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

Thank you, and good morning once again, everyone. I'm Jerry Revich of Goldman Sachs. Really delighted to have with me the senior management team from Clean Harbors. Immediately to my left is Mike Battles, Co-Chief Executive Officer; and Eric Dugas, Executive Vice President and Chief Financial Officer. Also, we have Jim Buckley, Head of Investor Relations. Gentlemen, thank you so much for joining us.

Yes. Thanks for having us, and thanks for the Goldman Sachs team for having us at your conference.

Thank you, Mike. So fresh out of your Analyst Day and what really stood out to me is out of the outperformance for the stock that you folks laid out at the Analyst Day, what we've seen specifically over the past 4 years in particular. And it feels like we've had an inflection across your businesses over that time frame and wondering who just to frame the conversation, just talk about what's really clicked in the business over that time frame to drive the margin expansion, M&A accretion? And how do you see the operating momentum from here?

Yes. So again, thanks for having us, Jerry. I appreciate the opportunity to tell the Clean Harbors story. It's a good question. I think we kind of say it's about 4 or 5 different things about why the -- if you look at the ES business over the first -- especially the first 4-5 years ago, it is kind of where it's happening now, I think you can lay it into like 4 or 5 things. So first of all, I think that -- going back a few years, I think the vision was, hey, we need to grow. We need to fill the plants and we need to grow and we need to get waste. And I think that mindset has changed because the answer is that we need to grow profitably. And so -- and what does that mean? In the technical services businesses where our incinerators and our landfills primarily, it's less dirt jobs, less fueled job, less med waste, more direct burn and drum volume, which are the higher mix, higher price point. These plants that we built can handle that. And so we needed to stop just taking whatever was down the pike and focus our energy on the higher-margin waste streams. So if you look at what's happened over the past few years, there's certainly a mix shift up the curve to get kind of higher-priced waste streams. On the industrial services and on the field service business, one is about $1.2 billion, the other one is about $400 million, $500 million. I'm not sure that number is perfect, but it's in our financial statements. The -- that's been -- what we've come to find out there is that, hey, guess what, just like disposal assets are hard to replicate and hard to maintain, qualified people in specialty equipment is also hard to get. And so we really have been focused on, hey, look, we need to get a price that covers ourselves for our emergency response work. We need a price that covers us for the dangerous work that we're doing at an industrial turnaround. And we've been able to kind of -- and oh, by the way, since we are a market leader in the spaces we play in, and it's a big enough job, it's hard to replicate that. So we've been able to separate ourselves from our competition and drive a better price. And so those types of things have on the IS side, Industrial Services, Field Services and Tech Services. On the SK branch, also small quantity generation. That's been able -- since we are such a dominant player, we've been able to drive price there as well. A lot of the drums we get are incineration drums, so that's also been able to drive price there. The other thing I think that's happening over the past 4 or 5 years to answer your question, because I do think the pie is getting bigger. I do believe that -- obviously, you read about reshoring and onshoring kind of a cool, fun thing to say. What we really see it in our -- with our customers. We do operating reviews every month. We get involved in -- it's a 2-day event. We get involved in all the details and go business by business. And it's -- I'm using Dow as an example, but if not particularly to Dow, is that Dow went from 3 loads a week to 4 loads a week. And we asked the question, well, why is it going from 3 loads? And the answer is, well, they added an extra shift. They added -- they're paying a little over time. Well, why are they doing that? Well, the business is doing well, but they may -- I suspect that they're slowing down their German plant and their Chinese plant and moving more here to the U.S. and producing a little bit more here. And so I think that reshoring phenomenon -- their shoring phenomenon, not reshoring -- their shoring phenomenon is really happening, and we certainly see it in our financials. So I think that the pie is getting bigger in that regard, which allows us to drive price, to drive to be more selective and really drive those margins up.

Really interesting, Mike. A lot to unpack there, that's going well. The higher margin, higher-priced waste streams, can we start there? So how are you folks transitioning what goes into the post collection system? How are you driving such a big shift?

I think what's happening there, Jerry, is that we've done a much better job of looking at contract pricing on making sure that we're getting the proper margin and stack ranking customers, getting better access to data. It's actually not terribly dissimilar to what Stericycle is doing. And they're focusing on revenue generation opportunities that are at a higher price point. I think that we're doing the same for us, and we've been doing it for a long time. And that allows us to be like, hey, who is the lowest customer that we get a fluorinated waste stream from? And let's talk about a price increase for those guys. And -- because there's so much demand, because we thought about the shoring phenomenon, we can tell them we can't take it. And I kind of spoke to this in the Investor Day presentation is that when someone opens up a can of solvent, you're creating hazardous waste. And in many cases, that has to come to us. And so like the solid waste guys, there aren't a lot of choices for you out there for what you do with this thing. And we've always been -- going back a few -- we were hesitant to raise price. We want to get a full share of wallet, that's changed, that's changed.

So we got to get the perfect margin on every product. So -- product...

If they want to shut a software industrial services, so be it. And we got to get margin on the businesses that we can -- on everything.

Very interesting. And in terms of -- on the post-collection side, how far are we into this repricing journey?

I think that -- when I think about pricing in our Environmental Services business, people will tell us we hit the wall on pricing with the feet and they haven't yet. So more pricing coming, how about that?

Sounds good. And in terms of -- on the Industrial Service side, so that's a really interesting dynamic because even in an economic slowdown, the employment rate or the unemployment rate, I should say, hasn't risen much. Is that what's happening? So you folks are able to charge for the talent that you folks have in that line of business? Is that what's happening?

I think it has to do with the fact that we've been able to do a good job of retaining our people and offering them a career path. I mean we bought these companies from private equity, and we're making investments in benefits in vacation days in holidays, like they weren't doing that. And so we're trying to develop. And I think that's really lowered our turnover rate and helped with our retention, which again has a kind of a virtuous cycle. You get more talent, they're safer, they can do more work. They look for more selling opportunities. It really has been that along with -- when there's a problem, when there's an unplanned turnaround and you need 30 people tomorrow, there aren't that many companies that can do that. Because we are in every single city and town in North America, while we may not have them in the Baton Rouge office, we can bring them in from New [ Orleans]. We can bring -- we bring the people in to service our customers. And again, that's a differentiator in my mind from, let's say, a regional player that we talked about at Investor Day.

And Mike, what's interesting about this type of example that we're talking about unplanned downtime, it can drive volatility in the business year-to-year. And we've seen actually pretty steady results from you folks. Can you talk about how have you been able to mitigate the impact of, well, we didn't have this major event in region X this year versus last year. It hasn't come up on in any earnings call. So talk to us about how you've been able to smooth that out.

We have a lot of different lines of business. And if one is slowing down or has a big project and next year, it doesn't -- well, kind of -- when you think about the Field Service business, there's 6,000 emergency responses a year. They're all pretty small. I mean we don't -- they're not like the avian flu or the decon project or the BP oil spill. But there's a lot of small ones there. And so we have a lot of those types of projects. And the funny part is that when you stretch it out over a period of time, it really is -- it looks pretty smooth. And it really does create -- on the rounds, it creates some noise there, but overall, I mean, from what you see from a $4 billion and the $5 billion, it gets lost in the wash.

And it sounds like we have a good opportunity to continue to push pricing. Where do you think margins should be for the Environmental Services line of business?

I brought this -- just got asked a question in the Investor Day, and I firmly believe it. So you ended the year, I forgot the exact number, 21%, 22% EBITDA margins as we define it. When you look at the solid waste companies like our Waste Connections or Casella's or Waste Management, they're high 20s, even low 30s in some cases. I don't know why we can't get there as well. I mean, I feel like if you look at a company like Republic who just bought U.S. Ecology, which is a hazardous waste landfill company. I mean they come out and said it that they're going to try to drive, and that's good for everybody. It's good for the industry. And so I feel like that should be an opportunity for us. And when you think about -- when we put together the 5-year model of Vision 2027, we talked about the fact, it'd be 40, 50 basis points a year, which is not inconsistent with what we've done in the past 5 years. So it's not -- we're not only trying to try to do a hard left turn, it's just more of the same, I think.

Did you send the Republic folks a Christmas Card?

It's good to have -- we wanted that business. We thought the U.S. Ecology business might fit well with Clean Harbors. We looked at that business. But if we weren't going to get it, I'm pretty happy that the Republic got it, to be quite candid.

And regulatory-wise, it would have been tough fight.

It would have been tough, but we saw a path to make it work. We wouldn't have been able to keep all the landfills, would keep most of the landfills. But at the end of the day, if it wasn't us, I'm happy it went to a disciplined competitor like Republic Services.

And part of the journey over the past 5 years has been profitable M&A. So you folks have done acquisitions equivalent to 5% of sales per year on average. Can you talk about just the major sources of cost reductions and revenue synergies that you've identified that have driven -- I think on average, you folks have improved core EBITDA by 30% on assets that you've acquired. So just to unpack the path?

Yes. Thanks, Jerry. I'll take that one. And certainly, acquisitions has been a success for us, I think, throughout the company's 43-year history. And we see it as a large stepping stone to future growth. But to answer your question, any time we have a really in-depth process, not just from a diligence perspective, but also from an integration perspective. So aside from kind of the normal leadership trimming that happens in many acquisitions, there are several areas where we can bring value and extract synergies. Some of the big ones at Investor Day, we kind of shared our footprint, some geographical maps. You can see that we're located all over the country across several of our business lines. So no matter kind of where we do an acquisition, we can consolidate rooftops, bring them into the fold. Certainly, if we look at transportation being such a large transportation network, we can internalize a lot of the transportation where some of our targets use external trends because of our capabilities there. When you think cross-selling and opportunities, Mike mentioned 51 lines of business, right? We can cross-sell and bring, for example, with the Hydrochem acquisition, bringing Industrial Services firms into the fold. But also being able to bring them a portfolio of services, whether that be a Safety-Kleen branch legacy services or TS services. So all sorts of areas there where we've really extracted value by bringing them onto our platform. And I mentioned platform lastly because I do think our proprietary software system and operating system that we use, our wind platform. We've -- from day 1, virtually, all of the acquisitions we do, we bring them on to our IT platform. We're running on one system, and we really do believe that, that platform brings value to all the acquisitions and extract synergies as well.

Very interesting. And Eric, at the Analyst Day, you sized the addressable market as $50 billion. Can you talk about which parts of the market, you're most optimistic from a consolidation opportunity standpoint?

Sure. I mean, we're open to deals in any of our markets, either segment. But obviously, with the ES part of our business being roughly 80% of our consolidated, I think you're probably going to see acquisitive dollars just naturally kind of go in that direction just because of the pure scope and size of the 2 segments. But what we're really looking for is investments that not only makes sense from an operational perspective, but also a cultural perspective, and a financial perspective. So all those things, I think we're looking for acquisitions that are going to continue to drive waste into our network. I think that's where we can bring the most value to another party. And so we'll continue to kind of look in that space predominantly. But again, opportunities arrive to continue to grow out our SKSS network as we have with a few tuck-ins. We'll continue to do that as well.

And we haven't spoken about it yet. Safety-Kleen, you've also really improved your margins cycle over cycle even in this year, a down year, you're going to have really good margin performance. I'm wondering now that we've seen a full cycle in used motor oil prices post IMO 2020, can you talk about how the motor oil prices for what you're picking up have performed in this cycle given the lack of demand from a shipping standpoint?

Yes. So I'll maybe take those in 2 pieces. Certainly, when we look at our SKSS business, I think you alluded to last year, a phenomenal year for a lot of different reasons, great margins. I think last year, we continue to see price increases for a lot of different reasons whether it be the Russia-Ukraine conflict that kind of reduced base oil availability or other supply chain challenges. The first quarter this year, we've seen prices kind of going the other way. But I think what we've been able to accomplish as a management team really since IMO and since we kind of broke that SKSS business out is better management around the front end of that spread. So when I think about collection costs for that used motor oil feedstock that we bring in, and re-refined, we have a team that's been devoted to that part of the business now for a few years. They get better intel on our competitor pricing on that part of the spread. They've driven it down to regional levels. So we know exactly where the used motor oil in a region goes to, what people are paying and what people are charging and we're able to kind of flip pricing as we have over the last couple of months in that business. So we alluded to publicly on our call last week. We exited kind of Q1 being about a quarter for the used motor oil. As we sit here today, we're down close to 0. We've been in charge for oil position across the whole population. So I think we've been able to do that because of the investments we've made in the part of the business that I was just discussing. It doesn't fix the spread immediately. There is still a lag as prices either go up, benefiting us or prices come down that we need to recalibrate to. But really kind of the investments in that side of the business, as you said, are going to continue to make this business profitable.

And Eric, just to make sure I heard you right, you were paying $0.25 per gallon...

Across the entire collection base, right? So we collect roughly 250 million gallons a year. If I look at the entire population kind of in the first quarter, that's what we're paying on average.

And then paying essentially net 0. Have you ever been at that point in the past?

Yes. I mean if you go back certainly to kind of the mid-2015, 2016, I think during that period of time, we're as high as dollar. Certainly, kind of when COVID first hit, we were able to swing quickly. So where it ultimately goes, it's going to depend on base oil pricing and demand and all those types of things, but certainly have been in a period where we had a high charge for oil price.

Yes. But it is a challenge to go from customer to vendor, right? And so when you're going from pay for oil, like I'm giving Jerry's autobody shop $50, $100, $200 versus having to charge them, it's a tough conversation because now you have to actually get a check out of them. And that transition is always painful. But we've done it before, and that's going back to 2014 and '15. And so we have the systems and processes to kind of make that.

Well, it's interesting, right, because 2015 was a very different oil price environment than today after that correction. So essentially, we're at a higher oil price where you get...

And we're still charging.

And where you are charging.

And I think it speaks to Eric's point that he mentioned is that that's because we have a much more thoughtful business. I think the IMO has something to do with that. And so the days of us going back down to some low number kind of pre-IMO, and pre the breakout, I think, is kind of challenging. I don't see that. I think we're going to stay in that $200, $250 range -- in the $250 range stream for a long time.

And can you talk about how much have you charged when the oil price was at historic lows, what's the most you've ever charged for pickup?

I think it was a $1 a gallon was the price. I'm not positive what that is.

And when was that, Mike?

2013, '14 time period, I believe.

Okay. And so if we do see refining runs ramping up and base oil prices declining, do you see moving towards that?

We can't control the back in the spread. We control the front in the spread. We're getting better at it. We're getting more efficient at it. And as Eric said, went from a quarter to a charge for oil in a month, I thought it was pretty good.

And it sounds like we're going to have to continue to be on that path.

That's right. And that's why one of the reasons we kind of broke out that organization, so we could be more devoted to managing that front in the spread and we've done that.

And we're hopeful that price has stabilized. I think that -- and when prices go down, that's a bit of a hurt to us because oil gets stuck in the pipe and prices go up, it is the opposite side. So I'm relatively agnostic to the price -- of oil price and only if it moves up or down dramatically.

Yes. And -- got it. So we're essentially monitoring refining runs and base oil prices?

That's right.