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

All right. Let's go ahead and get started with the next presentation. So for those of you that may not know me, I'm Tyler Brown, the senior Transportation & Environmental Services analyst here at Ray Jay. This afternoon, I'm really excited to have Clean Harbors with us. Presenting today is Mike Battles, the company's CFO; Jim Buckley, SVP of Investor Relations. I appreciate you guys being here. It's great to see you. It's been a while since we've met in person. But again, I appreciate you doing the virtual presentation.

Yes. Happy to do it, Tyler, and thanks for the team at Raymond James to have us. I think we've had a quite interesting 6 months, and looking forward to tell our story.

Yes. So right. So we are going to keep this as more or less a fireside chat. I'll kind of moderate. [Operator Instructions] We can certainly cover any burning issues you guys have.

But so let's just transition and start right there, Mike. So the last, call it, 5, 8 months, if you want to go all the way back to the beginning of the year, it's obviously been maybe nothing that we've ever seen before. But can you just kind of give us the cliff notes of kind of what's transpired over the last few months and some of the challenges and whatnot that's kind of presented to Clean Harbors?

Yes. Tyler, it's interesting. A couple of things. So first of all, we've always -- what is our core, what is part of our culture, what is our core, and our core is emergency response. And in my view, it's like what a better -- unfortunately, this is like the biggest emergency response in our collective lifetimes. And so the fact that the team did a really good job, led by Alan, to kind of model the resources, making sure people were safe, making sure our communities were safe, making sure our customers were safe. And really did a good job of taking the same type of mindset around crisis management and kind of applying it kind of to ourselves, if you will, versus a natural disaster or some other type of problem. And so really, that includes a lot of actions like shutting out 4 of our refineries, putting wage freezes in place, lowering our CapEx, looking at our covenants, they can do all of those that drive on our revolver. I mean, the list goes -- it goes on and on and on. And we're really proud of the fact that, including like going on, getting federal monies and providing or receiving federal monies, we're really proud of the work that we did there. And I'm glad that we did because I think that in the backside of this, whenever the backside is, I think that we'll be well positioned to go forward. And I think that the financial statements are actually in pretty good shape, kind of all things considered. I know we focus on the quarter in front of us, but if you look at the first half of the year on EBITDA, we generated more EBITDA in the first half of the year this year than we had last year, right?

Right.

Our leverage ratio is lower this year than it was last year. I mean that's on a -- and then ROIC is much better. I mean it really does speak to some of the actions we took very early on, and it really spoke to the underlying business model. And look, I can't -- I couldn't -- something that you can't control. Your model driven going down, refineries shutting down and not allowing us -- our customers shutting down and not allowing us to get on site. The door is being locked at our products launch and services and our auto repair shops, and that just happened. But I think the team as an organization really rallied around the idea that, hey, we're going to make sure we manage our -- make sure our team is safe, and we're doing this and then look for opportunity to capitalize, like the decontamination work, like other things we've been doing to try to take advantage of perhaps -- and we were first movers. I mean we made a great -- made great progress in that area. And again, a lot of good things to be proud of here. Obviously, we want the results to be better, we always do. But I think that we did a pretty good job and all the things considered to work our way through the pandemic. And I'm hopeful that in a post-vaccine world, we're going to come out stronger than now.

Yes. Yes. No doubt. And maybe going back to what you just mentioned, Q1 was really strong. I think you'd agree. Frankly, things were probably...

It was the best Q1 in our history. Tyler, it was the best Q1 in our history, right there.

Yes. So things were tracking really well. I think you had originally guided to $565 million or so of EBITDA. Then COVID hits and obviously, there's disruption in Q2. You've reinstated kind of a $485 million type midpoint EBITDA guidance. That's right. I think visibility is appreciated. But how do you bridge that $80 million? Where were the pain points from an EBITDA perspective? You obviously had some decon work that came in. So what was kind of working against you at least whenever you guys thought about putting the forecast together?

Yes. So it's funny you bring that up. Let's just take a step back. So we gave our guidance kind of like mid-February. We kind of locked it on guidance, and we got kind of January results, and we see February results. And I remember, Jim and I talked with a bunch of -- a couple of other people, Eric Dugas, who you may have met around, hey, we're going to have to raise guidance. This is going to be -- $560 million to $565 million is not good enough. This is going to be -- we are having kind of a great year, and we're really -- we were kind of like, what about the cash flow, this is going to be great. What about the balance sheet, this is going to be great. And then, kaboom, everything kind of went sideways, right? So when you think about the $565 million to kind of the $485 million, which is $80 million or so of balance, it really is in SK, right? Because the natural hedge we have, it would have been an ES too because of lot of things like household hazards, waste, that kind of went away. [ Taking ] care, Lab-Pack and all the things, those are good margin businesses. They kind of got put on hold for a while, right? And now we're starting to pick that up again, but they were on hold, certainly for a few months. And so Tyler -- but the natural hedge against that was the decon. 7,500, or whatever the number is, of the amount of events we did, those all doing pretty well. And as we talked about on the main call because it's emergency response work and because it's happening in nights and weekends, we're not really using a lot of third parties that help us with this. We're -- think about the avian flu or other types of large events, where we've had to kind of some contract that work out, and that just eats into our margins a bit. So at the end of the day, that business is a pretty good margin business, north of 20%, I'd say, and that's been able to offset some of the loss business in the ES business. So really, when you think about that $80 million shortfall, most of that is in SK, right? And the good thing about that is that, that business, as you know, and you and I talked about this, even joked about this, we've talked about the branch business, that has been growing pretty steadily over the past few years. There's nothing in my mind in a post-vaccinated world that just doesn't come back and become a thing again and come back to the -- of the $280 million last year, it made $200 million of it, and that just continues to kind of go back to normal, whatever normal is, right? On the oil side, we've talked a lot about oil. We are managing that spread very well, and we said $0.50-plus a gallon of charge-for-oil in Q2, and that's a new record for us. And that really offset the -- it was really just a demand problem in Q2. And I think that, again, once we get back to some level of normalcy, I do think we can get back to kind of a level of profitability. And I don't think going back to 2021 is a long way away. I know you want to play the plus, minus on us on this. But I don't see why we can't get back to that level of profitability in a post-vaccinated world. Over what time horizon? That's an open question, right? You tell me where we're going to be in January and February and in the world that makes sense for that right? But I do feel like all catalysts that were there in Q1, in January, February, they haven't gone anywhere, including a resupply initiative of organizations saying, putting supply chains closer to their end customers, where you don't want to do that twice, right? I mean a lot of our customers have got stock short on critical parts because they had supply chain issues in Asia, and maybe they want to start making some investments in the U.S. incrementally to try to build that up.

Okay. Yes. We're going to come back to SK. We'll get there. But I do want to take...

But really -- the bridge, the $80 million bridge is SK.

It was mostly SK. Yes.

ES down a little bit, corporate up a little bit. Okay.

Okay. Well, the other -- the flip side is though, even with the reduction in the EBITDA guide, I mean the free cash guidance didn't really move a lot. So can you talk a little bit about the natural shock absorbers within the business? And you're still looking for over $200 million of free cash flow. And just talk a little bit about what helped you bridge that gap, so to speak?

Yes. I mean I think the 2 big things were the -- we got the CARES money. So I want to be clear about CARES. There are different buckets, right? Some is a grant that we got because of low revenue and keeping people employed who weren't working or portion of the people who weren't working. That's the $23.4 million that we talked about. That ran through the P&L, and we got some of that cash already. We're going to get the rest of it here in Q3. The other piece is what every other company in North America did or U.S. did is the employer own portion of payroll tax, right? And that averaged about $12 million a quarter. So for the year -- and that started April 1. So that's going to be about 36 -- assuming nothing else changes, that going to be about $36 million. So that's a good guidance of $36 million. That certainly kind of offsets lower revenue, right, and lower EBITDA, right? And then we lowered CapEx. We were at $205 million or so. We lowered it to like $165 million. So that's a $40-plus million good guide as well. So that's how we -- although we have it lower, no debate on that, right, the cash flow is still kind of hanging together. And of course, we kind of worked on our vendors. We kind of went after collections. And we did -- we helped our working capital a bit. And that's all been pretty good. So that's how we're bridging the gap. So when you think about 2021, and we're not thinking about that yet, we took the 30 -- half that back in December of 2021, and the other half of that $36 million in 2022. So this is going to be headwinds from a cash flow standpoint as you go, as you look forward.

Right. Yes. No, believe me, duly noted, duly noted, Mike. All right. So let's maybe shift gears a little bit to SK. So you mentioned vehicle miles driven. So I just want to make sure everybody kind of understands the real KPIs. So maybe just broadly to start, just can you break apart that business? Like what do you do, would you say, in SK, right? You've got the SKO, you've got the SKE, lots of letters. But maybe just broadly, just break it down for people and what really drives that business, particularly on the SKE side first, and then we'll get into the SKO.

Yes. So you know I love that business, the SK Environmental business. So that is 200 locations across North America that we go out and do services, mostly in the automotive space, not in car manufacturer, in automobile repair, whether they have dealerships or at Tyler's Auto Body shop or Jim's Muffler Shop. I mean, this is what we do. And so simply stated, at Tyler's Auto Body shop, when he does a brake job, you have to clean off the rotors. You can't do that in a sink, right, because it's got metals and oil on it. So you have, what's called a, parts washer machine, which is nothing more than a tub and a pump and a 55-gallon drum, and you just clean it out with a solvent and you put it back in. And every 8 to 10 weeks that solvent needs to be changed. Fairly straightforward. And then when we go to Tyler's Body Shop, we replace the solvent, which we charge a small subscription service for. He also has things like asbestos brake pads. You can't throw those in the dumpster. You put those. Those one-off pads go into a 55-gallon drum, either a plastic drum or a steel drum. We pick that up, and we'll charge them a fee so that will burn that as well. If he has grease and oil trapped in his bay, we can clean that up or a vacuum service, bring in a pump and vacuum all that oil up that got on the floor and spilled. We have a vacuum service as well. And then we also pick up the huge motor oil, which we'll talk about in a minute. So that business last year, we did about $280 million of EBITDA in 2019. About $200 million of that came from that branch business. That branch business has steadily increased over the past few years, $160 million to $170 million, $170 million to $180 million, $180 million to $200 million. And that business -- now look, it's not a super sexy business, miles-driven drives it. We can always talk about. But at the end of the day, that business is a high ROI, low capital investment and a great national footprint that really has been able to drive -- we're the #1 player in that space by a long shot. We can drive small incremental price increases. We trade -- we fight it with some smaller players [indiscernible]. But overall, prices have been able to go up a little bit there.

So -- right. So the ultimate driver is people driving, right?

That's right.

You're going to consume your brake pads when you drive. You're going to consume -- basically. So if you look at, say, like gallons pumped at the C-stores, that's probably a pretty good proxy of what's going on.

Absolutely.

It seems like that business is still tracking down, call it, 10%, 20%. Have you guys -- are you seeing that steady increase? Would that be roughly the way to think about it, at least as of today?

Absolutely. So we talked about this in the main call back a couple of weeks ago. We ended the quarter like 80% of where we were last year. In the guidance we gave you, like 85%, we get to like 90%, maybe low 90s, maybe high 80s in -- by Q4. But in no case, we get back to 100%, but we make steady progress, right? Kind of 1 step -- 2 steps forward, 1 step back type of progress, right? So that's how we model this out.

So as you guys talk to your SK folks, I mean, have there been -- so I assume that some auto body shops have just simply folded. Well, I'm not sure, maybe that's not the case. But have you seen a lot of friction there or is that not the case?

So to back that up a bit, so we're not going to steer away from that a couple a bit. We have had -- Tyler's Auto Body shop didn't make the cut -- he made -- but remember, though, like a brake job is a brake job. Whether Tyler can't do the work, and then now I have to go to Jim's Muffler Shop, I mean, it still needs to get done. It doesn't like -- they're not going to drive to -- they live in California. They're not going to drive to Nevada to get a brake job done, right? It's still going to be done locally there. So the amount of brake work is still being done there. It's just maybe not done by Tyler because he's still decapitalize. He didn't manage his financial statements very well. So that's -- so we are -- certainly, there's a risk. Bad debt is -- we're normally around $4 million or $5 million for the first half, its closer to $9 million, so it's double. And some of that is Tyler's Auto Body shop and some of that's some bigger players. But at the end of the day, I feel like if that work is not going way. That work is now going to be done at Jim's Muffler Shop and his shop is 3 blocks down, and he's going to start doing that brake work. But it still needs to be done.

Yes. No, no. That makes perfect -- that's a good way to put it. I like that. Maybe switch gears over to the SKO side, so this is the rerefining business. Obviously, you shuttered, I think, it's about half of the capacity with a handful of just a small number of your rerefineries down.

That's right.

You did restart a couple. So just maybe just at a very high level, just talk about kind of -- you used to sell, I'm going to -- right around 180 million gallons or something. But just kind of just big picture, just talk about that business and how that restart has gone.

Sure. So going back to the Tyler Auto Body shop. So we do a parts washing service. We pick up a couple of drums of brake pads and other stuff you can't throw in the dumpster. And then we also -- he also can't take -- he does a bunch of oil changes, and he can't take that oil ad pour it down the drain. So he puts it in either -- he has 1,000-gallon tank below the building or he has a 55-gallon drum for his dirty motor oil. And then we go, as part of our service, pick up that motor oil, bring it to our 6 rerefineries where we take it, run it through a hydrotreater and make base oil. So that's the business model. And then we resell that base oil, either base oil or fully blended product, back to customers and distributors or back to our own customers. And so that is the business model. So that business model is all about managing the spread. We talked about this many times. So we charge Tyler's Auto Body shop a price per gallon to pick up that waste. And then we sell that base oil out in the market. And we try to manage a spread between the price we pay for the waste and the price we charge for the oil. And as the prices go down, we have to charge more so we can manage the spread. That's very simply how the business is run. And we've done -- I think we've done a very good job in the past couple of years of really focusing the organization on that spread. So as going back in 2019, as an example, of the $280 million, we got about $200 million is the SKE business. $80 million is the SKO business, SK Oil. And in good years, maybe that's $90 million or $100 million. In bad years that's $75 million, $70 million, $65 million maybe. But we're still just managing the spread. This year was -- so we tried to tell our story to the street many, many times that although oil impacts our business, it's not impacted like it once was, going back a couple of years, when we had a big presence in Western Canada in the Oil Sands. That's a small business now. That doesn't even make our footnote anymore, right? But people are still getting confused on this. And we're not helping them very much because in Q2, SK Oil, which normally does $20-so million of EBITDA in Q2, did like $2 million or $3 million. And so that kind of brought that back. So now we're back in the building blocks, talking about oil again because of a pandemic that dropped demand for oil. Normally, we don't have a problem selling the oil. The oil is like -- it's just a spot price, whatever Motiva price is, we get a small discount from there and move on with life. This Q2 and Q3 are just once in a -- hopefully, once-in-a-lifetime type of models. Now that puts us back into talking about SK Oil again because normally, we do $20-plus million, and we did $2 million or $3 million. So that's what the problem is.

Right. But going back...

The issues was not the spread. The issue was more just demand.

Yes, exactly. Well, we teased this out on the call. Like it feels like there's a lot of noise going on, but it felt like the spread itself actually wasn't the problem. It was just you had shuttering and a lot of things going on. So...

Tyler, we still -- we thought -- we charged oil over $0.50. It's a new record for us.

Yes. Exactly. Exactly.

And we -- and the discount was like $0.60 to $0.70 than lower last year. So that's manage -- that's spread was there.

Right. So the whole -- but -- and going back to it, and you kind of alluded to this upfront, but it doesn't feel that, that $280 million, that is still a bogey. It may not be '21, who knows, right, it may be '22, maybe 2030, I don't know when. But the idea is that does still feel like it's in play. You don't believe that there's any real structural impairment that has occurred.

Absolutely no. I honestly believe that, that business is going to -- you know I love that business. And that business has been growing steadily every single year. We have once-in-a-lifetime pandemic that sucked all of the profitability out of it this year. I think that in a post-vaccine world, and we're going to go drive somewhere to go vacation versus doing it in our homes, I think that it will be -- I think it will be fine.

Yes. I drove to South Dakota this summer. So I was consuming...

South Dakota?

Yes. Yes. It was pretty cool actually. It was a lot of fun. I do -- I don't want to beat on that one too much because I know there's always a lot of talk about SK. Just really quick...

But let's be clear, though. I think that, that $280 million we talked about, I'm of the view that, that comes back pretty quickly. It went down quick, I think, comes back quick because we're still the dominant player. We're still #1 in this space. I mean at the end of the day, Tyler's Auto Body shop, you got to do something with this stuff, right? And Jim's Muffler Shop, it just doesn't -- people like love their cars. They're safe with their cars. Like it's going to be -- cars come back, [indiscernible] come back, I think.

Yes. I would agree. I would agree. Now going back to E -- so just switching gears real quickly to ES.

Sure.

So that business was just incredibly resilient, all things considered. And I think the idea, as we look at it postmortem is, well, the McDonald's or the Chick-fil-A didn't really generate hazardous waste. It's more like your chemical companies that were, frankly, essential businesses and continued to run largely, I mean, largely, some parts of the U.S. industrial economy got beat up. But it felt largely that stuff was continuing to run. But that business showed a lot of resilience.

Yes. So a couple of things happened in the ES, right? So the chemical space continued to do their thing. So that was great, as you said, right? Industrial services, they threw us off the site. But as you know, Tyler, we don't make a lot of money in Industrial Services.

Exactly.

So things like turnaround work, that revenue was down $60 million in Q2, 47% down year-over-year, so bad guy. But since we don't make a lot of money on that, single -- high single-digit margins maybe, that didn't really hurt us that much. The big thing that we did and the smart thing that management did, we had first-mover advantage on the decontamination work. We were first to promote that. We were first to get our name out there. And that turned out to be a huge counterweight to things like household hazardous waste days going away and remediation and waste projects in the landfill is kind of getting put on old. So those types of things happened. Offsetting all that badness was the decon work kind of way up. And because of those 2, it kind of gave you a really decent answer.

Yes. Okay. Okay. And real quick because we're already running out of time, Mike. This is -- it's going very quick. So I do want to get to ESG here.

What?

Yes, we have about 8 minutes. So I want to get to ESG in a minute. But I do want to quickly just talk about PFAS. Is there any updates on PFAS? Is there anything really to share or that's notable? I know there's a lot going on in Washington. So maybe, that's not quite the biggest thing right now. But I'm just curious if there's been any developments on that side.

There's nothing concrete for us this year. As you know, the gridlock is going on down there in Washington. The only anecdote I think maybe worth sharing with this audience would be the custom activity levels are still pretty high. They're all wondering what they're going to do with this. They're not getting any guidance from regulators. So they're talking to us because a lot of them know, in the end, it may end up in our kilns or in our -- buried under our ground. So we're still getting a lot of customer kind of asking us for guidance. So we really need the regulators to come together on this.

And just to be clear, I mean, it's more of a soil -- contaminated soil type of projects for you. That's really where it's going to impact you as opposed to the water side.

Sure. That would be where it's meaningful for us because where the Calgon Carbon and Evoqua and those guys, they're going to filter your and my drinking water, we're never going to play in that space. So we may take the filters and their media from them, which will be a win for us, but it won't be the types of wins that a big remediation soil job at an airport or somewhere that's got a lot of polluted soils would mean to us.

Okay. Well, let's shift gears to issue. We've got 5 minutes left. So I just want to -- I want to briefly talk about this because I think that it is something that is near and dear to both you all's heart. And so maybe can you talk a little bit about Clean Harbors and their ESG journey? And is this something that you're spending a lot of time on internally? Is it something that the Board is talking about? Can you just talk to us a little bit about ESG, just broadly as it relates to Clean Harbors?

Sure. So when you think about ESG for a minute, I mean, we're moving waste from the environment. And I think that's a huge -- we do a lot of things around rerefined motor oil. We just talked about that a minute ago. And we do a lot of things around running our plants efficiently with clean exhaust from our plants. And so we're really proud about what we do. But at the end of the day, we weren't doing a great job on our scoring, like using ISS, and there are thousands of different ways to do it. But ISS has a comprehensive list of questions, so we used a IHS as the benchmark. So we dedicated some resources to kind of focus on that and find the area where we can make some progress both on the E, the S and the G, right? So whether that be changing some of our stock comp plan to make them more ESG friendly or focusing on safety from an incentive compensation standpoint, from an S standpoint. That helps on the S side. Or publishing other types of documents we already had around how we treat our employees and how we treat our vendors to help those on the S side. And so we've lowered those scores. From 2018 -- from July 2018 to today, we lowered our G score, our governance score, like by 20%. We lowered our environmental score by like 12%, and we lowered our social score by 80%. That's good, getting better, lower numbers. And so we're really proud of the progress we've made in that area. The next step really, Tyler, is around putting metrics out there. So we're working on what metrics we want to use, whether it be carbon footprint, water usage, CO2 and so forth. We have to try to put those out there. The good news is the business has always been doing that and always been focused on how to save money, right, lower our water use, lower our electricity usage. And this is all about -- the business is always constantly into ways to do that. So we just need to kind of start documenting that better and being able to publish that with the idea of being able to issue some form of stability analysis or some sustainability to report in 2021.

Okay. Because you guys have a sustainability for sure, but not a full-blown report, right? Is that more around...

That was more coming from the marketing guys here to all factual stuff in there, but more of the marketing guys versus trying to make something that meets the PFAS standard, it takes a little more of a -- let's say, a finance pen than marketing pen. We need both of them together. And I don't want it to look like an annual report, but at the same time, it needs to be based in data we can actually measure and prove to ourselves, right?

Yes. So one thing I want to come back, and I'm sure I'll fire you up here, but I want to talk a little bit about the S side because safety is a huge piece of your culture. I mean, as a matter of fact, your long-term incentive compensation, I believe, has a tier component to it, if I'm not mistaken.

Short-term and-long term, Tyler, yes.

Yes, short-term and long-term. So obviously, safety is something that I'm sure Alan preaches every single day. But can you just talk a little bit about the culture and how that really, again, kind of filters up? And maybe that's part of the reason why the S part has improved so much. But just kind of an open floor to talk about that for the last couple of minutes here.

Yes. No. Tyler, you're absolutely right. I think that every meeting starts with a safety moment. Every meeting starts with -- it really is -- and you want that because what we're dealing with is very dangerous. I mean, make no mistake, you see Clean Harbors' truck down the road, it's carrying something probably pretty dangerous. And so safety has to be very -- it's everything we do, in everything we post today, we have an industry-leading safety record, and we're really proud of that. And because realize, we are selling that -- when we deal with a Dow or a DuPont or Chemours, I mean they trust us to do this safely and in compliance. So that's just part of who we are. It's part of our culture. And again, something we're all really proud about. And I'm happy to work for a company that take safety so important. You really couldn't have it any other way, to be fair. It couldn't be any other way because of the business model we're trying to do here.

So do you think, though, that the rating agencies, is there something that they don't get? Or it's not that your ratings are bad. Those come kind of middle of the road maybe. But I'm just curious, do you think -- well, I'm just curious, do you think there's something that is just categorically underappreciated or just missed by some of those...

I mean I think it's more of a general waste comment that we don't -- the waste we're dealing with, we don't make it, right? We're taking it out of the environment. And when you think about incineration, environmentally friendly is not the first thing you think of. But make no mistake, the alternative is to be in the river, right? So I'm pretty pleased by the fact that -- we all should be pleased by the fact that we're burning it in accordance with laws and regulations and safely and efficiently because the alternative would be in the groundwater or in the soil, right? So it's hard for the ESG guys to kind of appreciate that. It's probably not in their scorecard list. But certainly, someday when we talk to new employees or talk to our Board or talk to the street, it's an important part of how we deliver our message.

Right.

And just to add to that, a lot of times when I talk to the ESG funds, and you probably get this, Tyler, one of the first questions you'll say is what percentage of your revenue is recycling? And to Mike's point, that destruction in the incinerator is probably more critical to the environment than recycling aluminum or paper and what that does. But we get no credit for that, and it's frustrating. I mean, we still have a decent answer. It's probably 25% or 30% of our revenue, so it's better than a lot of companies. But close to 100% of what we do is good for the environment.

Yes. I agree. I would leave it with that. I very much appreciate the time, guys. And again, it was great to see you.

All right, Tyler. Thanks a lot.

[indiscernible] even through this. All right. Thank you.

Talk to you later.