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

Hi, everyone. This is Matt Fields. I cover high-yield metals and mining and industrials for Bank of America. It's my pleasure to welcome the team from Clean Harbors to our 2021 Leverage Finance Conference. From the company, Michael Battles, Chief Financial Officer; and Eric Dugas, Chief Accounting Officer. Welcome guys.

Good afternoon, Matt. Thanks for having us. Thanks for Bank of America for having Clean Harbors on your conference.

Absolutely. So I think we're going to have a fireside chat format here for the next half hour. We'll do some Q&A. And if anybody wants to send me a question from the audience, I'd be happy to ask it. I think we're going to focus on the most exciting recent development, which is your acquisition of HydroChem. Can you let us know that very recently closed and kind of how the integration is going in terms of operations, systems, getting everything on the kind of the same operating system, reporting systems and the culture of the 2 businesses. How is that integration process going?

Sure, Matt. I'll start, and Eric, feel free to chime in. When you do an acquisition, a large acquisition, you buy from private equity, there's always the risk, Matt, that you're buying an asset that is getting kind of pretty enough, if you will, to be sold in a transaction and you worry that there's a new coat of paint on the wall, but there's a crack underneath the wall, kind of what you're getting. And the good news is that when you kind of get into HydroChem, you really don't see that. It's actually -- I think it's a pretty well run company by even before and the investment that they made in the business. And so we're really pleased with both the assets that we acquired, the contracts we acquired, the people that we've acquired. We've actually put those people in leadership positions on a consolidated. As you know, we own a $450 million Industrial Services company on our own prior to the acquisition of HydroChem. So we put some of their leadership in charge for the whole thing. I think it's a really good message and really a testament to the investor that they make in their people and some of the quality people that we acquired in this transaction. The other thing is that we own them, as said, we own this similar type of business. And so the culture has been a really nice fit. I think the team from HydroChem appreciate the fact that they're being bought by a company that understands them really well, given the fact that we do this kind of already and we use -- and we're hopeful that the cross-selling opportunity that we get from the acquisition of HydroChem and some of their customers and being able to sell our disposal services, oil collection business and other areas into those customers should be a big win. Something that we modeled in our numbers we gave out in cash from the announcement, but certainly something we think there's upside to a model and you start thinking about getting in there and starting cross-selling. Back to your original question on systems. So normally, Matt, it's day 1 cutover, everything gets on our system like no exceptions. Welcome to Clean Harbors, you're on our ERP system, you're on our ledger system, you're on our payroll, everything gets cut over. Given the size of the company, from the good processes that they had, we didn't do that for [Indiscernible]. We kept some of their systems. We moved over some critical things like accounting and other areas that we need to have, but a lot of the kind of the ERP, how they run their business. We kept on their system and we're going to keep indefinitely. So I think there's some good -- they have some good process systems that they use, and we're really pleased with kind of some of the things that we saw there. So again, I'm of the view that it's been a great acquisition. I'm really excited about the opportunities going forward. The people that we met, by time when they seem kind of fit very well to our culture.

All right. Great. And then you mentioned some cross-selling opportunities. Can you talk about the synergies that you definitely advertise some in the announcement? Maybe talk about some of the cost savings and some of the revenue opportunities that you're starting to see as the integration proceeds?

Sure. So when we talked about a $115 million EBITDA number and $40 million of synergies, those synergies are just cost savings. They're not -- it's very hard for us to measure and model out revenues -- cross-selling revenue synergies because when they happen, they run up through -- if there's an emergency response situation, we need to bring in our ERT without run through field service. So it's going to be really hard for us. Historically, it's been hard for anybody. You kind of track those types of cross-selling opportunity, not suffice to say there's many of them, and we're already seeing that within our business and our ability to kind of impact, get more of a share of our customers' wallets. It's the reason why we're in the Industrial Services business, is because we want to be able to sell more services to the chemical company, to the manufacturing companies, to the agriculture and the pharma companies, we can get more of their wallet and sell these services to them is the reason why we're in the Industrial Services business today.

And then can you go into detail around some of those cross-selling efforts, kind of, what are the programs that you're putting in place to try to generate those opportunities?

At the end of the day, it really is an education of the HydroChem sales organization, other services that they can sell. Right now, the HydroChem team just walk right by, if they see a 55-gallon drum or something, they're not going to bother even ask the question as to what is it? is it used motor oil? Is it a chemical? Is it a hazardous waste? Whatever it is. I think that's on us to put the incentive programs in place, what we're doing and the training in place, so that they know when they go out and do walk-throughs and site visits, they know to look for things beyond just doing a kind of a turnaround. So I think that's really the -- that's kind of on us to drive that, so that they -- they have the relationship with the customer when they're walking through there, say, we can fix that, we can get that, we can do that. That's kind of on us to educate them and to incentivize them to go do that. So that's really -- it all comes -- we're all kind of coin operating at some level, and we really have to make sure that they understand that this is an important part of the job, not just selling the Industrial Services type, tank cleaning like things, but beyond.

And then when you are doing that, the kind of additional sales, cross-selling, kind of those new things, are you trying to be aggressive on pricing to try to win share, sort of win a bigger piece of that business? Or are you kind of -- how is the pricing of these sort of newer opportunities comparing to the legacy Clean Harbors pricing?

I'm of the view that pricing is a different world, Matt. I mean the cost of our business has gone up dramatically recently. And we need to price aggressively, and that's on our legacy Clean Harbors businesses, Industrial Services, Field Services and Tech Services as well as in HydroChem. It's just a new world. And those prices have -- our cost structure with subcontracted wages, temporary services, fuel, we need to pass those costs on. And we're -- and the good thing about buying a company like HydroChem, we become #1 in the space and should allow us to have more influence on that decision. So we're confident that we've done it many times before, in inflationary environments, we'll do it again now.

Okay, great. Moving on to another smaller, but still important acquisition, Vertex. What are the holdups at the FTC specifically? Can you walk us through kind of what are the hurdles that you're still trying to go through? And do you still expect a first half of next year closing?

Yes. At the end of the day, this is -- we've never gotten a second request. This is an official second request from the Federal Trade Commission. And it is a fairly detailed data request information around us and our competitors in the market and other areas, it really is kind of a very deep dive going back, in some cases, went back a number of years, as far as the level of specifics they're looking for. It just takes time. I don't -- I think -- I felt day 1 that we think we'll be successful in getting Vertex Energy over the goal line in buying these assets. And we think with a natural owner, we actually can take it well with our other business. And so it's just a matter of going through the extra. I still feel confident we'll get it done. We have a team working on it kind of as we speak. So pulling all the data we need and making sure we have all the information and so that we can have a robust discussion with the FTC, give them the time to need to review it. I think that it's not a function of divesting certain parts of it. They're not -- it's not like that. It's more of -- it's more of a, hey, the UMO market, are there going to be -- is there enough competition in the UMO market or the questions that they're asking. Of course, there is there's hundreds of collectors out there [Indiscernible] paper mills, cement kilns or other areas. I mean, the BTU value of that dry motor oils has value. So there's certainly tons of the collection. So we feel we'll be successful. That being said, they ask the question, we have to respond, we get back. We're making sure -- obviously, we're a compliant driven organization. So we're going to be compliant with this data request like the algorithm.

Do you think you'll be forced to divest any branches or any assets as part of it or is too early to tell?

It's not like that. It's more of the fact that we're buying 2 re-refineries essentially. And so it's not like we buy 1 versus the other. We're not buying a lot of collection assets, some, but not a lot. And so it's not only divesting this branch or that branch. It's more of like in or out. I think it's more binary than that.

Okay. Great. And then just lastly, is the plan to fund that it-- I think it's $140 million. Is that just sort of cash from the revolver funding or something else?

Yes. So we -- if you take where we were at the end of Q3, we're at $711 million. We did expect some $250 million to go by. The HydroChem assets, let's say, that's high 4s, if you will. And that role between now and then, we were going to use available cash to pay for the price tax and not drawing the revolver per se.

Okay. Great. The other kind of new exciting project that you have is the new incinerator in Kimball. Can you remind us kind of what the CapEx is for that project and the timing of that spend?

Yes. Yes. So happy to do that, Matt. It's an interesting project here. A lot of people ask about acquisition pipeline. And one thing we point out and say, "hey, in addition to the 2 things we talked about, we've also we've got this new incinerator bills. So Really, what we're doing is we're taking the blueprint that we used when we built our El Dorado plant and went online down in 2017 in El Dorado, Arkansas. And we're really taking those blueprints, improving them a little bit and putting a new 70 million-ton capacity incinerator out in Nebraska -- Kimball, Nebraska, small town. We have a site there already. And just like we did in Arkansas, we're going to add on this new incinerator there. So Total CapEx, we're looking at is about $180 million over the course of the next 4.5 years. We broke ground out there. We've begun moving earth and poured some concrete. I think as we look to next year, the current production schedule to build a site, probably about $55 million of CapEx in 2022 and then on up to $180 million by kind of late 2024 when we think we'll probably turn the plant on and then we'll probably start receiving kind of revenue-generating waste or hazardous waste in 2025. So that's kind of our current time line, which shift a little bit, but that's what we're thinking right now. And like I said, we've kind of got to get the blueprint to be successful with this project.

Great. And then can you just remind us kind of what are the economics of that asset once it's open and totally sort of up to speed, what are the economics of an incinerator like that of that size?

Yes. Really -- I mean it's really accretive, if you will. I wouldn't want to put a specific number on it here, but 70,000 tons, we're seeing improved pricing on a per pound basis here throughout the year, and we'll continue to see that. It is a facility just again like the Eldo facility where we can manage some real high-margin waste. And I think it will also allow us some of the challenges we see sometimes with moving waste around the country to our different facilities. This gives us another outlet to send waste to be able to burn it efficiently, which is -- which helps our margins as well as the transportation to get it to different locations. It will be even more accretive that way. So -- our incinerators are kind of the jewels of the network. That's where we're able to really leverage the capacity there and the capital there to drive margins and drive revenues, and that's what we'll do.

And then I hate to put the cart before the horse because you basically just broke ground. But once it's up and running in '25, '26, and you're going to look at your sort of capacity again. When do you think you'll see a need to build the next El Dorado or Kimball down the road?

Yes. Great question. I mean it's even a question that we kick around internally here, right? What's the timing of kind of the next one? And I think, unfortunately, time will tell and market factors, will play a role in that. You hear a lot about moving capacity, manufacturing capacity and things back to the states from overseas. I think the pandemic has brought some of that about. So an exact time line, we're not exactly sure, but we're beginning to think about it. The last point I would make on it is, we do have locations where we think we can do that. Nobody wants an incinerator in their backyard, understandably. But we have another location now from Utah; Aragonite, Utah where we have a site now. And again, if you are thinking about another new incinerator out into the future, that might be a place where we do it and again kind of piggyback on an already existing site.

All right. Great. I appreciate that. Moving over to Safety-Kleen. Everybody has been talking about kind of the automotive market in terms of the chip shortage and prices on new cars and all that. But kind of what are the effects of these big macro trends that you're seeing kind of in your businesses, especially maybe higher gas prices is probably the most applicable one that you're saying. But can you just talk about kind of these big automotive trends and how they apply to Safety-Kleen?

Yes. Yes, I'll kick off and then Mike can chime in as necessary. But if I think about kind of auto trends here, right? Like certainly, as we went into pandemic mode last year, people stayed home and things, we did have a slowdown. But right now, what we're seeing is that business come back in Safety-Kleen line of business, in particular. Across all of Clean Harbors, our auto vertical is only about 8% of revenue. So we're not talking about a huge part of our business here. But what I would begin to offer a little bit is there's a twist to the story in some regards here from the perspective of not only our miles driven up here as we come out of endemic conditions, but I think the supply chain issues that we're seeing in the auto world, people are driving their cars longer. They're holding on to used vehicles. You hold on to used vehicles where you got to change the oil on those vehicles, you've got to change the brake pad to get to other normal maintenance. And that's what our customers on the Safety-Kleen side of the business specialize it to some extent. So you could see those auto shops and whatnot doing more and more work as the fleet across the country ages, as people drive their cars more rather than taking mass transit. And you can see that side of the business growing as a result of some of these supply chain shortages that we're seeing in the new car market.

So maybe as people hold on to their cars longer because they don't want to buy a new one, while prices are so ridiculous. I actually just went through the process last month, it's pretty terrible. That's sort of a positive for Safety-Kleen as a people hang on to their cars longer.

Yes, yes, certainly could be. I mean I was at an oil change a couple of weeks ago, kind of -- and I had to wait for an hour just to get in. So I think there's a lot of folks that are going to be in that can.

Okay. Slightly moving around to the rerefining spread, which is obviously important for that business. How do you see the recent actions in the oil price, the gasoline price kind of affecting re-refining spreads? And maybe kind of what's your outlook for that going forward?

Yes, Matt. So I'll start. The -- it's been such a bit of a windfall as you look at 2021, where oil prices have gone up. But the price for our ability to keep the price down on pay for oil, for our used motor oil has stayed pretty low. So as such, our spread has gotten wider, the price we sell it for all 4 versus the price we have to pay, assuming the refinery costs are the same, it's getting wider and wider and as us that's been very profitable for the company in 2019 kind of pre-pandemic who did about $130 million of EBITDA in the SKSS business. This year, we'll do 210 million to 220 million. So that's a huge kind of a huge windfall, $80 million, $90 million windfall for us. And the question is kind of when does that spread start to narrow? And what is the impact of increased regulation on IMO 2020? What's the impact on oil prices in the market around there? We can't control oil prices. That is -- and we are a tiny player in the market. So we are a price taker in the oil -- in the sale of oil -- base oil and blended oil through our customers. But on the info cost, we've done an excellent job of managing -- our prices have gone up, not having to pay more than a few pennies for the used motor oil that we're buying to fill our re-refineries. And as such, that level of profitability has gone up dramatically here in 2021. The question that people are going to ask is what about 2022? What's going to happen there? In my view, it's really hard for me to answer that, other than say it took, we did -- in Q1 of 2021, the SKSS business did $32 million worth of EBITDA. In Q3, it's $70 million, right? So Q1 won't be 70 probably, but it won't be 32 either. So the question is like, maybe that spread start to now at some juncture, I don't know when it's not here today, but could take time to narrow and as such 2022 will still be a pretty good year, in our opinion from a spread management standpoint just because of the fact that it takes time for oil prices to kind of come down to they will be more aggressive on pay for oil and who knows. But I'm of the view that IMO 2020 was real, he'll stay here, the CEO of Heritage-Crystal Clean, projected $0.10 to $0.15 a gallon, we collect 240 million gallons, you can do our math on that. That's really over that right now. We don't kind of post -- kind of oil spreads being a little unnatural.

Okay. Great. That's very helpful. Moving over to the cost side of the business. I think a lot of your peers, and you've mentioned some of these things on recent earnings calls have talked about, how the inflation on materials and sort of supply chain difficulties has affected you, I think, kind of you've highlighted labor shortages as maybe your most difficult challenge due to the constraints of your business? can you talk about what's been the most difficult things for you guys to overcome in terms of maybe labor shortages, increased wages, transportation costs, all of those things that are kind of eating in the margin?

Yes. I mean I think the 3 priorities that we have, as we kind of talk about this all the time with the management team, with the Board, with street, its safety, pricing and higher. I mean those 3 things we have to do and maybe in safety first, but those 2 are intertangible, we definitely need to make sure that safety is paramount to make sure that our place stay safe, that we stay safe. But we got to drive pricing to offset the cost structure. Costs are going up whether it be wages, whether it be third-party transport costs, whether it be subcontractors, disposal and disposal costs that we use for some of our non-haz waste. And all those costs are going up. We have to be aggressive on pricing to counterbalance that. And we have to be aggressive on hiring, to bring people into the organization, not lose people, either like fix a leaky boat. If you will, they start to stop losing people, as well as bringing in quality employees so that we don't use subcontractors or subcontracted labor, temporary resources and use our own people to do that work. And I think that's really the goal for us. And we have made investments in 401K match and health care match, and talk about that for many years in a row now. We did it again in 2022, we're increasing more investment into health care as an effort to incentivize people to stay. And we're hopeful that we do that.

Okay. Any ability to kind of -- you've been -- you said a couple of different times now that you've been aggressive on pricing due to the environment that we're in. Can you talk about how you've been able to pass along some of these cost increases and kind of what programs you put in place on the pricing side to kind of mitigate those challenges?

Yes. I mean I think that we have a separate team of pricing, a pricing team that works for the CEO, that is reviewing contacts every day and has for a number of years, to ensure that we're getting -- every aspect is getting the max price. And we do have a fuel surcharge. Just so you know, Matt, you're asking the question around fuel prices, which have gone up quite a bit over the past year or so. I mean we have an automatic fuel surcharge that counterbalance that. So we're -- from a fuel standpoint, diesel standpoint, we're okay. The rest of the things that we're struggling with a little bit. And the answer is that we understand that its price is fair amount, the stick rate has been higher too. We've been bringing it all the way down from the CEO, all the way down from the sales manager, they understand they have to go back to their customers. Even if you did price 6 months ago or 9 months ago, you got to go again and they're stack ranking customers, that a program we're putting in place, stack rank the margins and take the lowest margin businesses and going after them hard. Even if we've done it recently, and the answer is frankly. As you know, if we lose a customer too along the way, that's kind of okay. We have a hard time doing what we do right now. And so losing a handful of customers in this process as kind of acceptable loss, if you will. It's not normal for us to do that. The bell rings and off we go, and we're a [Indiscernible] emergency response company on a core. And so it's hard for us to kind of say, no, we work, but we have to, to make sure we're at it.

Speaking of kind of like looking at sort of customers and contracts, what kind of flexibility do you have in your longer-term contract business? Are there people that are kind of locked in to longer-term contracts that have difficulty adjusting prices versus maybe shorter cycle like the emergency cleanup, right? You can kind of adjust prices to that very quickly. But the longer-term contracts are more difficult. Can you talk about that kind of short cycle versus long cycle business?

Matt, there's only a handful that are long sites that are beyond the year. Even the big contracts like Dow, they get updated in and they all have notice clauses, state clauses that -- if there's a disagreement [Indiscernible] . So regardless of whether we gave them price last March. And while we can't go back to them again, we gave them 5% last year, that doesn't, he can do whatever want. And they don't like it. They can fire us [Indiscernible] think that they want to do, right? And Alan said this on the earnings call, back in 2020, when customers are suffering, they came to us off-cycle and asked the price decreases, especially in the Industrial Service and we were commenting to that, right? So the shoe is on the other foot here. And so now we need to go back and get to the prices. And for the most part, we've been successful. I think that people kind of get it that prices everything from the supermarket, to clothes, to gas, everything is going up. So that has to translate to ours. And the good news, Matt, is that the overall cycle of the cost of material, the waste disposal, the tiny fraction. So although prices have gone up and it's a little bigger fraction, it's still not going to make a break their overall cost structure.

Yes. And it's valuable to keep a good relationship with a long-term provider that you trust.

That's right. That's right. You're talking about hazardous waste and under U.S. regulation and Clearwater Act, they have great responsibility to dispose of that waste no matter what happens. So they're not in the business of like the lowest cost provider because that's a lifelong liability, they don't want to.

Okay. I want to talk about the CapEx budget. For next year, I know you said you're still going through the budgeting process on at least third quarter?

I thought you started asking the question now.

Yes. You're kind of at the $205 million to 225 million, I think I'm off by $1 million on both ends, but I'm just rounding for '21. But for the next year, you're adding HydroChem, you're adding Kimball CapEx? It seems like directionally, you've got to be kind of somewhat higher in '22 than we are in 2021. Is that a fair assumption?

Yes. I think that you're spot on. I mean you think about the HydroChem acquisition, $800 million business. You put 4% or 5% of just normal everyday CapEx on that business. And then as I said earlier in the call, $55 million is what we're estimating for the new Kimball incinerator next year. And yes, you are in the very high 2s, low 3s kind of all in. But I think it's all great strategic projects, a lot of the upside. So certainly kind of have the balance sheet and the free cash flow to support it.

Yes, absolutely. And then you've been somewhat active in the M&A process. Any other M&A on the horizon, kind of where do you see the most valuable targets? Where is the pipeline kind of focused? Is it denser routes in your existing business, more re-refinery assets, collection assets? Kind of where is the focus?

Yes, Matt, between digesting the HydroChem acquisition, closing the Vertex Energy acquisition, building out our new incinerator in Nebraska, I mean we've got a lot of food to chew here in 2022. We have $2.5 billion worth of debt. I think that we'll cool it for that. I think obviously, we work for entrepreneur who's -- there's not the permanent assets, they come across only once a decade. They become available to us, we'll be aggressive after that. We may use an equity to do it given the stock price that is today. But at the end of the day, I feel like we have enough things keep us busy here for a little while. Not to say we're not -- we look at a lot of deals. We pass on a lot of deals, and we'll continue to do that. If something comes out, [ Indiscernible] do it. But otherwise, I think we have plenty of actions to take in. And really, the idea is that get HydroChem running well, hit their numbers from a stand-alone basis, go get those synergies. They're not that easy to do. It's all fun [Indiscernible] we actually start doing it. It's a lot of work to get that done. So it's a lot -- a big number to get done.

Okay. No, that's a fair answer. It sounds like 2022, unless crown jewel kind of thing comes up is a year of digesting more than going after new projects.

That's right. And I think that it's -- I think we've got our hands full. We have to respond to protect and we have to close on Vertex [Indiscernible]

Okay. Looking at the balance sheet, obviously, leverage is up materially after closing HydroChem. You said you wanted to bring it back down and you might temper share buybacks due to that and due to other capital priority like Kimball and whatnot. Where do you want to bring leverage back to in the shorter term? And then kind of longer term, what's the new leverage target for Clean Harbors?

So we definitely want to get under 2.5. I think that -- in my personal view is right around 2 is a pretty good place to be. Prior to the acquisition, like 1.7, 1.8. So as I thought that was wonderful. It's fine by me. And you look at some of our peers who have done some deals, and they're getting [Indiscernible] they're overleveraged. And that's not -- we don't want to have one either. So we're going to work hard in 2021, generate some good free cash flow, maybe pick out some debt, maybe not on a net debt basis. I think we're going to get under 2.5, and then we'll get in the low 2s where we want to and we'll stay there.

Okay. And then you guys have a solidly kind of mid- to high B credit rating right now. You're getting bigger as a result of HydroChem and Vertex and Kimball as your balance sheet I just saw, you get back to that kind of low 2x, you might kind of look and feel like an investment-grade company. I know you already borrowed at pretty attractive rates and pretty light covenants, but what do you think about obtaining an IG rating and kind of -- what are your aspirations of doing it? Is it a nice to have, but we don't need it kind of a thing? Is it something that you want to attain? Like what's the philosophy there?

Yes. I think it's the former versus the latter, Matt, it's nice to have, but we're not actively seeking it. Our biggest fear is that we go out and get -- go at hard after that and get an investor. I agree with you, we're not that far away. We're not there already. And then something would go sideways and we get downgraded out of the investment. That's really not. That's not good for anybody on this phone call to be fair. So really, in my opinion, I think we're in a great spot as you spend light covenants, attractive rates. I mean it's kind of the best -- if I'm investor, I can detect that from like this phone call, be like you get investment-grade type of company or non-investment grade rates. So I think that's a win all around. And so I'm totally fine with that. I'm not in a race. It looked good on my resume, but I'm not sure it does for me outside of what I already get through our negotiation with a good kind of Grade A bank group.

Okay. That's a fair point. Well, I think we're about a minute or so over the time. So I appreciate you all joining us. Please, everyone on the line, please join me in thanking Michael and Eric and the team from Clean Harbors for participating. We're happy to have you virtually and next year in BOCA.