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

It's my pleasure to welcome up on stage our 3rd of 3 industrial waste companies, Clean Harbors. With us we have Mike Battles, who is the Chief Financial Officer, he's sitting right next to me; Jim Buckley is Senior Vice President of Communications and does Investor Relations. Gentlemen, thanks for being here.

Michael, thanks for having us. And congratulations on winning -- getting in the hall of fame for the NWRA, quite an honor.

That is awful kind of you to say that. I am deeply humbled by -- if you go downstairs to the lobby, you can see a photo display of everybody who's in it. And when you look at it, having spent 35 years in this industry, it's a cool club to be part of, I have to admit. So thank you very much.

Congratulations, again.

Well, thank you. I have Don Slager to thank for why I'm in it. And so thank you, though.

So industrial economy. I've been having this conversation broadly anyway. But your other 2 peers are -- feel pretty good about the state of the industrial economy. How would you frame it, given the biggest you have, I think, a lot more fingers in these pies, both countries, U.S. and Canada? How would you frame the industrial -- the quality of the industrial recovery right now?

Well, it's certainly been robust. And I'm certainly -- I wouldn't say anything differently from my peers. I think that's been a great -- is my mic on?

Is Mike's -- Michael's mic -- there you go.

So I think that it's been a pretty robust recovery. And I think that we've had a great volume of work on both sides of the business, both on the SKSS oil side as well as the environmental services. When I think of Environmental Services, whether it be Tech Service and -- or Field Service or Industrial, it's been a really nice recovery. And it's really just been -- on the Tech Service side, it never really slowed down. As you know, Michael, that kind of kept on...

Well, they were kind of essential businesses, so they were allowed to run.

That's right. That's right. Field Service went down, but we supplement that with that decontamination work and Industrial Services is coming back really nicely.

And so one of the things you are fond of saying is I hope the decon goes away because that means we're doing better. But there has been some variations of the COVID. So is the decon down or back up again?

So we gave guidance back in the Q1 call that we'd be $30 million to $40 million for the year. That's where we're going to land.

Okay. So I mean, the read-through of that, it's less about your numbers than it is, okay, you haven't seen a resurgence such that it's leading to more decon work?

No. It's onesie, twosies, as we kind of sit here today, which is what we kind of expected.

All right. Good. Well, but don't believe everything you read in the press, right? Is there any concerns that this industrial cycle gets shortened because of supply constraints, labor constraints, issues that are challenging your customer base in them fulfilling their own demand?

Yes. So those are real. Inflation is here, and we feel that. But we feel that there's so much investment going into the marketplace. I mean, I'm not sure other people noticed this, but if Las Vegas is any indication of what's happening in the marketplace, it's crazy. You couldn't get a restaurant reservation last night. There's 5,000 restaurants in Vegas. So it just tells you kind of what's happening. And so I think that's going to counterbalance any type of inflationary pressures we're going to see. Just too much opportunity out there.

Well, and the other side of it is, as an industry, you can price it through pretty real-time, too.

That's right.

So we shouldn't -- any investors listening, he's not sitting here going, my goodness, there's margin compression because of inflation. You've got real price control over those?

Yes. In the businesses where we have a strong moat, we've been able to drive price and people understand that, and we've had a better stick rate than we normally have. We get price every year, as you know, Michael. But this year, we've been able to go a little more aggressive because there's good reasons for it. And that there's been more marketing acceptance of it.

So one of the numbers that I track, and I think you talked about it openly is a deferred revenue line that shows the demand side, particularly on the inorganic and the high hazards and that number was up on a year-over-year basis. My sense is we have a shortage of high-quality incineration capacity in this country. There's more demand for it than there is available capacity, is that a true observation at this point in the cycle?

It just may be episodic given the kind of the reopening of the economy I think that we got to be careful about adding more capacity into the network. We do, as you know, do debottlenecking and other types of capital adds to add value to add more capacity to the network, but you want to be careful with that. At the end of the day, I think that I'm hoping this is temporary, and we can get our deferred revenue back in line and make our customers happy, we are having some challenges right now.

And it's not a performance issue on your part. There's just that much volume?

Yes. And I think the weather that in February in Texas and the Gulf really impacted us and everybody and shut down the plant for a little while, and that created a backlog that we're working our way through.

Right. But you're probably greater than 2 weeks of a backlog.

Probably so.

Yes. So there's still a demand issue.

That's exactly right.

Everybody is talking about labor, is that different for you or is...

No. But I think that we've been making investments in labor for quite a period of time, whether it be benefits, 401(k) matches, other types of incentives that we hadn't done in the past. We're hopeful that we can kind of manage through that as best as we can, but it's tough to find people at kind of any price.

And across all skill sets or is it more unskilled or is it...

Direct labor. Direct labor. We need drivers. We need people. It's not just driving, it's actually driving and doing other things as well. It's a hard drive to do as you know. And we struggle with that, like everyone else does.

What does -- I don't think money throwing more money at it from a wage standpoint solves that?

Again, it's really providing a career path for people. And the good news is we've got 14,000 people. We have about 10,000, 11,000 direct labor. It provides a career path from driver to branch manager to management.

Right. So that means investing in them?

Absolutely.

And so is training in the context of who you are and what you do different than, say, 5 years ago? Or is this more of the same, you just got to do it better?

Yes. It used to be more training for the sake of compliance to get -- to make sure that we're safe and doing things well, which is still very much the core of our training, but also we wanted to buy development opportunities. And really, what we do and led by Alan, who started the company 41 years ago, he promoted from within, and that's a great message.

Well, and I also would say that from a training standpoint, the more you invest in people that tends to mean you -- there's better retention, too.

That's right. Right.

Okay. So we've alluded price earlier within the context of inflation but talk a little bit about what the price dynamic looks like. Is it in the sense of the opportunity to do it across differentiated services or is it -- and the sustainability of it at a level that really means it's better than the underlying cost of inflation because I think of this industry is one that historically kind of met the cost of inflation, maybe slightly better?

Yes.

It feels like it's different.

Yes. I think that there's been much more receptivity to pricing. I think that people kind of -- because it's not just say we're going to raise price 5%, it's what the stick rate is. So that we've been able to have -- because everyone is experiencing the same thing, whether it be benefits -- not just the benefits and wage inflation, it's insurance, it's other types of things, it's raw materials, all that stuff's going up. And everyone is experiencing that. So our ability to kind of drive -- the good news is we can drive price into the marketplace, and we have. And to cover off on that, so I think that's been able to -- that plus.

So you're both a consumer of inflated things as well as operating in businesses where they're seeing that inflation. What's your view of -- is this a run-up and it's going to settle or is this a -- we're in for structurally long term, better -- more inflation in our economy?

So we've tried to be careful with that concept and not just raise people's wages because if you think it is temporary, well, those wages don't go back to back -- right. And then that creates other types of problems with wage compression, as I'm sure we've mentioned before. And so it really is a -- we've really tried to be creative with it because it could be temporary. And if it is temporary, we don't want to get stuck with a cost structure we can't handle.

Right. So that's doing bonuses and things like that as opposed to changing the hourly rate?

That's investing in benefits, investing in training, investing in those types of areas that will provide value now and in the future.

Right. So I think of wage inflation is something that's probably been 2.5%, 3.5% kind of for a while but seems to be creeping. Are we headed for a long term, it's 4% to 6%?

Tough to say. We are hopeful it's temporary.

Okay. Okay. We in the industrial waste market, sometimes it's not quite as obvious to talk about is there recycling reuse, reduce. You all actually have some interesting aspects of your business model that's worth really, really talking about. And yes, I get to say then we have an ESG conversation, too, but more importantly, you do a lot of recycling.

That's right.

I mean it's like a key aspect. So let's tease all those pieces away because part of this room, the service companies, they should be participating in part of this. This is the used oil side. And so let's tease this out a little bit.

Yes. So we collect 250 million gallons of dirty motor oil that is in your cars today or in your crankcases of your plants, and we refine that and make base oil out of it. And that, in my mind, and we'll have an ESG discussion in a little while, is a great bridge to an electric vehicle solution. We all know that EVs are coming at someday, who knows when, slow fast, I don't know. But re-refined motor oil is a great bridge to that answer. And I think that it really is -- we are probably 3 years earlier to the idea. We've been talking about the closed loop. And we've been talking about the closing for 5 years now. And we're probably early to that idea. And now I think it's really happening. The people see the value.

So I mean -- and I'm not going to say who the name of your biggest collection customer is, but it's big. It's a name everybody would recognize if you said it out loud. They don't close the loop. I don't get why? I mean particularly if we start having to see this ESG conversation...

Yes. I keep saying that there's companies right around the corner. And you are going to roll your eyes at me. But there are companies right around the corner because we're having a different conversation now, Michael. Before it was with a purchasing agent, and they didn't want to switch from a Valvoline or Quaker State to an unknown brand...

Or their buddy whose distribution -- that the -- BFW or whatever...

Absolutely. They have been there for 20 years. And now we're having discussion with sustainability officers. And after 4 or 5 years of trying to have that conversation, we're having it.

So for the benefit of this room, where all the people are service companies, I mean, they're changing their lubricants out. I think it's at least 2 or 3 times a year at kind of a couple of grand every time you turn it over. There's: one, a super high-quality aspect of this, right? This is irrefutable. It's not a quality issue. Their engine manufacturers are giving warranty back. So you got backstop some warranties. That's not an issue anymore. And it costs less.

That's right. And there's a sustainability angle that is irrefutable.

So -- and they've all heard me ask all the other garbage companies all day long is this now becoming a part of a moat that your customer is asking for a sustainable solution. You're bidding on residential business, you get to walk in and say, hey, all my trucks have recycled used oil in them for their lubricants?

That's right.

That's a competitive advantage.

I think that it's a great story, and I think that it's something that we have to tout more. And I think it's because -- I think people in the room are going to run out of good ideas for sustainability. They've done everything they can do, and this is an easy one because it actually helps you from a sustainability angle and from a price standpoint because everything has got to happen. As you heard from [ Davina ] 5 minutes ago, everything has got to have an ROIC in it.

Right. Yes. We'll have a question. So you have -- we have been having this conversation for a long time, and you do say that there's some interesting ones right around the corner. You reorganized the business and took part of Safety-Kleen and put it in environmental services, and you've left the Safety-Kleen sustainable solutions on its own. So when are we going to get a press release that says -- in '21?

Yes. I'm not going to commit to that. On a live call, it's being tape recorded. But at the end of the day, I think it's -- the industry is coming to us. The market is coming to us. And I feel like it is a great solution. That's part of the reason why we did it is because we want to make more investment in that area. So we think that's a great sustainable solution.

Okay. So a lot of these people are in here. Their business is driven by what you and I do as consumers. Because If we have some place to go and then when we do that, it generates cash. So your branch business that's now in Environmental Solutions and the SK Oil business are absolute indicators of that because the oil change cycle is driven by miles consumed. Are you seeing a much more active driving by the population?

Absolutely. Yes. No, the business is...

Like meaningfully, like a real -- it's not a little bit, it's measurable?

Well, I'm hopeful they get back to 2019 levels. That would be a good indication of the pandemic's in the rearview mirror.

In sheer volume, service cycles, let alone value proposition. Because I suspect the spread is really good right now, too, because there's macro issues that are influencing base oil prices and you've improved, I think IMO 2020 is absolutely narrowing the pressure around charge for oil, price for oil, pay for oil. So they got a really good spread plus more volume.

Plus I have a branch business that is back -- coming back to life and getting back to normal. At this time last year, it was way down.

So instead of 10- to 12-week cycles, you are back to 8-week cycle -- service cycle, something like that?

And on the SKSS business, that spread is really wide, almost unnaturally wide. So it is a market event that we're the beneficiary of, like we are for events, like we are for a lot of things.

So 2 years ago, you did $80 million of profitability in that, the like of the way it's been reorganized now sort of $120 million. You could beat the $120 million?

Yes. If you look at our guidance, we have us beating us $120 million.

That's really powerful.

Yes. No, it's a great story, and I think that it's -- the question really is, Michael, how much of this is sustained in 2022 because is it IMO? Is it Clean Harbors does an awesome job managing the spread? Or is unnatural forces infecting supply and demand on base oil? It's probably all 3. And when oil gets back in line, then we'll see what happens.

Right. And part of this is back to the disruption in the spring, it disrupted lots of the fuel chain there. And so...

Absolutely, that's part of the unnatural nature we're seeing in the supply demand in base oil.

Okay. Back to this recycling compound of your business model, what percentage of total revenues could actually be defined as a recycled revenue?

About a quarter, I'd say.

That's pretty good.

Yes.

I mean when you think about -- it's an inert nasty waste stream, broadly the whole company, say to get to 25%...

We're the greenest company you've never heard of.

And it's not all used oil?

That's right. It's -- oil is a big part of that. But we also do solvents, which then go in our parts washer, we also recycle metals and water.

Okay. What do you do with all these recovered materials outside of the oil?

We sell them to third parties. We sell them to third parties, they're commodities. The solvents get reused just like the oil does. Solvents are right back in -- frack into your parts washer.

Right, or blend it back into a fuel as an organic fuel?

That's right.

So this conversation around ESG, we've been having it all day. I think it's -- for a while there, you might have argued that this was just yet -- you had to talk about it because it was a flavor of the month. I personally believe it's table stakes. I think this is here to stay. And I don't think it's on the -- from a political spectrum, a left thing or a right thing, I think this is -- U.S. businesses, whether you're public or private, or being expected to share with the marketplace broadly, your customer, what are you doing? How are you doing it? Measure it, show us the data. So talk about what's happening at Clean Harbors in that regard because you published your first CSR in the last year, you've put some stakes in the ground as far as goals and timelines. So help the marketplace -- everybody, understand that how this is becoming a competitive moat and what it's doing to drive business decisions?

I think it used to be you need to have something to say something. And now I think people -- and when I meet with investors, it'd be -- the question would be on cash flows and EBITDA and margins and all the things. And maybe at the end, they'd throw in a question on sustainability. And now it's more like the first question we get and what are we doing about goals? And how do we measure those goals? And what are we doing at bottom? And certainly, when you think about value and where that creates value, I'd say that not to say we have a lot of international investment, but we had some. And now we have a lot and now I think that's going to -- and that's coming to the United States. It used to be you get the European investors asking these questions, now I get it all the time. And the good news is that we have a great story. It is -- we've done a great job with it, and it's a really good talking point. And I think that we -- from a net climate benefit standpoint, we take out twice as much greenhouse gases as we produce. And that's just the fact. And that's something that's really compelling. And I think that as more guidance and more compliance from the SEC and the accounting firms kind of make it more uniform, you'll see that more and more.

And were you able to address the demand for information naturally through your own infrastructure or did you actually have to -- like have had the equivalent of a finance department to be able to do this?

It was an unfunded mandate. It was an unfunded mandate. We didn't have a lot of resources to do it, but we had the people who were really good at it, and we got them engaged, and they really did a good job of pulling it all together. Michael, we didn't have to create a lot of data. We had to organize it and then we had to make it kind of unit -- fix the unit of measure, and they did a great job doing that. And the good news is that we were already doing a great job. We just got to improve upon it. And when you think about things around safety, and around compliance. It's part of people's incentive compensation, and that's going to hopefully drive behavior.

Okay. So let's talk about what you can do with this business model. So I want to say it's post a great recession. You did an Analyst Day in New York City. At the time you put up on the wall was a free cash flow target of $300 million, but you were going to get to 20% EBITDA margins. So where are we on those type of objectives? What's possible? What's the art of possible here?

So we've said publicly we're going to do GDP -- revenue, 1% or 2% above GDP. We're going to raise margins 30 to 50 basis point, and we're going to get to $300 million in cash flows. I think those are all the starting point of these discussions. I think that especially on the cash flow side, kind of where we are now and how we're doing in 2021, we'll probably get there faster than slower. And that's great. And I think that we've proven ourselves over the past 3 or 4 years of doing that. I think that's going to be the case. And then from there, that doesn't include any M&A, and that assumes in that model that we get billions of dollars' worth of cash on our balance sheet. And this is sitting there. Of course, that's not going to happen but we're going to make investments. We're going to buy back our stock. We're going to make capital appropriations. We're going to buy CapEx as we need to, to grow the business. So I think it's going to be a -- it's that -- those numbers are kind of no M&A and no beyond normal CapEx type of investment.

And as a percentage of your EBITDA, what's that cash conversion look like at that...

Low 40s.

Low 40s?

Low 40s.

Okay. So when you think of the capital-intensive industries, I mean that's -- the garbage industry is super capital-intensive and sort of best in classes in the 50s, but the vast majority were living in that 40s range. So you're rising to that level because the industrial waste didn't use to be able to do that.

It is making ROIC an incentive compensation target, and it was very helpful.

Okay. We've talked a lot through the day about alternative fueled vehicles. This is a very different driving model because there's great distances between -- I mean there's a short pickup cycle because it's an interesting dynamic. This waste is generated in a really small increment. You're allowed to store. You're allowed to aggregate it to maximize the transportation dollar. But once you get it aggregated, then you got to move it a great distance to get to a final disposal option. And you all have been doing long-haul for a long time. Garbage is, on a comparative basis, is relatively new on a like-to-like basis. So where is the potential to introduce an alternative fueled vehicle to the model?

So we've made commitments to do some energy efficient EV type of vehicles. At the end of the day, what we're doing today is we still need combustion engine because of the long distance that we're hauling. In my view, the movement's to rail, I think that's much more efficient. It's a much more cleaner form of technology, much cheaper. So that's really what we try to move away from the long-haul truckers and move toward rail.

And can rail -- I mean because you're not -- that's just in carloads. Not -- you're not doing the whole unit trains when it's the -- so can that -- how does that make -- how does that work economically? Because they need -- they tend to -- they got a monopoly. So they tend to hold you a prisoner to whatever is going on.

The rate per mile is still exorbitantly cheaper than going over the road.

Even if it's -- you're going 300 or 400 miles or do you have to go 1,000 to make that work?

It doesn't work as well. It still works.

Yes. Okay. At what percentage of the volumes moving that way today?

No. You're going to keep asking your questions so I can't answer one. You got it. You win.

It's a very high percentage on our waste oil, but on a...

Yes. That seems obvious.

It's a different story.

Yes. So one of the things in the waste oil business that you don't have as exposure to processing in the Gulf Coast?

That's right.

Is there an opportunity to do that at some point in the future or is that -- and if it is, is that a greenfielding? Or is there capacity that can be bought?

I mean I think that I think greenfields are tricky with the permitting and all that around that. I think there's been a lot of ideas of people putting greenfield refinery -- re-refineries in the marketplace, it's been very difficult. There hasn't been one really done since Safety-Kleen did it with East Chicago. And so it's been -- it's really difficult to do that. I think there's M&A opportunities, both big and small in both sides of the business.

So that's a -- I think of them as a competitor because they're in used oil, but they're more of a fuels play was buying a refinery that shell is selling and going to do renewable diesel. You're really about taking oil and turning it back into a base lubricant, but is there a renewables fuel story here that we should be thinking about? Is there more refining capacity that's going to loosen up, and that's maybe the access to something in the Gulf Coast?

Maybe. I think that it's what -- the answer is that we want stick in our swim lanes. Biofuels are interesting, but we want to make conventional motor oil for now.

Right. And you clearly believe that you've seen an impact of IMO 2020 because you sell a certain amount of your oil as recycled fuel oil. Are you confident that's a permanent and structural change? Or is it -- we need a little more time?

I think it is. It's hard to put a number on it because the spread is so wide right now, I can't tell if we're doing a good job and just managing this spread really well or it's just the demand pressures that we just talked about or it's IMO. I think it's all 3. We'll see that as we put together kind of our 2022 budget, we'll have to get into that.

Right. And do you -- so I think there's going to be a back-to-work, back-to-school correlation. And I have no idea whether we're hybrid back-to-work or back-to-work or whatever. But I think the likelihood of a change in activity is going to be tied to a back-to-school, if I had to think, put a business hat on and say, what are companies going to say to their employees. Part of it is figuring out day care and animal care and all of those things, right? And so you get the back-to-school leads you into this? In theory, it should change the vehicle miles traveled.

I mean I think vehicle miles traveled is kind of -- again, I can only speak from personal experience, I mean in Massachusetts, it's back to normal plus it is busy as heck.

And even the normal rush hour or is it actually busier throughout...

It's been busy. Again, I come in early and leave late, but it's been pretty busy the whole time.

So we're seeing data that would suggest that we're driving a lot more outside of rush hour and rush hour is still below, but it's better.

And also what I've seen, I guess, is a public trans is still not at -- back to the levels. People are taking their cars versus trying to commute in.

Right. Although we -- Harsco who has that rail business is starting to see orders around the maintenance that's tied to passenger, cater trains and what have you.

From a very low base, I'm sure.

Yes, absolutely. So M&A, we've talked about this, building up of cash and the opportunity for the free cash flow. Alan loves to talk about the sort of opportunity to do -- or the inorganic growth. We were together a couple of weeks ago, and Brian Weber was on. There really aren't very many elephants left. This is really more about the find the market or the product or the service that plugs into this extraordinary network you have, isn't that the right way to think about that?

I guess I would say that we don't -- the answer is we're looking at big and small deals. And we're not -- I don't get stung on getting a big elephant or a small bunch of tuck-ins. I mean, they're all -- if they provide the return to our investors, that's something I mentioned them doing. So there are some. We pass on many more deals than we do. We say no a lot of times. We just got to find the right deal. And we're going to keep looking and be patient and make sure we get good return for it.

What -- in the portfolio, what's not as a name of a company, but either a product line or a service or a geography that's missing that you'd really like to fill that -- plug a finger in?

And I think there's opportunities on both sides to do investments in M&A that provide both the new regions, new technologies, better -- more people and there's opportunities there.

So PFAS is a conversation that lots of people want to have as an opportunity. We think PFAS, and we're going to have a whole panel on -- there's viable technologies to manage it today. But when you think about it as a business potential, our belief is this could look more like PCBs than asbestos. And you all had a great run for like 20 years in PCBs. What -- if you -- the world is listening and you're looking for -- you need a box checked, what are you looking for the marketplace to do, whether it's a government, state, federal, that triggers this activity starting up?

I mean I think that it's already happening because people are trying to get in front of those regulations, but we really need to have regulation at a federal level to drive what defines clean and where...

So the maximum...

Absolutely. And they're probably in water first because that's where the most danger is, but I think it comes to soils and that's an opportunity for the space.

And would you buy into the thesis that there's a huge opportunity around airports and municipal firefighter training centers and military bases before you ever get to private companies? And so that's likely to see that first?

Yes. I would say so, and I think that the whole -- I think that others in the industry would agree.

Yes. We've seen it already, Michael. They've reached out to us, to Michael's point, they're trying to get ahead of it. It's just they don't know what the MCL is, so nothing's moving forward yet, but the conversations are happening.

And you have a little business in currently, you're doing activity and it's bigger than it was 5 years ago, but it's kind of hit a limit until some of this gets defined?

Agreed.

Let's say something happened tomorrow when they gave us the standard, then you look out, what, 18, 24 months before you'd start to see the ramp because that's sort of the engineering mobilization bidding...

Alan would say it this way, he'd say that the regulation is tomorrow. It's 1 year or 2 for litigation that's going to run through the court to make sure -- and then it's 10, 20-year run.

But if it's airports and municipal firefighting training, will there be litigation?

That's -- sure. Why not?

That -- you would think that's a public dollar. It's going to -- if they've either got it or they don't?

Yes. I mean I think that it's -- I think there's going to be ramp time, though.

So I think being a good buyer is also -- is important to be a good seller. You have been parsing out pieces. The one piece that you still have is around the Canadian energy economy. What's the prospects of -- at $75 oil of that not being part of the portfolio, is it getting any better?

It's getting better. And we're not the natural owner for that. It's just the function of time. Right now, it's gone to the point where it doesn't really move the needle that much. It's a discussion point.

But there's an opportunity that -- more positive opportunity than not at this juncture?

Absolutely.

All right. Well, we're at the end of our time. So I want to thank you very much for coming to Las Vegas in this nice cold weather and sharing it with us.

Thank you for having us, Michael.

Thanks, Michael. It's nice to be interviewed by a hall of fame.