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

Hello. This is Michael Hoffman. I am the group Head of Industrial Research at Stifel and cover the environmental services space, and it's my pleasure to have with us this afternoon Clean Harbors joining us at our CSI Virtual Boston Conference. With us is Mike Battles, Chief Financial Officer; and Craig Linington, who's the President of SKO, Safety-Kleen Oil. And this is a true treat from my standpoint to have him join us as this has been a business that's had some interesting challenges this last 6 months. So both of you, thank you for joining us.

My pleasure, Michael. Thanks for having us, and thanks for your interest in Clean Harbors.

So let's jump right into the deep end and talk about the last 6 months. If we can -- this is a high level, and then we're going to dig into the weeds on business lines. But if we think of it as a before, during and an after, I have this sense that there's a real distinct characterization of how business was playing out across all 3, and the good news is it was great. It looked terrible, and it's improving is sort of my simplification. But can you talk about that for us?

Yes. It's actually not a terrible way to kind of think about it. I would say that if you looked at -- especially in Q1, Michael, where we had kind of record level of EBITDA for Q1 in Clean Harbors history, record level of margin in Clean Harbors history for Q1, an excellent Q1 and safety record, 10% organic revenue growth. I mean really, all the good things that were happening in 2018 and 2019 were kind of manifesting themselves. Spread management and Craig Linington's business around IMO, good waste streams from different types of project work. Favorable weather, too, that helped as well. I don't want to discount that. A lot of good things going kind of up and to the right. Jim and I were talking along with the controller, Eric Dugas, who you've met before, about, geez, are we going to -- when are we going to raise guidance, and this is going to be great. Cash flows are coming in really good, and we really were kind of really pleased after the January results and even into February, and then the kind of world torn part. And there was -- between the pricing wars with Saudi Arabia and Russia as well as, of course, COVID-19 and the dramatic impact and devastating impact to add on the world and on the U.S. economy and on Clean Harbors. Before I get into kind of the low part, though, I do want to make mention, and I want to make sure our investors hear this, is that we are a safety culture. And that safety culture, I just couldn't be more proud of given the fact of what's happened in the environment with COVID-19. For a couple of data points, Michael, is that we had people signing up to go into hot zones who are looking for hours, going into hot zones and doing decon work from other parts of the business. And you think about that in contrast to other companies where people are picketing outside the building because they worry about being safe, and we got people signing up to going into known hot zones. That speaks to the fact that they know that they're going to do that because it's safe and they're going to have proper training. And again, I couldn't be more proud of the organization and our focus on safety and compliance. You would hope -- and a hazardous waste services company is focused on safety, and our industry-leading safety record and our focus on safety and compliance really has manifested itself really well. And even in these dark times, I look to that where our infection rate is substantially lower than national averages, even though we are going into known hot zones, tells you that we are doing the safe and smart. And again, from myself and from Alan, from the leadership team, we couldn't be more proud of the organization that we have in front of us and really has been in really tough times. We're making some really hard decisions on people and different things. It's something we really are reflecting on and thinking about how lucky we are to work for such a great company.

Well, thank you for sharing that because I do think that's a topic that often doesn't get the time it deserves, is the importance of safety because it's cultural. It's not a program. It's not a box that you check. So that's something that stands out. Not everything is perfect. What were some of the things that stood out that, all right, well, we learned a lesson from this, and we won't repeat that. We'll learn not to do that or we'll learn to do something better.

I think that it was a -- I think that from a lesson learned standpoint, I was surprised in how fast we had to kind of turn things off. And I think we were aggressive on taking out costs and driving that business down. I'm hopeful that we didn't go too deep, right? I don't think we had the problem of the opposite problem, where we didn't go deep enough. I'm concerned as the economy starts to recover, did we take too many costs out? How fast are we going in that area? So again, we just got to be cognizant of that. And as we -- as there are signs of life within the organization and in the economy, we're going to be judicious about putting costs back in, but we got to make sure we don't hurt the kind of long-term growth prospects of this business.

So you did suspend guidance and lots of companies did, and I see the prudence of doing so. Having said that, the guidance at the beginning of the year was $565 million of EBITDA. And when you think about sort of the pieces of that between Environmental Services and Safety-Kleen, how do I think about where the pressure is relative to that guidance? And when the numbers -- when we have clarity on the restart and you're going to be able to come back and predict more accurately where everything is settled, is more of the pressure coming out of Safety-Kleen and less out of Environmental Services given the nature of the customer mix and the services offered? Is that the right way to think about it?

That's exactly right. I'd say that the Environmental Services business is highly resilient. And the businesses that got shut down, the restaurants, the bars, other nonessential services, we don't generate a lot of hazardous waste from those businesses. And so we get our waste from agriculture, agri chemical, chemical pharma. Those businesses kind of kept going. And certainly, we lost some work in some smaller lines of business, Michael, like household hazardous waste days or Lab-Pack services or containerized waste we get from the Safety-Kleen business. But the Environmental Services business, I'd say, continued to go forward, kind of, let's say, as is for the most part. And with the additional work of the decon work that's out there, which is certainly a helper and helped offset some of the softness we saw in household hazardous waste, in Lab-Pack, some industrial services work got pushed out a bit for turnarounds. But I think, overall, that business was, let's say, it's fine as far as where we are given all things -- actually doing great given -- all things being considered. The area that got hit the most dramatically, as you can imagine, is our Safety-Kleen business. And you know, Michael, I've been harping on the SK Environmental business. It throws off about $200 million of EBITDA a year. It's a great steady business, a very high ROIC, a great return on capital, huge cash flow generator. So really love that business. And that business was stalled in Q2. We talked about -- in the earnings call, we talked about it being down 30% in April and May was a challenge as well. I do see signs of light in that business. I do see that business coming back. As a matter of fact, I see -- I said this before on the main call and I'll say it again, this could be the summer of driving. With people not wanting to get on airplanes, people not wanting to hop back on a mass transit, the lower prices of gasoline that's out there in the marketplace, the fact that people are worried about their jobs and not buying new cars, they're going to keep those old cars going and get a tune-up or get something fixed versus just buying a new car. All those catalysts are out there that I think drive that business back. I think that business will come back relatively quickly. Of the $280 million last year in EBITDA for the consolidated business, about $200 million of that came from the SK Environmental business. I think that comes back with a bit of a rush. And maybe even better, given the fact that it could be the summer of driving -- and I know that commuters maybe are not coming back as fast. But certainly, that's going to be offset by people not hopping on trains and planes and other forms of communication -- transportation and then driving around to where they need to get to.

Okay. So let me just close the loop real quick on ES because we are starting to see driving again, which means that gasoline consumption is picking up and so we'll work through some of the inventory build in distillates and gasoline and then the refiners start to enjoy slightly better margins. And so could we see a recovery of some of that turnaround work that got pushed out, plus the ER work on decon? And then stable technical services and ES has maybe got a little bit of pressure in profitability, but not much at all. Is that too optimistic of a way to think of the world?

Yes. It's not a terrible way to think about it. I do think that decon work does slow down in the back half of the year. So what happened, Michael, is that when the thing first broke out, we had first-mover advantage. We're a nationally recognized branch -- brand. We were out there and really driving the message. And we talked about $50 million for the year in Q2, and we'll get all of that. We'll get all of that, if not a little more. But what's happening now is that, that business has slowed down a bit because certainly, if there's been a cashier who's sick at a grocery store, well, then we get brought in that night to do a decon into a hot zone. But these gray areas, these cool zones where we just -- they're going to open up the business and want to come in and do a deep clean, people are just doing that themselves now. Now either they're -- Lysol is not a patented -- we don't patent Lysol, anything used to clean that stuff. And people are doing it themselves or having a Merry Maids or a local service pro type of company come in and do the cleaning. It's only when you have kind of a hot zone do you bring us in. So that business has -- although we're going to be north of $50 million, it's not going to be -- at one junction, we talked about maybe being a line of business forever. It may be, but it'll be small. It'll be very, very small. It's only going into kind of hot zones where people have gotten sick where we get called in. We still get a handful of calls in on a regular basis, it's just more on the emergency response type of work. So I do think that the -- I do think, though, that when I think about Environmental Services, and just to close the loop on that, I do think that there are -- turnarounds will come back in the fall. I think that we do, do about $100 million in waste projects and remediation, as you know, Michael, and that's going to be slow to get back. And so we're going to bring that business back as well. So nothing here dramatic. All these are kind of smaller -- on the smaller side. I do think, though, that business recovers. I think it's been a steady performer, and I don't think there's been a huge slowdown in that business here in Q2.

Okay. So let's talk about Safety-Kleen in more detail. And you've already started to set the stage with the 280 -- split $280 million. On the SKE piece, we are seeing vehicle miles traveled start to walk up because you're seeing gasoline shipments rise, and they actually have risen every single week until last week, they were down slightly. So I think we might have hit a little bit of a leveling off, and then we'll see as we get into -- really into earnest into the summer, and we really start talking about people choosing the vacation and doing -- what I think you're talking about, I think, is some accuracy because if you go onto RV rental sites, they're sold out, right? So everybody is trying to figure out how they're going to Yellowstone, and they're not flying, they're going to drive. So where I'm going, so way too much for a preamble, is there data at the branch level, because you collect data like nobody's business, that's showing in places where economies reopened, people allowed to move around, that the branch activity trend is moving up and to the right gradually?

Absolutely. Yes. I -- we have 200 branches. We manage them every week. We do get data and dashboards on that. You do see signs of life. And that business will pick up quickly. Like when businesses are open back up again, parts washer services almost start immediately. Now we got to take some time before the containerized waste business starts to crank back up again and maybe the VAC services could take some time to crank back up again, but that's measured in weeks, not months, right? So I do think that there's -- businesses have reopened, we have gotten a lot of inbound calls and inbound traffic about getting back out there in that business. Certainly, I think that April -- the month of April was the trough of that business. And I do think that as we look at May, better than April, and June is going to be better than May. And we hope that there's no reinfection. And if there's no reinfection and there's no further shutdowns, I think July will be better than June.

Well, I think we're going to know pretty quickly given the concentrations of people as they moved around over the last few weeks and some of the protests and marches and what have you. It's either going to resurface or it's not.

I couldn't agree more. I couldn't agree more. We're going to find out darn quick how bad this is going to get.

So Craig, your business has had some actually very fascinating challenges. To help everybody understand a major distinction about 2020 versus '15 and '16 when -- and I gather you've only been there a year, but there's lots of data that this is a business for 15 years pay-for-oil or maybe charge to team out, but it was a customer used to being paid for their oil. And today, that's not the case. And therefore, from a spread management standpoint and the ultimate pressure on EBITDA, you have a whole lot more control, I think, than people might appreciate. Can you help us understand that better?

Yes. I mean I think I would totally agree. I think -- and I've obviously only been here for just over a year. But as I have learned the history of the business, I think it's always been a spread management business. I think perhaps the difference is the evolution and improvement that we've made over the last 3 or 4 years in particular, our effectiveness at managing that spread. And I think COVID has shone a light for every business on where you need to build on your strengths and close your weaknesses really quickly. And when it comes to spread management, that's certainly been our focus here in the last 2 months, in particular, is how do we leverage our management of that spread to mitigate the downside risks to the economic performance of my business.

And would you say that you have been able to move that fast enough, that reduction in volume because you shut down some of the processing capacity? So normally, you sell 150 million gallons. You're going to -- unless you reopen this capacity, you're going to sell less than 150 million gallons by definition. So that's one point of pressure you just can't fix. But the spread part of it, you can work on. Where is the spread relative to the macro environment? Is it where it needs to be? Or is there still work to be done?

No. I think it's where it needs to be. We moved really quickly, as I think you know, because we talked about it on the earnings call in terms of bringing down production and idling facilities at 4 of the re-refineries. We moved with similar speed, actually, well in advance of us bringing down production to implement charge-for-oil price increases across the market. They moved quickly. I think they stuck pretty well here in the last couple of months, and that's enabled us to manage fairly effectively in terms of where prices have gone because it's not just lack of demand that's challenged kind of the strength of the business model, but it's the price pressure that we've experienced non-COVID-related in terms of the oil price oil price -- oil price reductions. So I think on a -- if you look at it on a per gallon basis, I feel really pretty good about how the teams delivered in a particularly challenging environment. To your point, there is the volume challenge, and number of gallons times that spread is going to be less because of the reduced production that's based on a significantly reduced demand.

Well, so there's 2 pieces I need to tease out of that. Let's take that last piece quickly. So we are driving more. I'm assuming oil collection, because you collect -- ostensibly, you could collect all of your demand. I get that you buy some of the third-party market because of transportation and logistics, but you're very intimately tied to the collection side. So where are we in the recovery of the generation of used oil?

Well, I'd say that if normally -- big round numbers, Michael. We collect 240 million gallons a year. So that translates into 20,000 -- from 20 million gallons a month. And we were about half that in April and maybe a little better than that in May and better than that in June.

Okay. All right. So we're still below the run rate, but we're trending every week, and it seems to be improving.

Yes. And not only that, Michael, but we've been able to kind of hold the line on charge-for-oil. And so we've done a lot of math around this, is that we may be able to make a fair amount of money even with the lower volumes as long as we hold the line on charge-for-oil to kind of get to the margin that we need. So again, I'm really pleased with the fact that the analysis we've done at the levels we're talking about, the maths can kind of -- it can be very compelling even at these lower volumes.

Okay. And then, Craig, what demand environment do you need to restart the 3 plants that were shuttered in relation to what was happening in supply and demand?

Well, to run at 100% of our production capacity, demand would need to be close to or at 100% of where we were expecting it to be or kind of prior year. So it's a pretty complicated question to answer. Or maybe the question is simple, but the answer is a bit more complicated. But I will say that we've got a really well thought out plan in terms of what the triggers will be for us to switch the refineries back on in priority order and do it based upon market demand and the end-to-end economics of the business versus what I think was a paradigm before, which is it always makes sense to run those refineries flat out. And I'm conscious about not reintroducing essentially fixed costs without making sure that the demand pattern is consistent that would support that decision.

At the right price point.

Yes.

Right. Okay. Okay. So I guess -- then there's a couple of pieces to that. So this is a little bit of a sidebar. There was a DOE study done in '05 that was -- ultimately concluded re-refining used oil wasn't a viable industry yet and probably fairly so in '05, but they reconstituted the study in '18 to be done in '19. Supposedly, it's done. It's sitting at OMB. Everybody is waiting for it to be released. One, have you all had a snapshot of that? So do you know what the conclusions are? And two, if the conclusions followed the basis they did the first analysis, it seems like they should come to an answer that says re-refining used oil is a viable business. Therefore, the U.S. government becomes the biggest buyer of used oil -- re-refined used oil potentially. Where -- there's a big wind-up here. I get it. Where -- what do we know about that? What do we know about that? And are we seeing benefits of moving to closed-loop because of COVID? Has that helped push this? That's where I was going with all that. Didn't you like that wind-up?

Yes. So 2 separate questions. I think just briefly on the study, we have had fairly recent conversations with the DOE and other folks and groups in D.C., having conversations for different reasons as many industries are and have pressed on an update on the status. It is still stuck in OMB. I think them, like everybody else, are very -- 100% focused on COVID-related items. I do think looking around the corner, there's really strong kind of bipartisan support for that, for the case for re-refining. And so I do expect, like our industry partners, a positive outcome to come when it comes. But when it's going to come, I think, is unforeseen at this point and will probably take place past the election if I was a betting man. On the closed loop side, I mean, I think the kind of before-during-after structure of thinking about things is a good fit for the closed loop. We -- I was excited about the potential for that kind of differentiated business model. We've put a lot of focus on building sales pipelines across SKE and SKO related to the relationship between waste and blended oil and that differentiated value proposition, as I say, and was pretty excited about where we could go this year and in the coming years. COVID has put a pause on that, no doubt about it. I think the value proposition, while compelling, there aren't too many people who are buyers of finished lubricants today who are using an opportunity during COVID to switch lubricant suppliers. They've got other things on their minds. And that’s certainly put a pause on us kind of breaking through with more progress than we've been able to make over the last few years. But once we get through this, I'll be similarly excited about the future potential there.

Okay. I'm going to switch gears and talk about M&A. It's no longer what I’d consider a critical component of the Clean Harbors growth story, but you have been opportunistic. And adversity and crisis scenarios sometimes surface opportunities, so how do we think about the prospects of things that you would like to own that might become available because of outcomes related to this pandemic?

Yes, Michael. So I would say that we've tried to manage our cash very carefully, lower for longer, holding -- drew on our revolver, managing -- taking advantage of the CARES Act. I mean all -- cut down CapEx, manage our payables, manage our working capital, go collect receivables, an idea to kind of collect cash and be stronger coming out of this than even when we were going in. We've done a good job with that, and the cash balances continue to -- even in this tough time, continue to grow, and we're really pleased with the progress that we're making on cash collections and having a strong balance sheet. To your point that we think that when the pandemic is over, there may be some companies that are weaker, and there may be opportunities for us to take advantage of that. And Michael, you've followed us for a long time. You know that we're opportunistic in areas where we see some distressed assets, and we're not afraid to take a bet and do that. We are going to be very disciplined. We have been in the past, as you know, where it has to make strategic sense and make financial sense. And the challenge we've had over the past year or 2 is that we have found very attractive assets, we couldn't get the math to work. And we're hopeful that in a new post-pandemic world, that the math will be able to -- make a little more sense because of it, and we'll be in a good spot to take advantage of that. But we will have the balance sheet to do so. And I think that we'll be aggressive in that area. Assets that feed the beast, assets that provide waste into our waste stream, assets that -- whether it be re-refining capacity, whether it be in the SKE business. I mean we're not bound by this. We're trying to support all the businesses. We're trying to stay away from Western Canada, areas that are probably going to be lower for much, much longer. And so we're probably going to stay away from that, even though there's -- there are probably some pretty low-priced assets there. It's just not an area we think is going to grow over the longer -- medium or longer horizon. So I think we're going to try to stay in the U.S., focus on areas that have permanent facilities that feed the beast and looking for value and being aggressive when we find it.

And remind everybody on the CARES Act. You did share this on the 1Q call. What do you think your deferred payroll cash tax benefit is?

So it's about a $30 million -- it's above the line cash savings. Not above the line, but there's just cash savings. So we're going to defer the employer portion of social security tax, which is -- turns out to be about $3 million to $4 million a month for us from, I think, it was from April all the way through the end of the year. So that's a 30 -- and we have to pay that back, half of which we pay back in December of 2021 and half we pay back in December of 2022. But from a cash flow perspective, that's certainly a winner. We're also looking at different parts of the CARES Act. And whether or not anything else applies, really haven't found much yet, but we continue to do research on that.

All right. And then my last question...

And in Canada, there's also a wage subsidy act that may have some applicability to Clean Harbors. I don't think these are big numbers. I don't think they're big numbers. But we don't want to -- we want to make sure that if there are things that legally apply to us, we want to make sure we take advantage of that, but I don't think in either case they're big numbers, but who knows.

Okay. Last question. ESG is a topic that's gaining prominence within the investment community. And it's more than just checking a box and saying, well, hey, we're an environmental company therefore. Can you talk about what stands out about Clean Harbors and why the investor public should pay attention to why you're a relevant company to own in a sustainability, ESG or impact portfolio?

Sure. So when you think about -- there's many companies that do ratings of different companies. We look at the ISS QualityScore ratings as just one of many possible benchmarks. They're one of many. They're ones we follow because they've been around for a while. And obviously, the G, the governance, we've always done a really good job on that. We've always had a very strong governance structure, and that number has always been low. It actually went down a little bit here in May, down from a 4 to a 3, something we're really proud of, the fact we've made some real progress in that area. And in environmental and social, the areas that we haven't -- again, using ISS QualityScore as the benchmark, that we have still pretty high scores on, in the social side is labor, health and safety. And you know, Michael, that we have an industry-leading safety record. We need to do a better job of talking about that and publishing the right data to the marketplace to tell people that story because it's very compelling. Because what bums me out is that, although we have an industry-leading safety record, although we have no labor issues, although we have people signing up to do decon work, although we've increased our health care benefits and 401(k) benefits, we still have a bad score there, and that's just lack of publishing and talking about it. And so we got to do a better job and we will do a better job. It's on Mr. Buckley's and mine plans to do just that, to get that message out there because it is something we're really proud of. We just need to do a better job of talking about it and making sure we do a sustainability report and getting that out the door. And on the environment side, the one area that we scored poorly on is carbon and climate, which, again, is really surprising given the fact that we re-refine 240 million gallons of used motor oil a year. And that -- and again, something that we need to do a better job of kind of getting that message out there because that is a climate change winner. And so again, my goals in 2020 is to maintain the good governance score and not go backwards, of course, but then try to improve the E and the S side. Again, we're not in bad shape. If you look at us versus our peers, we're right in the middle of the pack. We're not -- we do a pretty good job of it. We have cranked out a sustainability report before. We got to do another one coming out here in -- and we'll hopefully do that by the end of the year, certainly before we file the 10-K next year.

Well -- and so we just hosted a panel at lunch time, and this was the topic. And I think one of the things that came out of that is set goals to provide data and strive to achieve progress on all of those goals, and those goals ought to be intrinsic to operating the company.

That's right.

And if you do that, the investment world will recognize that is exactly what we want companies to be doing, not just randomly picking some target and saying, "Well, we'll be better about x because it sounds good."

Yes. The funny part is, Michael, is that I know for a fact, even though I can't point to a certain data, that our energy usage is down. Our water usage is down because we've been looking to take out costs in this business in our incinerators and our re-refineries for the past 5 years, 10 years. And so it's just a matter of kind of accumulating that data in a way that's consistent with SASB standards and improving that disclosure to get that number out there. There's all the things that they look for. We want to do, too, for all the same reasons and to save a few bucks -- oh, by the way.

Right. All right. Well, we are at the end of our time. I want to thank you both for joining us today. I really do appreciate it. Be well. Enjoy the rest of your one-on-ones, and I look forward to sometime in the future doing this live.

Right. Michael, thanks for your time, and thanks, Stifel, for having us. Appreciate the opportunity.

Thanks, Michael.

You're welcome. Take care, Craig. Nice meeting you.