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

Good afternoon, everyone. Thank you very much for joining us on day 2 of Oppenheimer's 18th Annual Industrial Growth Conference. My name is Noah Kaye. I'm the Managing Director and in Oppenheimer's Sustainable Growth and Resource Optimization practice. And with us, we're very pleased to welcome back to our conference, virtually, of course, the management of Clean Harbors. In the room, we have Co-CEO, Eric Gerstenberg, CFO, Eric Dugas, SVP of IR and Strategic Communications. I hope I still get that right, Jim Buckley. And gentlemen, thanks for being with us today.

Thanks, Noah. Good to be here.

Terrific. So before we get into the business segments, you recently had your investor day in 10 years. You laid out financial goals for 2027. You gave the investment community an opportunity to hear from a broader group of business leaders. It seemed to resonate with the markets. But what are a couple of points that you would want to reemphasize here today really around the strategic direction of the business?

Yes. Sure, Noah. I think the one thing that I would start with is that we have a very, very sustainable business model that is driven by strong demand. We have a great network of over 700 branches. We have those branch locations for our business units throughout all the providences of Canada and every state in the U.S. And that business model allows us to leverage our rolling stock, leverage our assets. And most importantly, feed our great assets of our disposal network, our mode of recycling, treatment and incineration facilities. Additionally, that we're diversified well along many different verticals. Every single vertical that you can imagine out there, generates some form of hazardous waste products and needs our services, whether it be for an emergency or to continuous ongoing cleaning. And because of that, the demand is strong. And if there's any changes in one vertical, we can pivot and supply more capacity to another vertical. So I think those are the couple of key things that resonate -- still resonate today.

Thanks, Eric. So typically, we go through the segments in these discussions, and that seems like a good format. So I want to start with Environmental Services and particularly on pricing. I think an investor looking at recent price trends when you had 15% price mix in incineration and 17% at landfill this quarter. I think it might default to assume that's just a function of hyperinflation and should normalize. Some industry players have said that we're kind of past the point of no return where there's more industry discipline and pricing will be structurally higher. What's your view?

Yes. I would go back a little in time to just coming out of COVID that we have always had a very disciplined pricing approach. And the demand for our services is very, very high. And both of those have lent itself for us to be ahead of inflation and be able to move our price needle based on the capacity and accelerate it. And we've been doing that for the past couple of years. We'll continue to do that through 2023. We still have pricing to go. We will exceed increases in costs and increases in inflation that come. And we're going to have, especially with our disposal network. We're going to continue to be probably in that low to mid- to high single digits, and we think that stays. And we're not we're not going back. We're not -- no givesy-backsies here where the pricing that we've deployed across our network continues to be in place, and we'll continue to improve on it.

I think no givesy-backsies is a good policy. It should be, but I guess just what would a normalized pricing environment look like within the other lines at ES. Can you provide the sort of range of somewhere in the low to high single digits for disposal, talk about the other business lines?

Yes. I would say that disposal is always going to be on that high end. But the demand around labor equipment materials is probably in that 4% to 6% area that will continue to command.

Right. So that would be for the fuel business and in Industrial Services. How do we think about that?

Yes. The -- I'll walk on each through from our technical service business that is doing the collection, predominant collection of disposal, that will be in the upper high single digits, even low double digits. The field services business, where it's a lot more labor and equipment and materials. That will probably be in the midst. The Safety-Kleen service, Safety-Kleen Environmental will be in the high single digits. That business is generating a lot of waste volume into our plants, parts wash services that we're able to command those higher prices. And then on the industrial side, that's been one of the lagging areas of pricing. We really got momentum as we exited 2022 and into 2023. That's just a longer cycle to implement those price improvements across the board, but we'll be in the mid-single digits there as well.

And just to clarify, this is expectations for '23 or more normalized going forward?

More normalized going forward.

Right. All right. That's really helpful. I think many investors are struggling with the secular versus cyclical themes in the U.S. manufacturing sector. On the one hand, we have reassuring and tailwinds from industrial policy, incentivizing domestic production. On the other hand, we look at declining PMIs and lower freight rates and we know what lower oil prices sometimes mean in terms of the demand environment. And waste tends to see impacts later in the cycle. But when you look at your pipeline and your customer dialogue, what do you see as the medium-term demand trajectory for your business?

Yes. Noah, I'll take that one. And certainly, kind of the diverging viewpoints that you alluded to here, it seems every day we're getting conflicting views on the economy and what direction it's going in. I will say for us, in the medium term, as Eric alluded to, things still seem really strong, right? So we still have a large backlog of waste -- on the waste side, both kind of in our network as we speak. And then we know we have some backlog at customers that should bode well for the near-term future here. Also, I think, high demand for many of our services businesses. So it's not just a disposal story, but in field services, in our SK branch business, still high demand for those services. And if I think about the last 12 months, our net headcount at the direct level is up about 1,300 heads. So we've been able to hire people and retain people to meet that demand. So we're getting a lot of inbound interest from customers, both current customers and potential new customers for services as well as disposal. So really near term and even medium term, we're not seeing any slowdown. We're not seemingly losing any customers. We're still having pricing discussions with folks. So things seem pretty good. And then you mentioned reshoring and infrastructure bills. Longer term, we see those as tailwinds as well.

The industry is struggling with labor, which you mentioned and logistics and permitting constraints. Do you think you're gaining share organically? Where would that be? And why might that be the case?

Yes. I mean, I think we are. I think the first thing I'd point to is, again, I mentioned kind of the direct headcount being up quite a bit. So I know we're taking some share from competitors that way. We've also had customers of competitors come to us over the last several months. The entire industry is really full, and capacity is really restrained. And if you look at our footprint of all our facilities and the capabilities we have at those facilities, not just to incinerate, but also take care of the waste and other ways, we really provide where we can and outlet to those customers. So certainly, I think we're growing share as well as upward pricing trends helping the bottom line as well.

Yes, capacity to serve is a big theme right now, I would say, across the waste sector broadly. And if you look at the progress that you've made that sort of hiring, do we think about that continuing? I mean, do you continue to add heads here? Do you maybe start to slow down?

Yes. I mean we still have several open positions to meet the demand that we see. So I think that hiring trend it continues just to meet the demand that's out there. And certainly, as we bring out more capacity in our disposal network with our -- with the addition of our Kimball incinerator, we'll need the folks out in the field collecting that waste as well. So continue to be looking to hire good folks and also internalize some external third-party spend in that way as well.

Interesting. Just to be clear, I think my question was sort of around the same pace of hiring growth. Or do you think you might start to decelerate a little bit?

Eric, do you have?

Yes, I'll answer that, Noah. We're going to continue on the same pace. We have opened -- we have over 1,500 open positions today that we look to fill, still fill. We were successful last year, as Eric said, of adding 1,300 more billable headcount, half of those being drivers. Our employee base is about 22,000 as it exists today. We realigned our recruiting and HR structure to be teamed up with our operations group to drive that headcount addition based on what we're seeing in the market. And there's heavy demand for our services. So we expect to continue on that same pace that we've been doing, and we put programs in place to make sure that we do that.

Eric, we talk in the industry level terms about what you just mentioned around realigning HR with the segments. In practice, does that mean that bringing people who really speak the language of specific industries or specific disciplines and note -- I mean, just talk to us about why that is helpful. Why is that effective in terms of bringing people on board that are the right people?

Yes. So our senior business levels from our Vice President up through our Industrial Services group. I'll use as an example, we learned with HR and recruiting. And to your point, HR and recruiting for industrial services, people that are working day in, day out at our -- at chemical plants and refineries is different than hiring for Safety-Kleen Environmental, that is route driven business, collecting waste. So those needs our operations and our recruiting people have to align on. And there's different strategies that we deploy in those businesses. And it's been successful, and they're both holding each other accountable on how -- what we need to do, how we need to do it to get more bucks in the seats. So that alignment, that focus, that understanding what everybody is up against a pay dividends, and we're going to continue to work that.

And to the extent that part of that hiring is for some logistics and sourcing as well, I mean you called out the need to invest in that previously. Can you dimension the investment spend for us in terms of bringing more functions in-house and the savings opportunities that you see within the business?

Yes. A couple of key areas year-over-year that we look at is around that driver spend. On outside transportation, we've been able to -- even with the capacity growth, the revenue growth we have been able to reduce our outside spend on transportation by 15%. And there's still more go get that we can do. Our national transportation to have dependency on moving waste through our network was critical, and we did a great job of adding drivers in that segment in 2022. We also added drivers to eliminate on the front-end collection from direct from customers, but also the routes. So -- we have more to do to internalize outside transportation, but we took a good chunk of it, particularly in our long-haul fleet.

And in terms of financial perspective, what that means when you're reducing that outside spend? Just remind us, I mean, how large is the total outside spend for the company?

I mean, we're talking hundreds of millions of dollars. I mean, it's a huge spend. So attacking those areas of the company where we can vertically integrate take outside costs out when we're paying a margin on top of those I mean, it's really -- I think we have a list right now of a key target of to take out $150 million of costs, largely outside spend. And that's kind of this year's goal, building on goals from last year and the year before. So it's an area of the business that we're continuing to get after every single year.

Well, thanks, Eric, I mean you're anticipating my next question, which is, you think about all the initiatives that you have to manage cost in the business. You've called out SG&A and getting better leverage there. Just dimension some of the other key self-help levers that you have remaining on cost reduction and productivity enhancement.

Yes. Well, first, you mentioned SG&A specifically. And certainly, that's an area where we've seen some great leverage. If I think back kind of just pre-COVID in 2019, our SG&A was about 14% of revenues, and now it's down to 12%. So when you think of the overall margin expansion we've seen over the last 3 or 4 years, certainly that SG&A line has played an important part. And really kind of as we've grown with the large acquisition we did with HydroChem, really leverageable platform that allows us to drive margins. But if you think about maintenance spend, for example, we spend over $100 million a year on maintenance. And about half of that is kind of internal maintenance, and we're looking to continue to drive that internally. And really, that's value we bring to acquisitions as well as we can internalize that maintenance and save money. So that's a big one. Certainly, rental costs. right? We spend a fair amount of money on rentals, particularly in some of our industrial services and field services jobs and certainly trying to internalize that as much. We'll devote some CapEx this year as we do every year to kind of maintain equipment and get some new equipment to drive those rentals down, but it's also putting kind of centralized pools together and sharing in that equipment more easily across the business to drive cost down. So just an abundance of different things, but those are 2 kind of large ones that we're specifically getting after this year.

Yes. And just I'll just build a little bit more on the rental spend there. One thing that we're able to do based on our scale and our platform is open internal rental centers that can service a district in a region of things that we're renting from outside firms that we can internalize and provide many different branch types. So we're in the process of opening an additional 10 rental centers as we work through 2023 and into 2024 to internalize that spend.

And that might be types of equipment. Are we talking trucks here, hydro-vac or you're talking to more tools on the job? Just help us understand.

Yes. Really all of the above, right? So the big items like trucks, hydro-vacs, could be pumps, could be generators, could be more disposable type things, really all those key pieces of equipment that we need out on the job every day.