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

Thanks for joining us, everyone. My name is Dave Manthey. I cover Industrial Distribution and Environmental Services for Baird and great to have Clean Harbors here today to speak with us. We have Mike Battles, who's the Co-CEO; and Eric Dugas, the Chief Financial Officer of the company. The way we'll handle this is I'm going to just -- maybe we can set it up. I'm going to turn it over to Mike and just talk a little bit about the business in general, what the segments look like, just to sort of level set everybody on what Clean Harbors is and does. And then we'll go right into Q&A. I'm going to grab that iPad in a second here, but if you want to send an e-mail, you can send it to -- drumroll -- session, it doesn't say, but I -- we're just going to take -- we're going to just take questions manually here in the room afterwards. But Mike, if you would kick us off here and just give us a rough idea, big picture, let's talk about Clean Harbors segments, subsegments. What does the company do? What makes it special?

Thanks, Dave, and thanks for the team at Baird for having us. My name is Mike Battles. I'm the co-CEO of Clean Harbors, along with my partner, Eric Dugas, who's the Chief Financial Officer. Thank you for having us. Thank you for your interest in Clean Harbors. So kind of what is Clean Harbors. So Clean Harbors is the largest hazardous waste disposal company in North America. We are about a little over $5 billion in revenue in 2022, about $4 billion of that is in our Environmental Services business and about $1 billion of that is in our oil -- our used motor oil collection and re-refining business. We did about $1 billion last year. We're going to forecast a little over $1 billion this year of EBITDA. About 85% of our business is in the U.S., about 15% in Canada, so what do we do? So of the $5 billion, $4 billion of it is in environmental services. So that's a pretty broad label, what does that specifically mean? So we do -- we'll go out to a large chemical plant, a large refinery and picking up hazardous waste. We go on their site with our trucks, with our equipment, pick up the hazardous waste, recycle what we can recycle and dispose of that waste through our 9 permanent hazardous incinerators, our hazardous landfills, wastewater treatment facilities, solvent recovery facilities. We have 9 of the 13 commercial hazardous incinerators in North America. We're an industry leader in that area. It gives us incredible pricing power in that space. We also do emergency response work. So if there's a spill on the highway, tanker spills over, we have over 90 branches across North America. We go out and clean up that waste. We also do industrial cleaning. So think of it -- we're going to the Dow plant to pick up their hazardous waste every week, every 10 days. We also -- they do turnaround. They do clean-outs. We have a team that goes on site there every day and do industrial cleaning. We also do -- that's -- the Dow plant are the large quantity generators. We actually also do small quantity generation, which is go into an auto body shop or an auto dealership, doing a parts washer service, doing wax services, do containerized waste services. More small quantity waste, and that's about $800 million. So that business equals about $4 billion of the $5 billion. We also go and pick up dirty motor oil, so mostly in the automotive space, the car dealerships, the Jiffy Lubes of the world. We pick up that dirty motor oil. We bring it. We take water out of it. We bring it to our 8 re-refineries, and we make base oil out of it, which is the building block of motor oil and then sell that base oil, either based or blended oil back to our customers as a green solution to their oil needs. So that's -- again, that's about $1 billion of the revenue, and I think that's the business. We also have a corporate -- we're based in Norwell, Massachusetts. We have operations all over the -- we're in every state in the country. We have -- and the interesting thing about it is that unlike the solid waste guys where they have -- they pay tipping fees, we go out to our customer site and pick up the waste ourselves together that's hazardous. It needs to be manifested at the customer site and brought into our facilities. We are the 17th largest commercial shipper in North America, and that's a big part of what we do is managing this large fleet of over 15,000 trucks and over, I think, 30,000 pieces of specialized equipment to make sure that we're doing the right things at the right sites.

Terrific. Do you have a solution for smoke by any chance?

Good luck getting that one. I'm taking the train home tonight.

Let's talk about your long-term targets here. You're targeting this 5-year EBITDA growth, well, 6% organic and then redeploying $4 billion into M&A to achieve 14%. Let's start with the 6% organic. Could you break that down between sort of GDP-type growth, share gains, pricing importantly?

Yes, sure. So I'll take that one, Dave, and I'll start. And -- and Mike can fill in whatever I might miss here. But when you think about that, first of all, we had our first Investor Day in over a decade last March, and that's when we unveiled our Vision 2027 model. And as Dave alluded to, we kind of had 2 pieces in organic model and then an acquisitive model. But the organic model that Dave just alluded to, did have a 6% to 8% growth on it. The way we look at that, Dave, is really if you think about GDP, we think about growing at a GDP plus model, particularly in the next couple of years with some tailwinds that we have behind us from reshoring infrastructure builds and alike. And then also kind of the pricing power that we're seeing in our business right now, given the strong demand. So we kind of look at GDP growth, GDP plus a couple of percentages points and then continued revenue growth from pricing. And we think with the strong demand we're seeing, there's probably another couple of percentage points on top of that get us to the organic model. If you move down to kind of the EBITDA level, we continue to see great cost controls on the company side. We do have a very strong fixed cost leverage, where we can bring in new businesses or develop new business lines and really pull value from that -- from the fixed cost leverage. So that's the other piece in the organic model that we're really counting on.

I think, Dave, before we get to that question, the other point I'd add, that Eric mentioned is that -- so we label ourselves GDP, industrial production plus a number. And the question you have to ask yourself. So -- and you go back in time and Dave's followed us for years and years, industrial production up, industrial production down, and that's kind of how our results have kind of mirrored that. To some extent, it's not a perfect correlation, but it's not crazy off. Over the past couple of years, and I think for the next 2 or 3 years, at least, we are getting a lot of secular tailwinds that I think above and beyond industrial production. So industrial production is going up, it's kind of flattish. Our business has grown much faster than that. And the question is kind of why? And why is that? And some of that could be, okay, we're fighting off inflation. We're raising prices because of inflation. Some of that, I think, is that not all industrial production is the same. The industrial production that we're seeing today is in the areas where they generate a fair amount of hazardous waste. Battery manufacturing, semiconductor manufacturing. Those types of green jobs create an incredible amount of hazardous waste. And so it's not like the jobs are coming back to the United States, and we're making pencils and shoes. It is high-tech jobs, especially manufacturing that generate a fair amount of hazardous waste. So that's generating a lot more waste into the network and allowing us to price accordingly. So the question you have to ask yourself as investors, is the following: is that are we going to continue to follow the industrial production wave, over infinity, of course. If you're doing a terminal value growth rate on DCF, then last year, you're going to have to do some GDP plus something. But over the next few years, I think we grow much faster than that because of the investment that's being made in the United States. Some of that's due to government funding. Some of that's due to reshoring, some of that's due to supply chain concerns people had. I mean, I think that Dave and I were working at a company and he was a supply chain leader. I mean we stared down the abyss, we were worried about our jobs, about where we're going to be able to get [ parsed ] and manufacture the products we need. We can't have that happen again. We have to be better about that. We have to move more manufacturing back in North America, and that type of shoring or reshoring will be and -- has been and will continue to be a growth driver for us, I think, beyond cyclicality of the business. That's my hypothesis.

There's a lot there, as I say, to unpack. Let me try a few of these. First one is talk about -- you mentioned the company's position in the incineration of hazardous waste market, very strong. Talk about the types of waste that needs to be incinerated or that wants to be incinerated. I just want to differentiate in terms of what are we talking about here? Are there other disposal methodologies that people could switch to if they needed to, how could they get around Clean Harbors if they wanted to?

So it's easier said than done. When an item is labeled as hazardous, the regular -- government EPA describes how it needs to be disposed of. And if it's labeled as hazardous and it needs to be disposed of incineration, well, they have to come to the 13 commercial hazardous incinerators and dispose of that waste that way. Not all our waste we take today is required to be incinerated. Some companies, like a perfume manufacturer want us to incinerate that waste because they don't want to see it on the secondary market. And so there's certainly a percentage of our waste that we do because of customer demand, where if that were -- if there was more waste coming into the network, we could kick that waste out and refill our incinerators with higher margin, higher value waste streams. But to be fair, the customers don't come to us for the most part because they want to, they're coming to us because they have no choice. And I said that in Investor Day, and I want to say that again to you, maybe you missed it, is that we are a required -- requirement of companies that have to dispose off waste and it's certain type of waste that has to come to us. So it's not an option in many cases.

So if conditions remain strong, you're getting into the black market for perfume then?

Not us. Because we are a compliant organization, David.

So then in pricing, in general, you've been able to move price mix up very effectively over the past several years now in a row. As you're thinking about what's going on in industrial production and all of the things you mentioned before about the economic sensitivity that may or may not be there, how are you thinking about that element of price mix as we go forward in the next 3 years, say?

Yes. I mean I think we're going to continue to see a strong mix. When you think about pricing most recently, I think with a lot of the pricing strategies, Dave, that we put into place kind of in the face of inflation. I think in this most recent quarter, if you think about the price mix ratio probably 75% -- 70%, 75% of the growth was on the price side, [ 25-30 ] was on the volume side and the mix side. I think that gets back to kind of a 50-50 play for the next 3 to 5 years. Terminally, can the mix of waste continue to be as attractive as it is today and drive growth the way it is? Probably not. But certainly, for many of the tailwinds Mike alluded to, next 3 to 5 years, we kind of see that playing out that way.

Okay. Let me check the questions here. And it's [email protected], if you have any questions.

Or raise your hands.

Or we just take them.

And I'll repeat the question, if you want to ask a question.

Okay. Seeing none, we can move on. So the -- speaking of the pricing situation that -- that you've enjoyed at least recently, I was to say, especially recently, One of your large competitors has an incinerator in the Midwest that was pretty much down for the year. And that clearly is a benefit to Clean Harbors. Other competitors may be adding capacity as well. Could you talk about that dynamic? I mean did we just go through the best possible condition this year? And then as we go forward, some of those things start to unwind a bit.

We thought about that when we were setting our budget for 2023 as far as the competitor who had a large fire at one of the -- so we own 9 of the 13 commercial hazardous incinerators. It's public information. One of our -- one of our competitors had a large fire in June of last year and shut them down really for about 6 months. It came back online in January. That certainly helped. We're not going to say it didn't help. That put more pressure in the marketplace and allowed us to take on more waste. But we weren't that interested in taking that waste because we want to have long-term relationships because when that thing opens back up again, well, I don't want to just lose that waste back to them. And so we try to offer a value to our customers saying, look, if one of our plants has a fire, and we're not immune to that, by the way, we have 8 others that can take your waste. We're not going to -- we're a much better solution than a one-shot incinerator that if that goes down, well, then you're out of luck, good luck with your waste. And that's what kind of what happened. And so we were kind of being selective with that because we didn't want to just take a bunch of waste, drive price up and then lose it all again, come -- when they came -- and it feels they came back online in October, it became December, became January. They're back online. They're actually running well from what we hear, which is fine for them. And so I don't -- I didn't see that as a big winner or loser per se, Dave, certainly helped us. It helps us with better conversations about winning customers for the long term versus a kind of a one-off, let's capitalize on a market opportunity. When you think about some of our competitors actually opening up and trying to open up more capacity into the network, I kind of welcome it because right now, we have so much demand in the network that were causing problems -- it's getting backed up at customer sites. And so adding another -- and we have a new incinerator, we're in the process of building. I'm sure Dave will ask a question about that. We want that online tomorrow. And so we are trying to -- we have challenges with our own network to fill -- to keep the incinerators working well, to keep the plants running well to kind of work down that backlog. And so having another incinerator that may come online and they're a little opaque as to the timing, 2024, 2025, that's fine by us. There's more demand that, that could easily be sopped up with a little more capacity. And that incinerator I think, does -- is not a rotary kiln. It's different -- you can't take all the high hazard waste streams. Certainly, it'll take some of the streams like the sludges, but it can't take the high haz stuff.

Okay. That's helpful. We have a question in the back.

Yes, I just had a question regarding the -- whether or not some of the solid waste players on -- and going back 15 years, the entire industry there kind of went through a price over volume shift where it was really more like [indiscernible] per volume effect. [indiscernible] they can't [ 10% ] not build, doesn't really matter. And what you saw there is like free cash flow buried and structurally improved the whole [ 7 5 ]. And I'm just wondering, is there any reason why the same kinds of shifts wouldn't happen on the industrial hazardous side or is that kind of part of the [ plan ].

So I'll repeat the question so that it can be heard by the transcript team. So the question was simply stated, can we -- when we grow up and become big boys and girls, can we be like the solid waste guys -- and the answer is yes. I think that, that type of mindset and Republic buying US Ecology and John Vander Ark coming out and saying things like, "hey, we're going to price a scarce asset like it is," is exactly what -- how we feel the same way. We feel like inflation was probably the best thing that happened to Clean Harbors because it forced us to raise price, it forced us to be more aggressive. It forced us to push back at our customers. And I think that -- I think I see a future, certainly in the Environmental Services business, our margins are in the low 20s now. The solid wastes are on the high 20s, maybe even 30 depending on who you ask. I think that grows from there. And our 5-year model, we got into that a little bit. I don't think we get all the way there in our 5-year model, but I see no reason why we can't price these assets, these scarce assets like they are, like the [ solid ] waste guys do, like the Casella's does, and we can have the same type of return metrics and the same type of multiples that they enjoy because I think it's very similar.

Claire, did you have a question?

So there's an argument to be said that -- so we're building one in Kimball, Nebraska. So that's $180 million spend, we're about halfway done. It's on time, on budget, should come online early 2025. It took about 5 years to build. So just for people who aren't familiar with the story, that's a big deal for us, really proud of that. We have a meeting every week and I just get amazed about that plant coming online so fast. So that's great. So when you own 9 of the 13, it may be tricky to do to buy one if they were to sell, they don't come for sale very often. They're all fairly profitable. I doubt they would come for sale. Maybe there's 2 in Ohio, so maybe we could buy 1 in Ohio because we have a natural competitor in Ohio. I don't know about that. I think the better answer is that as we continue to build out the Kimball plant, there's more capacity in our network to build another kiln on an existing site, that may be the future. I'm not here to talk about that today, Dave. I wouldn't want to see that in a [ note ] per se. But certainly, we could do it. I'm just trying to tell you.

Everybody heard you.

I'm just trying to tell you we could do it. I think the focus is that we got to be careful. We want to -- when we own 9 of the 13, you don't want to add capacity too fast, right? Because you're going to be slitting your own wrist. I really believe that you want to be late to the party than early to the party. So we're going to be very thoughtful with your capital before we deploy in a new incinerator even though I do think the return metrics are very compelling today.

Okay. So let's touch on the other component of that long-term growth algorithm which was acquisitions, which -- redeploying $4 billion of capital into M&A producing a 14% CAGR total. Could you just talk about the acquisition pipeline? What areas would you be looking to focus those dollars.

Yes. And first off, as we created that model, Dave, what we're really trying to do is to illustrate a path that a strategy could employ to kind of double the business in 5 years, which is exactly what we did in the previous 5 years. So we are working around some math around keeping leverage where we wanted it to be and kind of got to that $4 billion figure of investment, which generated the $2 billion of EBITDA that we showed. But when you think about kind of the acquisition pipeline, we are open to acquisitions in both of our segments. I think certainly with ES, a larger piece of the business, that's where we like to steer our acquisitions. But there are -- we look at this as an executive management team almost on a weekly or biweekly basis and really look at targets that are available out there. We have 4 or 5 pages worth of ideas. Anything from small tuck-ins to larger tuck-ins, things in the $100 million neighborhood and then some large strategic targets that would be $1 billion acquisitions that we keep our eye on. If they come out, we have the balance sheet to be able to exercise an opportunity there. But it's really what we're focusing on are acquisitions that can kind of stay in our swim lane, feed the beast if we will, generate a waste that we can handle in our own network and really kind of grow that ES side of the business, but also keep an eye towards the SKSS, continue to grow our collections network, continue to grow capabilities in the re-refining space if those are accretive. But when we look at acquisitions, there's really kind of 3 checkmarks that we got to have. Does it fit strategically? Does it fit operationally, does it make financial sense? And does it fit culturally? And with the most recent acquisition with HydroChem a couple of years ago, I think that was an example of something that fit really well culturally and strategically at the time. And I think we would all say that, that acquisition from a synergies perspective and operational perspective, 1.5 years later, has probably done a little bit better than we thought.

I'd also say that -- and we don't talk a lot about this, but there's assets to acquire not just in industrial services and in oil -- if you look at our recent track record, probably more industrial services than less. Of course, HydroChem was a big consolidation play. And there's still plenty out there. As Eric said, we bought this Thompson business at the end of March, about $100 million acquisition, which is, I think, going well after just 2 months. I would say though that all business, all lines of business, tech service, permanent facilities, field service businesses, IS businesses, SK branch businesses, there's opportunity across the board. I think that as we grow our margins from low 20s to high 20s or even higher still, we can do that through M&A as well. That might be more expensive. They may be smaller because of our limits around justice, but there's certainly plenty of opportunity out there to continue to grow, not just IS, not just oil businesses, which we love, and we think they're doing well with them, all businesses.

And just a very last point on that. I would make, Dave, is the $4 billion number over 5 years, is that a goal? No, our goal is to do smart acquisitions. So we'll be patient. We'll find the right targets, and we'll execute.

Okay. Let's talk PFAS for a minute, and I'm going to take a different angle on this and say, first off, the MCLs that are proposed out there I mean, I heard that the -- these 4 parts per trillion is the equivalent of 1 second over 8,000 years, I mean we're talking about an [indiscernible]. Number one, are people going to be able to measure that small and get that level, just your opinion on that. And then second, is there any chance at all that PFAS ends up being a goose egg. I mean we went through this thing with the coal ash. It looked like it was going to be a big deal and then it's nothing. Is there any chance that it becomes a goose egg, do you think?

Well, I think that -- well, first of all, PFAS definitely hurts people, definitely causes birth defects, kills animals, kills plants, I mean there's no debate on the science behind it. I do think that 4 parts per trillion for water is going to be hard to manage and hard to get to. I think that's -- I think that's going to end up in the courts and then it's going to take time. But make no mistake, PFAS is dangerous. And that's not going to ever kind of solve itself without some regulation. They're not going to voluntarily kind of clean water without being regulated to do so. Obviously, we think that the -- where the value is for Clean Harbors is in the soil. And certainly, as we think about our 5-year model, we didn't really have a lot of PFAS. Today, we do $20 million, $30 million in PFAS, if I had to guess, mostly firefighting foam on military bases and on airports because we know that's heavily saturated with that stuff. And so we've been remediating that work. But we see value in soil. There's ultimately going to be a solution to that. I wouldn't want to put it -- I mean, they're supposed to come in regulations later this year. I said the same thing last year sitting on the stage with you, Dave, it's going to be last year. I mean I haven't really -- I'm not -- I don't need to make my Vision 2027. PFAS is not required to get there. I do think it's a catalyst. I do think it's going to happen. I believe it's obviously important for us as Americans to get that remediated, especially around the military bases, where it's heavily concentrated, but I don't think I need it to get to 2027, the vision we had.

And the technology, we know that incineration kills vast, vast majority of PFAS when it's put into a kiln. Others have technology. It sounds like it's filtration, it might be concentration. Do you think there's also an opportunity that maybe hasn't been thought about yet in terms of when others are filtering and concentrating the PFAS that if that doesn't break the bonds and actually kill the molecule that they will ultimately need to incinerate that product? Is that possible?

Well, I think you're asking -- you're in the right church, you're in the wrong pew. I think the question you should be asking yourself is, who can do it in a large scale because right now, what we're talking about is tons and tons of hazardous soil and -- filled with PFAS. So these guys who consolidate, who concentrate, they're doing it in smaller scale. We've proven today, and we've had analysts look at it, we've had analysts look at their work that we can burn up [ six 9 99.9999% ] of the PFAS in soil that we can clean it in our incinerators today in real-life situations with other waste in the network, and we just rolled dirty dirt in on top of that to see if it worked, and it worked again and again and again. So we know we can do it. And so that's the question you should be asking yourself when looking at other technologies, not to remediate the soil. Well, can they do it in a large scale? Because we're not talking about a table full of dirty dirt, we're talking about 18-wheelers and railcars full of dirty dirt that go -- that are lots of it.

Makes sense. Any other questions from the group here? Mike, I'd be remiss if I didn't ask you how the co-CEO role is going? How are you dividing and conquering today?

Yes. You were never a big fan. I'm going to make you a fan. I think that so it's only been a couple of months, and we just had our first board meeting. Eric and I had our first board meeting a couple of weeks ago as co-CEOs. I'm here to tell you it's working out very well. And I think that Eric and I have very complementary skills as we bring to the table. I'm more with investors and with the Board. And Eric's probably -- because he's Chief Operating Officer more with the plants, and making the plants work well. So we have a good kind of complementary skill sets, and we're kind of tackling this role together. We still have the founder is the Chief Technology Officer, still Chairman of the Board. We still work with him quite a bit. He's still very much involved. But he's actually been very respectful of us and not trying to step on us or go around us and he's been -- he's like, you guys have a problem, talk to Mike and Eric. And we meet once a week, we met last week, I asked him with the door closed, I said, how are we doing? On a scale of 1 to 10, how do you think we're doing as partners. He said 10, and I said, "I agree." I think it's been great, and I'm looking forward to it. You know how it works, Dave, when things are going well, the co-CEO world is -- we're geniuses. And when the numbers are going poorly, oh, the structure is off broken. So we'll see. I'm of the view that we can make this work. I don't think this is temporary. I hope it's not temporary. I think it could be a good match. I think we work well together. We bring complementary skill sets together and we both learn from each other, and I think it's going to be a long-term winner.

Do you have separate direct reports.

We do so -- not the whole leadership team have rolled Eric and I together. I have natural breaks, like I have to find it. Eric works for me as a CFO, I have other areas of the business and Eric has other areas of the business, kind of more his strength. But make no mistake, we both signed the 10-K. We're both responsible for each other's business. And we're both trying to make sure that we have a hand in what we say, and I have no problem asking Eric a question on his businesses that will report directly to him, and he isn't for me because we both feel accountable for it. And as we both develop, it's important for us to learn each side of the other's business we probably know more about. So for example, Eric is today at another investor conference call, [ close your ears ], that he's here with Jim Buckley and he's learning as well.

And Dave, I think it's really important for those folks that are rolling up to Mike and Eric -- for myself, rolling up to Mike. There's significant things that I looped Eric in -- Eric Gerstenberg as well. And I think the folks that report up to Eric do the same thing with Mike. So we understand as a management team that it's a [ Co-CEO ] structure, it's a little bit different than most -- but both of those guys, there can be no daylight between them in terms of the significant kind of goings on of the company from day-to-day. And it's operated much like that for the last few years. And so we think, and to some extent, it's business as usual, although under a different structure.

I would say one last thing is that although it looked different from the outside, like oh, this is kind of weird, from the inside, I think people are more surprised that Alan's stepping away. He's -- he ran the company 43 years. He started when he was 23 years old. He built it with 4 guys, that really happened. I mean there's a book out there he wrote that talks about it. It's all true. And that was more of the people surprised about Eric -- Alan actually stepping away versus Eric and I taking over. That wasn't as big a surprise.

[indiscernible] you have a question?

[indiscernible] What things do you disagree on, with Eric and [indiscernible]?

What do I disagree with Eric on, right? That's a fair question. So we don't know -- we are 2 different people, we have 2 different visions of how we want to grow this business. We're not always aligned. I am more of a -- I am more of a good businesses buy and sell assets smartly. And so I'm probably more in the path of divesting different businesses. He's less so. That doesn't make one right or one wrong. And we debate that and discuss that. And there's probably a middle ground there where there's some assets, small things, not big things that we're probably not the natural owner for that we're going to get rid of. And so that's going to continue on, and I don't see that changing. For the big stuff, we're aligned on, and we've been talking about that for years.

That's great. I will remind you, there's no breakout session with Clean Harbors. I guess they have to get on the train and get out of here. But Mike, Eric, thank you very much.

Thank you.

Thank you for having us.