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

All right. Okay. We're back. I'm Michael Hoffman, Group Head of Diversified Industrials at Stifel, cover Environmental Services. We're segueing now into one more industrial waste name in our coverage is Clean Harbors. It's my pleasure to have with us Mike Battles, who's the Chief Financial Officer. Sitting next to him is Sharon Gabriel, who is the Chief Investment -- Chief Information Officer. Subtlety here. So Clean Harbors, 25 years ago, developed an in-house IT platform to manage assets. They call it WIN. Anybody who's ever had an opportunity to go to the corporate office, if Alan's there, it is probably one of his favorite things to do is to take you into this little war room and it's got this almost surround sound screen set, get on a computer and he can start pulling up things. And when you realize the density of their footprint, you kind of come away partly in awe that you can actually manage all that. So we're going to have an opportunity to tease out from you the power of this. That's sort of the setup.

But before we do that, I want to help the market understand this business model better. If I get one pushback is people will default to, "Oh, this is a neat company, they've got great share, but it's a hard company to model." How do we help them get to a place where you shouldn't think about this as a hard company to model? Where are we in the transformation of who this is, the segments, the data that's available within the segments and the opportunity to sort of really believe in the compounding of a growth rate of the business?

Yes, Mike. So first of all, thanks, Michael, for having us. Thanks to the Stifel team to have us here today. It's an honor to be here presenting today, and I appreciate the opportunity.

On 3D.

3D.

Live.

Yes, it's nice to be here. It's nice to actually see people and shake people's hands. It's nice to actually be together. So thanks again.

Yes.

So when you think about Clean Harbors, and you think about the pieces, and I get the same criticism that I'm sure Michael here is tough to model, and I feel like saying like, "Well, okay, it's not that tough, but it will help you. We'll help you with that." So if you think about -- I'm going to start with kind of the Environmental Services business, right? The Environmental Services business is all about our landfills, our incinerators. We own 9 landfills -- hazardous landfills. We own 9 hazardous incinerators -- 13 hazardous incinerators in North America and we have a very big moat -- a very strong base there. And those services we put around that end disposal kind of feed the beast. All the services we do tie back to they go collect or do services for our customers that generate hazardous waste that ultimately makes its way into our end disposal, whether it be a landfill or an incinerator or wastewater treatment or an accumulation station, TSDF, they all make their way into that. So that's really the premise behind it. And we don't give out revenue guidance, but Michael does give out revenue guidance. He has it at 4 6, $4.6 billion for this year, $4.7 billion, something like that. I'd say, about $3.8 billion of the $4.6 billion is in that Environmental Services business. But think of it as services that we provide for our customers that feed the beast. And there are different ways to drive that to your point. Like, for example, industrial production drives that -- certainly drives part of that. We do pick up a lot of containerized waste in the automotive space. So vehicle miles traveled is also a big indicator for us. We use kind of -- those are, I'd say, 2 good KPIs for that business as we try to think about market dynamics. But we're actually better than that. We think we're kind of a GDP-plus type of business because we have increased regulation. I'm sure you've talked to a lot of customers. They talk about regulation and how they can be a burden on the business. We love regulation. Regulation kind of drives the business. It's the premise of the business model. When there's more compliance and more regulation, that means more waste coming to us, which is a good thing. And so we are kind of a compliance-driven organization, which I think is a good thing. And so as more regulation come up, whether it be industrial -- the infrastructure spend or PFAS, which I'm sure we want to talk about, we are -- that's a good thing for us because we are the solution. We are the solution for many of our customers in these areas. When you think about the other business, Safety-Kleen Sustainable Solutions business or the oil business, we'll call it simply the oil business, that is same idea. We're picking up waste, that's regulated waste, used motor oil, whether that's in -- coming out of passenger cars or in industrial, any business with a crank, like a printing press or any type of stamping machine, they don't have a crank case, they'll have oil. We'll pick up that dirty motor oil. We'll re-refine it in our 6 re-refineries. We're the largest re-refiner of used motor oil in North America. And then we'll sell that, and we make base oil out of it, which is 3/4 of 10w-40 is base oil. And so 3/4 percent of motor oil is base oil, and we'll sell that back to our customers. And so that business is about $800 million in revenue. And so that also is -- again, think of it the same way. It's a regulated or hazardous waste. You can't pour dirty motor oil down the drain. And then we take that waste and then we'll re-refine it and sell it as a product. And so that was -- we bought that business back in 2012 when we bought Safety-Kleen. And that oil business is actually doing very well. We'll talk about that more later this morning. But that is a simple way of thinking about our business. And we're managing -- in the oil business, we're managing a spread. We have -- we sell base oil. We're a small seller of base oil in the market. We're competing with the Exxons and the Mobils and all those big producers of motor oil, but we control the input costs. So as oil prices go up, in theory, we have to pay more for this dirty motor oil because there are other uses for this motor oil. It has BTU value. And so as such, we're managing a spread. So in general, we're agnostic to the movement of oil price. People say, "Oh, oil is at $120, you're making a lot of money." I'm like, "Well, we're making a lot of money because, a, we're managing that spread very, very well. And b, oil prices are going up, that creates a little bit of a benefit for us," because oil prices go up, we turn the price immediately on how -- what we sell it for, but then the prices for our input cost change slower. So that's a small winner for us, but it does move, and we do certainly manage that spread, and we manage it very well. But don't think of the oil business as just, we wake up every morning, we pick up all the hundreds that are on the table, put it in a bag and wait for tomorrow for the spread to stay wide. It's -- we're managing that aggressively and we're managing it a couple of different ways. The first way we do it is that we broke that business out in 2020 and separated it from the SK branch business and put resources in it to manage the front end of the spread more intelligently, right? So we really did a good job of kind of putting better systems that Sharon will talk about, better systems and processes around that collection of dirty motor oil so that we can manage it more effectively. Used motor oil collection is a local market. The Atlanta, if there's an outlet for it, if there's a paper mill, if there's a cement kiln, that -- they can use that as a fuel supplement. And so we're competing locally in those markets while we manage the price locally. And so that is something that we've done a much better job of and not just moving prices when base oil prices move. The second thing we did was that we really focused on trying to develop -- it came out recently, our base oil making it a sustainable product. I mean, this really is -- all our oil we manufacture, all our base oil manufacturer comes from dirty motor oil. We don't add any kind of crude to it. So it really is a great sustainable story. And the quality of that motor oil is actually better than base oil because it's already been refined once. And as such, we're working on trying to price it not as a discount because it's a re-refined product, but as a premium because it's a sustainable product. And that -- if you read the press release that came out the other day about Clean Plus, that is branding that oil as a higher-quality oil. And if you -- it takes 87 -- 78% less greenhouse gases to make a court of base oil from dirty motor oil, that is directly from crude. And so that's a great story. If people are looking for ESG solutions and maybe running out of ideas as they're in year 3, year 4, year 5 of this that's a great answer for us as they move away, as they move toward electric, if that's the ultimate answer.

All right. So I'm going to try and pull apart...

Pull it all apart, baby.

Some of these pieces, right? So we're going to -- and Sharon leap in here when there are points to leverage off of WIN and how to...

Sure.

So we're sitting here on $3.8 billion of revenues at ES. There's -- about 1/3 of it is the collection disposal, old-fashioned collection disposal. And the other 2/3 are all these services that incrementally feed it.

That's right.

If I think of -- so revenue-wise, 1/3, 2/3, but it's very different margin.

Yes, yes, I get that. Of that ES. Yes, yes.

Of that ES, how much of the total tons, maybe this is on your world, is the recurring customer off of production versus the services side of the total amount of volume that goes through your infrastructure? How much of you incrementally increased operating leverage because the services piece has added 5%, 10% to the total tons or volume, whatever the volume metric is, going through the infrastructure? What's that number approximately?

I'm going to answer that question. So when you think about it, it is -- so to Michael is right, so 1/3 of the ES business is going out to the Dows and DuPonts as examples, and picking up their hazardous waste that they produced in their manufacturing process and bringing that into our incinerators or our landfills and disposing of it. The other 2/3 is either kind of emergency response work, which is about 400 million of that and industrial production, we just bought the -- Industrial Services, which we just bought the HydroChem business. That's a perfect example. It's about $1.2 billion. And then we have the Safety-Kleen business, which is the branch business, which is doing containerized waste, VAC services and parts washer services for our customers, mostly in automotive. So I think that...

It's another $800 million?

It's $800 million. That's -- if you do the math on that, you'll get close to that number. So that is the deal. And so my point being is that all those businesses kind of feed the beast. To Michael's point though, the Tech Service business, which is all -- this is all laid out in our footnotes, we have revenue footnote to lay all this out very clearly, that's where -- that's probably the highest margin business. When we have end disposal and when we -- and the more -- the higher percentage of the invoice that is end disposal, the better the margins are. We've been -- people who have followed us for a number of years, our end disposal, we've raised price 3% to 5% a year forever because these are scarce assets, which is what Jon Vander Ark called them when he bought U.S. Ecology and they're pricing him accordingly. And I think that's very true. And I feel like we've been doing that for a long time. We're doing that more now because of inflationary pressures we're feeling, but that's kind of how we do it. What's happening now though around pricing is that we're getting better pricing for our services, for industrial services and field services. We're getting better pricing there because of inflationary pressure that we're feeling in labor and trans and disposal and other areas.

So it still didn't get quite to what I was trying to get to.

Do it again.

Total volume through the whole -- the ES model, how much has been incrementally improved because you added the non-TS stuff?

I see your question. Your question is like, okay, of the 569,000 tons of waste we get into our incinerators, how much more of that is coming from Industrial Services, Field Services, SK brands? Hard to put a number on that because when it gets into the network, how it gets there is through all those different branches. I can't -- the answer is when we bought HydroChem, they have industrial -- they had hazardous waste, which we're taking, 10 million, 15 million of incremental waste. There's not big numbers in that area.

Right. But because your point was you only added those services to feed the beast, and I'm trying to understand, one, that it has absolutely proven to be that your incremental feeding the beast...

Sure.

The subtlety of this, and where I'm trying to get to, and not doing a very good job of it, there's 300 million tons of trash in North America. There's 35 million tons of hazardous waste. 20% of it comes offsite. These are tiny volumes.

Yes.

So every ounce matters, like you never chase volume in the garbage business. You do -- that you chase volume, but you care about it. So finding ways to get your hand on and doing a service that creates some incremental piece of waste that then allows you to internalize that is very powerful. That speaks to this infrastructure that you're managing, without question, I think you can validate.

The point, Michael, when you think about HydroChem, now I kind of understand your question a little bit and say, yes, there's some direct waste we get out of that. But more services to our customers, when there's a spill, when there's an emergency response event, or when they have containerized waste or other things, we're there every day. And so we're providing those services. More share of wallet for our key customers, for the Dows of the world is a good thing, it's a good thing. That provides more services when there's an unplanned shutdown or when there's a spill, which happens, right? And so that provides more services for us and then ultimately more waste for the plants.

Okay. So I'm not getting to numbers, but I'm going to tease it one other way, which is the model has become incrementally more predictable, in part, I believe, because while this recurring revenue piece at Dow and DuPont is very stable with the normal -- there's ebbs and flows. You have enough diversity of services that when things are stronger or weaker at any points of an end market, the services are keeping enough incremental volume through and you're getting really intensive operating leverage from it, it's helped to improve the predictability of the model?

Absolutely. Well, as we've gotten bigger and as we've gotten more diverse, I think that smoothes things out a little bit because we do 6,000 emergency responses a year, for example. And I can't tell you when the next one is going to be, but I know there's going to be about 6,000. And so that -- although it's hard to predict kind of where, what region, that happens and that's been pretty stable. And we will fit 18 consecutive quarters of meeting that through the expectation that's part of the story.

Okay. So let me drill into a couple of pieces. You are the largest incinerator. One of the things that's absolutely happened is that the nature of the waste stream has changed. It's becoming more complex. They refer to it as high hazards. There's tight capacity in the market to be able to absorb this. I have this sense that based on your deferred revenue and the trends that are going on in the market, you're sold out -- basically sold out for the year now?

So the way it works is in certain ports, high haz ports that need to have direct burn streams, you're probably right as far as kind of the amount of waste, incremental waste that we can take into the incinerators. But whether they be landfill product -- I mean, hazardous projects for like in superfund sites or other types of soil work, like that, we can take all day long. And we have a lot of capacity left for that. And we're seeing that. It's not, all soil goes into landfill, some of it goes into incineration, depends on what waste is in that soil. And so those types of project work that we're getting more and more of, which we've been talking about for 2 years now, we actually saw that in Q1, and we're seeing it in Q2 as well.

So the discretionary project market is starting to come through again?

Absolutely. Absolutely. After talking about it for a long time and talking about a pipeline and we're this close, us and I think a competitor, I'm sure are doing the same thing.

Yes. Okay. So the next piece is you're adding capacity, about a 10% increase in capacity from online in '25.

12%, early '25, right.

Veolia who bought Gum Springs is going to add about 100,000 tons. They'll add it earlier. Can the market absorb 170,000 tons of incremental capacity?

Well, I'm not sure exactly what they can take in their new incinerator. So you may know more than I do about that. But certainly, our rotary kilns can take the high hazard stuff, which is plenty of it. And you saw that from our balance -- you see that in our balance sheet. We talked about that. There's more than we know what to do with it. I mean, we're also -- just so as people wait, we don't sit there and say, "Well, we've got to build Kimball. We'll build this new incinerator faster," because you can't because there's water studies and environmental studies that go along the way. But what we have done is we have made a progress to increase incremental capacity a little bit. If the COO was here, he'd say, 20,000 tons over the next 3 to 5 years to add more capacity into our network to help manage some of that.

And what the point being is the 20,000 tons is -- about 700,000 tons that's still done internally captives, you all think 20,000 to 40,000 a year is going to start rotating into the open market?

What I'm saying is that we're making slight improvements into our network to provide more capacity to put waste for debottlenecking.

Debottlenecking, okay.

You had made a point there in the call or somebody said like, "Hey, do you need an industrial recession to kind of debottleneck?" I'm like, "I don't know" for industrial recession. So no, we're making adjustments accordingly over time.

Okay. So you're debottlenecking, but there's also an outsourcing going on from captives?

Absolutely, which is also happening. So I think people see companies like 3M, which we're talking about publicly, and they talked about publicly about closing their captive incinerator in Cottage Grove, Minnesota. There are others that are out there.

Okay. All right. So I want to talk a little bit -- I'm not leaving you out of here, so I want to come back to the other part of the predictability. You have this extraordinary network of assets. I mean, it's in the thousands. It's not hundreds, it's thousands. This is what WIN does. So help everybody understand the power of your competitive advantage based on this system? A piece of work comes in that's discretionary and your ability to go into the system and look at where assets are deployed or people are deployed, billable hour people and that -- what this -- the power of this to be able to move things around in the model to be able to respond to? Help everybody understand the competitive advantage?

Sure. So our asset tracking system is probably the crux of really our whole asset management system. We have thousands of pieces of rolling stock, which most companies our size would keep track of their rolling stock. But we also have hundreds of thousands of parts washers, which are the tanks where we wash all the parts that service all the gas stations. We also have thousands of containers that hold haz and nonhaz waste. Being able to track those, where they are at any given point in time is kind of our secret sauce of our asset tracking system. So as they move from customer to customer, they move to our facilities back and forth. We even track customers -- our containers that are at our customer sites at big refineries, thousands of them on site. So we do all that through mobile devices. And by feeding all that into the back end, it's immediate billing. So we rent our assets. And sometimes we don't charge for rental. We just -- it's there because we're picking up the disposal. And so we've built those systems out over the past about 5 years. And we've kept them incrementally. We put money into those different tools and technologies to make sure that they're state-of-the-art. And so we've started maybe about 4 years ago to introduce AI and RPA into some of those tools so that we're currently modeling where we should have things, assets and...

So predicting where it ought to go?

Based on customer volumes, yes.

Or if there's services that come up, we say, "Well, normally, it would need this, this and this. Let's make sure that we have those assets and make sure we're billing for those assets.

Right. As opposed to spending capital, you -- it's...

Repositioned asset.

So how would you describe where the asset utilization is today based on this 5-year program comparatively? If it was the beginning of the baseball game 5 years ago, what inning are you in, in driving that asset utilization?

I know the CEO would say we're in the early innings of doing that. I think that we've done a great job. Sharon and the team have done a great job. I'd say we do -- it's middle to late innings. I think we've kind of do a good job of, like we can literally tell you where every truck is in North America and we tell you where every roll-off container, which is those 10-foot bins that we have. I mean, we know where those are. Every parts washer, there's 200,000 parts washers, we know where everyone is.

And when you think about the improvement in the cash conversion that's in the model and the goal of getting over $300 million in free cash, how much of that has been driven by the benefit of this versus just the mix of the business?

I mean, I think that this type of -- it's all about keeping rentals to a minimum, right? Because we have give those service to the customer. We'll have to do with -- if we don't have internal resources or internal assets to do it, we'll rent it. And that's -- you're giving margins to someone else. So us that's -- the secret sauce is driving that EBITDA, which then drives that. I think from a cash flow perspective, I think the biggest, most exciting thing is the Kimball incinerator. We're spending $40 million this year. We're going to spend $80 million next year. We spent $10 million last year. All that is 0 EBITDA. But think about it, when you go out in 2025 where the EBITDA is down to a small maintenance amount and that plant is throwing off $35 million and $40 million of EBITDA, well, then that's a cash flow machine that will kind of pay for itself really quickly. And so -- and we see that today in Eldorado, Arkansas, where we made that investment in '13, '14, '15, '16, and we're seeing the benefit of it today.

Okay. So I want to talk about a couple of things within the sublease of the model. So the SKS business, there are perceptions in the market that we're in this above-average spread, and therefore, the spread has to change, and there's certain percentage of this incremental profitability has got to be given back, and you frame it against the '19 because that's sort of the last time we talk about and what it looked like normally. Heritage was here earlier today and made an interesting comment that on the front end, they think given where oil prices are currently, and the last time you were in this relative neighborhood, and they're looking at what their PFO is, then versus now, that, that savings is going to prove far greater than it -- or how much of you're going to get to retain? If it's $130 million in '19, you did $230 million last year. You haven't guided to $230 million, but likely you're going to be flat here, if not, up a little bit -- he's shaking his head up and down, maybe I got a request of out of that...

Yes, yes, yes. I understand your question and I know what you mean. Your first question was a puzzler.

Yes, right, I was close. I almost got a guidance for this year. How much of that $100-ish million -- when you gave guidance this year, you basically thought you were going to get back half of it.

Yes. Right.

But it would appear, maybe it might be less than that because the PFO has not gone up as much as I would have thought at $120 oil?

Yes. Again, I can't see what Brian said at Crystal Clean, but I would agree that it's a fundamental shift, right and where we were when the prices were this high and what the PFO pricing is, to where we are today, it is night and day different. Now why is that? Why is that? Well, I'd say, first of all, new regulation, and I think we all, us and our competitors, underestimated the amount of used motor oil going in the bunker market. We used to say that if there's 1 billion gallons of used motor oil produced every year in the United States, 1/5 of that 200 million gallons would go to the bunker fuels, it's more than that.

It was huge.

It has to be more than that, right, because there's a glut and you see it, and I read the financial statements of Crystal Clean as well, I'm sure they read mine. There's a glut of used motor oil out there, and there's no outlets for it. And as such, we've been able to keep that price that we pay for that dirty motor oil really low versus where we were back in '13 when the price -- oil price were that high. The other thing that we did, though, and we acknowledged it because we were having all kinds of problems in '14 and '15 is when -- is that we were managing that front end of the spread much better. We've made a lot more -- we broke that business out and separated it in 2020. We made a lot of investments in sales force and collection efforts to manage that because it's a local market. It's what you can do with that dirty motor oil in -- for other uses. And we've been managing that much better, and our prices remain low even as oil prices continue to rise. I don't think that changes if oil prices go down to 80 or whatever the answer is, the spread start to narrow, whatever that means. We're just managing it better in the IMO regulations for real. And Brian called it a fundamental shift. Brian Recatto, the CEO of Crystal Clean calls it a fundamental shift. I totally agree with that answer. I totally agree with that answer.

Okay. So we're all -- we don't -- we're not going to try and quantify it because the truth of matter is everybody would be guessing because we just need it to correct and then see where it settles. But there is absolutely $0.01 per gallon difference between pay for oil in '13 and pay for oil today. There's a spread there that's to your favor?

Absolutely. Absolutely.

Right. And it's not trivial. It's $0.40 $0.50, $0.60?

I'm not going to acknowledge that, but it's in that area.

And this is in their note. They said $0.60 just in their business. So I'm not asking you to say it's your $0.60, but they, in their business...

Well, you can see it, right? You can certainly see in the numbers.

Okay. On the back end, and you alluded to this, you issued a press release, the repositioning of the base oil. The base oil is sold at a discount to a spot market. Or thought differently, it's sold to a discount to Virgin. We've been a great believer that if you -- this is -- I mean, there's several things on paper -- not paper. Come on, Michael. Aluminum cans, used oil, glass if it was economically, you can step on it forever. There's no...

It doesn't lose its chemical properties.

There's no property losses. It's not like fiber and paper...

Yes, it actually gets better because it gets re-refined and re-refined and re-refined.

Right. So we'd see -- it's one of those -- it's the perfect sustainable thing?

Absolutely.

Every major generator of used oil -- big generators, the Walmarts of the world and all that fleet-based companies ought to be closing this loop. They're not yet, they should be. But the Valvolines, the Mobil 1s, the Pennzoils, all should be having some green portion of this. Is that starting to happen? I mean, you issued a press release, you talked about the positioning, but is it -- are they starting to call you say, "Okay, how do I get green in my portfolio?"

So it's getting closer. But what we have done is this. We said, look, we're going to sell you base oil at a certain set price. If we use it for -- if you start marketing as a sustainable solution, we're going to raise the price. There's a price in the contract that gives a lift to the base oil price if they start using it as a sustainable...

So their position...

So they're acknowledging, we're all acknowledging that maybe it's not happening today or maybe it's happening on the realms, but when it starts to happen for real, which I think is not that far away, I think we're going to be able to get a...

So you have contract language to allow you to come back?

Absolutely. So that it's automatically adjusted. So they don't buy our oil at the market rate, if you will, and then turn around and use that as a sustainable answer. That's the whole idea behind Clean Plus, which is the new kind of brand we put on the base oil. We sold a lot of blended oil and we've started a Performance Plus, but really, I mean, we make a lot more base oil, we should market the base oil as like -- as a high-quality, sustainable solution that if you use an motor oil, it should provide more value.

Okay. So the reality is this $100 million lift from '19, far more of it is potentially retained.

Yes. The way I say it is this, so to be fair, I used to say like, hey, going back to 2019, we did $130 million in this business. And if you say, the IMO regulation is worth some amount, $20 million, $30 million, well, then now you're at $160 million. And those days are -- in my mind, those days are over. And the reason why I say that is because base oil -- unfortunately, 5% of all base oil is manufactured in Ukraine and in Russia. They're in the penalty box. They're not -- I mean, that's just a supply disruption that I don't think it gets solved anytime soon. Even if the world were to stop tomorrow and unfortunately, I don't think it's going to, they're going to be -- they're out of business. They don't exist anymore. And as such, that's going to create a supply shortage that's going to last for a lot longer than we originally thought. I sat on the stage probably years ago or a WebEx probably and said, "Oh, it's 130 plus 30, and then there's your number." I don't think that's the case anymore. I think it's going to be -- I'm not sure what I'm going to say in August yet about kind of where we are for the year, we have to go through a forecasting process to do that, but we're having a great year in that business. The spread is as wide, if not wider than it was, when we talked about it back in May. And so I'm not sure if it's more of a sustainable than we think. That's my point. Whether it be more bunker fuel than we thought, that's not being used right now, so that keeps the front end the spread kind of low or the fact that base oil may stay pretty high, forgetting sustainability angle, which I think is just an add on to that.

Okay. All right.

So did that answer your question?

Yes. And it's all to the upside?

Absolutely.

But the other side of this is every single line item in ES is in 1Q, maybe the refining turnaround business because they're just having such good margins, they're not taking turnarounds, beat your own internal model?

Yes. So the interesting thing about it is when we raised guidance in Q1, it wasn't just like, well, oil spreads are wider than we thought. So here you go. Both businesses, we raised them up equally and then -- we raised $35 million. Half of it was in ES, and half of it was in the oil business. And my point is that, yes, I mean, we got asked in a conference earlier this week about where we see weakness in our end markets. I don't. And we use a tracking -- we use a billing system. I mean, a forecast system with Salesforce.com. When we look at our end markets, I don't really see a lot of softness in those end markets. And that's not just on the oil side, that's on Industrial Services, that's on Emergency Response, that's on Tech Services. And all that seems to be doing really well. And then they'll beat kind of Q1. I feel good about Q2 and Q3.

So I'm back to an opening statement. We don't have a demand problem. There's a very good...

Absolutely not a demand problem.

And you've all managed the cost issues through pricing?

Yes. But it's more than pricing, right? So pricing -- I mean, when I talk to customers and I say, hey, we're going to raise price. No one just says, okay, right? It's a battle. It's always a battle to say, well, here's our new cost structure. Here's what I think is reasonable and it should offset. Some of that price increase should offset the cost you're seeing. But they're not -- we're not going to make -- we're not going to give -- customer is not going to make money on that price increase. We're going to offset the cost. And that's our go-in. The way we get margin expansion is through cost actions. Our own internal cost actions. We have to show our customers that we're not just like, "Well, prices went up, I'm sorry about that, and here's a new price for you." No one is going to accept that answer. The answer is that we are managing our costs very aggressively, and we did a small riff in April of this year and in a headcount shortage world, that's amazing, and that's not -- that's unique. And my view on that is that to kind of what our customers demand of us is that if we're going to raise margins, it's through cost and price, and that is the solution here. And just doing price, I mean, that is just going to get people -- and when things start going down, they're going to go aggressive on that. So I think that mix is how we drive margin expansion even in an inflationary market.

Okay, which allows me to close -- there's 2 -- I got close on M&A, but to close on this subject, I don't think that you will see any unit price pressure if there's such thing as something called normal in our -- when we look forward. I'm not -- I mean, the Ukraine, Russia or whatever, other geopolitical thing is disrupted, things are disrupted at the moment. And there doesn't seem to be any easy remedy to getting not disrupted anytime soon. So -- but when we get to a place where we're not actually factoring year-over-year disruptions into a business model, I don't think you're going to have to give unit price back?

I agree. Well, I think -- so first of all, when you think of the price of a product, the amount of -- the cost of the hazardous waste disposal is a minute amount of the overall price. So I'm of the view that when things get normal, and I'm not sure when that is, Michael, those prices they don't go backwards. Just like in labor cost. I mean, we give a raise to someone, we're not going to be like, "Well, inflation is over, give it back." It doesn't work that way. And so this has to be long term. And I'm of the view that if there is some normality, there will be some margin expansion because of it.

Well -- and so to that point is when we -- yes, that's why I was going to base said my point, which is there's some incremental leverage kind of...

I think so too. And people ask us a lot because we are a huge shipper, around 13,000 trucks and trailers. We have a fuel surcharge. We've had it for 20 years. We used to update it once. It's based on the price of diesel. We used to update it once a month. Now we're updating once every 2 weeks. The reason behind that is because it has been very volatile. And so we've been able to offset. The biggest positive inflation is the cost of fuel and so -- and we're a big shipper, so it's a big deal for us, but we've been able to kind of offset that pretty well.

All right. Last one, M&A. You did HydroChem and that was pretty chunky. There's not actually a lot chunky left. I mean, unless some -- there's basically 6 of you control of the disposal assets. We could dispute whether you could get through Hart-Scott on any of that. So I don't think there's any big trades going on that, but there's hundreds of little players. I mean, there's a little over 100 permitted TSDFs. You've got about 35% share of that.

That's right.

There's probably about 40% or a lot of little independents. What's the one, the ability to do and, two, the willingness to sell? Where are we in that part of the M&A?

Yes. Yes, there's always -- so we did that big deal last year. We borrowed $1 billion. We spend $1.25 billion to buy HydroChem. It's going very well. I think that's going very well. I think that the turnaround market is still pretty good. So that's been lucky because it's always hard when you buy a big business like that of bringing it in and synergies are kind of fun with spreadsheets and that you actually have to do them. And so I really think that that's going pretty well. I'm not sure there's big transformational deals out there. We can debate what's available and what's Hart-Scot and everything else. I mean, we are trying to delever a little bit, digest that big transaction, bring that business in, both system-wise, process-wise, people-wise, and then we'll go from there. My goal is try to get the leverage down to kind of the low 2s. It will be that way by the end of the year based on the guidance that we gave earlier in May.

But there is a -- at the small end, there's a lot of little independents coming in...

Absolutely. We'll do some tuck-ins. We'll do -- Brian Weber is here, our EVP of Business Development. He'd say there's 2 or 3 out there that we're looking at. We look at a lot of deals, Michael. We're a natural buyer for a lot of things. We pass on most, but there's some things out there both on the ES side and on the SK side.

But if you pulled up your WIN system and pulled up, there are some white -- but believe it or not, there's some white space. And that's really what the opportunity is to fill in the white space.

Yes, one year we did 7 acquisitions and we just tucked them all in one after the next. We got them up and running on our systems day 1, 30 days' notice, 2 weeks' notice, day 1.

Okay. All right. Well, I've again run over, but it's lunchtime.