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

Okay. Let's go ahead and get started with the next presentation, which just so happens to be my last presentation. It's been a long 3 days. But for those who don't know me, I'm Tyler Brown, senior analyst here at Ray Jay. I cover both the environmental services space as well as the transportation space. This morning, still morning, I am very excited to have Clean Harbors joining us. Presenting today is the company's CFO, Mike Battles, the company's Senior Vice President of Investor Relations, Jim Buckley. So I think some of us know Clean Harbors. But for those who don't, Clean Harbors is one of the largest specialty waste players. There's a lot involved with Clean Harbors. They do a lot of things, but one of the largest specialty waste players in North America. I think we're going to go through a few slides. We're going to kind of get a lay of the land. And then I'm going to come back up and maybe we'll do some Q&A, some fireside chat. This is interactive. If anybody has any questions, feel free to raise your hands. But with that, I turn it over to Mike.

Thanks, Tyler, and thanks for the team at Ray Jay for having us here. I'm Mike Battles. I am the CFO of the company. I've been with the company for about 9 years. And before I get into my slides, we're in the hazardous waste disposal business essentially. And when you talk about that, if you have ever been to one of our incinerators, they're not really -- they don't look very green. I mean they're burning waste at 1,800 degrees. But really, it's the greenest story you probably never heard of because our world -- we didn't create the waste that we're talking about. We are disposing of it in accordance with laws and regulations. It really is a very -- can you think about a world without Clean Harbors, I'm not sure what I would be doing, but world without Clean Harbors, where would that waste go? I mean we didn't -- whether -- and this is -- some of this is just physics and engineering. When you think about the manufacturer of car paint, well, they're benzene as the byproduct, which is a known carcinogen, this is how you make paint. And so that benzene needs to be disposed of and we take care of that in our incinerators, in our wastewater treatment facilities and, however, whatever waste it is. My point being is that it's really proud to work where we work. And it really is a great story and a great company. And then again, it's just -- we are removing waste from the environment. And we issued our first-ever sustainability report in accordance with SASB guidelines earlier this year -- last year, excuse me. The -- and we remove twice as many CO2s as we produce. And we refine over 230 million gallons of dirty motor oil and make motor oil out of it. So it's a great story. It's a great ESG story. I won't spend a lot of time talking about it. I'm happy to answer people's questions about it. But when we think about kind of when I do interviews or talk to the employees to do presentations, again, people are really proud about working, and I'm really proud about working here because it really is a great sustainability story. And we are the sustainable solution for many of our customers. So what makes the value proposition for our shareholders is the moat that we have within our industry. We own 9 of the 13 commercial hazardous incinerators in North America. And why is that valuable? It's valuable because when the EPA label something as hazardous, they say you have to dispose it a certain way. And if it's a really dangerous chemical, well, it has to be incinerated. And so when that happens, and we have the moat, if you will, to price what we need to price and sell the service that we provide. So we have -- we try to say we're growing GDP industrial production we move. We think that GDP plus because of increased regulations, because of parts of the business that the market can grow, I'll talk about that in a minute. I mean, we have great opportunities to continue to grow and make money beyond just GDP. And I think it's a very resilient business. I didn't put the slide in here, but I love this slide. It shows kind of 5 years, the last 5 years of growth. And whether there's -- you would know, in there, there was a massive pandemic that slowed down the whole world. I mean we just continue to grow and continue to create great cash flows. And I think that makes us a very resilient business, led by Alan McKim, who started the company 42 years ago, still very involved in the business. He's there today. So -- and I said before, sustainability and ESG profile, which I think can compete with, which is real sustainability, not just great MCI scores. So I mentioned some of these before. We're going to -- we did about $3.8 billion last year. We're the largest hazardous waste disposal company in North America. 85% of our revenues in the United States, up 15% in Canada, not just North America. The interesting about it is that within this, so when you think about solid waste, you roll up -- anyone can roll open to a landfill, dump it, pay a tipping fee out to go. This is different because it's hazardous waste and there's regulations in every state, you're taking it from Massachusetts and moving it to Nebraska. Every state along the way has regulations. So we go out to the customer site and collect that waste. So we're actually a top 20 motor carrier. In this company, there's a transport company, which is we're transporting the hazardous waste from the customer site into our disposal network, wherever it needs to go. And so again, it's really -- it's a little different business model than, perhaps, a solid waste got. They are both waste, but this is a little different than banana peels. The other thing I'd say is that we are in every single city in North America, we are kind of capturing it because of the fact we've got to get close to our customers for emergency response purposes. We're about $3.8 billion. And that waste can be -- think of the waste like -- it can be in a drum, it could be in a tanker car, but it could be spilled on the side of the road too. And so we have a team, a field service organization that goes out to the customers -- it goes out to a site on the highway and picks up hazardous waste and gasoline, diesel fill, whatever gets billed and dispose it properly. 20,000 employees and over -- what is the number? Over 100 waste management facilities -- I have a slide on that in a minute. Again, this is the business model. We have 2 segments. We have an Environmental Services segment and we have a Safety-Kleen Sustainability segment. The Environmental Services segment is the landfills, the incinerators, the wastewater treatment facilities. And that -- again, we pick up the waste. We bring it, we recycle where we can recycle and then ultimately, we dispose of it in our incinerators and our landfills. On the SK Sustainable solutions, that's oil, dirty motor oil, going you're picking up kind of Tyler's auto body shop, picking up dirty motor oil and re-refining it in our 6 re-refineries and selling it off as base oil or motor oil. This is our footprint. These are our disposal facilities across North America. And as you can see, we have the kind of where the waste is being generated, we have the network to dispose it properly. And as I said before, we're a transport company. We have over 10,000 pieces of rolling stock commercial trucks and transport vehicles. Target market opportunity. It's hard to kind of pick this number up and try to get a sense of that, but the addressable market is pretty big. And it gets growing. It grows every year with more regulation and enforcement of regulation is not a bad thing for Clean Harbors. It's a good thing because we are a compliance-driven organization. And so when presence change and things happen, it's -- and more regulations put it into the market or more enforcement, which is what's probably happening these days, that is overall a very good thing to Clean Harbors and it increases our addressable market. This is our growth strategy. We want to try to sell more services to our existing customers, whether it be industrial services and cleanouts of their plants, whether it be network capacity as far as we have incinerators in re-refineries. We try to get more out of those and even building a new incinerator in Kimball, we are currently in process of doing right now. Kimball, Nebraska, we're building another 70,000 tonne incinerator. It's capturing large-scale projects. And what I mean by that is the EPA will have a Superfund site, they need to be remediated. We want to try to win that site that drives our hazardous landfill disposals. I mean, again, there's a lot of good growth drivers in this business. I think that we're kind of well-positioned going into 2022 and beyond to continue to kind of meet and beat street expectations and deliver kind of good cash flows for the company. That's all I got. Thanks.

Perfect. Okay. So I want to start on fuel, actually. So you talked about being one of the largest motor carriers or at least consumers of transportation. Fuel prices are dynamic to say the least. So can you just talk about your ability to recover fuel in the short, medium and long term?

Yes, sure. So we have a fuel surcharge system. We've had it in place for a number of years. And it's redone every month and all customers get that fuel surcharge. And it covers our costs, maybe it's a tiny bit higher than that, just to cover the lag that's involved, but it's been pretty effective over the past few years. It -- fuel -- when you thinking about inflation, and we'll talk I'm sure Kyle asked a lot of questions about inflation. Fuel is not -- which is huge, is not a huge driver of margin expansion or contraction.

Perfect. It's a good segue because I do want to talk about it. So it does feels -- it feels like this is a consternation point, particularly in ES but -- so maybe we can talk about that. I want to unpack a lot of that. But obviously, you had some great -- here's a great picture. This is probably not the easiest job. The labor is relatively specialized.

[indiscernible] day it is, though.

[indiscernible] So can you talk a little bit about the points of inflation where you're seeing it and again, kind of how you're dealing with it. We can talk about pricing. But maybe we'll just first talk about the actual cost inflation, and then we'll get to pricing.

Sure. So we're not immune. You've done 3 days of meetings. This is your last one. You are having good energy. I appreciate that.

We have heard about inflation.

But I'm sure you've talked about 13 times about the inflationary pressures that people are under, and we're not immune to that, right, whether it be labor costs, third-party transport, third-party disposal costs, all those are very real, maintenance costs. We have 10,000 company vehicles, and so they all need to be have maintenance and parts and so forth, they're all are all going up. And so that's a real number. That has happened around midyear last year, and it continues on here into 2022. The unique thing, though, is that we have the ability of -- we have 2 things going in our favor. First, we have the ability to price. We have these moats, and we understand that. We understand that, and our customers understand that. We've been able to price through some of that. And also, we have -- a company that's focused on cost, and we always have. We've talked, Tyler, you have covered us for a long time and we focus on costs, and nothing changes with the pandemic, and that's consolidating sites, leveraging our fixed cost base, doing things smarter, adding technology to kind of do things quicker and faster. We're not going to talk about the costs associated with doing that, we just do it and incurred the cost to kind of get things to run more efficiently or low-cost jurisdictions or everything else we do. So that's not going to change. I don't want to see that -- I don't want anyone to walk away from saying, hey, we're going to reprice our way through this. It's price, volume and costs. All those 3 things, I think, are going to allow us to expand margins even in this inflationary environment.

So right. So like we take a look at this picture that I assume this is a beach cleanup type of work.

It is.

So how do you price your business? And how much flexibility do you have when -- this project may be a long-lived project? And how do you -- do you have the ability to kind of go back, reprice it when the labor markets or fuel or whatever it might be, are obviously quite dynamic?

So you got to break it down into pieces, right? Because it's $3.6 billion or $3.8 billion, but it's not all from one place. So when you think about the different lines of business, tech service, which -- tech service is going out and getting tanker cars full of hazardous waste from a chemical company. Those are annual contracts with escalators based on inflation. So those will automatically adjust, and we have -- and we renegotiate price every year for those. On a field service trial, like this is probably an emergency response situation, that's a spot rate. So every contract is negotiated. That's probably a day or 2 long spot rate. And so as our prices and our costs go up with these guys, we would be able to charge that in the actual contract in the -- when they go into the system, the price is higher. On waste oil, we're making base oil, so that's a commodity. So we're tied to movements in base oil pricing that drive the pricing of that. Industrial Services, like going out and doing a turnaround service at a large chemical plant or a refinery, that is negotiated at that time, and that's based on a cost-plus buildup of our labor and materials.

Okay. Perfect. And I think even -- if I go back to the quarterly call, Alan had made some comments that, through COVID, I don't know if I would call them concessions, but you certainly helped out some customers and you're kind of coming back to those customers.

Yes.

So I'm curious about how those conversations are going. I think most of us, at least the other 12 companies realize there's inflation in the system. So curious about how that conversation is going?

Well, it never goes well. I mean no one comes back and says, "Hey, thank you for your price increase," right? It is, to Alan's point, though, we do have long-term relationships with our customers, and we value those relationships. So when COVID hit, and they came to us for price concessions, even off cycle, we gave them those price concessions. And so we need to do that now and say, "Hey, look, we're going to be hit with cost pressures, we need more help in that end." And to do that, and some are open to it and some aren't. And so we need to be prepared to, and led by on, we're definitely prepared to walk away from customers to kind of reset the market set in industrial services.

Yes. Okay. That's good. So I have to ask the broad question. You're looking for flat margins in U.S. this year. So it feels like there's a lot in there. So maybe we can start to unpack that a little bit.

That's right.

So again, you talked pretty adamantly that you can kind of cope with the inflation, but again, guiding to flat margins. So what are some of those key pieces that are kind of maybe the push and pulls against margin this year because I think there's a few.

Yes. So there is some noise, right? So we've got to work our way to explain that a little bit. So in 2021, mostly in Canada, we did receive some government funding given the lack of profitability in Canada and about $10 million of government funding came into the Environmental Services business, which is what you're talking about, you're talking about margins. And so that's a headwind that's going to be there in 2022. We also did -- as part of our business model, we did a lot of emergency response and decontamination work. We led the industry in decontamination work and going out to warehouses and retail locations and did overnight cleanout work. Well, that's emergency response rates, which are pretty lucrative. And so -- and that's gone away, which is good for everybody in this room. But that's probably a $15 million headwind that was -- the margins on that business were much higher than, let's say, standard margins. And as such, we made pretty good money on that business. And so that's a headwind in 2022. So those 2 kind of good guys in 2021 that are bad guys are putting pressure on the margins. So we need to get the price. We need to keep cost down. We need to get more volumes to kind of counterbalance let's say, those headwinds.

Right. So also though you didn't mention the layering in of the HydroChemPSC.

That's right.

So I assume that's also a margin dilutive, not -- certainly not dilutive to earnings, but dilutive to margins.

So it's dilutive to ES margins, the segment margins, is not dilutive to the consolidated margins for the year. But certainly, as you look at Environmental Services and the 20% margins that they're generating, and 16% or 17% margins that HydroChem generates in the Environmental Services business, as that grows, that mix difference is causing to build some pressure on margins.

Perfect. So I have some calculations. Hope they are good, so we'll go through it see. But just at a high level -- and again, I don't know if my calculations are perfect. You started with the [ 218 ] this again, ES specific. [ 218 ] margin. It feels like there's like 30 basis points for government, maybe 10 basis points on DCon, but I actually get about 60 basis points on HydroChem. But maybe those are close, maybe they're not. But I would say that if you look at it at the base level, it feels like there's about 100 basis points of core margin expansion. What do you think about that?

I think that it is directionally correct. I don't agree with all of your piece parts. I looked at -- you shared some of this analysis with me before today. But directionally, I think you're right. I think that it is going to be -- I'd love to come back and tell that story that I do think we have kind of unique assets, and we can price those accordingly to try to beat back the effects of inflation. And I think that we are. And here we are talking to you today in, let's say, mid-March. And we have enough price increases in place today that will be in excess of what we did in 2021. So -- and we still got 9.5 months left to go. And so I'm really bullish on our ability to kind of generate those types of things and hit all our targets, all our EBITDA targets, all our cash flow target, our margin targets, all our ROCA targets, all our safety targets, I'm really bullish on our ability to kind of hit all those here in 2021.

I mean I've got to keep you on feet. It's got to be dynamic here. So I don't know if we have any questions out there, kind of going to leave ES going once, twice, 3 times. Let's talk about Safety-Kleen solutions. So the 2-minute overview. Can you just tell us a little bit more about what that business is exactly?

Sure. So think of that business as we're going out to Tyler's auto body shop, who has oil that he's changed out of people's cars. And that oil is a regulated waste in every state and it's a hazardous waste in a few states. And so we pick up that oil and bring it to our 7 re-refineries, 6 or 7, 7 re-refineries, and we refine that to make base oil out of that waste oil. So we're trying to manage the spread. So we can't control the output. The output is base oil, which is a spot market, it's a commodity. And so we can't control what we can actually sell that oil for, but we can control the input cost. And so that input is what we charge our customers, or pay our customers for that dirty motor oil. So we're trying to manage a spread. So as oil prices go up, oil prices go down, in theory, our charge for oil or pay for oil, used motor oil, dirty motor oil, will move with it. And so that is the basis of the organization and a lot more to it than that, but really, we are trying to manage our spread. That base oil can be sold as base oil. That can be sold as -- we can process it further, add additives to make motor out of it. We can take it and sell it as in drums and cans and corp bottles and tanker cars, rail and barges. I mean that's the deal. Planes, trains and automobiles.

So it feels like you guys have been enjoying, let's just say, a wider than normal spread recently?

Yes.

I think we are all in debate, the folks out here, the folks out in TV land about that spread and what is normal. And I don't know if you can talk about it, but maybe talk about what do you think has changed organizationally, exogenously that might be helping that spread? And who knows where it ultimately pans out, but maybe it doesn't go all the way back to where it was, say, pre-COVID?

Yes, sure. So just to give people some numbers. So going back to 2019, let's say, pre-COVID, that SKSS business, that safety grew business did about $130 million of EBITDA. And last year, it did $227 million of EBITDA. So that's $100 million, almost $100 million higher. And so the question that Tyler is kind of getting at is that, what is -- why did that happen? And what's it going to be in 2022 or 2023 or 2025 numbers? And I can't give him that answer even though he's asked a couple of times. The -- what I will say is this, is that there are some certain things that happened since that 2019 period. The first of which is new regulation came in place, which happens all the time at Clean Harbors, by the way. New regulation gets put in place that allows us to either drive the business forward. So a new regulation on how much -- what this dirty motor oil can be used for. It can't be used now anymore in ships, simply stated. So a big competitor for that dirty motor oil no longer exists. And as such, that has an impact because we're not competing with those guys anymore and so we can charge more or pay less for the oil that we're collect -- dirty motor oil that we're collecting. And so that's -- and other people have put a number on it, $30 million, $40 million. I don't know the number. It's hard to really speculate what's driving that, but it's a big number. The other thing we did was that, in 2019, 2020, we pulled the business out of safety. We made its own separate business so that we have people every day focused on how much they pay or how much they charge for that dirty motor oil versus it was part of another business, which is more of a side project for them. And so that level of focus is real. And that's been a big winner for us. So the question -- so when we guided in 2022 a few weeks ago, I can't tell you when the spread starts getting back down to some -- so the other third thing that happened, of course, is that COVID happened. There was a huge winter storm early in 2021 that shut down the refineries for a few weeks. And that demand still hasn't come back. And so there's -- base oil is still kind of higher -- it's dislocated from crude a bit. And so that type of spread being unnaturally wide has been another catalyst for our $100 million in incremental EBITDA. So the question of what is normal? Normal is never getting back to [ $1.30 ] because of IMO and because of better management, I don't know what that number is. I'm assuming in my guidance, it gets back down to like in the [ $1.95 ] range. And so I'm assuming that the spreads start to narrow. I don't -- here we are. Q1 is over, almost over, spread hasn't narrowed a bit. The oil prices are still pretty high, if not higher. So I'm of the view that who knows. Every day that, that goes by, makes my 2022 number better and probably 2023 number better, too. So...

Right. So the key, though, to be specific, is that you do have a red bar in your bridge -- when you are expecting...

Absolutely because I'm not in the business of predicting oil prices and oil prices has to -- eventually, I'll be right. I wasn't right in all of 2021, eventually I'll be right. Not right today. But I'm not in the business of speculating on that, so I have it coming backwards. As a matter of fact, if you did the math, what we guided in Q1, we've guided to $15 million higher than 2021 levels. And as such, we'd have to go backward by $45 million to get back to the guidance. So... that's a fact.

I know it is dynamic, but today, it doesn't feel like those spreads have really, at this point, March, whatever day it is?

No. Hasn't changed.

Hasn't changed?

No. Hasn't changed. A lot of things are happening, but it hasn't really changed.

Okay. So that's Safety-Kleen at a high level. We can talk about it some more if anybody has questions out there. If not, I want to talk about capital deployment.

Sure.

So first off, your balance sheet is in great shape.

Thank you.

Welcome. And I am curious, you obviously generate a lot of free cash flow. Even though you already are spending incremental capital on things, I think you mentioned Kimball, there's some extra CapEx running through. So how do we think about capital deployment post those -- obviously, investing in your business first. I get that everybody says that. But post that, what do we do with that excess capital?

Yes. So just for some numbers for people who are here in the story. We ended the year a little about 3x levered. Based on the current cash flow generation and the earnings of the guidance number, we'll be down under 2.5x levered by this time next year just assuming we hit the midpoint of the guidance and -- midpoint of our cash flow guidance. So we're -- and the rate on our interest rates are still under 4% kind of all in, so it's still a pretty reasonable rates. We have investments, as Tyler said, in to building a new incinerator in Nebraska and really excited about the process. I wish it was ready to go tomorrow. It's going to take a few years to kind of get built and permitted. The -- we have -- Alan's out today, looking at a small deal, and the pipeline of M&A is still very much alive and well. And so we'll invest in our business and continue to drive M&A on both sides, both the Environmental Services side and on the Safety-Kleen side. So again, I think that there's plenty of good investments for disciplined investors like us to deploy capital. We do have about $150 million left on our current buyback program. We think the stock is valued at the price of that today. We buy back stock to support the stock. We have authority to do so, and if we need more, we can get more. I don't see that -- I see that as a great deployment. I see -- the cash flows we're generating and the $500 million we have in the bank, I think we have plenty of opportunity to deploy capital in all parts of our business, including buybacks.

Yes. We'll kind of rehighlight that, but it does -- it's $150 million left on the authorization?

That's right.

Okay. We only have a couple more minutes here, as a matter of fact, not much, but you briefly -- you led with sustainability, and we want to end with sustainability. So again, I think you actually weighed it pretty well. So maybe this is a little bit redundant. But what is it that you feel like the market doesn't really understand about your sustainability story? I mean I think you laid it out pretty well, but it seems like it's a story where, obviously, this isn't your doing, but it's you're the one who's kind of helping others meet their sustainability goals. I don't know if you could talk about that just a little bit more.

Yes. Again, I started with it, but I think it's a great way to end it as well. I think that it's a great sustainability story. And I think that we are a differentiator in the market. And you may not see it in your MCIS scoring, and you may not see it in our ISS type of scoring, even though we made great improvements in those areas, we've improved our ISS scores by more than double the past couple of years. So we've made progress there. We reached our first sustainability report I mentioned earlier, earlier in 2021. So -- and we'll issue another one by the end of the year. Again, it's a great -- we're getting a lot of interest in investors into this issue, especially European investors. I think that's been -- again, you don't think of it that way, but it really is -- and Tyler talked about this a couple of times around kind of what we produce, what our footprint is, but what our handprint is, how much we remove from the environment is really the compelling story here.

Yes. We'll end it with that unless we have any other questions. We do have a breakout. So Mike, Jim, thank you so much.

Thanks, Tyler.

Thank you.