Greetings, welcome to Clean Harbors, Inc. first quarter 2018 conference call. At this time, all participants are in a listen-only mode. A 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, Diego, good morning, everyone. With me on today's call are Chairman, President, and Chief Executive Officer, Alan S. McKim, EVP and Chief Financial Officer, Michael Battles, and SVP of Investor Relations, Jim Buckley. Slides for today's call are posted on our website, we invite you to follow along. Matters that we are discussing today that are not historical facts are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Participants are cautioned not to place undue reliance on these statements, which reflect management's opinions only as of today, May 2nd, 2018. 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 results of any revision to the statements made in this morning's call, other than through filings that will be 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?
Okay, thanks Michael. Good morning, everyone, thank you for joining us. Starting on Slide three, let me begin with a discussion of our change in segments. After a year of planning, we created a new structure for our legacy Clean Harbors organizations comprising six regions, which include both sales and service. These regions, supported by our facilities organization and several national product lines, resulted in the consolidation of three reporting segments, Technical Service, Industrial and Field Services, and Oil and Gas and Lodging Services, into a newly formed Environmental Services segment. We expect this change to strengthen our resource allocation, both our employees and assets, deepen customer relationships, reduce third-party spend, and generate greater cross-selling across all our environmental lines of businesses. This structure closely aligns with Safety-Kleen's regions and will help both segments grow their respective lines of business.
One other point to make on sales is we initiated a new quota program as we combined several sales organizations under this regional structure. We now have a better alignment between sales and operations and incentives tied to profitability. Turning to Q1 results, we opened 2018 with a strong quarter that exceeded our expectations. We executed our growth strategy and benefited from improving market conditions in environmental services and Safety-Kleen, both of which delivered profitable growth. Safety-Kleen results were particularly encouraging as we effectively managed the spread with the increase in crude oil prices. Turning to environmental services on Slide 4. We generated 10% top-line growth in the segment driven by higher volumes in our disposal network, the Veolia acquisition, and growth from our base business, as well as project work.
An improving industrial economy helped to create favorable momentum across key industry verticals, such as chemical, manufacturing, and energy. Incineration utilization of 87% was particularly impressive given the high number of down days year-over-year due to several unplanned outages. In what is historically our slowest quarter for landfills, tonnage increased 58% as we completed a significant project in the quarter. We maintained a steady cadence in our base business. Also contributing to our environmental services segment performance were our industrial service lines of business, including the Veolia industrial acquisition, which closed in late February. The timing of that transaction was beneficial to us as the team hit the ground running with a nice start to the spring turnaround season. Veolia industrial has quickly proved itself a nice addition to our U.S. business. We're optimistic about its longer-term potential.
Our oil, gas, and lodging assets performed in line with our expectations in the quarter. Looking at this segment's profitability, adjusted EBITDA was up 2%. However, as we expected when we spoke with you back in February, our adjusted EBITDA margin was down primarily due to the additional facilities cost and disruptions we experienced at our incinerators and solvent operations in the quarter. Moving to Slide 5. Safety-Kleen grew revenues by 7%, largely due to a higher base oil and blended pricing, supported by growth in several of the offerings within our branch network. Parts washer services for the quarter were flat at 251,000. Waste oil collection volumes, however, were strong as we gathered 54 million gallons, up from 50 million gallons a year ago.
In addition, despite the year-over-year increase in base oil pricing and the rise in the value of fuel, we remained in an average charge-for-oil position in our collection business. Adjusted EBITDA in the Safety-Kleen segment increased 18% due to the favorable pricing environment for our base and blended products. Expanding the spread in that business. Within our branches, we are benefiting from cost reductions associated with our national customer care center. In terms of sales mix, direct lube oil sales accounted for 5% of Safety-Kleen's total volume sold, up from 4% in Q4 and 3% a year ago. Blended product sales accounted for 23% of total volume in the quarter, which is unchanged from Q4. Moving to our corporate update on Slide 6. Profitable growth remains our top priority for 2018. Our key growth initiatives center on incineration volumes, closed loop, and growth in the base business.
Relative to improving price and mix in our incineration network, despite a tough January, our network has been running well, including the new kiln in El Dorado. We see numerous opportunities to capture additional volume, including newer expanded chemical waste streams that should improve our mix going forward. Looking at our closed loop, we have a clear objective in 2018: double the volume of direct lubricants sold from 2017. As we move forward here in the second full year of the program, we continue to see a high level of interest among our customers and a large pipeline of opportunities. With respect to growing the base business, we believe it's imperative that all areas of the company, sales, service, and operations, be aligned to the same playbook.
Through our realignment, we're now presenting one face to the customer and therefore creating greater opportunities for cross-selling our more than 300,000 customers. We're moving ahead with the integration of Veolia's U.S. industrial business to capture both revenue and cost synergies. From a revenue perspective, we see numerous opportunities to bring environmental services as well as Safety-Kleen's full suite of service offerings to those customers. We also see opportunities to drive additional waste volumes into our disposal network. Turning to Slide seven. With the addition of Veolia Industrial, we now are 14,000 employees strong, working out of more than 400 service locations across North America, as you can see demonstrated on this slide. We have industry-leading brands in Clean Harbors and Safety-Kleen, with customer relationships that extend back for decades. Our reputation for safety and commitment to excellence are second to none.
Our service capabilities, including environmental, industrial, re-refining, and hazardous waste disposal, are unmatched in our industry. We believe that we have assembled the right combination of offerings to provide compelling solutions for our customers, and we're excited about our prospects going forward. Turning to our capital allocation strategy here on Slide eight. The board and our management team are closely aligned on maximizing value and returns for our shareholders by allocating capital effectively. In 2018, our management team now has ROIC as a key performance measurement, and our executive incentive plans are partially based on ROIC improvement. Our net CapEx this year will be up slightly from 2017, as we look to selectively invest in growth areas, including in Veolia, and we'll continue to evaluate acquisition candidates that we believe will support or accelerate our growth.
At the same time, we're continuing to seek opportunities to divest some smaller non-core assets and businesses. We are executing on our expanded buyback program with a current target of repurchasing a million shares this year. Let me close with our current outlook. After a good Q1, we entered the current quarter with strong momentum across multiple markets and remained excited about our overall prospects for 2018. The current environment is favorable for us, with a healthy industrial economy generating increased waste streams and rising crude prices, providing a backdrop for higher base and blended oil pricing. We remain committed to enhancing margins through pricing strategies, improved revenue mix, and operating efficiencies. Overall, we anticipate a strong adjusted EBITDA and adjusted free cash flow performance in 2018. With that, let me turn it over to Mike Battles. Mike?
Thank you, Alan, and good morning, everyone. Turning to Slide 10 in our income statement. We kicked off 2018 with strong top-line growth as revenue rose 9% or more than $60 million. This growth was driven by contributions from both environmental services and Safety-Kleen. Gross margin declined year-over-year due to our mix of business in the quarter, as well as facility costs related to unplanned disruptions at several locations early in the quarter, which we discussed in our Q4 call. We believe that our focus on pricing and shifting toward higher-margin waste volumes in our disposal network will enable us to improve our gross margin performance going forward. Higher revenue and improved leverage, combined with our ongoing cost reduction programs, contributed to a 100-basis point improvement in SG&A expenses.
For 2018, we expect this trend to continue and anticipate SG&A as a percentage of revenue to be slightly down with 2017 as we leverage the new regional structure. Depreciation and amortization was up slightly from a year ago, reflecting the addition of Veolia, as well as higher amortization in our landfills, given the greater volumes we disposed of this past quarter. For full year 2018, we expect depreciation and amortization in the range of $295 million-$305 million, which includes the addition of Veolia's fleet of assets. Income from operations for the first quarter more than doubled year-over-year to $11 million, primarily reflecting the higher level of revenue. Q1 2018 adjusted EBITDA increased 10% as we benefited from the higher revenue and cost controls, particularly in SG&A. Looking at the bottom line, we reported a GAAP net loss of $0.22 per share for the quarter.
Adjusted net loss for Q1, which includes the effect of non-cash valuation allowances on tax loss carryforwards in Canada, was $0.12 per share. Turning to the balance sheet on Slide 11. We ended the year with cash and short-term marketable securities of $224.1 million, down from our year-end balance of more than $350 million. This is primarily the result of the $120 million all-cash acquisition of Veolia's U.S. Industrial business and share repurchases. DSO came in higher than expected at 76 days, which is up four days since year-end. The Veolia transaction accounted for nearly half of the increase. We are committed to reducing our DSO as we move through the year by increasing our focus on collections and improving contract terms, particularly with our industrial and energy customers. Turning to our cash flow highlights on Slide 12.
Q1 cash from operations was $51.9 million, was down slightly year-over-year. Q1 CapEx, net of disposals, was $43.4 million, leading to Q1 adjusted free cash flow of $8.5 million. These numbers are consistent with previous expectations for 2018. For the full year, we continue to target CapEx, net of asset disposals, of $170 million-$190 million, which includes our plans for Veolia. For the year, we continue to anticipate generating adjusted free cash flow in the range of $125 million-$155 million. During Q1, we repurchased $14.3 million of stock, or approximately 280,000 shares. As Alan mentioned, we're continuing to target share buybacks for the full year in the neighborhood of one million shares, but that remains subject to a variety of factors that could move that number up or down. Given where the stock closed yesterday, we believe Clean Harbors stock represents a great buying opportunity.
Moving to guidance on slide 13. Based on our Q1 results and current market conditions, we continue to expect 2018 adjusted EBITDA in the range of $440 million-$480 million. The midpoint of that range represents an 8% increase year-over-year. Looking at a 2018 adjusted EBITDA guidance from a quarterly perspective, we expect our Q2 year-over-year % increase to be in the mid to high single digit range versus prior year. Here's how our annual 2018 guidance translates into a segment perspective. We expect adjusted EBITDA for the newly formed Environmental Services segment to increase by approximately 10% in 2018. This growth will be primarily driven by a combination of pricing, mix, and margin enhancements in our disposal business, augmented by industrial and field service opportunities. We continue to expect the addition of the Veolia U.S.
Industrial business to add $8 million-$10 million in adjusted EBITDA this year. Safety-Kleen is on track to generate an approximately 10% increase in adjusted EBITDA, fueled by the closed loop, increases in base oil and blended product pricing, as well as the core SK branch network. We expect the negative adjusted EBITDA in our corporate segment to increase in the low teens in 2018, with costs from acquisitions and higher compensation and benefits, including 401(k), outweighing our ongoing cost-saving programs. In summary, we begin 2018 on a strong note. We're focused not just on putting together one or two good quarters, but delivering consistent, predictable, and profitable growth over the long term. We believe the proof of that will begin to emerge as we move through 2018 and deliver on our guidance. With that, Diego, please open up the call for questions.
Thank you. We'll now conduct a question and answer session. If you would like to ask a question, press star one on your telephone keypad. To remove yourself from the question, please press star two. Once again, to ask a question, press star one on your telephone keypad and a confirmation tone will indicate that your line is in the question queue. Our first question comes from Hamza Mazari with Macquarie. Please state your question.
Hi, this is Kayvon Rahbar. I'm filling in for Hamza. Can you please frame for us how your go-to-market strategy may be changing from what it used to be, given the change in the reporting structure?
Yeah. On a regional basis, we have one sales organization now focused within, in most cases, four different districts. All selling all lines of business within the Clean Harbors Environmental Services business, which is different, where we used to have different salespeople selling our field service business, our industrial services business, or our Tech Services business. Our go-to-market strategy is really to have one salesperson own each of our accounts, supported by specialists and other experts on a national product line basis when needed.
Thanks for that color. A little unrelated, can you give us a sense of how your M&A pipeline is shaping up, whether there's any larger deals, or mostly tuck-ins that you guys are looking at?
Yeah, sure, Kayvon. This is Mike. We remain focused as to allocating capital, whether it be buybacks or CapEx or M&A. We have a strong pipeline of acquisition candidates, both large and small, and continue to work that. No real change in our historical strategy. We certainly have the cash flows and the dry powder to do something large, and we still have a strong pipeline.
Okay. Thank you.
Okay.
Thank you. Our next question comes from Noah Kaye with Oppenheimer & Co. Inc. Please state your question.
Thanks. Good morning. Maybe following up on the previous question, transitioning to a single sales point focus for an account makes a lot of sense. Where exactly is that effort? Have these salespeople already gotten all the training and the support systems in place? Or is this something that you expect to kind of evolve over the course of the next, say, year or two?
There really was very minimal change to customer ownership, and all of that work was completed. You might recall that we moved our entire sales organization, which is about 950 people, to a single CRM platform in Salesforce, Inc.
We historically had a couple of other CRMs that were the result of some acquisitions that we had made and some of the legacy systems we used. All of that transition is done. We still have a large corporate account program, which encompasses 500-plus customers. Some of them are very large enterprise-wide accounts. Others are large key accounts for us, certainly. Really was no change at all with any of the ownership and leadership of those accounts. Pretty minimal change directly to the customer. Probably more of a realignment as it relates to a lot of our specialists and sales reps that we have.
Yeah, that makes sense. I think intuitively we can all grasp the business rationale for this consolidation. There is real synergy potential in the cross-selling, asset utilization, procurement, operating costs. I kind of wonder, is it possible to offer some early thoughts about the potential dollar scope of all these synergies that you see?
I think we're probably not prepared to share or come up with a number right now. Mike Battles, do you have any thoughts on that?
Yeah, Alan. It really isn't a cost play per se. There were some costs that we had savings that did affect Q1, Noah Kaye, really it's more of a driving incremental revenue, incremental margin. As Alan S. McKim said in his prepared remarks around putting quotas and driving more profitable growth, that is part of the story here. It's not just we did the regional structure, which I think is going well. Early days would suggest that.
Really, I think it's also the fact that we kind of put in better metrics around cross-selling with specific targets and improving profitability, which I think was lacking.
Appreciate that color. Makes sense. Then maybe one more from me. It feels like we still have some good run in the IP cycle here. I think you commented in the press release and in your prepared remarks. Just to take maybe one or two metrics for you, where do you think, for example, incinerator utilization should trend over the balance of 2018? How should we think about some additional sort of metrics that would manifest some of these tailwinds?
Yeah. Noah, it's always been I think the plants are running well. As we mentioned in the Q4 call, we had some unplanned shutdowns and some bad weather in Deer Park and other areas. We think those are behind us. It's always been an issue with mix, not utilization. We've been able to get kind of a good amount of utilization in the plants all year, even with the new El Dorado plant. That was, as we said, it would take a few years to get up to this level of utilization. It took a few months, that's been a great story. The real issue here in how we drive incremental profitability is a mix shift and getting more kind of higher margin waste streams through our network.
One thing that, thinking about a data point, the turnaround season in the U.S. is kind of going as expected, and I'd say Canada is probably a little better than what we expected. If you're thinking about data points in the marketplace, we see turnaround season being kind of very strong, which is going to help both our U.S. industrial business and our newly acquired Veolia business.
Great. Thanks. I suspect there will be some follow-up to that. Nice execution, I'll jump back in queue.
Thank you.
Our next question comes from Jeff Silber with BMO Capital Markets. Please state your question.
Thank you so much. A lot of the municipal solid waste providers have been impacted about things going on in China with recycling. I'm just curious, are you seeing different kinds of waste coming into your facilities because of those disruptions?
No, it wouldn't have any bearing on us at all. Not any part of our mix at all.
Okay, great. Is it possible, and forgive me, I don't have the information in front of me, did you break out the Veolia impact separately in terms of the impact on growth in the quarter?
We didn't, but we can give you those numbers. It was about $17.5, $18 million of revenue and about $2 million of EBITDA for the five weeks we owned them.
Okay, great. How about, you mentioned a significant project completion that drove up your landfill tonnage. I'm just curious now that that's over, what the impact was in the quarter to just help us model going forward.
We normally don't break those out, Jeff, because we think that there's projects. There was a very large one that happened in Q1, they happen kind of regularly, the good message is, I think that the pipeline remains strong for other larger types of projects that are coming online, we feel good about the rest of the year. We normally don't break out kind of large projects. The fact remains is those larger projects are probably at lower margins than the average.
Okay, great. Just one quick follow-up. I know you reiterated your cash flow guidance. I know the first quarter is typically light seasonally, it came in a little bit lighter than the year ahead. What do you think is going to drive the improvements on a year-over-year basis in free cash flow for the rest of the year?
Jeff, we were impacted in Q1 by a couple things. By a bonus payment that we talked about in the Q4 call, we did have a little less interest, a little better taxes, so it came in as expected. Really, what we need to do is focus our attention on AR and drive AR. If you look at the cash flow statement, you'll see AR was a bit of a good guy in Q1 last year, and a detriment here in Q1 of 2018. We don't think that the aging is getting worse. We feel good about it. We're not concerned about it. It's just a focus of us, and we have a full year to get after that, and the team's already starting to kind of get back in that mode and go chase those receivables.
Okay, great. Appreciate the color.
Okay.
Thank you. Just a reminder, to ask a question at this time, please press *1 on your telephone keypad. Once again, to ask a question, press *1 on your telephone keypad. Our next question comes from Bobby Burleson with Canaccord. Please state your question.
Hey, guys, this is John DeCuir for Bobby. Congratulations on the quarter. Just two questions from my end that I wanted to follow up on is, the higher waste volumes in the Environmental Services segment, can you kind of touch on that from an industry standpoint, kind of what stands out? Moving forward the rest of the year, you just talked about the pipeline for projects. Any color you could give on an industry standpoint there would be helpful.
Yeah. You'll notice on our financial statements about $68 million of deferred revenue, that's sort of reflective of the amount of waste that we have in backlog in our plant. We have a very large amount of waste in our network to be processed and incinerated, and our drum volumes particularly have been very strong year-over-year. I think we see the economic conditions, both in the U.S. and Canada, improving and driving more waste volumes from our regular waste-generating customers. I think to Mike's point, we also have a good pipeline of projects and large remediation-type jobs that are in our pipeline as well. I think looking at our competitors, we believe that our competitors, particularly on the incineration side, are enjoying equal amount of improved utilization as well.
I think that volume is going to continue to improve throughout this year and even in next year as some additional plants come online.
Okay. Thank you for that. A follow-up question kind of on the qualitative growth color that you guys have provided. With the first quarter growth for adjusted EBITDA being better than the flat rate that you had spoken to last quarter, and the new Q2 color, does that change the previous expectation for the second half weighting of this year? Just trying to get a scale of the higher growth in the second quarter and kind of what's driving that change, if there is a change.
Yeah, John, this is Mike. I'll take a shot at that. I think that there isn't a heck of a lot of change. Obviously, the Q1 beat versus kind of what we said was a pleasant surprise and gives us kind of more comfort for 2018 and probably takes some pressure off of Q2 and the back half. Nothing is changing our forecast and our belief and our guidance that would change our range that we gave you or kind of how we feel about that. What it really does is take some of the pressure off of the back half.
Okay. Thanks, guys.
Good.
Thank you. Our next question comes from Hank Elder with Goldman Sachs. Please state your question.
Hi, guys. Yeah, this is Hank on for Brian. Thanks for taking the questions. The top line at Safety-Kleen was pretty strong. The segment margins, especially in Safety-Kleen, were a little below, maybe, year-over-year where we would have thought. Was that a function of seeking out higher volume or mix or something else going on?
Hank, can you repeat that question? I'm sorry.
Sorry. The margins in Safety-Kleen, I guess, were a little below where we would've thought given the top-line performance. Was that a function of volume or seeking out higher volume, the mix, or something else?
Yeah, Hank, I'm not sure. We were very pleased with the results of Safety-Kleen for the quarter. They had improved their EBITDA margin by 220 basis points year-over-year. We look back and eight of the last nine quarters, the margin has improved year-over-year for SK. I guess it could do better. We always push ourselves and push our team to do better. There's spread to be had there as oil prices have gone up and trying to hold the line on charge-for-oil. Overall, I think the executive team is pleased with the performance of SK and is in line with our expectations.
Okay. Got it. On the OpEx, you guys, I think did a great job on the cost control this quarter. You mentioned that the higher corporate expense year-over-year, do you think that kind of the savings in 1Q will continue, or should we expect those expenses to tick up moving through the rest of the year?
Yeah, Hank, that's where we thought that we're pleasantly surprised by the results in the quarter versus what we had said before. I think healthcare costs came in a little better than what we thought. We think some of the costs we're going to have to invest in our team is in process, but not a ton more here in Q1. When we talk about for the full year, we think that's probably going to do a little better than what we originally had thought.
Okay. Thanks, guys.
Thank you. Ladies and gentlemen, final reminder, to ask a question at this time, press star one on your telephone keypad. Our next question comes from Charlie Wohlhuter with Raymond James Financial. Please state your question.
Hi. Thanks, everyone, for taking my questions here. Following up on that previous question about the SG&A, Alan or Mike, when you mentioned about the incentive comp changes here incorporating ROIC, and then based upon, Mike, your just previous comments about the lower healthcare costs, are there any sort of incentive comp deltas to think about this year versus last year?
No, not really. I think we're going to continue to see an improvement in EBITDA, which is really what is the management incentive plan and a lot of our senior executive incentive plans is predominantly driven off that EBITDA margin improvement, and therefore incentive comp is tied to that improvement. We anticipate both will improve, as well as now with a percentage of that being focused on improving on ROIC. We put that in place at the beginning of this year, and that will be another additional metric that we're going to continue to drive across the entire organization.
Okay. Got it. Thank you. Mike, you mentioned earlier about the pipeline for some larger projects in, well, formerly tech services. I believe you said something along the lines of a lower margin profile. How do you price or factor in transportation costs with those projects? Is that incorporated into the pricing or negotiations, or is that a piece perhaps that is causing the margin profile to be a bit lower than perhaps originally expected?
Not necessarily. Clearly, we tend to separate out our transportation rates, and there is some variability with it in regard to our fuel surcharges that we include. We have been raising prices as a result of our costs going up in transportation. It's a big component across the entire company, over 4,500 drivers, CDL drivers. We're moving a lot of waste. We're also using a lot of rail and even barges to move product. Transportation is very important as we price these projects and manage them, particularly as some of these projects might be a little delayed to move forward. We really try to go back to our customers and address any transportation changes that need to be addressed.
Okay. All that being said, transportation is not a root cause of the lower margin profile of these projects in the pipeline?
No. I think it's just when you look at very large, 100,000 ton+ kind of projects going into landfills, they tend to be more competitively priced, simply because of the nature of those kinds of events. That's based on historical. It's nothing new. It's really how large event projects tend to be bid for our landfill business.
Okay, got it. Thank you.
Okay.
Our next question comes from Michael Hoffman with Stifel. Please state your question.
Thank you very much. Nice to see you back on a path of potential repeatable predictability. Can I ask on the free cash flow working capital, I get what your comment was, Mike. Your 7% of revs is your cash flow from ops in this quarter. The average for the year needs to be 10%. Is most of that going to be working capital, given what you've shared with us about if we stay at the midpoint, that's a pretty healthy working capital play. How do I see that play out? Is that 2Q, 3Q? Is it three and four? Where's the timing of that?
It's going to happen during the course of the year, kind of Q2, Q3. Q1 was particularly low because of the bonus payment that we paid here in Q1 of 2018. That was made unusually low from a working capital perspective. We assume that's going to get back as the year rolls on. Certainly, if you look at our cash flow statement and look at accounts receivable, which I mentioned earlier, that was a bit of a drag as well in Q1 this year, when last year it was a bit of a pickup. We feel that that's just a matter of focus. Our aging hasn't changed. Our profiles of receivables haven't changed. It's just a matter of going and getting it. I'm less concerned about the cash flows given the Q1 performance.
It was a little lighter than prior year, but more to do with kind of a one-off payment than anything else, and I still feel good about that kind of midpoint in that range.
Okay. You shared with us your thoughts about the progression of both environmental services and Safety-Kleen, the margins through the year. Just want to make sure, when you gave that was the absolute $ of EBITDA change, not margin. When you said low double digits and low teens, low double digits for both ES and SK, and then low teens growth in corporate overhead. That's against the absolute $ from a year ago?
Yes, sir.
Okay. If I think about that, you did $146 in corporate overhead last year. That'd put you at kind of at $165. Safety-Kleen goes to $275. That puts the ES at somewhere between $350 and $355. To get me to the midpoint. That's the right way to think about it?
Yes. Certainly, Michael, as I said before, I think that the beat in Q1 gives us more confidence as the year rolls itself out. We felt that one quarter of goodness does not mean a guidance change, but certainly as we rolled the numbers out and the beat that happened in Q1 gives us some positive momentum for the rest of the year.
Fair enough. I'm not trying to press on a change of guidance, let's just meet and beat for the moment. The ES, though, the thing to notice in that is margins are going to get better through the year relative to the first quarter. For that outcome you've described to occur, clearly, I'm going to have an absolute margin change too relative to the start of the year.
Michael, I probably should have repeated it in my prepared remarks, but we did comment in the Q4 call in environmental services, primarily in tech, there was a $7 million, I'd say due to weather and a fire and other types of disruptions in Q1 that did, if you added those back to our Q1 numbers, would result in a 100 basis point beat in the margins versus prior year versus environmental services. Although we realized to kind of get to the margins we're talking about, we have to do better than a 100 basis point decline year-over-year. We realized that a good chunk of that has to do with some ice storms in Deer Park and other things we talked about in the Q4 call.
Okay. That's good to know. When I look at the $165 million of corporate overhead this year and the benefits of the reorg both driving incremental growth, do I see that number come down on an absolute basis in 2019, or is it that it will grow slower as you drive operating leverage against it?
I think both happen. I think that we look for opportunity as we put the structure together and look to maximize not just headcount, but space and capacity in some of our locations. That should help corporate expenses. As you said, the incremental revenue and the leverage we get off of that is going to help the margin number as well.
Okay, just to clarify a margin question that was asked earlier, the right way to look at this is you're supposed to look at it against direct revenues and your EBITDA, not the third-party revenues. If you did look at it as third party, the question earlier in SK, the margin was your 210 basis points is I'm taking $278 million of revenues and dividing that into $62 million to get to the 22 point.
Yeah, no, Michael, we were a little confused.
Just to clarify, somebody was looking at the wrong number.
We were a little confused at the question. We're happy to answer our questions. We're really proud of how SK has done. We do base it off direct revenue.
Right. That's how to calculate margin, though. Back to the other margin question or the issue with regards to project, the way to think about project bidding is you cover all of your fixed costs in Technical Service asset base through base revenues, recurring revenues. That allows you the luxury of just bidding against variable costs to win incremental volume to drive that into that fixed asset base.
That's right.
Right. That's why that business can be lower margin in that context, because it's more competitively bid to cover just variable cost.
That's right.
Okay. I just want to make sure none of those things have changed. All right, great. Thank you.
Thanks, Michael.
Thank you. There are no additional questions at this time. I'll turn it back to management for closing remarks. Thank you.
Okay. Thanks for joining us today. We do have a strong IR calendar coming up, and we'll be in New York and Boston next week, so we look forward to seeing many of you at these and other events in the coming months. Have a great day.
Thank you. This concludes today's teleconference. All parties, you may disconnect. Have a great day.