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

And then we have Craig Linington, who is the President of the Safety-Kleen Sustainable Solutions, which for all of your garbage operators, you're supposed to be buying recycled used motor oil to put in as your lubricants in your trucks. I'm going to have all 3 of you every here, so I don't swivel as sort of the smartest thing. So welcome on stage, Craig, welcome to WasteExpo.

Thanks.

I want to start with the market that you live in, the industrial economy. What is your perspective of the North American industrial economy today?

So Michael, first of all, thank you for having us. Thanks for Stifel for inviting us to the -- to your conference. It's a great opportunity to meet investors and has been a great day. So thanks a lot.

We're going to ask you about.

You're going to ask very similar questions...

Okay, very good.

Yes. So you think about macro factors. I think that we said this in the earnings call a couple of weeks ago, I mean the -- all our kind of verticals are seeming to be doing very well. Our pipeline of projects seems to be very strong. And whether that's chemical or manufacturing or in automotive, we seem like it's kind of up and to the right in every area that we play in. It's -- demand is there. And we talked about it before when you think about industrial, for example, without our acquisition of Hydrochem, it's up 28% year-over-year, which is an amazing kind of story and really a recovery in that part of the world, and we'll talk more about that, I'm sure. But it just seems like everything we see, regardless of what we're seeing in the market today, it seems like it's going really well.

Is it still selling off?

Bad day.

It is a bad day.

Bad day for everybody.

Yes. So to tease that out a little bit within the -- context of the industrial economy, how much of this is the artificial constraints on being able to run a business? And then you're allowed to start running again, and there's really strong demand, and you can't keep up with that demand as opposed to it's just a healthy industrial economy. Like is the capacity utilization and supply/demand back in balance? Or are we still at a balance and there's a healthy.

It's hard to characterize that. But I would say that certainly, we are better than we were in 2019 and in 2018. So I think that all the verticals that we play in, we're at least there, if not beyond there. So if that's -- if the answer is like we're getting back to normal...

You exceeded normal.

Exceeded normal. And that could be due to price as well, so somewhat that's price, but we see it in volumes as well. And you see areas like the Safety-Kleen branch business, had a great Q1, and that hasn't happened in quite a while. So those types of businesses continue to do really well. And I think we're kind of well beyond the back to normal and now it's good growth.

Well, and just to pull a little bit on the Safety-Kleen brands business, so that what used to be Safety-Kleen Environmental, that business used to be very sensitive to, you get to a $4 gasoline and the service cycles would lengthen -- the parts was or service cycles, and you didn't see that.

Yes. No, I think that the serves -- went back and looked, by quarter, going back a few years, it's all in the 9-week range. It hasn't really moved that much, moved down a little bit, but I think the service cycles have still kind of hung together pretty well.

Yes. So the old theory at $4 was a pressure point against the consumer. Now it seems like maybe it's $5 is the new pressure point on gasoline.

It's not $4, that's for sure.

Yes. And sort of vehicle miles travel and how that ties into the service cycle. So just to remind everybody, so as I asked these questions. In the ES segment, the environmental segment, you have technical services, it's the treatment -- collection processing treatment disposal. It's incineration predominantly, but there's landfill. There's liquids management around fuel blending and recycling. My impression is, for sure, incineration sold out, there's healthy demand in landfill. And for the most part, your -- that organic liquids business is -- the drum cycles are pretty much at capacity?

Yes. So I'd say that certain waste streams are at capacity. That's not a Clean Harbors issue. That's an industry issue. And I wish we had Kimball, our new incinerator tomorrow, and we're building it and we'll be ready in a couple of years, but we're making good progress in that end. And we are doing things, though, just to kind of take as much waste into the network as we possibly can, whether it be adding shifts that are TSDFs, bulking up more waste there, being smarter about our routing, all these things to try to get more waste into the incinerators, making sure that it actually meets the criteria of incineration and not just a want, it's a need. And we've been -- I think we've been good about that.

Okay. Am I right when I look at deferred revenue, your incineration sold out pretty much for the year?

Certain waste streams, absolutely.

Yes. And with it, not just that, but the overall health of the industrial economy has allowed for the first time, substantive real pricing.

Yes. It's always been -- we've always been able to get price. One thing I want to say about our plants before we get into pricing is, okay, so the incinerators have some challenges. Landfills is the second straight quarter we've had kind of double-digit growth in landfill volumes. We still have plenty of capacity there. I mean really happy about the growth...

That's never really a capacity limitation.

It is. And there are some caps. I mean we can take per year with different landfills, but I think that it's been a good growth year, and it really speaks well. As I said on the earnings call, one of our head of sales in that area said the first 5 -- first 6 months of 2022 will be the best 6 months he's had in the last 5 years, which is really a great statement as far as how much work that's out there and how much work will be able -- not just kind of recurring work, but good project work.

Right. But the bulk of it is recurring or?

It's project work.

Project work. So you're seeing a recovery on the project market...

Yes. Some we talked about for the past 3 years, we were like, well, the pipeline is big, but there's nothing happening. We kept saying, well, it's nothing -- it's coming, but the pipeline is big. Well, here it is.

So did a big acquisition late in the -- or early in the second half last year. Hydrochem closes right before the fourth quarter starts. What did that bring to that industrial maintenance service business that is a true incremental add as far as either capacity skills, go-to-market strategy? What's the sort of transformation of that?

So first, I'll say, I think that acquisition went really well. I think that -- since we have a $400 million industrial business and they are about $800 million, it really was 2 teams that kind of knew each other, worked well together. The cultural fit was really strong. I think we're getting after the synergies. We talked about a $40 million run rate. I think we're making good progress there. I think the business hit their numbers in Q4, and we're close to the numbers in Q1. I think it's been going really well. The other thing I'd say is that they bring a lot of automation and specialty tooling that we can use both in the U.S. and Canada. They have made more of an emphasis in automation, and we can bring that, and that's allowed -- their margins are probably a little higher than our margins on a historical basis.

What are we automating when you say automation?

Kind of how you get into the pipes and how you kind of make specialized tooling to kind of get kind of some hard-to-reach places and that speeds up their turnaround time, which they'll pay -- what customers pay for.

Right, right.

Now I want to go back to your question on price, because going back in time with Clean Harbors, when you talk about -- and same with the solid waste guys, when you talk about kind of just end disposal, our pricing has been pretty strong. Our ability -- because it's such a scarce asset, our ability to drive price has been pretty good. It's always been on the service side where there's more -- it's trucks and people where we've had trouble with pricing. And that's been a little less -- a little more price sensitive, if you will. Well, that's not the case here in Q1 of 2022. And you look at our ES growth, organic growth for Q1 was 17%, which is great. About half of that was price. And that's across the board. That's not just incineration pricing or landfill pricing, that's everything, and that really tells me that we're getting price not just in our disposal process, but in all parts of it, the collection and the trends.

And what's the underlying wage inflation that's underpinning that?

The interesting thing about it, so wages are up, and they're up a little more than they have been historically. But I think it's been more subcontractor, supplies, I mean that's where the pricing, I think, has been much more acute. And I think that's where we need to do hiring to make sure we can -- I think that's more of an improving margin story than our growth story. I think we've been able to do the work that we have in front of us. It's just been at a lower margin because we've had to subcontract work, subcontract trends, and we have made some progress in both voluntary turnover reductions and hiring.

So what are you doing that's different that allows you to attract that billable hour employee and then retain it and keep that work inside as opposed to having to outsource them?

I mean it really comes down to -- and we talked about this before, Michael, is that we've made investments in the basics. It's health care costs, it's 401(k), it's other types of benefits. It's making investments in our people, and we said this in the call, there's been over 700 internal promotions. And we have many people, including Alan himself, started the company and bring people along and there's over 6,000 employees have been there for 10 years. I mean we do try to attract and retain in our voluntary turnover race and what I can see from some of the peers is pretty low.

Right. But there's no question last year you alluded to that you would have done more business if you could have hired more people. Where are you in that conversation?

Making progress on that. No doubt about it. Well, voluntary turnover is back to 2019 levels. We need to hire people. We really need to retain people. That's in my mind, that's a bigger problem than trying to attract new people.

And why do they leave?

They leave for a variety of reasons. I mean it's a hard job. And if you've ever seen anyone do this work, it is not for everybody, and that is something that we recognize.

Right. Well, most of these services, if I characterize it, right, is requires a skill. And sadly, if somebody goofs up, somebody is going to die.

That's right. It's a high safety, high compliance type of job, and it's outside and the wind and the rain is now.

Right, right. Are there geographic -- you had a huge national footprint. And I know that the -- you'd like to have some more things in the West Coast and all that. But generally speaking, you're everywhere.

That's right.

Geographic significance to this conversation about labor?

It's hard to pinpoint. I'd say that it's a challenge everywhere.

Right. And is there a type of labor that demand that you just can't get this kind of pipe fitters here or there or whatever?

Yes, I mean, I think drivers are always a challenge for us. And I think the other thing I want to say is that when you think about kind of accidents and where our field service work could be of use and emergency response work, what we're seeing is that as the great resonation of whatever people are calling it, and there have been new people and new jobs, I mean, it's the new people who cause the accidents. And so there's been certainly an uptick we saw in the second half of the first quarter here in Q2, where there's more spills and there's more accidents. And there's more things happening, and that's -- you don't want to be your best customer, and we're not, but you want to make sure that you're responsible. That's been a good thing for you.

Right. Yes. At least, just to put it in perspective, these are size of the actual dollars of cleanup or 10,000 or less.

Yes, 15,000, 10,000, depends on what happens. Depends on what happens.

Yes. But this is -- these aren't multimillion dollar things?

No, there hasn't been a lot of big project work. Outside the decon work for 2021 and 2020.

Right. Does you're driving side of the model lend itself to fuel surcharges?

It does. We have fuel surcharges for our environmental services business and it's across the board. And it's every 2 weeks. It's actually pretty good program.

And you can -- so people should put that aside as far as inflation? Is just a pass-through, so it's got a margin dilution issue, but you can cover this?

That's right.

So the bigger lever here is wages.

That's right.

And then...

Well, wages and -- I think subcontracting in outside trans, outside disposal, that's where we have to price, have to exceed inflation in those cases.

Right. Okay. And what about materials and supplies?

Steel drums, as you may know, are up 60%, 70%, and we use a lot of them, right? But if you look at Q1 in the Environmental Services business and you back out some project work and some government funding we had and normalize it for -- take out Hydrochem, we're up 20 basis points. I don't know if anyone you met today on an apples-to-apples basis is up year-over-year in Q1 and they have a great story. And I think that's...

Next company will actually going to talk about that, but yes...

I'm sure there's [indiscernible]

Yes. Okay. And then what is the pattern right now in the industrial maintenance cycle? Are we back to doing what we're supposed to be doing? Or are there still delays?

I think it's -- they are -- it is -- they are full out. They are making as much jet fuel and diesel as they possibly...

So the refining industry is capturing the refining margin while they can they [indiscernible] little maintenance...

Absolutely. Well, they want to get ready for the summer driving season. So I think they're doing normal maintenance. Normally, this turnaround start in March and end in May, early June, we haven't scheduled out to July now, which I think is a great story.

So it's smaller for longer.

That's right.

Right. Okay. And can you find -- those take a lot of people to do.

They do.

And so how much of this smaller for longer is about stretching out the labor and leveraging your own utilization there? Or is this more driven by the customer?

Driven by the customer.

They're just going to capture the moment.

Yes, I think they're going to try to go as hard as they can for as long as they can.

Right. And then you talked about beyond just the automation. I had this impression that Hydrochem also had a little bit better infrastructure that they...

Well, they have a bigger footprint, and they're twice our size, right? So they really is helpful to have a bigger geographic footprint and allow us to sell more services to our customers. I think that's the cross-sell there.

All right. All right. Craig, your business.

Go easy on me, Michael.

Go easy? No way. I'm a little bit of a roll. I'm going to be late again, but I'm on a little bit of a roll. So I think this is a fascinating business on so many levels that we could start with the whole sustainability conversation. But we could leave that off the table completely and just go, we consume something shy of 3 billion gallons of base lubricant in North America, annually, it's 2.7, 2.8. And a very high percentage of it can be successfully captured and it can be recycled, meaning we brought back to base lubricant forever over and over and over again. You can do that with aluminum and can sheet basically, theoretically, glass, but there's no value in it. But you can't do that with paper. You can't do that with plastics under mechanical recycling. You can do that with base oil. So it seems so obvious that, that circle out of -- you put it in vehicles, you take it out of the vehicles that ought to be sent into a recycling model. So why isn't more of that than captured from a circular standpoint? Why aren't more of the sources of it from a transportation standpoint, bringing it back in and using it again and then close that loop?

Well, first of all, I think it is, because every gallon of base oil that we produce, we sell back to market either as base oil or as finished lubricant. And so if your question is why are we not selling more finished lubricants...

Well, finished is really the cost -- it's the blended market.

Yes. So I mean I think 2020, obviously, everybody was just trying to survive. Last year, as we've talked about huge disruption in the industry from the additive shortages and other raw material shortages. So while we've seen conversion of a number of customers and have a number of customers that are buying from us kind of under the closed loop program, today, that kind of significant growth wasn't going to happen in 2021. People were trying to find supply from anywhere they could get it. But I think we're in a great place. I mean I totally agree with the kind of value proposition that you just outlined. I think we've got a terrific story and a terrific set of assets right across North America.

And if I think about just this room, and so this is people who run Class 8 chassis and engines, so are all of the engine makers who put their engines into these chassis? Or have they all bought into that you can use your blended product and meet all the warranty requirements?

Yes, our products are approved for each of the heavy-duty...

So there's no issue around the engine side?

No. Now proving that to a fleet manager is a different conversation and proving it to the engine manufacturer. And so that's the sales journey that we're on is putting our product in test with fleet managers, letting that data prove itself out around fuel efficiency, longer drain intervals and obviously, keeping the engines running at...

Right. And it doesn't cost any more. It's competitive from a pricing standpoint?

Absolutely.

Right. So this is making a decision spending more money. I'm on parity, but the piece that's not seen in -- be discussed is it's an absolutely verifiable, sustainable play.

Yes, absolutely. We just completed our latest update of our life cycle analysis and compared to a gallon of lubricant produced from crude oil, you save 10 kilograms of CO2 per gallon versus that alternative we're producing from crude.

So not just the fact that you just closed the loop, you've also now got a carbon...

Benefit.

Benefit as well. Okay. Let's talk about the state of the business at the moment. So we are in this usually wide spread and just for everybody's benefit. So used oil collection, there's 1 billion-ish gallons that can be collected. My estimate is few hundred million of that is internalized and the rest is the sort of the addressable collection market, 800 million-ish, a little over half of that goes into the recycling it back into base lubricant. The rest of it is sold into a fuel's play. Is that sort of a fair characterization?

Sure.

So you've got a whole collection network that's capturing this approximately 800 million gallons, depending where the price of crude oil is, you may actually get paid for it or you might actually have to pay for it. So it's a charge-for-oil scenario, pay-for-oil scenario. That's one end of the spread. The other end of the spread is you bring it back and make it into base lubricant, you sell that as a by-product. That's the oversimplified description of the spread. We are in an unusually wide spread at the moment. I think because of supply/demand imbalance created by not flying for 9 months and all that marginal production comes offline, it's related to distillates manufacturing. What's the line of sight? Am I right about that? Approximately?

We're in a higher margin situation than we have been for lots of different reasons.

But as a supply and demand imbalance is...

Regulatory changes, too, Michael, that were very advantageous for us. I think are permanent, so I don't think -- I don't want to characterize it as a temporary thing. I think it's a sustainable change.

Right. This is IMO 2020.

Yes, of course.

Yes. So the question I have is the supply and demand part does eventually get back into some form of equilibrium. Is there a line of sight on that?

Well, I think, to your point, the way you segmented the industry, you either burn it or you rerefine it, recycle it in some form. I think the rebalancing of the market because it's oversupplied since IMO 2020 is going to be solved by more rerefining infrastructure that's going to take time to come on board.

So the fuels market has less options, which means more oil is available for you to collect to put into refining or others who develop refining capacity -- from that side. But what about the demand side from a standpoint of all of us driving versus the actual production of base oil period, not just re-refined. Is there any line of sight of that going back into balance?

Yes. I mean, I think it's relatively in balance today. Again, there's kind of short-term disruptions like refiners, major refiners being incentivized to produce diesel versus base oil for example, but as far as the kind of demand picture for lubricants, I think everybody appreciates that the passenger car market is in a structural decline, steady, not dramatic as we move towards electrification, commercial market, heavy-duty trucking, the same, but much slower. The industrial sector, not so much. I think that's set to grow based on kind of the reshoring dynamics that Mike was referencing. So I think we can see the total demand picture for lubricants that we produce being pretty steady in the stage over the coming years.

And so what happens to the spread then over the next year to 24 months? As -- does it -- is this the new normal? Or is there some compression likely as that marginal production for distillates settles and we start seeing that incremental base oil gallon being produced, and things like that?

Yes, I mean there's always going to be, as there always has been different dynamics in terms of the relationship between base oil and crude and base oil and high sulfur fuel, oil prices. I think what I'm focused on, what my team is focused on is taking what we've learned over the course of the last 2 years, the systems we put in place, processes, great talented people who are managing the spread and taking that and applying it and figuring out how do we continue to incrementalize that. And everything we talked about earlier on in terms of the value proposition for the products that we produce, that no one else can, unless you're in the re-refined base oil business, it's a small group. We've got a terrific advantage there.

And then you all had -- we're in a process a year ago to buy re-refining capacity along the Gulf of Mexico. For lots of reasons that transaction didn't have -- no fault of your own. There's just a decision for it not to happen. But clearly, you'd like to have capacity there. So what's the plan B in order to be able to source site capacity to recycle the oil there that you collect?

There's a couple of ways to do it. We could add more capacity into our existing infrastructure to take on more oil. There's also smaller deals that are out there that we could look at that have both collection and some re-refining capacity. I mean there's still plenty of opportunity in that business.

So it's likely that you will find a solution to how to process oil locally as opposed to moving it out of the Gulf Coast.

And we're doing that today, and we're still doing our right.

Okay.

The good news is that we focused on -- as Craig said, we've added to the business. We broke it out of the SK branch business. We added resources there. We're collecting more gallons than we need and it allows us to be more thoughtful on where we source those gallons from. So for example, we used to have a -- we get a gallon in Florida, up it goes to East Chicago, Indiana, no matter what, right? Now it's like, well, if they get the right price, make it work, sure. If not, we can sell it as [indiscernible] in the local market. We're trying to collect more than what the plants need to give us that flexibility...

Where the sourcing...

Absolutely. So we're not bound by trans costs because as trans costs have gone up, there's inflation in the SK business. You just don't see it as well as you do see a business...

Because it's spread so wide.

It is spread so wide.

Right. All right. One last thing on your business, Craig, to this room. What's your pitch to the fleet managers of why they should be buying this blended product?

I have an offensive one and a non-offensive one. So I'm going to -- since I'm new to the group, I'll go over with the...

Stick with the non-offensive.

Non-offensive one.

This is a tapped.

No, I think we talked about it. It's a great oil and we've got lots of data to prove that. We've tested our finished lubricants for heavy-duty engines against some of the brands that people are most familiar with probably buying today and they're either at parity or outperform in some cases. Add to that, the sustainability benefits that I described. And I think it's a conversation we love to have with every fleet out there in the market.

And we get the fact that it's hard to step away from the brand you had for 20, 30 or longer years, but we provide a better angle and we need to have the conversation with the sustainability leader, not the purchasing manager because we get in that room, it's a much more effective conversation.

Well, and I imagine probably sitting in their seat and then walking into a bidding situation, and they go, "Oh, by the way, I'm also -- not only I move to alternative fuels, but I've also got alternative lubricants."

It's a great bridge.

And can you -- so can you -- is there a documentation of data piece that you give them that empowers them with that?

Yes, absolutely.

Yes. Okay. ESG is a big topic conversation. One of the other companies is in the industry wanted to talk about that the real focus about beneficial reuse or recycle reuse. I want to make sure it's clear. You do all do a fair amount of recycling?

Absolutely. 25% to 30% all of Craig's business, plus other parts of our business where we recycled metals and raw materials and solvents. It's about I'd say 25% to 30%, Michael.

And just to be clear, the $1.2 billion of industrial services probably doesn't have a natural lend to a recycling thing. So if I pull that out and then start doing this calculation, there's a far bigger piece of technical services is recycling plus SKE, old SKE, that's all recycling.

Yes, it's all the solvent cycle. Absolutely.

So the reality is that there's a lot more beneficial reuse going on and it's fully maybe appreciated about the Clean Harbors.

Yes. When you think about Clean Harbors, you think, okay, it's landfills degeneration. It's not recyclable, but it's a big part of our business.

Right. So within the conversations about fleets, there's increasingly this focus on moving away from hydrocarbon-based fleet to alternatives. Your -- I mean, there's a certain amount of local, but there's an awful lot of long hauling. Does your model lend itself to a shift to an alternative fuel, at least a lower carbon -- lower intensive carbon fuel, so CNG versus can you electrify our fleet?

Yes. So we're working on that. I mean we try to get figure out a way to it in the long haul and industrial, it's hard to do that. We have made commitments in our sustainability report about being 10% of our light-duty vehicles being electric, and so we're working toward that answer. And so -- but I think that when I think about it, we use our own oil, and that's a great bridge to electrification. I think that it's -- as Craig said, it's 85% less carbon intensive than from oil from crude, and that's a great bridge in between the 2.

Right. Okay. So the other one, the favorite topic every wants to bring up is about the importance of a technology platform, the ability to use data effectively to manage the business better. Where are you in that evolution and how you can be -- and what the customer is looking for and the KPIs or dashboards that they want to be able to pull up on a screen and go, this is what happened to my waste streams?

Yes, Mike. We have our own proprietary software, which we've been using for many, many years. And it's well designed for waste profiling and giving the customers what they need.

Okay. And then from a standpoint of truck systems dispatching, are we -- where are we in maximizing vehicle miles traveled and taking minutes out of cloud have you? Do you need water?

No, I got it. I guess the -- what I'd say is that we still use low cross routing. We've used that for a number of years.

Okay. Big industry consolidation has just happened. So there's still 6 disposal players. It's now just a different owner. As you look out there and think about some of that consolidation, how do you think about what that means to just operating in the business climate of being an industrial waste services provider?

Do you send that one, Jim?

Sure. So you talked about the recent...

Yes. [indiscernible] Republic, what's called state has been.

Yes. And we're a fan of that deal for a number of reasons because it's going to bring a well-disciplined person into the space, and some of that has a track record of pricing, these scarce assets appropriately. And so I think that's going to be good for the space because it's an industry that you have to have a discipline on pricing in order for all of us to succeed. So I think for -- when I think about the consolidation in the space, we're going to continue to do what we do and do well, and we're really sort of unique in that sense because ECO had a lot of landfills, but we've got really incinerators in the entire spectrum.

Right. And so is it -- is this figuratively a finger out of a dike and there's -- because it's a lot of little players beyond the 6 the control of the disposal capacity. There's a lot of smaller players within the industry. Does that pick the pace up of that consolidation?

I don't think it changes the profile for what we do and what people on the street don't see is that we turned down a lot of deals. We're the natural buyer of a lot of companies just given that we're #1 or #2 in every place that we play. And so we kicked the tires on a lot of deals. You guys -- that's off camera, and you don't see that. So I think there's going to continue to be a lot of opportunities for us to continue to do bolt-ons, and that's sort of our plan moving forward.

Okay. Well, again, I've run over time. I want to thank you -- I want to say to this room, you should talk to Craig because you ought to all be using the blended oils in your vehicles from a sustainability standpoint. And hopefully, we'll figure that all out. Thank you very much.

Thanks, Michael.

Thank you.