Clean Harbors, Inc. (CLH) Earnings Call Transcript & Summary

Let me get started with the next presentation. So for those of you who don't know me, I'm Tyler Brown. This is the 11th out of 12, so you've probably seen me up here a few times over the few days. But I am the senior analyst here at Raymond James. I cover the environmental services space, also cover transportation. But this morning, I'm really excited to have Clean Harbors with us. Presenting today, Mike Battles, company CFO; Eric Gerstenberg, the company's COO. So maybe some are familiar with Clean Harbors, maybe not. This is a really unique business. They really have some real high-quality assets, particularly on the hazardous waste disposal side, really unique and a solid kind of re-refining operation, SK Oil. But with that, I'm going to go ahead and turn it over to you guys. I think we're going to do a presentation, take some Q&A, and then I think there's a breakout afterwards. So Eric, Mike.

Good morning, everyone. As Tyler said, I'm the Chief Operating Officer for Clean Harbors. I've been with the company approximately 30 years. I wanted to start by highlighting Clean Harbors' mission. So it's creating a safer, cleaner environment through the treatment, recycling and disposal of hazardous materials. Moving on to a company snapshot. We are the largest hazardous waste disposal provider throughout North America. We're also the largest collector, refiner and recycler of used motor oil. We have an unparalleled network of disposal assets along with transportation vehicles to manage transportation of hazardous waste throughout North America. We have over 300,000 customers, more than 14,000 employees. Our business model, moving from left to right, is comprised of starting with over 450 branches throughout North America. Those branch types are broken down into 5 major categories. First, starting with Technical Services. Our Technical Service branch types go out and service our customers by packaging, transporting hazardous waste back to our hubs. Our Industrial Service branches go out and work day-to-day on large chemical plants, large refineries. We have over 1,200 people that work day in, day out at large plants throughout North America. Our Field Services group predominantly supports emergency response, both small and large, also very critical to supporting the utility infrastructure throughout the country by doing manhole clean outs, small tank work, VAC services. Our Energy Services, a small part of our business, obviously, supports oil and gas. And then our Safety-Kleen group branch type supports automotive. They collect the used motor oil. They also manage the waste residuals from automotive shops. All of those branch types transport waste and waste oil back to our outstanding collection of transfer treatment, recycling facilities where we aggregate, we do recycling. And then much of the residuals move on to our unparalleled network of hazardous waste incinerators and landfills. Broad asset infrastructure, over 100 waste management facilities. Starting with our incinerators. 9 incinerators geographically positioned throughout North America, key assets down in the Gulf where a lion's share of the hazardous waste in North America is generated. We have landfill sites, 11 landfill sites, 9 wastewater treatment facilities, 6 refineries. Again, geographically dispersed. More than 10,000 company vehicles supporting our network nationally. Expansive service network, the 450 branches I spoke of earlier. You can see from this map, both our Clean Harbors branch types, our Safety-Kleen branch types throughout all of North America, great outstanding geographical distribution that we can service not only regional customers but our national customers with response times within less than an hour. We have excellent market diversification, as you can see from this chart. Starting with manufacturing. Chemical, those areas, they drive a lot of the waste disposal into our network. Small portions of our business, oil and gas, but no one area driving more than 16% of our revenue. Getting a little bit into our reporting segments, starting with Environmental Services. You can see from the pie chart on the right-hand side of this slide, which represents our Environmental Services group, approximately $2.2 billion of revenue. Incineration of waste materials is one of our largest pieces of the pie, the higher-margin area, along with skilled labor and transportation, picking up those residual hazardous and nonregulated waste and moving them through our disposal network. The key business drivers, obviously, regulations and compliance. We're at the forefront of working with our regulatory community, working with our customers, protecting their liabilities. Also, we manage and monitor all of the captive incinerators that our customers have, some captive sites that we like to work with them and reduce their cost structure by moving their volumes into our network of incinerators. Emergency response events. Anytime you see something happening throughout the country of an emergency of response, whether it be a pipeline spill or whether it be a large hurricane, we're there responding and helping our customers. Key metrics. We obviously manage our incineration utilization, our landfill volumes day in, day out. Within our Environmental Services, I think all of us know in this room that there's been a chemical renaissance. This chart shows our locations in the Gulf, the red dots. We're surrounding all of those large projects, over $204 billion of investment in the Gulf, driving waste residuals into our plants, where we're extremely well positioned. On the Safety-Kleen side, some of the business drivers here, $1.2 billion of revenue on the pie chart. We do parts wash services. So when automotive shops that are cleaning and repurposing and changing out parts in your cars, parts washers is how they clean those parts. We service that. Containerized waste services, a lot of residuals coming from those auto shops as well. The sale of base oils and blended oils from that used motor oil that we collect, send to our refineries and sell back into the marketplace. Key metrics there, managing our used motor oil price. It's a spread business, how we collect it, how we transport it, how we refine it and how we sell it as a base in a blended oil. This chart is from the Auto Care Association. It just -- it complements that Safety-Kleen slide, where it shows the consistent growth of oil change and lube shop sales. Obviously, there's a lot of things going on in the market about electrical vehicles. There still is a great consistent growth that complements our Safety-Kleen network driven by those auto and oil change lube shops as you can see. Within our Safety-Kleen group, we emphasize our direct lubricant sales model. What's that about? All the oil we collect, every one of those sites that we collect used motor oil is also a customer to purchase our blended oil products. So on the same vehicle, we can go out and we can collect used motor oil, we can route it to our terminals and our refineries, we can blend it and package it into a finished product, we can route it to our distribution centers. We have 23 distribution centers throughout North America. And then be able to return it as a Group II plus blended lubricant for the change out of the vehicles that they're working on. We're extremely focused on sustainability, 40 years of sustainability in Clean Harbors. We have great message to our customers. Our customers are asking us more and more, how can you help us meet our sustainability goals? We're focused on that. How can we give them green solutions around the oil we collect, the solvents we collect? How can we give them credits for the CO2 reductions that we're doing? Some examples of that in our re-refineries. More than 3.5 billion gallons of used motor oil has been refined through our refineries. We also recycle the solvent, so those parts wash systems that are on -- in auto shops. The dirty solvent we take out, we recycle it. We put clean solvent back in. Our incinerators are also used to reduce CO2 emissions by destroying incinerating CFCs. Now I'm going to pass it off to my colleague, Mike, who will give an update on the corporate strategy.

Thanks, Eric. Good morning, everyone. I want to start by thanking Raymond James for having us at your conference. We appreciate the opportunity to talk to investors, both old the new, and thanks for the invite. It's a great opportunity. I also wanted to do a quick shout out to Tyler. And I don't -- and I think that we obviously have a lot of people who cover us, and we love all our sell-side analysts who cover Clean Harbors, and we appreciate their insight and wisdom. I don't always agree with Tyler and kind of what he says and kind of his viewpoints, but it is always well thought out. And it is -- and he does come to some really thoughtful conclusions and does -- he does his homework and comes in with good questions. And I always feel like I appreciate the fact that, again, I don't always agree with him, like what he said sometimes and like last year, he put me in a cell. But I do understand, but I do understand kind of what he did and why he did it. And I appreciate the fact that he did it with some thought and insight. And now that we're back in his good graces, the stock's up and he's back this time and I appreciate that as well. But thanks, Tyler, for all your insight. So I'm going to talk a little bit about corporate strategy, and then I'm going to talk a little bit more about the financials. And then we'll try to get through the specs to give people time for questions because I think those are probably the best part. This is our overall strategy. And it really centers around, as Eric talked about, kind of leveraging the network. We have this unique set of assets that are very hard to replicate, tough to permit, tough to keep our permits. We work really hard to do that. There's a team of people who do this every day, and we need to leverage that. We need to leverage kind of waste into that waste stream. We need to add network capacity. We're thinking about not just by building a new incinerator like we did in 2017, but debottlenecking issues and trying to find ways to kind of get more through the pipe, if you will. And there's a lot of opportunities on that. And Eric, actually as the Chief Operating Officer, leads that charge. So that -- these are the kind of 2020 strategies as we take the macro strategies implying to kind of where we are today. And I want to talk a little bit about kind of regulation because if you think about regulation, I mean, that regulation is our friend. And whether it be kind of IMO 2020, which I'm sure we'll want to talk about, we'll talk all about it. Or PFAS regulation, which is, again, an interesting topic that are upside to our models, those things in general for Clean Harbors are helpful for us. And those things are -- once it gets in as a hazardous waste item, it doesn't get taken off and more and more gets put on. It does take years. But we are there, and we're going to continue to make those types of inroads and continue to leverage that as well. The other thing I want to just talk about for a minute is our people. And we've certainly made a lot of investment in our people. We have 15,000 employees, a very -- like 11,000 in the direct labor force. These guys are out there kind of doing the doing every day and doing some of the most dangerous jobs in the country and in the world and doing it safely with an industry-leading safety record and something we're really proud of. So we've had to make investments in our people to try to lower our turnover rate and provide that -- and that's going to have to continue. And that's just a -- there is a war for talent out there for, certainly for drivers and some of the things -- some of the really dangerous jobs we do. And so we are going to continue to kind of make those types of investments, including increasing benefits and increasing 401(k) contributions and giving raises. And that's here to stay. But what also is here to stay is what's in our DNA, which is -- and we are cost-conscious. We are -- but we are an industrial services company, we are managing our margins every day. Every dollar gets scrutinized, and we are very careful about kind of how we spend our dollars. And you can see in our model and our results, I'll get to it in a minute. We've been able to expand kind of our model in the areas like SG&A. And so that's really been a lot of hard work around moving to lower-cost countries and working on cutting costs and finding -- taking out temporary resources and other things to be creative around driving that down. So when you think about growth in the top line business, we got to grow, and I think we have plenty of runway to grow. There is -- we are not -- nowhere near close to kind of taking the cost out that we need to take, and we will continue to do that. Again, it's part of our DNA. Eric's worked here for 30, I worked here for 7. It's amazing what the team does and is creative in how they go after costs. So a little bit about the financial results. As I -- a couple of points I want to mention is that Q4, 1% growth, you're kind of a bit of a yawn there, but we did have a 20% grower in Q4 of 2018. So the comp there is kind of tricky. I'm not trying to make excuses, I'm just pointing out the fact. The other thing that happened is that although we only grew 1%, EBITDA grew 8%. And the reason why that is, is because we were able to -- the areas that we didn't grow as fast or even shrunk a bit or businesses that don't make a lot of money anyways. I mean our Industrial Services business, which we've talked about, high single-digit margin grower. And so that's not -- that's -- that got smaller because we've been trying to walk away from businesses that hasn't been as profitable as it needs to be. Very dangerous work, high issues around that. So we've been shrinking that business deliberately as a way to just kind of drive margins up. And so that's part of the growth story there. You take a step back from where we've been for the past 3 years. Again, we kind of nearly focus on Q4, but for the past 3 years, our EBITDA has grown over 10%. Our cash flows have grown more than 15%. And so we've been able to deliver 50, 80, 100 basis points of margin improvement year after year after year. I don't see that -- I don't it stopping over the next few years. I see that -- as Eric said, the chemical renaissance is happening, the low price of natural gas. And that's not -- that doesn't change kind of where we are. And I still think there's plenty of growth in this business. I also do want to say that we do have a very strong safety record. TRIR is total recordable incidents. It's an industry-leading safety standard. It's really helpful when we're going into plants, into chemical plants and into refineries, and we need to have that very low level. And it's -- we're really proud of it. We -- again, part of our DNA, very focused on safety. We start every meeting with safety conversations, and it's really critical to our success. Here's the balance sheet. The leverage ratio is the lowest it's been in 7 years. It's 2.1x levered on a net debt basis. We are -- you can go 2 ways on this. We can go 2 ways, right? If virus and oil prices and things kind of go sideways, we have a strong balance sheet that will be -- Alan McKim started this business 40 years ago. He wants -- we want to be here 40 more years. We have a strong balance sheet. We're going to be fine. And we're working -- when we're working with the Dows and Duponts of the world, we definitely want to make sure that when we're taking their waste, they want to make sure that we're going to be around. And so we have a strong balance sheet, and we've always been managing our balance sheet relatively conservatively for reasons that -- and I inherited a strong balance sheet. I'm going to give it to the next guy a strong balance sheet. That being said, we do have $400 million in cash. We do have an opportunity, if things get depressed, to go out and do some M&A. We bought 50 companies over the past 40 years. We'll continue to do that. And we -- and the pipeline remains strong as far as opportunities that are out there to go and invest in the business. Again, we try to do this smartly, something that meets the strategic rationale and a financial rationale. And deals that we kind of walked away from for the past year or so haven't met one of those criteria. So we're trying to find things that kind of feed the beast that either both our re-refineries, our landfills, our incinerators or -- and also make a financial sense. And we've been trying to be disciplined around those lines. Free cash flow. Again, I'm really proud of this. We've been able to grow this dramatically over the past few years. As you can see on the slide, that continues. And we have guidance. The midpoint of our guidance for 2020 is that $225 million net free cash flow number. And again, we're really kind of proud of our ability to have a strong conversion ratio from an EBITDA to a cash flow statement. And nothing changes there. Eric talks about whether we want to make investments in a new plant. And we challenged ourselves on that and do the math on that. You, as an investing community, will know that kind of well before we put a dollar -- we spend a dollar of your capital on that. And we'll make sure that the returns on that. Like we did for the incinerator in El Dorado, Arkansas are strong and that, that will turn out to be -- that was a great investment, and there's probably more opportunity to do that. Capital allocation. I think that we've tried to be good stewards of your money. We try to be smart about both on the buyback program, on capital allocation for CapEx, for M&A and then for buyback -- for debt repayments. Our average debt rate right now is under 5%, by 4.6% or 4.5% is the interest rate. And so from a return standpoint, we've been less of a debt pay down strategy. We do have a mandatory payment of about $7 million or $8 million a year, which we make that payment. But I'm not sure of the 4 choices. I'd say that's the one we're probably not going to raise to do, especially with our leverage ratio at a pretty good spot. But the other 3, we're active in the marketplace. We're active. We've done -- we had $300 million remaining on our current buyback authorization of a $600 million program. So we have plenty of dry powder to kind of go in a variety of different ways depending on market conditions. And we are actively managing both the M&A, the CapEx spend and the buybacks to kind of find the best return and increase our returns to you. And that's it. Okay. Thanks.

All right. I was afraid that was going to turn into a roast. I appreciate that. I actually thought you were going to talk about my EBITDA bridges and waterfalls...

Would we do love those bridges and waterfalls.

Yes. Yes. So this is interactive. If you guys have any questions, certainly, raise your hand. Maybe I'll start with one. I want to kind of come back to something we talked about right at the very end there. So I think the leverage around 2x, the best in 7 years, $300 million on the buyback. The stock has been a little bit dislocated. I'm just curious kind of your thought process on buybacks. Is this a particularly interesting time? Just any broad thoughts there?

Yes. No, I think that we actively manage. We have conversations kind of all the time about the authorization and how much we can buy back and how much we should buy back, and we'll be active.

Yes. Okay.

Sure. Yes?

I'm wondering about recycled oil and the price of -- commodity price of oil. How -- is that less of a burden than it has been in the past?

Yes. I think that -- what's happening is that we're seeing in the marketplace re-refined motor oil, we are a price taker. So that -- we make base oil, and that base oil is sold in the marketplace, and we are a very small player in that. Where we see an advantage is more on picking up the used motor oil, the dirty motor oil that comes out of your cars and trucks and what we do with that. And with the new regulation of IMO kind of 2020 and the impact of that, what that means is that there are uses for that motor oil, that dirty motor oil. You can do a lot of things with it. And one thing that is used predominantly for is used in ships and used as a fuel for ships. And that dirty motor oil, because they have some metals in it, has a high sulfur content. And so that rule basically lowers the sulfur content of those ships and makes that used motor oil not an effective fuel for ships. And so that is a big change for us because it's simply stated, we compete. When we go to your -- John's Auto Body Shop, and we go to pick up the dirty motor oil, we're competing with companies that can use that motor oil for fuel. And so with those competitors not in the marketplace because you can't use it for fuel anymore because it's against the regulations, we're hopeful that we can be able to do what we should be doing all along is charging for that motor oil because it is a waste. It is a regulated waste in every state, it's a hazardous waste in some states. And so we, like every other waste stream we pick up, we should be charging our customers to pick up that dirty motor oil. And so we have been charging for that. We are going to be more aggressive in that as the regulation continues to take hold.

Yes. Back there.

And can you talk about the PFAS growth opportunity?

Sure. Eric, do you want to take that one?

Yes. So obviously, a lot of activity in the news about PFAS. We can be a leading provider and solution for PFAS-contaminated material. Right now, we're still waiting for evolution of the regulations. And so we can participate in not only treating groundwater, we can provide remediation of sites and manage that PFAS material back to our incineration network. Right now, as the waiting game continues with U.S. EPA, we're waiting for those standards to be created of what the regulatory thresholds will be and act up. Actively today, we continue to get inquiries from customers that are asking us for solutions, for disposal of AFFF, the firefighting foams. They have residuals of that, and they want it managed. We do that provide management of that. And we're actively working at remediation sites and working with consultants and engineers on at what level will they remediate and move that material off-site.

Nothing in the 2020 guidance around PFAS. Certainly, a lot of inbound traffic. And we do, do a lot of kind of educating ourselves and educating our customers around what we can do.

Is that something you can expect clarity on this year with the regulation looking at an election year?

I doubt an election year would provide any conclusions on this. I had to guess.

And the first objective is really to set standards around drinking water, and so that will play out. It will take some more time.

Joseph, do you have a question?

Very quickly, do you have a closed loop system? You mentioned that every customer can pick up from and also can sell back to you. Are there requirements for the customers that you collect from and repurchase for those purchase requirements? Or you just come in on an as-needed basis?

On an as-needed, there is not a requirement. However, it's beneficial for the customer and us and cost structure for them. We can be more competitive to them. We work with them on their used motor collection. We're obviously servicing them on the same truck, and we're trying to share in those benefits.

Joe, we're trying -- as we've tried to raise prices on picking up the dirty motor oil, the used motor oil and we're getting some pushback on that, we've been able to try to provide bundled services where we say, "okay, fine, but we'll do it. We'll give you the clean motor oil, too, and we can able to work with more effectively to do that." It's hard for us. It's not something we got to have on our systems or do it that way, but we're trying to do that creatively. The other point I want to mention is that around the closed loop is that, that is the ultimate sustainability story. And I really feel proud about what's happening. And the market is coming to us. We deal with the maintenance leaders. And they're not -- they're more caring about pricing and the quality of the motor oil, which is price is competitive and the quality is better. And so we get them over that. Now look at the performance plus, when we're up against [ biker ] state, it's a tough sell. I get it, right? But sustainability is coming to us and coming to us hard. And they're getting it from the CEO down. And when we have those types of conversations around that, we're much more productive in getting in there.

Yes. Maybe kind of going back to that, I mean, it seems like it's a bit of a chicken or egg problem, right? I mean there's a lot of brand loyalty in the oil markets. It seems like the direct -- the closed loop system has maybe taken a little bit longer to kind of get going. But can you kind of talk about the cadence and how do you ultimately see closed loop being where ultimately you had originally anticipated?

Yes. I knew you'd bring up closed loop and our lack of progress there. I would say that -- look, if you and I were running a business, Tyler, and it was growing 20% to 30% a year, we'd feel pretty good about that, right? And that's been growing 20% or 30% a year since we started it back in 2017. Did we make comments about growing faster? Sure. And guess what, these companies that are large majors, they're -- there's a lot of brand loyalty there. And so we learned that the hard way. That being said, it's still growing really, really fast, and it really is taking hold. And we have consistently kind of had pretty strong growth trajectories, and that's going to continue. And we like that for a lot of reasons, not just because of the sustainability story. And in fact, it's a new growth opportunity for us. But more importantly, it's a higher price point, and it's a higher -- and it's stickier to our customers. We think a lubricant's stickier, but it is once you get in there. It does get a better pattern and a better cadence. And we'll be able to offer a higher price point and then generate more EBITDA.

And maybe coming back to -- you talked a little bit about captive incineration. So you guys have, let's call it, the preponderance of the commercial incineration market in the U.S. I am curious though, there are a number of captive incinerators that would be managed by somebody to say, like a DuPont, for example. I'm just curious, are you seeing those -- this was a story maybe a few years ago with those maybe kind of idling down or shutting down. Is that still a story, Eric? I'm just curious, what's the current state on captive incineration?

It absolutely is. There is approximately 50 captive incinerators throughout North America. Many of them are all our customers as well. So there's just different technologies in those captive incinerators. Our rotary kiln incinerators are more advantageous to take a broad spectrum of waste materials. We work with those customers as their volumes and their streams change in their manufacturing processes. We work hand-in-hand with them on creating solutions for all of the residuals that they have. So there continues to be some active captive incinerators that are looking to not manage their sites, do what we do well, let us take the waste. That continues to be an active play for us. And we continue to be in contact with every single one of them on offering that solution.

Yes. Going back a few years ago when it was at 100, there was -- going back, you've been covering us for a while, Tyler. It has -- it did go down. It has stabilized a bit. But that being said, they do turn around, they do shutdowns. And when those get shut down, that waste comes to us. So we have a strong working relationship with all the captives.

Right. Okay. Well, I think we're about out of time. We do have a breakout afterwards, so they can carry it down there.

Great. Thanks.

Thanks, everybody.

Thank you.