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

Hi. Welcome back. I'm Larry Solow, a research analyst and partner with CJS. We're pleased to have next speaking with us the management team from Clean Harbor is a leading provider of environmental, industrial and hazardous waste management services, primarily across North America. Presenting from the team today are Mike Battles, CFO, Jim Buckley, who heads up the Investor Relations. We'll start about 10- to 15-minute overview for the management, and then we'll move to a Q&A/fireside chat. Clients, anybody interested in asking a question, you can send the questions through the portal, and I will try and weave them into the chat. With that, it's my pleasure to hand it off to Mike Battles to introduce Clean Harbors.

Good afternoon, everyone, and thanks, Larry, and everyone over at CJS for having us. My name is Mike Battles, I'm the Chief Financial Officer here at Clean Harbors, and it's an honor to speak to you today about our great company. So a little bit about Clean Harbors. You may have heard of us, you may have not. We are a $5 billion North American-based hazardous waste disposal company. So everything from -- any environmental spills it may happen, everything from a manufacturing process where hazardous waste is produced, we'll go to that customer site, we'll collect that waste and then ultimately dispose of it in our unique set of unique disposal assets. What makes Clean Harbor is great is that we own 70% of the hazardous waste incineration market. Why is that important? It's because certain types of waste streams, some of the most dangerous waste streams, need to be incinerated, they're a little unstable to be put into a landfill or it could be recycled or put into a solid waste landfill or hazardous waste landfill, they actually need to be incinerated. So we have a unique set of assets that help do that. We also own 1/3 of all hazardous waste landfills. Again, the EPA and other government bodies regulate where hazardous waste needs to go. And in some cases, it can go into a hazardous waste landfill, sometimes you can go into -- it has need to be incinerated. So we own more than 500 hard to replicate permits. And so that's what really is the moat in our business. They're very -- these are very hard permits to get. We own over 100-plus waste management facilities and every bit of the hazardous waste needs to be profiled. And what does that mean? Well, you need to document what it is and you need to -- you need to keep track of it all the way through from the point of origin to the ultimate disposal. And so that manifests. We have over 1 million waste profiles of different types of waste that we can take and dispose of what the CEO, Alan McKim would say, and we can take everything short of nuclear, all your waste sort of nuclear, all your hazardous way short of nuclear. In this business, we're actually a private motor carrier. We're a top 20 private motor carrier because we have to -- because it's hazardous waste, it's highly regulated. And so we have to go to our customer sites and pick that waste up at the customer site. So we need our trucks and our people to do it safely with our industry-leading safety record and our industry-leading compliance record, we need to go to our customer sites and do that. And we have over 300,000 customers. You'd be surprised every end market generates some form of hazardous waste. Obviously, the chemical space generates a lot of hazardous waste, maybe the refining space generates hazardous waste, but everything from pharma to retail, I mean there's the highest waste all over the place. We have over 20,000 employees, and we're in North America, about 82% of our revenues in the United States, about 18% in Canada, and we have over 700 service locations through North America. And so -- and we have a very sustainable business model and so what we do is we go out to the customer set, as I mentioned, gather waste and perform services, transform that waste, whether it be hazardous waste or waste oil, kind of recycle what we can then ultimately dispose of whatever we can. Once we restructured all value from the waste that we dispose of that waste when we can. And as I said, we have an unmatched network of disposal assets over hundred waste management facilities, 9 incinerated, 9 landfills, the big treatment disposal treatment storage and disposal facilities, which are transactors first [ patients ], TFDFS, solve the recycling, wastewater treatment and so forth. So again, and if you look at the map of Clean Harbors, it's kind of in every major city across North America. The addressable market is very large. It's got over $11 million hazardous waste management market, remediation and cleanup of industrial services is $14 billion, and the lubricants market is about $15 [ billion ]. So we have a very large addressable market. And what really makes the value proposition now is really the moat -- is really our hard to replicate, permanent facilities and really is a very unique investment opportunity for people who don't know our story. Again, I think that it's kind of how we grow. I think that obviously, we grow with U.S. North American GDP is a big part of that. Regulation and many of the customers -- companies you may follow regulations probably a barrier for them. It's actually an opportunity for us, right? Because we -- regulation and compliance is what we do -- and so it's really important, a new regulation or enforcement of existing regulation is very important. Just because we collect 250 million gallons of dirty motor oil, vehicle miles driven, like amount of cars and the cars on the road and driving around is really important. And of course, we started the company through emergency response. They started my conversation. We are the company you call when there's a spill, a truck spills on the highway. They need to bring in the experts to clean up a hazardous waste material, where we attended over 6,000 emergency response events per year. That's basically it kind of in a nutshell, Larry, I'm happy to go in deeper if you'd like, but I tried to keep it at a pretty high level.

No, that's fine, Mike. That's fine. That works. We'll have to dig in a little deeper on the questions, that's all.

Good. We appreciate that. Let's kick it off. First question, just sort of a general same we've been a question we've been asking all our presenters. You guys might be actually a little bit different. So just to hear your response here. But I think a key theme or what we're hearing is in terms of visibility or lack of visibility as we ended '22, entering 2023. There were supply chain issues, staffing issues that kind of hampered a lot of last year and probably still sticking around this year. Our potential recession in the back half of this year, maybe we avoid that, who knows. But the question I have for you is just your visibility today as you enter the new year, versus historically where you think your visibility normally is? Do you feel a difference this time around?

Larry, I think that as I said in the Q3 call, I'm very bullish on 2023. Nothing has changed there. In my opinion, that would change my answer. Obviously, I read the same newspapers that everyone else reads, and I hear about recession concerns and job loss certainly in the tech industry. I'm of the view that the hazardous waste pie has gotten bigger. That is, there's more waste streams, there's more assuring and people coming back to the United States than moving jobs into Asia, that 10,000-mile supply chain challenge you talked about a minute ago, is making companies rethink about where they want to put their manufacturing. And again, if we owned a plant in Shanghai and one in Tennessee, you're not going to close the Shanghai plant. But certainly, you maybe put an incremental investment or an extra shift into Tennessee. And we're seeing that because what's happening is that I can't say that we're winning all these customers. It's all been great. But what's happening is that instead of getting 3 loads from this loads a week from this company, we're getting 4. And we ask kind of, well, why is that happening? Is that well, they're adding another shift. They're adding extra over time. They're trying to, as a result of the supply chain disruption, they're trying to maximize their footprint, which includes kind of more investment probably in the United States, which has been a big win for us. And so I don't see that with -- from our comments back in early November, I don't see that changing today. I think there's a lot of waste in our network. There's waste kind of beyond our immediate network that's out there that we haven't been able to collect yet. I'm of the view that we're going to be fine as we work our way through 2023 from a waste standpoint, I'm not concerned about -- obviously, a big walk back, a major recession. We're not immune to that. But outside of that, I think we're going to have a pretty good year. Our Environmental Services business, in particular, will continue to have a really good year as they had in 2022.

Okay. Great. No, I had to feel your answer would be somewhat different than others, and you sound very bullish. You're still bullish. So that's good.

Larry, I don't I don't think anything has changed there because I think that all the drivers that have gone through there don't change because of a slowdown in consumer demand.

Right. That's fair. Okay. I had a second separate question. First, congratulations. I know you didn't -- I called your CFO, and you are a CFO technically today, but I know you're tending co-CEO, I guess, at the end of March, right? So congratulations on that. And then the question I have for you is what's sort of the rationale behind the co-CEO structure with you and Eric Gerstenberg?

Yes. So thanks, Larry. So yes, it's quite an honor. The Board promoted Eric Gerstenberg, who is the Chief Operating Officer and myself, to be co-CEOs. And I know that some investors that we talked about over the past couple of days have some concerns around that, around -- they want to have 1 person held accountable for the whole thing and how is it going to work with Eric and I kind of splitting responsibilities. And the answer to the question is that, frankly, for the past 2 or 3 years, if not longer, the current CEO, Alan McKim, has been training us, has been grooming us for this responsibility. And he's been doing less and less investor interaction, less and less customer interaction, less and less employee interaction. He's been more focused on strategy and more focused on some IT projects that we've been working on trying to get our operations to work much better and faster for our customers and for our employees. And so Eric and I, frankly, have been doing a lot of this stuff anyway. As you know, Larry, when I've met with you over the past couple of years in the CEO hasn't been I've been taking the meeting myself. And that's part of the training to getting us ready for this day for this co-CEO day. And I get that there's some confusion as to who does what. I mean at the end of the day, we both Eric and I have our swim lanes. We both things that we do really well, and we're going to continue to do that. Ultimately, we're both going to be accountable for the entire consolidated business. We're both going to sign the 10-K and be responsible for that. So we're not going to look for -- if not his fault versus my fault, it's kind of our fault. And so -- and I think that success in planning doesn't end just with Eric and I, we have a very good team beneath us, and we'll have more to come on who the CFO is and who we're going to promote into that role probably in early February. And I am of the view that there's plenty of good opportunities out here for the organization. We're also thinking about having an Investor Day and maybe at the end of March, where you can meet some of the broader team and have them speak and present to you and you can really appreciate some of the great things we see every day here.

Okay. Great, looking forward to that. Excellent. Okay. Good. Let me get into some more specific operational questions. I guess the starters, maybe you can discuss sort of the incinerator operations that overall Environmental Services has really -- margins have improved in the last few years. It's been driven more of an incinerator piece, I think. But what has driven that -- what have been the driving factors behind that?

Yes, I'd say a couple of things. So I'd say that the first thing is that the -- there's been quite a mix shift within the Environmental Services business, where we've been able to take more -- because of the advent of new incineration capacity in El Do, Arkansas, we've been able to add kind of more hazardous waste streams into our network. So that's really helped with mix and that's been -- and the higher priced items have higher margins associated with them. In addition to that, we've also been able to drive price through the entire part of our business, and that includes both on the disposal network and on our services business. And so I think both those things have driven up margins. So right now, we're going to end the year in the low 20s for the ES margins for 2022. And I know that the solid waste guys are closer to high 20s, low 30s. I'm of the view that our assets are very similar to their assets. I think we can drive those margins up, and I think that the inflation that we experienced in 2022 and 2021, was probably some of the best things that ever happened to Clean Harbors because what it is it forced us to kind of go back to our customers and drive price increases and our customer turnover has been very, very low. And so I'm of the view that even if inflation starts to come down, which it may, we can still drive price, certainly in our disposal assets will really be able to drive price. So maybe the idea of doing 3% to 4% or 3% to 5% of price increases on our disposal assets, that's probably -- that was the way it was going back a few years. I don't think we're ever going to get back to that answer. I think it's going to be kind of on the high single-digit pricing for that business going forward, not the low end.

Okay. Interesting. That sort of leads to my next question was sort of your pricing initiatives have actually more than offset inflation. So that's actually sort of been a net benefit for you, like you said, and then that can sort of answer part 2 was sort of the outlook for '23. You feel like you'll get any pushback from customers you keep...

So maybe a couple of things that -- couple of things I want to make sure our investors don't walk away from. It wasn't all on price. We've been very cost conscious. Obviously, wage inflation, we're not immune to that. We've been taking some wage inflation probably higher than we have historically. But we've been -- for example, in the first 9 months of the year, revenue was up $1.2 billion, $1.3 billion and corporate costs were up $28 million. And so that, in my mind, is because to get to where we need to get to, it's not just price, price and more price, it is price offset by cost conscious because what you can't have with your customers saying, hey, inflation went up 7%. I'm going to give you 10%, it doesn't work that way. The answer is that we're going to charge you more but we're going to take some hits too, and we're going to lower our cost structure as well, and that's how we kind of find middle ground. So when you think about pricing plans for 2023, which is what your original question was, we are going to have a fair amount of rollover pricing that we put in place in Q2 and Q3 of 2022, which would give us a good running start to 2023. But then also, I'm of the view that we're still charging price. I mean for specially for our disposal assets, we're definitely out there getting price. We have targets there pretty aggressive for 2023 on pricing targets. And I'm of the view we're going to -- the pricing train certainly does not end.

Great. What about personnel as you guys have -- were you able to hire marking about personnel last year, you made a little higher ratio [indiscernible] -- and do you plan on expanding more this year?

Yes. So we -- when we grew so fast in the back half of 2021 into 2022, we were having to hire a fair amount of temporary labor and contractors and that's not good. It's not good for a couple of reasons. First of all, is because you're paying a margin to somebody for those people services. And b, they tend to be the ones who have the safety. They don't have -- they're not properly trained. And so they have the safety challenges that we have. They can hurt themselves, they can hurt others. It's really not -- it's not a great model. When we get the best model we have our own employees, we train them our way so that they're doing -- and they have that safety culture mindset. So when they're going out to a job site, they're making sure things don't go sideways. And so what happened in 2022, we did increase some compensation. We have increased benefits, and we've been able to hire and retain our people at a much higher rate than ever. And we added over 1,800 direct labor outside of -- forgetting the acquisition of HydroChem, that's 1,800 organic headcount, 600 of those are drivers. And that really helped offset some of our third-party costs. It's still up a bit, but certainly helped us offset and drove some of the margins that you see here. We do an employee survey every year -- every other year, our scores are the best they've ever been. And I think that's a testament to the investments that we made in people, and you see that in the results. And hopefully, you see that in the turnover ratios and our ability to attract and retain talented people. So it's a tough job, Larry, going out there, and it's not just driving a truck. It's driving a truck in hall and hose, hall and drums and it's dangerous work, and hopefully, we're paying people and giving people the opportunity to move forward. The good news is, Larry, is that -- the leadership team here has been here for a long time. We -- some of the guys outside of myself, frankly, so are not as drivers in this company and work their way up. And that type of career path is pretty attractive to people. So -- and we definitely -- as you can see from the co-CEOs all the way down, we do try to promote from within to try to provide a career path for people. If you want to have a career, this is a good place to have it.