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

So I know there's a lot of people in the room that probably manage fleets and are looking for a sustainable solution. We're here, Castrol, powered by safety culture.

They're [indiscernible] Tuesday and so forth if I'm...

When you implement that and you think about the benefits, I mean, obviously, it's a circular benefit for the fleets. And then how much benefit versus selling just into the Group II virgin market? Does this help you out? I mean, because that seems like from a margin perspective should be pretty attractive?

Yes. It's at a much better margin than selling into just a spot market. And that's why we did it. It's again, I think the thing that we talk about virtually every day with this business is reducing that volatility, moving up in the food chain, making better sales, driving profitability and stability.

So we always looked at it at about $1 a gallon. Is that a reasonable place to live?

Yes. We want to sell more contracted versus spot market. That's good and we sell that oil at a reasonable price to our contracted customers. But it's better than the spot market. Spot market, you've taken it for where [indiscernible].

And you got 155 million gallons today is producing about $200 million of EBITDA. And if I could -- 35 million of those 155 million are contract now, and so if we can move 50 million more of it, in theory, we want to pick $50 million up, right? I mean is that -- oversimplified that?

I'm not going to fall into your trap, yes? There's lots of math in there. We're going to miss you, brother?

Are we in the right neighborhood? But here's the flip side of that, though, this is a tough part of this question is you had a hard time predicting the bottom through what was happening last year. What do you need to change either internally? Or what were you not seeing that would have allowed you to predict the bottom of where we ultimately landed in that $180 million, $185 million kind of number.

Yes. So I'd say that our goal for the SKSS business is to be boring, is to continue to drive marginal growth every year through things like Castrol and selling more blending and companies like Noble to kind of bring that more stable profitability. So I'm telling you when I sat on this stage 2 or 3 years ago and the business threw off $300 million of EBITDA, you're over-earning, and no one believed it, we weren't getting credit for it. So my view on that is that we have to manage the spread. We have to be disciplined around our cost structure. We have to be disciplined, more contracted work, more blended work, less spot work, and where things would -- our strategy around that business is to be a little boring and stick around $200 million. And when oil prices are rising, let's go to $210 million. And when oil prices are shrinking, okay, $190 million, $180 million. But let's stop the whip sign, because I don't think anyone's happy about that. It's a hard business to predict. I'm not saying we're doing a better job. It's still a hard business to predict. But I think we're doing a better job of that. And the good news is that we've stabilized that business, we get that business under control, and we focus our energy on growing that business and the aircraft carrier, which is Environmental Services.

So $200 million a year forever at 40-something percent free cash...

That doesn't sound too bad. Put that in a box and let's do that.

So I got you to get your yes to that. Okay. That's good. Okay. awesome.

Let's maybe switch over to PFAS. I mean you have the destruction technology, but we've had a lot of regulatory changes. We got the limit for drinking water. Maybe let's talk about where you fit in there? What you're currently doing business-wise? And maybe what's the opportunity both on -- is there any in drinking water? Is it all really on the leachate managing?

Yes. So I'll start, and Eric, feel free to add on. We're really excited about the PFAS opportunity. It really is very consistent with the growth of this company over the past 43 years. We have a total PFAS solution today, which includes sampling analytics and testing. We have a lab in Baltimore, which we can do that for them. We have water filtration, both drinking water as well as industrial water. We're doing a large project, as you know, Michael, with the U.S. government at Pearl Harbor. We can also do -- the big part of our world right now is soil remediation and AFFF firefighting foam cleanout work. And that's done through both our Technical Services business as well as our Field Service business is also doing that work. That's certainly growing. And then from there we actually have incineration or landfills. And just so we're all on the same page around these businesses, and we have the end-to-end solution, whether it be the media from the filtration systems to handle that waste, and we have 5 closed-loop landfills. So those landfills, the leachate from that never leaves the site -- it never leaves Clean Harbors, excuse me. It either gets incinerated or it gets treated on site and discharged. So we provide a certificate of destruction to our customers. We take care of -- we've proven with our technology in incineration six 9s, 99.9999% disposal. We have the OTM 45 testing. We've proven that. We're working with EPA. We're working right now on OTM 50 with EPA.

Help everybody understand the difference, just a subtle difference, not too scientific.

One is it's just a more volatile type of test, more volatile type of substances...

So organic compounds is the issue. There you go.

And so that's a new rule. So the DoDs come out with more regulation. The EPA on the drinking water. Obviously, PFAS and PFOA are now covered under circular. So these -- with their 1,300 superfund sites across the U.S., just FYI. And so there is a great opportunity for us. I think this is going to be a growth engine over the next few years. This year, $50 million to $70 million of growth. It all depends on how fast regulations get put in place. We think that our guide is pretty conservative around PFAS this year. But obviously, it's a great -- I'm sure all the people that are on this stage and people in the audience, it's on their minds. We have a solution for them, and it's been growing. And I think that as regulation continues to increase and get enforced, I think there's a great growth opportunity for companies like Clean Harbors to really be the PFAS solution for our customers, which we are marketing out of today.

And if you thought about just a 5-year look, it's not a hockey stick. There's a sort of steady progress towards a level. And then a little bit like PCBs where late '80s through the early 2000s, it's going to run at kind of a constant for a while.

I totally agree with that. I think that we have to get through the courts, we have to get the regulation now, we have to get through all this. But for example, AFFF firefighting we know is heavily laden with PFAS. So then we're doing a lot of work in field service, tank cleanout work. Obviously, on military bases, as Michael said earlier, we're doing a lot of work there, because you know they've been doing a lot of firework. And so that's happening today. I think that this is going to continue to grow. And as regulation, it could grow faster. But I think at some step, like PCB, we're finding PCBs today. There hasn't been a PCB manufactured in 20, 30 years. We still find PCBs in many things that are -- in work that we do and certainly in large cities. So this is going to be there forever. And I'm really excited about the growth prospects of this business over the next few years.

How quickly can OTM 50 testing be done, like the 1 that you did that was published in the circular rules. I mean when they put the rule making, they actually cited you.

That's right. So the best thing is we're working today with EPA to do that OTM 50 testing. We're going to do it in our incinerators. And there's no -- it's not that we need to change our incinerator. I work with permanent incinerators to do that. They do it today. So I think that we're working with EPA. We're thinking later this year -- the government moves at their own pace, you can't control that, but we're hopeful that -- we're working with them today to make sure that, that testing meets that new standard, and there's nothing we need to do differently to qualify for that. We've moved on our own work. We think we're in pretty good shape.

Do you need that to get tested and successfully passed for kind of to accelerate that growth? Or is that really even without that, you've still seen enough voluntary demand, I guess, would be a way to say it on...

It depends how fast you want to see the growth, Brian. I really believe that if regulation -- it's hard for our customers, it's how clean is clean, right? We need regulation to determine how clean the soil has to be. Do we need to go down 6 inches or 6 feet? That changes the game. We know with firefighting foam, that's being done today. We know there's a lot of learning, a lot of training being done. We're working on that today. That's your $50 million, $70 million growing at a pretty decent clip. But when new regulations are put in place and enforced, I think you're going to really see some growth there. But until you get that, it's hard to see that real material growth until we determine what the rules are, right? Because I don't want to do it and then do it again if I'm a customer.

Right. And that's been the kind of a delay, is that right?

That's right.

All right. Maybe we'll talk about incineration, just kind of the market in general. It's been a bit on the tighter side for a while. Does it stay tight? There's definitely some new capacity coming online, both you guys as well as competitors. Maybe talk about the way you view the Kimball facility coming online, time line? And what does that do market-wise from a capacity perspective?

Sure, I'll start. We're really excited about the new 70,000 ton incinerator being built in Kimball, Nebraska. We took our Board out there in March. It looked great. The team is working very hard to ensure that it's going to be online later this year. We're working on all the different final steps to make sure all the compliance is put in place, and we're really excited about that opportunity. So the question you ask yourself with us and another competitor also building a similar type of incinerator, does that going to create a problem from an oversupply standpoint, and does that somehow put pressure on a price point, because all of a sudden, it went from tight to excess capacity? I'm here to tell you, in my opinion -- we read what 1 of our competitors said. They said that publicly that they don't see that changing. I don't see that changing at all. I think that I can't wait for that incinerator to open. And I think we're going to be able to fill that kind of no problem. And if you talk to some of our customers in here, who we do some work with, they want that open too. I don't think that there's anyone here who feels that adding our capacity and our competitors' capacity changes the price kind of 1 iota. I think that, that price increases that we've been doing to cover off on our costs continue to go forward. And I don't see that changing anytime soon. I don't -- there's just too much out there. I mean we're really kind of trying to be super creative on how we manage our waste streams and bringing waste streams to other sources that probably the best and easiest answer is to incinerate. So let's get those things open. I don't see that changing anytime soon.

And this new capacity like this, both yours and Gum Springs, accelerate the captives closing?

I think that we've been in active conversation with our captive customers. As you know, Michael, when those captive incinerators close, that waste has to go somewhere. We know all our customers. Obviously, 3M was a big closure that happened a couple of years ago. This is a great opportunity for them to reconsider -- continue to consider closing or providing an opportunity for them to either we can manage their plant, they can close their plant, we can take over their plant, because we're open to kind of any ideas there.

So can we talk a little bit about strategy. There's 2 angles on this strategy. You've seen a consolidation happening in the industrial waste space of other waste operators getting big in this. There's that 1 angle. Sort of curious sort of your perception of what that means overall to market behavior? And then the other side of that strategy is your own efforts on participating in this consolidation and sort of the obvious things that should be added to the model, not the names of companies, but lines of businesses or areas of service expertise that would be an obvious place that the market would say, "Oh, yes, that makes sense. Why you're going there. Can we talk about those 2 things?

Sure. So you think about an acquisition HEPACO, which we did with them a couple of months ago in the Field Services business. And I think that, that business, you can see kind of a hand in glove with Clean Harbors. And they provide a lot of good -- a great emergency -- they have actually an excellent emergency response business that we're going to leverage, and we see that them using a fair amount of third-party field service mediation work. We can internalize all that. I feel great about the opportunity for HEPACO to add synergy. When you think about kind of 2024, pretty modest. We put a pretty modest number out from a guidance standpoint. The synergies come in 2025, and I see a real strong line of synergy savings as you think about HEPACO going forward. As far as consolidation in the industry, that's going to happen. I'm not going to comment on where we see that growing. We feel there's great M&A opportunities in both of our businesses, both in Environmental Service and the different lines of business and in the oil business with an acquisition like Noble. I think those are good winners for us. So I see that opportunity for us, and I see that us playing a -- because of our national footprint, because of our network of assets, being able to provide good value to sellers and to our customers.

Free cash conversion. So this is an industry that converted cash, whether you look at EBITDA or percentage of adjusted net income. Given the capital intensity, it was okay, but it wasn't good on a comparative basis and we have to translate that back into return. So 30% to 40% of your EBITDA or less than 100% of your net income, how do you get to 40% to 50% on the EBITDA or greater than 100% of the net income cash conversion?

Yes. I think we keep doing a lot of what we're doing, Michael. So if you look at our guide this year, we got some very large capital projects. We're finishing Kimball. We're expanding a large facility in the East Coast in Baltimore. When we take that capital work out, we're going to have free cash flow conversions of a tick over 40% this year. How are we going to grow that? We're going to continue to be very disciplined on pricing. We're going to continue to bring great value to our customers to drive that pricing, continue to be very smart with acquisitions. We look to it longer term, we're looking to generate free cash flow conversion of 45% to 50% long term. And it's going to be through a lot of the great strategies we've begun already and just carrying those through. But certainly, it will be on the heels of our Environmental Services business, as that is the largest portion. And like I said, every day we set targets. Our Vision 2027 target that we laid out about a year ago has us growing to those free cash flow conversion levels. And I think it's definitely achievable.

Great. Well, we're at the end of our time. So I want to thank you for making time for us.