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

Well, let's talk about PFAS. So just to level set, you talked about $50 million to $70 million of PFAS related revenues last year and the pipeline growing 15% to 20% each quarter. Maybe break down the mix of work you're doing currently and how you think about expectations for growth this year?

Yes. Jim, you want to?

Sure. I'll start on that one. Feel free to hop in, obviously. That $50 million to $70 million has been and some in the company think that's even low because we do some things that where there's PFAS and other things. So it's part of a larger project. But on that $50 million to $70 million, that's probably pure PFAS-only type of work. And breakdown, I'm not sure how accurate it would be but -- or even the value it would bring because we're really talking about a whole solution there. But I'd probably say of that revenue, roughly half maybe is related to water filtration because that's really what's move the market first. But certainly, we're doing disposal. We're doing some remediation work. We've sent some things to our landfills. We send some things to our incinerators. And more recently, we've added capabilities at our -- one of our main labs in Baltimore to do sampling of both water and soil. And there's special testing and spectrometers and other equipment that you need in order to do PFAS testing and we've just got qualified in some certifications there. So that hasn't been part of the equation in sort of last year's revenue but we think it will become part of it as the analytics market kind of takes off. And it's part of our ability to offer a one-stop shop going forward. And we've talked about PFAS, you and I, probably for 5 years. Water filtration wasn't on our bingo card in the beginning. But based on a project that we did at the Pearl Harbor naval base, which actually started as a fuel spill in late 2021 has kind of evolved into, we are their key supplier for filtering that and whether [indiscernible] or something in that water, that water is loaded with PFAS. And the government is doing all the right things out there to get that cleaned up and we've got a multiyear contract. So we've been there for 3 years. We're going to be there for probably another decade, I would guess. Based on the system we have installed there and we did such a great job that we were asked to go to other locations. So we see a path more in the water filtration spectrum than we would have originally thought but we're not going to try to conquer the world over the Xylems and Calgon Carbons and others. But it's another tool in our toolbox and it does allow us to offer a full suite. We can filter your drinking water. We can do your contaminated pond, industrial-type waters. We can soil sample. We can water sample. We can go there. Obviously, we do remediation. We can do the [indiscernible] and haul, take it all the way, bring it to our landfills, bring it to our incinerators. There's really no other company that has that and certainly, no one that has the commercial scale that we have. And we're working really closely with the EPA right now because there has been that anti-incineration bias in some parts of this administration. And we want to make sure that we get everyone comfortable with what we think is the right solution, which is to destroy these forever chemicals. And you really can only do that in commercial -- at a commercial scale in incinerators like ours.

Yes, not to get into the weeds here but in reading both your own results of third-party studies and what the EPA documented and noted in its preliminary disposal guidance and it seemed pretty obvious that you were getting 99.9999% to 99.99999% destruction on the material. So it's a little unclear to us. This is kind of a statement as much as a question. It's a little unclear what could be a more effective method of disposal. I guess what are the prospects for that sentiment and kind of the guidance to improve just based off of the science?

Yes. So whenever you're incinerating, there's always a concern there, these things called PICs, which is partially incinerated compounds, I believe, it stands for. And so the thought was -- and we deal with things that are, to be honest, more dangerous than PFAS. But for some reason, there's been this focus on this that they don't want things coming out of our smokestack or anybody's, in fact, raining down on the local community, which really doesn't happen. It's really more being naive about what our pollution controls are capable of. But we're working alongside the EPA. Their first standard is for those that want to get all wonky, its OTM-45 And they've established a new level at OTM-50 And the EPA has their own incinerator. I believe it's in North Carolina. They've done their own burns, their own testing. They want to make sure they understand what they're asking us to meet. And so we've really been partnering with them, which is how you want to do when you're trying to meet a new regulatory or establish new regulatory standards. So I think Eric Gerstenberg used highly, highly confident, we're going to pass that OTM-50 on the last earnings call just based on where we are with the EPA.

Yes, I would suspect. So is that one of the key things you're or we should be watching for to catalyze further investments in some of the areas of your strength? And what else are you watching for to help catalyze investment from, I think, from a regulatory perspective and also just in terms of funding and state actions?

Yes, I could start on -- yes. And I think Eric made a point when we were out in Las Vegas meeting with investors. I think it's an important one. We don't have to invest anymore. We're doing a study with the EPA but we have the plans. It's -- once we get the regulation, we can put the soil in there and it will eat that for breakfast all day long. So I think we just need the standard. And we've said this before in conferences that until you know how far you got to dig down or what level's acceptable, you don't put a shovel on the ground. And so I think water is moving along. They've set a standard that's not untraceable but it's a very low standard, essentially want it out of the water. And that's going to move the needle for a lot of folks. That's going to get some things in line and people are lining up to do this already because they want to get it out of the water ahead of the regulation before there's liabilities there. On the soil side, it's a little bit different. It will move at a much slower pace. It will be a lot of finger pointing. It will be a lot of lawsuits. But ultimately, there's been studies where when it rains, the river that's downstream from airports and military bases and firefighting schools, the PFAS level spikes. So you can't just do it in the water. You have to get at the source and that's really the holy grail for us. We're going to grow with the water market. We're going to grow with having an end-to-end solution. But ultimately, for us, grand slam is going to be when we start digging up huge piles [indiscernible] someone does and then sends them to our facility.

And best estimate of when we might get an MCL for soil?

Yes. They're saying August. But they said August last year for the water standard and they just came out. So I wouldn't hold my breath on that. And then you got the complication of an election year and possibly a change in administration. And I don't know that, that's going to really divert the train off the track. But certainly, there's a lot at play here but there's also good momentum. And the fact that it's already been named in a circular, ruling really helps kind of set the government up to continue down the road.

Yes. Yes. I know there's been many different attempts to try to size the TAM of opportunity here. There was an industry peer just a few weeks ago kind of pegging PFAS remediation to be as much as a $200 billion opportunity. Of course, that was kind of across water infrastructure as well as water remediation and hazardous waste. While I'm not going to ask you for your own TAM estimate right now, I guess how do you put this opportunity in context of other big, chunky remediation opportunities that the company has seen over the past decades?

Yes. I mean, Noah, I think it's certainly one of the largest opportunities we've seen. And I don't think that's a surprise to anyone. I think for us, we're in a great position to win work and provide the services. As Jim alluded to, we have the infrastructure in place to be able to handle water like we're doing now, soil. We have the incinerators. We have the landfills. We have the transportation. We have the lab work. So it's really a total PFAS solution. In terms of the total TAM, I know you didn't ask the question but that guess you alluded to is probably as good as any. I think the way we're looking at the opportunity is, it's a sizable opportunity. We're at the forefront. We're doing great work with the government on some sites now and in the past that you can read about online and things. So I think if you -- many believe the government maybe is the first mover here with some cleanup and we're in a great position for that. Our opportunity, I mean to say, revenue opportunities, if they're $50 million, $70 million now, could there be a couple, few hundred million opportunities sometime in the horizon? I don't think that's crazy. I think the only thing that we're certain on is, this is a longer-term opportunity. I think the PFAS remediation is going to be long term and for decades. It's probably what we're measuring it in. And again, I think we're one of the leaders in the clubhouse here in terms of being able to respond in a complete meaningful way across various different scopes of projects. So that's the communication we're trying to get across to folks. And as we said, the pipeline on it is growing. We just really do need kind of further clarification from EPA and others so that people know what they need to do.

Just one final point on that, Noah, because I know you've got a couple of other things you want to cover but we're really working hard towards our Vision 2027. And if you think of the growth rate, the organic growth rate that's in Vision 2027, whatever PFAS is, whether we grow 15%, 10% this year, 20% next year, 15% next year, whatever that number, it's far and above what our Vision 2027, it's got baked into it. And so I think it's just really good upside for anyone that's investing in our company today with an eye towards how we're going to do over the next 40 years.

Very helpful point. Maybe one last question on ES before we move on. It was clear that management really excited about HEPACO. I guess what have you seen from that business since you acquired it? And maybe walk us through the outlook for capturing the synergies you identified and really where you see the upside in the business.

Yes. I guess, first off, I'll start, 1.5 months or so into the acquisition. As you mentioned, Noah, very excited. I think if you think about the different screens that we put through acquisitions, certainly, cultural fit is one of our screens kind of along with strategic fit and financial fit. We passed all 3 of those, obviously. But culturally, the team has really come on board. Obviously, the nature of their services, emergency response and remediation, very similar to our Field Services. So we've been able to, from day 1, kind of plug them in. The first 1.5 weeks, 2 weeks of ownership, they were sharing labor, they were sharing equipment. We're getting systems synced up. So very impressive from that part. And that's why we were so bullish, I think, on the call. The other thing is, we've seen HEPACO continue to kind of win work here since our ownership of them and that gives us great feelings for the future with that asset. In terms of synergies, we've said kind of full run rate synergies of $20 million on an annual basis. I think we still feel very, very good about that. Some of the biggest opportunities, you have the standard kind of rooftop consolidation and back office and things like that. But what we're most excited about, I think, is HEPACO really had a nice footprint from an emergency response hotline perspective, whereby they had a hotline located down in Florida where customers even from the West Coast, even though HEPACO does not have branches out in the West Coast, customers could call the hotline. HEPACO would hook them up with a response provider on the West Coast to do the work kind of through a subcontractor relationship. We're looking forward to kind of internalizing a lot of that work with our own Field Services folks. And it's going to require some hiring and some retaining but we're doing a really good job on retention and headcount management in Field Services. So being able to internalize that work, being able to build that work as well, build the HEPACO business line, there's not -- there wasn't a whole lot of overlap between Clean Harbors' work and HEPACO work, which has been really good. So we're able to fill out some different geographies. But certainly think, especially given some of the success we've seen with recent acquisitions, that we'll be able to hit that synergy target and even exceed that. So again, feel really good, really good opportunity to increase the margins in that business, more similar to where ours are today with Field Services. So I think you are right in reading through the excitement that management has, just a great opportunity and we look forward to growing that business going forward.

Terrific. In the time we have left, I want to spend a little bit of time on SKSS. Certainly, the posted base oil prices we've seen are positive directionally. Can you talk to us about market pricing trends and visibility into better spreads as we get into 2Q and 3Q?

Yes. So certainly, as you mentioned, some good movement finally -- recently over the last couple of weeks with some posted base oil pricing improvements. I think the biggest thing for us as we continue to move out through 2024 is to be able to take advantage of that -- of the upward pricing but also move to more contracted sales for our product. Q1 especially is a typical time of year where we need to do a lot of spot price type sales. We're going to transition that to more contracted sales here just through seasonality but also a devoted strategy that we're employing to try to get into more contracted sales and use contracted sales as a larger piece of our business. You probably ask about Castrol here maybe and Castrol is -- the agreement we entered into with Castrol is another way to try to drive more contracted sales of some of our products. So as we look out the rest of the year, pricing, I think we're in a different environment than we were last year. I think customers' inventory levels have evened off and we're seeing the typical kind of seasonal upward price trending.

Yes. I mean with Castrol, I mean, just talk to us about how the partnership came about and how -- I mean there's obviously an opportunity to leverage their marketing and distribution capabilities. What does this mean in terms of increasing contracted volumes and really driving the closed-loop initiative forward?

Yes. I think it's a huge opportunity. In terms of how it came to be, this is -- we -- for many, many years, as you're familiar with, Noah, we've been trying to get our products into fleet customers and things of that nature. And it's really difficult, right? These big fleet customers, they rely on and they want a brand name oil in many instances. And so that was a very difficult egg to crack. The Castrol agreement, we've been working with that company for a rather long time now. Leading up to the arrangement, we undertook a pilot program with Castrol that was very successful and led to the formal agreement being signed and announced. But really, this agreement, I'd say it does 3 things for us. One, it validates the quality of our oil. So we've always known that our oil is high quality, just as quality an oil from that -- through our re-refining process as would be generated from a virgin crude process. I think it also validates customers' desire to have a sustainable solution for their oil needs. And we've been espousing the actions, become more and more important. This is a relatively easy way for customers to kind of meet their sustainability goals. And then lastly, as you alluded to, the third thing this does to us is it gives us a partner, a well-respected brand with very good marketing muscle that can help us get our product into these fleet customers and be able to provide a top-notch collection services as well. So ultimately, how -- what are the financial implications of this? Time will tell. Obviously, a lot of it depends upon continued success of Castrol in selling this MoreCircular offering. But we couldn't be more excited and really think it will be a good thing for business and drive even more volumes to the contract pricing I alluded to a moment ago.

Let me close with a question on M&A. Certainly, plenty of dry powder here. You did a bigger debt [Audio Gap] to close HEPACO. You laid out an M&A scenario in Vision 2027. So how should investors think about the company's appetite for deals at this point and the size and shape of the pipeline?

Yes. Well, Noah, as you know, in Clean Harbors' history, acquisitions has kind of been our key growth area. That's how we've grown the business over 40 years. We're going to continue to do that. It will be the largest piece of our capital allocation. I think HEPACO, we talked about, that was a great deal, kind of right in our sweet spot. We'd love to continue to do deals like that to continue to grow out kind of that ES space in particular. But we'll also look for deals on the SKSS side similar to the Noble acquisition that we're also excited about that really helped in that part of the business kind of fill in a key geography in the Southeast. But yes, we have a focus. It's 85% to 90% of our business. There's plenty of opportunities there. The pipeline is very strong. We see a lot of deals. We turned down a lot of deals because they don't meet all 3 screens that I mentioned to you before. But we've got a very strong balance sheet. We're busy pounding pavement out there looking at deals. And I think in line with our Vision 2027, you'll continue to see Clean Harbors do deals on into the future.

We look forward to seeing that. We're at the end of our time. Thank you as always for a great discussion. Hope everyone has a productive rest of their day at the conference. Stay safe, everyone. Take care.