardless of what happens to IMO 2020, looks like a winner. Secondly, our guidance, as we've given it out this morning, doesn't include any IMO impact. I know it's going to be, as you said in your opening comments, very dynamic. We agree with that. We want to make sure that the investing public know that our guidance is we're assuming that's a non-event in the back half of the year. To the extent that becomes a winner for us, well, that's just upside to this model.
Perfect. Thank you.
Okay.
Our next question is from David Manthey with Robert W. Baird. Please proceed with your question.
Good morning, everyone. Thank you.
Good morning.
First off, you mentioned workforce additions, which makes sense given the strength of your business. Can you discuss the specific areas of opportunity that you're seeing today?
I think it was probably more investment in the workforce. I think we have expanded our benefits program, like our 401(k), our healthcare benefits. We've taken on a lot more additional costs. We recognize that we're in a tough environment, in that we are very much dependent on a workforce that's going to stay with us and that we train and we invest in, and we want to make sure they stay with us for a long period of time. It was probably more in that context, Dave.
David, I think our headcount in SG&A and indirect is actually down kind of year-over-year. So slightly. The numbers I talked about, and when we talked about in the Q1 call or the year-end call was an incremental investment in comp and benefits, stock guidance at 401k stock comp, and other types of benefits we're trying to invest in our people.
Okay. That makes sense. Second, on IMO, it's pretty clear it's happening now, obviously. Is there anything that you've heard or seen that makes you more or less confident, specifically on the impact, kind of the secondary impact onto the used motor oil market? I'm wondering about how your contracts are set up. I think you answered in response to a previous question referencing Safety-Kleen Oil. If your contracts are set up that way, maybe it doesn't matter so much. I'm just wondering if you can give any color in terms of increase or decrease in confidence that you're actually going to see some benefit, even though it's not in your forecast.
Well, it's certainly a global issue, and it's upwards of 50 billion gallons that is being flipped here. We do see some news in some countries, particularly in Asia, where companies with their own internal ships are not going to adopt the IMO 2020 regulations, and they're going to continue to do what they're doing because their ships are too old, and they can't possibly convert them. There's certainly going to be non-compliance with these rules, and we read about that. I do believe that a substantial amount of that 50 billion gallons is going to be flipped to a low sulfur diesel oil. I think that we have seen limited numbers of ships retrofitting with scrubbers.
It just seems between those kind of points that I'm making and the investment that a lot of the large majors have made to be able to meet the needs of IMO 2020, that it has to happen. I think the end result has to be that high sulfur, heavy number six oil is going to be stranded, and there's going to be a substantial oversupply of that material without a home. I think that's our hypothesis at this point.
Okay. Just finally, not to pin you down on PFAS, but if it were to be declared a hazardous material, can you just tell us how that would manifest in your various lines of business?
From an on-site treatment, we see a lot of opportunities to, in our Environmental Services business, particularly our field services group, to go out and perform on-site treatment of materials that have been contaminated. There may be a need to transport some of those materials instead of in situ, actually remove those materials and incinerate them or landfill those. I think it's really too early to tell just where EPA and where the market is going to go on that, but those are the two points that I guess we would see as opportunities.
Great. Thank you.
Yep.
Thanks, David.
As a reminder, it is star one on your telephone keypad if you would like to ask a question. We will pause for a brief moment to poll for questions. We have a question, a follow-up from Michael Hoffman with Stifel. Please proceed.
This is as much a comment as a question. I always want to be a little bit cautious when the market gets excited about some new opportunity. They thought tronics was going to be a big windfall, and it didn't play out. PFAS potentially could be huge, but to be clear, it's initially a drinking water issue. You guys really steer clear of drinking water. Maybe the secondary play is you capture the filter media and get to handle disposal of that. Without a national contamination limit, even if this is just an industrial waste, without a national contamination limit, it seems like that's going to slow the remediation side, particularly on the federal government. The DoD doesn't do anything until you at least get a federal standard. Is that the right way to think about that? Let's be cautious.
There could be a great opportunity, but nobody should get over their skis and go, "Wow. This $13 million last year is going to turn into a $100 million next year," kind of opportunity.
Yeah, I think that's fair. I think what we're seeing, we're pretty much fully utilized with our mobile treatment capabilities handling the in situ kind of opportunities. You're absolutely right, Michael.
Okay.
Yeah, Michael, we put it in our prepared remarks because we get asked it quite a bit, and we wanted to give people an update. There's nothing really to talk about here. We think that the IMO opportunity is much more tangible.
Thanks.
Great.
We have reached the end of our question and answer session. I would like to turn the call back over to management for closing remarks.
Okay. Thanks for joining us today. We look forward to speaking with many of you over the next several months at our investor events, including our Needham event in mid-August. Enjoy the rest of your summer, everyone. Thank you.
Thank you. This does conclude today's conference. You may disconnect your lines at this time, and have a great day.