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

Welcome to the 26th Annual Needham Growth Conference. Thanks for joining us today, we're going to sit down with a discussion with the co-CEO of Clean Harbors, Mike Battles; and CFO, Eric Dugas. Also with us today in the audience, Senior VP, Investor Relations and Corporate Communications, Jim Buckley. There you are, Jim. My name is Jim Ricchiuti, and a senior analyst here in the equity research department at Needham covering industrial technology companies. I think most of the audience are familiar with Clean Harbors, one of the strongest industrial growth stories, I think, over the past 20 years that we've come across. So why don't we jump right into the Q&A. Guys, welcome. Welcome to the conference.

Jim, thank you, and thanks for the team at Needham for having us. It's always a pleasure to come out and see the team, and we appreciate -- meet all kinds of new investors.

Let's start off with the Environmental Services segment, which, for those in the audience, a little bit more than 80% of the total revenues. The ES business has been generating solid growth, healthy margin expansion over the last couple of years. And historically, you guys have talked about and I think we've looked at it on the sell side about the correlation in the business to industrial production, which obviously makes sense given the nature of that business. But more recently, the ES business has been growing faster than industrial production. I don't have -- what's your assessment as to why?

Yes. So it's a good question because Jim, you've followed us for a long time. And the answer has been, a, industrial production moves up, we're going to grow 100 basis -- 200 basis points as fast best in industrial production. And the most recent track record, we've grown much faster than that. And as industrial production slows or flattish or even down, there's some concerns certainly in the investing team and within the management team as to what happens to us when that happens. And so we look at this all the time. We have conversations with our teams. We look at the sales pipeline. I'm here to say a couple of things. First of all, inflation was high in those years. So our cost structure is -- and since we have such scarce assets and a disciplined competitor base, we were able to raise price at a pretty good clip, probably faster than inflation to drive the margin appreciation that we're seeing -- we saw in 2022 and in 2023 in the Environmental Services business. But more importantly, I'm not sure all industrial production is measured the same. I feel like investments that have been made in the chemical space, investments that have been made in the semiconductor space, investments that have been made in green technology. Those generate a fair amount of hazardous waste. And so again, it's hard for me to pinpoint as to why. If IP is flattish, why are we growing at 5%? The answer is kind of all of that, is that there's been a fair amount of growth. And when you look at our business through Q3 and even into Q4, the pipeline remains very strong. The waste streams -- we have a -- continue to have a backlog of waste streams, not just in our network, but even outside our network. And so I'm very bullish about 2024 and beyond. And we gave -- we had an Investor Day back in late March of last year. We talked about a 5-year horizon of the business growing. I mean nothing has changed in that area. As a matter of fact, I'm more bullish about Environmental Services than I was back then. That business continues to grow well. And I think that -- when you think about margins -- and we talked about this and certainly, some of our solid waste companies are getting into the hazardous waste business with Republic acquisition of U.S. Ecology in 2022. They see that where solid waste was 10 years ago, where there's a margin -- there's margin expansion, the Republic margins are in the solid waste margins in the high 20s. We see no reason to think that we can't do the same. And it just takes -- I mean, they are not making any more hazardous waste incineration. There's no greenfield out there, that has been for over 20 years. And so I'm of the view that there's more opportunity for us and less opportunity to continue to grow that top line and that bottom line in Environmental Services. And I think most of the people we talk to in these conferences and others are interested in that business, more importantly than anything else. So I'm really bullish about that as we go into 2024 and beyond.

And let's pick up on the point you made, Mike, which we're -- I think most of us are familiar or aware of is the scarcity value of these businesses, these assets, whether it's generators, the landfills, the transportation assets to some extent, I mean...

Sure. Absolutely.

So price has been a lever that you've pulled. And largely, we've seen as a result of the inflationary pressures that we've seen in the last couple of years. So what role is price going to play in the company's strategy to drive the ES margins higher over the next several years?

I think that price is -- we've been doing -- we've been raising price and have been price-focused for 20 years, right? We -- incinerators kind of came to be. We've always been focused on our ability to drive price faster than inflation. I don't see that changing. As we get through year-end and we go into 2024, even if inflation is starting to moderate, which is terrific, I think that there's still an opportunity there to -- maybe not as aggressively as we were in 2023 and 2022 when inflation was really, really high. But certainly, our customers realize that there aren't a lot of alternatives. And we give good service. We are very timely. We give them slots. We give them what they need, and we've been able to drive price across that. And not just in incineration and landfills, but in Industrial Services and in Field Services, because we are a very large player, because of our safety -- because of our focus on safety and compliance, we've been able to try to premium for those services. Like you said, transportation, it's hard to be a national player in there. We are the only national player now in Industrial Services. It allows us to drive better price even in those areas, even if they don't have a ton of -- another ton of hazardous waste at the back end.

That's mentioned -- there's cross-selling opportunities here.

Of course. And it's hard to put a finger on that because -- but certainly, it's very real.

Okay. The number of captive incinerators in the U.S. has come down fairly meaningfully over the last several years, maybe below those lines 3M closed a large incinerator in '22. They've expanded their collaboration with Clean Harbors. How's that relationship progressing? How did it progress in '23?

Yes. So I'll touch on that, Jim. And yes, the 3M relationship and what we've been able to grow with 3M has been great. They are one of our largest customers. And as you mentioned, Jim, they made the decision to close down their captive incinerator and send their waste streams to us, and we've been handling those waste streams for the last couple of years, providing great service, delivering things on time to them and really have grown that relationship, and I think we'll begin to get new opportunities going forward. But when I look at that 3M relationship and I think about it in the context of captives, I kind of view that relationship as maybe a blueprint for some further opportunity in the captive space. Other companies that have captive incinerators themselves that are a customer of ours today. When they go into turnaround as we take their waste, we're actively engaging in discussions with them about their captive incinerators and the ability to perhaps take over those waste streams if they make the decision to close them down in the future, which I think is a real reality. If I'm a captive owner today, running a captive incinerator really isn't my sweet spot as a company. There's large compliance that will continue to increase. There's a large cost there. So we really work with those customers. Think about the cost, think about ways we can help them reduce cost by taking on those waste streams. And I think we haven't really spoken about it in a great deal, but I think bringing our new Kimball incinerator on at the end of this year and kind of really bringing it up to speed next year, I think that may be something that, again, for some of these captive owners, hey, there's an opportunity, there's some more capacity opening up here. I can get into an agreement with Clean Harbors' help, and I can really have a reliable resource in the future to deliver those waste streams. So 3M in and of itself, a great relationship, but I think something could really pay off as being that blueprint in a future similar relationship.

How any other captives...

Yes. So just to give you some numbers, so there's 41 captive incinerators, 14 of them have a rotary kiln type of technology that we would be able to use. None of them have -- they're a stand-alone plant. They can't take waste from outside of that site. And so that's how the pie can grow here. And the great thing is, as Eric mentioned, the great thing about 3M is that it's a case study. It's a case study of success. And so you always wonder like, hey, if I'm going to close my captive incinerator, well, okay, you got to get in bed with somebody you can trust. You got -- you have environmental liabilities as Eric touched on, you have to remediate. I mean so it's a big decision that these businesses have to make. The good news is that, well, go call 3M, ask them how it's been so far. They've got to make sure that we can take their waste streams and deliver it every time. And those types of things, we've proven with 3M. And that's -- in my mind, that's a great -- Eric said it right. Great relationship, great customer, but more importantly, a case study.

And 41, how many customers -- how many companies would that comprise, do you think?

I forget what it is, Jim, do you know how many customers that translates into? It's maybe 30?

30 sites.

The point also being, in all likelihood, these are companies that know you.

We do business with a lot of them today.

They do turnarounds, Jim, and so we take their waste when they're in turnaround. So we have long-standing relationships. And it comes down to, obviously, compliance, and sustainability is very, very important, but the math exercise. Can we do that work, take that waste for them cheaper than doing them themselves? And after you get through that, it's -- and the good is we've been able to prove with 3M, we've been able to do that. It's a good winner for 3M, and it's a big company, it's probably a rounding year for them. But it's a big deal. And every plant has -- as you guys all know, they all have cost-saving initiatives every year, they have to go find, and they're kind of running out. So I think that's going to push more and more in our way.

Can you characterize the conversations you may be having as it picked up in this area?

Absolutely. It's actually with Kimball coming online. Especially with Kimball coming online, I think that they are eager to have these types of conversations. It's hard, right? Because you want to make sure when you do it, as I've mentioned before on the stage, is that it creates -- once you get rid of the permit, there's no gives you back seats. It's gone. And it's hard to start -- you can't start up again. And then you have the environmental compliance aspects, which is not immaterial.

And these are not necessarily -- these are not -- one option is not to acquire these assets because it's much more complicated.

Well, not only that, but they're captive incinerators. So I can only take the waste that's being produced by the plant. Dow has a plant making this up. And then at the back end, there is a incinerator. Well, I can buy the plant, if I want to, but I don't take that waste. The permit doesn't allow it to take any other waste, which is a kind of a good thing in one regard.

We talked about inflation. Labor has been tight across the industrial economy. How many employees do you guys have right now?

About 22,000.

22,000.

22,000, okay. Has that labor availability -- how much of a headwind has it been do you think to growth? Or is it just been something you've had to constantly adjust?

Yes, I'll take that. When I look at labor fairly closely -- and I wouldn't describe it as a headwind to growth this year, Jim. I think when we look at labor, we've done a lot of things to try to decrease retention. Obviously, with the Great Resignation things, we felt some of that. So we implemented more training, more benefits, more opportunities for folks within our company to see a path to promotion and greater responsibility. So we've done all these things. We've implemented different systems. We've tracked them, and we've seen retention today is at its lowest point it's been since pre-pandemic, right? And our direct headcount, we've increased our direct headcount by about 600 folks this year and really been able to utilize that to be a cost savings for us. It reduces -- obviously, turnover reduces, training costs reduced. When we hire somebody, we can't just put them in a billable position on day 1. There's a time there. So all those things are helping us on the bottom line and still helping us grow.

And you've talked about this, I think, possibly most recently in the Q3 call about -- this is probably ongoing, but you did call out productivity and efficiency initiatives to help drive that margin expansion. Talk to us a little bit more about what...

Yes. I mean when I think about our company, it's right in our tagline, it's our corporate mission, it's people and technology, making a cleaner and safer environment, right? And so technology is a huge part of our business. Our founder, Alan McKim, is really -- he's founded this company, built this company on technology, as I just stated. And he's taken an active role. He was active before. He's taken an active role now in our technology play. But we started using RPA, probably the early aspects of RPA a decade ago. But I would say, 5 or 6 years ago, we really kind of got into RPA, began in back office, AP, things like that. But today, we're looking at AI technologies in several ways. Some of the biggest ones being in transportation with low-cost routing. The -- with labor, scheduling out labor. A real interesting one that I was in a meeting the other day on that we're exploring is a technology that if you think about kind of what we call insight programs. So I'm out at a university, I'm out at a hospital, I'm out at a plant, and there may be some hazardous materials that I need to pack in a safe and efficient manner to get it ready for transportation into its ultimate place of disposal. 2 years ago, I was a chemist in that situation. I'm seeing all this waste and I'm kind of doing the best I can through a checklist, a paper checklist in many ways and packing things to the best of my ability. Now we can kind of load up what that waste is. AI will tell us exactly how to pack it safely, so how to fit these containers into a drum or whatever the packing material may be. But how do I put like materials together so that there's no bad reaction to that. But even more importantly, it's efficient, and then I can put it on a truck and I can bring it to its ultimate place disposal, and those chemicals can be destroyed together. And so it's really -- think about safety, think about speed, think about efficiency at the point when it ultimately gets taken care of, all those things are being helped by this AI technology. And that's just really the tip of the iceberg for us. It's something that we've got a large team devoted to it. I think it will continue to be a big part of our future.

Yes, I think technology has been a differentiator. Since Alan started the company, nothing changes. I mean he was -- he loves it, and he's focused on it. And we make a -- we don't talk about huge investments in technology. We make huge investments to keep it current. We spend $15 million a year versus $5 million and then $20 million. We make continuing investments in technology because we know that's a differentiator, and we know that's going to continue to be a differentiator. And as we get more complex, it's important that we get the right people at the right places.

Mike, you were talking -- you alluded a couple [Technical Difficulty] to Kimball. Talk about this facility in Nebraska. How is it progressing?

I mean, I'll take that one. I was out there a couple of months ago. And Mike, please chime in. But -- so back in October, we kind of had a topping off ceremony, we called it, where the largest piece of the steel structure was put on top of the facility. We announced when we put our Q3 earnings out, how we had shifted kind of the start-up date to late 2024. Prior to that, we thought early 2025. So we've moved that ahead. It will be late in the year, so it won't be producing for a long period of time, but it's great to see a large scale project like that a little bit ahead of time, a little bit ahead of budget on time and then still expecting kind of an overall $180 million spend. In terms of getting the facility up into production, the first thing I would mention, Jim, is I kind of view and we kind of view the facility just as another spoke within the entire incinerator network, right? So if we look at the El Do facility that we opened a couple of years ago and the new Kimball facility is almost an exact replica, new extra bells and whistles from learnings. But it took about 2 years to ramp that facility up. We're probably on that same time horizon. But I think it will really help us from a logistical perspective. We have a strong backlog of waste now getting into certain facilities. This facility will be able to burn the nastiest and the dirtiest of the waste. We can begin rerouting things to Kimball where it makes sense and where it eases logistics elsewhere in the company. So I think it comes on board late this year now in 2024, ramps up through 2025 and is really kind of full tilt in 2026 and at that point, fully accretive within our network.

The 2 things I'd add to that -- good points, Eric -- is that the reason why we moved it, we made -- we set a public statement that we're going to open in late 2024 versus early 2025. It's only a few months, like why would we bother. It's really just to tell the people in this room to say that, hey, we're going to be on time. You think of a 5-year project, $180 million spend, you worry that there's going to be delays, supply chain challenges and all kind of the other problems. And we built some of that into the numbers. So really just to tell you that it's going to be ready to roll in 2025 -- not going to be a material number in 2024. In 2025, we're going to be ready to roll. The other point I want to mention is that although Eric's right, there's going to be a year or so of kind of shaking it out, there's going to be things that come up during the course of the year, there's going to be compliance issues we're going to solve and solve for, all that's very normal, we've done that before. But it's going to be accretive to our ES margins. It's not going to be -- these margins are going to be still accretive to our -- if the average number of 25 or whatever the number is, they're going to be accretive to that. They're not going to be the 40% margin when this thing is rocking and rolling, but I just want people that don't walk away that, yes, it's going to be a tough 2025 as we get this thing up and running, it's going to start, it stops. Utilization will be up, it's going to be down a little bit because of the new incinerator. But overall, I mean, it was Kim and the El Do, what we did in 2017, we see that in 2023 and [ 2020, ] you see that in the margins. You see that in the numbers. I see the same type of growth trajectory in 2025 and beyond. So I'm really excited about it. I mean we kind of need it tomorrow, really.

Did this is -- generate a new customer -- it's mainly existing, isn't it?

I mean I think the answer is that the Kimball incinerator allows us to have more productive conversations in the captive environment. Because I do think people are saying, hey, this is a -- we had a onetime opening here of 70,000 tons of capacity. You want in, now is the time. Because when you think about a captive, the difference between them and Jim's auto body shop is that they can't stop the train. If they can't take the waste, the tanks fill up, operations stop. That's a problem. And so -- we know that we have 70,000 tons coming online, the captive knows that, well, we're going to be able to take it because they're going to be open. And so that's great. And so that type of thing is spurring that type of conversation, which I'm excited about.

But that's not to say -- just one final point, not to say that we need captive closing to be able to fill that plant. There's plenty of demand we're seeing in the marketplace. There's tailwinds with reshoring, and there's tailwinds with infrastructure work that's on the horizon. Certainly, PFAS is an opportunity, which we may talk about, but lots of other things to kind of get us there. We're just thinking from a captive perspective, it might be that thing that gets a captive operator over the hurdle.

Sure. And Eric, I do want to talk about PFAS. You guys talked about it at the Analyst Investor Day. Give us some sense as to what's happening there. There's still, I think, a lot of confusion. We're still going through some of the regulatory initiatives. And that hasn't all been sorted out.

So I love talking about PFAS. I think it's a real long-term catalyst for growth for Clean Harbors. Right now, we do about $40 million, $50 million in PFAS work. It's hard to measure exactly how much that is, but on $5 billion, that's not a really super big number. But that's mostly in firefighting foam, stuff that's heavily laden with PFAS. The regulations aren't finalized yet. They're finalized on what not finalized on soil yet. But the point that we've made to investors and to our customers, more importantly, is that we're the only company that has an end-to-end solution today that is scalable. When you read about some of our competitors having a PFAS solution, that's great. And that just validates it. But we have one -- is it scalable? Is it working? And we know today that our incineration can take PFAS today and destroy it. We've done 2 separate studies on this, up to 99.9999%. And so -- and we know we have the lab equipment to test -- we have an end-to-end solution, lab equipment to test how much PFAS they have. Water remediation services so we can clean the water, both drinking water and disposable water. The solar remediation team and of course, the assets, whether it's incineration, landfill, or whatever the treatment facility is, we have it all today. And so when I hear a competitor talking about these solutions and the fact that we're getting a lot of questions on it, that's just great. That's great. Let's go. And I'm of the view that PFAS, it's going to be -- even if the regulations started tomorrow, even if the government said, here it is, it's going to take time. But we're going to -- PFAS is just one more waste stream that we're going to -- that's going to drive our operations for the next decade. And so again, I'm excited about PFAS, but you've got to take a longer-term view of that because it's going to be -- even if it decided -- maybe they'd be stuck in the courts, it's going to take time. And in the interim, though, we're taking work. We're doing it. We're getting more waste and we have a remediation, it's about $100 million, $150 million of revenue. When I say that's a large-scale slow remediation project team, I mean that's all they're talking about is PFAS. They're PFAS, PFAS and more PFAS. And so that's really going to be a growth engine for them for a long time, and that's scalable.

Go to SKSS business, just shy of what, 20% of the...

Yes, a little under.

We had a banner 2022.