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

So Michael Hoffman, Diversified Industrials Research at Stifel, Group Head. We're sticking on our industrial waste thesis. Just having talked with Enviri, we have up on stage with us, is Clean Harbors. We have one of the co-CEOs, Eric Gerstenberg; and his Chief Financial Officer, Eric Dugas. Thank you both for -- Erics.

Thank you.

Thank you.

This will be [indiscernible] confusing. Eric, here we go. Eric, what's happening? So I have this really cool list of questions and then lots of stuff happened this week.

Oh, yes. It's been an exciting week.

It's been an exciting week. So just some of you were with us here in the room, but we took about 14 investors into headquarters yesterday. Mike Battles, who is your co-CEO, was sitting next to me. And I made the statement, I said, the stock's doing really well. There's really good sort of operating leverage but the multiple is not improving and you've got [indiscernible] no, no, wait a minute. The multiple is better than you think.

We'll get into that.

But on a relative basis, where I'm going with this, there's been 4 or 5 chunky transactions. Interesting enough, your chunky transaction, you didn't pay this. You bought things as well. HEPACO, you didn't pay this. But it had been sold for 12 to 16x. Until about 3 months ago, you were trading at 10x, 11x, now you're at 12.5x. The 800-pound gorilla in the business. So what is it going to take for the market to understand the repeatable recurring aspect of compounding aspect of this business? What is it from your perspective on the inside looking at? What would you tell them that they -- to get them comfortable why -- and I'm not here to argue multiple expansion as why you should buy a stock but it is fascinating that Heritage Environmental sold at 16x. CIRCON went for 12x to 13x. U.S. Ecology went for 14x.

Yes. So I'll list a few different things. And then I'm sure Eric will complement. So really, #1, our asset base across the board. We have a -- really a moat of facility assets from our incineration network, managing over 70% of the commercial hazardous waste incineration; our TSDF network, which allows us to aggregate waste and feed those incinerators, landfills, wastewater treatment plant; and then our collection platform. We have over 700 branches throughout North America that complement each other by sharing people and assets to be able to service our customers. So that's really where I'd start. I think one of the things that we continue to want to get investors comfortable with is our oil business. I think the Safety-Kleen Sustainable Solutions business, that drags on our multiple a little bit more than it should. It's a great business. We collect used motor oil. We sell it and recycle it into a great base oil and blended oil product. We're moving into making a group 3 oil. And we're also leveraging a blended growth along with a partnership that we have with Castrol. So that is -- I think that's one area that's kind of dragged our multiple from being at the 14%, 15%, 16% that it should be. On the environmental side, very clear that we've had great margin expansion. We've driven price to offset inflation. We've also managed our cost structure and our path to EBITDA margin expansion is very clear. And we're going to continue to do that across the board.

Okay. So let's tackle the 800-pound gorilla in the room and it's just used oil. I've had this view and I've said it to the investment community, if you can get comfortable with that business at a baseline, assume it's that number forever. Now let's figure out, would you own Clean Harbors because of what ES can do from a compounding standpoint. So what do you think that -- how I want to frame this is, we went from $130 million of EBITDA in 2019, you have all of the oddities of the pandemic and everything that happened I think we can fairly say over-earned at 310. But some stuff changed and -- 2020, things like that. What is the view -- if $130 million was the right because it's virtually the same set of assets, a little bit of additions. I mean maybe your 160 million gallons of production instead of 150 million gallons but it's essentially the same business as '19. What's the base? What should everybody get comfortable really truly is the base?

Our base line to get comfortable is around that 190, 200 million gallons area. And then we're going to grow it from there. And the way we're going to grow it there, is to be able to continue to make sure we manage the front end, which is in our control of what we're charging or paying for that oil, grow our blended business, take out cost, continue to work on our circular arrangement and make also that group 3 oil. That's going to be a higher differentiating quality product. And that will grow into the mid-2s as we go forward.

Wait, Michael. I would just add to that, when you analogize the 2019 being the same business, perhaps the assets are very similar. But I think we internally have done a lot of things coming from that low watermark of $130 million, both internally, breaking out the SKSS business from the Safety-Kleen branch business, for instance. I think that helped both sides of the Safety-Kleen business. It allowed our used motor oil collectors to really focus on that part of the business. We're much better in terms of managing the used motor oil and our collection costs in that side of the business, which helps profitability. And then you had some external factors. I think IMO 2020 did play a role. And so I certainly don't see this business, I don't want anybody to think we're going to go back to that $130 million. I think we've done a lot of things with the assets.

I think there are structural things that mean it's better than $130 million.

Absolutely. Yes.

I think that's -- that -- I did want to -- yes, so it's fair enough. I never thought 310 was going to $130 million because IMO 2020 alone happened. But we wanted to establish somewhere in the market -- and you just said it's going to be this forever. And by the way, at $190 million my sense is you're at $75-$80 million of free cash.

Yes, very attractive cash flow generator.

The 40% -- 45% free cash today of that one. And then you got to layer in corporate overhead winds. But before corporate overhead -- and corporate overhead at 4.5% of revenues is not outlandish.

No, you're in the right ballpark there, 45%, 50% free cash flow conversion generator.

Yes. Right. So it's good cash generator, stable, right? If you can get comfortable with that, where are we wrong? What happens when macro goes, shoot, this is $170 million? What's a macro thing that you can't control that says we're wrong?

An event. Some sort of event, again -- we don't.

Massively dislocated.

Dislocated price in the market. And that -- we don't -- we just don't see that, obviously.

And that's a short term dislocation because it then eventually resets [indiscernible].

Exactly. What the pandemic drove, you had customers manage their inventories differently because of supply chain issues. So you had people really stocking up in 2022 and then the reverse happened in 2022 -- 2023. And you kind of had that seesaw effect. So absent a major event, I think we can all agree a pandemic was a -- hopefully a once-in-a-lifetime type of event. So stability is the name of the game here.

So what I'm trying to build here is that the market should be able to get comfortable, $190 million is a good number.

Yes. Correct.

And growing.

And -- but it doesn't even need to grow. It's just -- if it's $190 million constant, you can maintain the stability, you can make it boring.

Yes. And today, as you know, it's only really 15% of our business overall.

Yes. And so I'm going to have this conversation about what the growth rate of ES looks like and if that $190 million is constant, then if I look out 5 years, it's 10% and I look out 10 years, it's 7.5%, it's a smaller, smaller piece. And just to remind everybody, it's -- people will go, well, just why don't they sell it? But the challenges, the permitting that structure exists at Safety-Kleen, the holding company, which impacts Safety-Kleen Environmental, the branch business of Safety-Kleen sustainable solution. So it's a cumbersome sale. It's not impossible.

It's not impossible, but also, we'd add that those customers that we collect used motor oil from, we're also collecting other waste [indiscernible] containerized waste that feed our environmental network as well.

Okay. All right. So let's go back to Environmental Services. I think of it as -- you've all talked about this. You did at the Analyst Day, there was 4 subsegments, there's Technical Services, Safety-Kleen Environmental. There's Industrial Services, there's field and emergency -- Field Service and Emergency Response. But I take another look at it and I go, TS and the branch business, Safety-Kleen Environmental, there's $2.5 billion, right? Large generator, small generator but it's a industrial waste management, fixed facility, leverage, collection network leverage, should be pretty good pricing. Year in, year out, coming at this price cost -- you learned you could price, the last 3 years. Is that the right way to think about that?

Absolutely. Absolutely.

So if we have 2% industrial production and 3% inflation, this should be a 6-ish kind of organic growth rate?

Yes, we feel high single digits.

Yes, I mean, we're doing 7%. We did 7% organic growth across all of the S, TS being the biggest piece of that in Q1 here and that's kind of where we're guiding to for the rest of the year.

So 6%, 7% in that kind of backdrop is -- I mean, people can think about that sort of rate of compounding. And then you talked about focus on margins. If you're managing price-cost spread alone on there, there's a operating leverage on that high 20% margin, 20, 30 basis points a year, just kind of over and over again.

That's right.

That's a good way to think about that?

That's the way we are -- our aspiration is to drive to those high 20s.

Okay. So the other $2.4 billion of revenues is just sort of $1.4 billion in industrial clean services and then about now just about $1 billion with HEPACO in field service and emergency response.

Yes.

That's a billable hour type of business. So that's about asset utilization of labor and equipment. You saw pricing opportunity there.

Yes. Two -- separating the 2. First of all, on the industrial side, we want to be -- having our employees work day in, day out at large industrial customers, chemical plants, refineries. And we're able to get embedded and then be able to leverage that business into specialty services, which is a higher-margin business and also be there to collect the waste of those industrial customers. So we're -- we have leverage on how we bundle our services into those chemical and refinery plants and that's an opportunity for us. On the field service side, little bit different. There, we're running out the door. We're working for utility customers, the largest utilities throughout North America, as they have events and they need support to be able to support the utilities. We're in there on an emergency response basis, not just performing emergency response but running out the door to help them change out transformers. And that is a very reoccurring, repetitive basis, with a critical service level agreement with those customers that we got to be there within 1.5 hours and 2 hours. So that's what gives us our leverage there, being able to respond to their needs in a timely fashion.

And these are thousands of incidences at $10,000, $15,000, $20,000 kind of a pop.

That's right.

These aren't $1 million dollar things. These are lots of little things over and over again.

The $1 million things are on top of those. Those are the large projects that occur in our history, the bird flus, the Gulf oil spill, things like...

This -- it might not be at the same location but the repetitiveness of several 100,000 of these as a market, low 100,000, and you have your chunk of it.

That's right.

Over and over again.

And very recurring. We get a lot of questions, hey, is this -- because it's an emergency response basis, how much of this work is recurring? A vast majority of it can be considered a recurring but just not sure...

Not sure of location but...

Exactly. We don't know where. We don't know when. But we know we'll have a branch nearby that we can respond.

If there's 70,000, 80,000, 100,000 of these you're going to process in a year now, that's $1 billion of revenues -- over and over and over again.

Yes -- and continuing to build our footprint, leverage our branch openings, open more field service offices. A lot of the field services we're doing today is for some of those smaller customers. So Safety-Kleen Environmental type of customers, believe it or not. We have a great field service presence for those small customers, and continues to grow.

So what's the operating leverage in these 2 businesses? I mean, because the industrial services businesses are really big customers who tend to squeeze the daylights out of vendors. So as -- is that more about the quality of it and a relatively stable margin? And...

It is. It's -- obviously, they have big demands and they have very well-schooled purchasing people. However, that's about giving -- having a great safety record, which we have, and be able to be there when their needs or their plant shutdown is required to have our quality people and our quality equipment there. There is customers there that we've chosen to walk away from because they didn't want to pay for our types of services. But we're really trying to focus on those customers that value our partnership, value our safety record, value our specialty services that come along with that base industrial of our people embedded into their plants and that's our opportunity.

Okay. It's -- I think there's fairly significant switching costs in Technical Services and Safety-Kleen Environmental. Is there a switching cost this year? I mean -- like you're really big in the energy space on doing tank bottom cleanout, heat exchangers, deep cleaning, depegging pipes, you're big. You've got a significant share. So does that share give you a little bit of room to -- quality?

Yes. It does. The specialty that we have and the quality jobs that we do of being able to clean a tank or clean a heat exchanger unit using technologies such as ultrasonics that allows you to take out heat exchanger and be able to clean it so it operates better for our customers. Those types of specialty services is what we're known for and keeps us embedded with those customers.

And so one piece of the business that we don't talk a whole lot about here but I think is really important is that a lot of the industrial services business is built around in-site locations. So these are locations at industrial sites where we have people embedded there every single day. It could be a team of 3 or 4, could be a team of 7 or 8, could be a larger team. And they're on site at these locations, doing a lot of day-to-day kind of industrial cleaning type work. And then as turnarounds come up or the need for specialty services that are a higher margin, we'll come in and do that work, too. But when you think about switching costs or the stickiness of the customer, because we're there day-to-day doing work, identifying work, getting to know the people in the lunchroom or the coffee room, there's some switching costs there and there's stickiness there that keep us on site.

So to that end, does that allow for margin expansion? Or is that a relatively stable margin business?

We're going to see -- the in-site location is set at relatively stable margins. Now we're going to grow margins across the entire business. And then the specialty, the things that require maybe a different type of labor, more specialized equipment, those margins are going to continue and increase. One area that we really tried to tackle, I'd say, over the last 2 years, really since the HydroChem acquisition, is internalizing more and more of our work through our labor force, being less reliant upon subcontractors. And you can see, if you look at our turnover statistics, Michael, that we're holding on to folks and we're able to internalize more of that work and increase margins that way. And in an environment that we're all operating on right now, where labor is tight, inflation is still sticky, wage inflation, in particular, I think, is still sticky, the fact that we can hold on to our people, not have to do more training, have more tenured people that are safer, all of those things are driving our margins. And we saw it last year in the Industrial Services business. We saw some -- we don't really show it publicly but you saw tremendous margin growth there, that showed itself in the entire Environmental Services segment. But a lot of that was in Industrial Services, where we saw the pricing gains and the internalization of a lot of the work.

Two other things that I'd highlight on the industrial business. We're in the midst of putting in a better platform to run that business on, called our Industrial Services platform. And that takes very -- IT platform that takes very sophisticated contracts with these large clients and narrows it down into an electronic worksheet for our workers that make sure that we capture everything that we should be billing for with these customers to help get us margin expansion and be more efficient. Additionally, when we're embedded in-site and Eric mentioned that, we have 2,600 employees that are working day in, day out at customer sites. That leverages opportunities to find waste, hazardous waste from those locations, industrial, large tank cleaning that feeds into our network as well.

Okay. Billable hour businesses tend to -- you talked about the sort of utilization of that labor. You need to be in sort of the high 80s, pushing 90? Or how do you feel about that utilization from your perspective?

Yes, very strong. We're at that the low 90s today. We continue to add to our billable workforce to complement. We added 1,000 net billable heads. That utilization is high. We have employees that are 50, 60, 70 hours of work on a continuous reoccurring basis. We're also trying to lower our subcontractor base. We've used too many subcontractors and we now have an opportunity to reduce our costs there and that's continuing to leverage all those branch offerings where we could have field services, support IS or IS support field services, develop labor pools and we're working on that. So our utilization of our employees is very high across all of our service businesses today. And as Eric said, we've done a solid job of reducing our turnover and really focusing on our employee base.

Okay. So I want to talk about PFAS and then I want to talk about incineration and incineration capacity. But within the context of the PFAS storyline, so we've been socializing for about 5 years that we thought PFAS was an investable thesis from a stock market standpoint. And interesting enough, you all as a company, I think, wisely, said -- like I talked about this for a while but did start doing so in '23, is -- became more recurring aspect of your message. What does the market need to understand about, one, your relative position in PFAS today, what it might be and what has to happen for that lately to occur.

Sure. Our position today is that we're able to offer total PFAS solutions. And what we mean by that is, #1, we can perform sampling. We can perform background analysis through our labs. We can service and clean drinking water. We can clean industrial water. We can excavate and remediate sites that have high levels of contamination and feed that into our landfills and incinerators and we can help with the change out of AFFF, where it needs to be changed to a different material. So we can do all that. We're the only scalable company that we think that positions us well in that. To continue to change, what we need is the -- to work through, #1, get better regulatory parameters, particularly around ground contamination. We think that's coming -- that will...

So that's a remediation MCL.

Remediation MCL, we need that. And then also more clarity on funding. Who's going to pay the bill and who are the customers that we're working with? So we have 1,200 salespeople throughout in North America that can offer up this total PFAS solutions depending on the customer type sites. And we have specialists, 25 to 30 PFAS specialists, that are then selling those services. So clarity on funding, along with regulatory clarity is what's going to build this network and help deal with this problem that we all have.

And you're doing about $50-ish million of revenues today?

That's right.

Predominantly on military bases?

It's a mix. I would say that 50% to 70% drinking water and industrial water is 40% to 50%. The rest of it is, we are seeing contaminated sites that we're cleaning up that those customers know that they don't want to extend any more liability and want incineration into our sites.

Okay. You did an independent study at your Aragonite facility to show that incineration had a high degree -- some multi nines worth of destruction.

That's right.

EPA has come back with its disposal hierarchy. It has acknowledged thermal. It actually quoted your study. But it's asking you to do another study, basically you're doing 1 level of volatile organic compounds, you got to prove that you can manage this at a higher or more efficient level of destruction relative to the volatile organic compounds.

That's right. That's right.

Is there anything from your perspective that says you won't pass that test?

Not at all, not at all. We feel very confident about doing that second round of testing. And what's even more exciting about it too is that when we did our first test at our Aragonite incinerator, we did it with a third party that helped give validity to the study.

Can you use that same third party?

We're going to use the same one. And the DoD and the EPA is working with us together on this next one. So we're really excited to continue our partnership and building out with them.

So DoD was predisposed to thermal all along and EPA was -- because it's climate and air and all that. What's got them around the bend here to be more receptive to thermal as an option?

I think just that -- I think a big part of it is the study we performed and there's been a couple of other studies out there as well. They've done their own and then there's been another company that's done some. So I think they're really proving out the study that six nines that we've had of destruction efficiency was a big step towards...

This is 99.9999.

That's right. Right.

And are you doing liquids or solids or both?

Both. Liquids more in the form of the AFFF and solids is more in the contaminated topsoils.

And so solids tend to be lightly contaminated and that's what you're burning or highly contaminated and that's what you would burn?

I would say both. We're really seeing both types of -- think of an event like if an airport is going to put in a new runway, there -- on that airport, there's been firefighting drills and that's going to be a high contamination area that needs to be excavated. So we're seeing a gamut. And then we just see some customers, some educated customers that really say, I know I want [ incineration ].

You want a short destruction -- you don't want sequestration, you want a short destruction.

That's right.

Okay. So that segues into incineration. So you alluded to this at the beginning that you're nearly 70% of the outsourced market. You're bringing capacity online. A competitor of yours is bringing capacity online. Can the market absorb that and not see the bottom fall out of the marketplace? What's your view of that, all of that capacity coming on because it's all coming on within 6, 12 months of each other.

That's right. We're very confident and we're confident because of a few different things. #1, the backlog that the whole environmental services market has today is very strong and continues to grow in anticipation of those units coming online, continues to be more legislative and regulatory requirements that -- some things like we were just talking about, that's there. Captives are another continued opportunity that there most likely will be more captive closures, which will drive volume. So along with the presence that we have, our growth in the market of how we service customers, we're very confident that we'll fill up these units.

So you...

And they are too.

Yes. I mean I think you always said the same thing, right, at your Analyst Day. One of the things I think that Alan takes a lot of pride and he'd been there for 36 years something...

34 years.

34 of the last 40 years -- is hiring really smart people who know end markets really, really well. And I forgot this gentleman's name, he knew more about the captive incineration market than anybody in the place -- that your -- works for you guys. And sort of appreciating which of that infrastructure is more likely to be like 3M in a position where they were seeing rising capital costs and the optics of this from an expense standpoint was less and less attractive. What's your confidence of, based on your own G2, that more of the chunky bits like a 3M, another 20,000 or 40,000 tons are going to come out of the market.

Well, first, the overall captive market, it's about 40 different units.

And it's about 900,000 tons.

It is. And those companies are also our customers today. So not only are they feeding waste into their own units but they're feeding waste into our units -- in our network of other types of [indiscernible] that isn't going into their captives. So we have strong relationships with them. We know them. We work well with them. We look at all those opportunities to be able to help save them costs, help them focus on what they do best, making products as an example. And we -- our relationship is growing, continues to grow with them. There's only a handful, though, that really would have the potential rotary kilns, 14 of the 40 are rotary kilns that might have some cost improvement by either having somebody like us operate them or shutting them down. And we stay -- we feel pretty comfortable that there will continue to be an evolution of how that plays out, whether we own or operate their unit and/or they come offline because their utilization is low, they'd have to do a lot more capital investment, the 3M scenario. We think that's going to continue to evolve.

When you think about the 14 rotary kilns, what percentage of that 900,000 tons would that represent?

It's directionally, I'd say probably in the 40% of that.

Okay. So it's a chunky number.

It's a chunky number.

So even is a little bit of that comes out, plus the ongoing foreign direct investment and reshoring, recovery of industrial production, adding [indiscernible] this is 100,000 tons, I am a little suspicious if that's really that number. But that's 170,000 tons coming into the market. It's going to stay tight for a while.

Yes. And I think, Michael, what I'd like to share, if I'm a captive operator, one of the things that I got to figure out if I'm going to shut my unit down is, where are these waste streams going to go. And I think with us opening up our Kimball, Nebraska facility, that's an opportunity for some of these folks to refocus on doing what they do best and sending captive volumes to us, similar to what 3M did or similar to what some of these captive operators are doing today with some of the complex waste streams that they just can't handle.

So in the last minute, I have to ask this 1 question. So there was a news article, broke yesterday in Canada, that GFL was selling off its environmental services business, about CAD 1.8 billion in revenues, CAD 500 million in EBITDA. You have about $700 million of revenues in Canada. It's the #1 player in containerized industrial liquids, you love containerized businesses.

We do.

Is that a good fit for you?

Could be. Could be. Yes. Yes. Sounds interesting. Yes. They have a nice footprint. Some past management that used to be part of our team -- so yes, that's...

So never say never.

Never say never.

All right. You heard it here folks. Thank you very much for making time for us.

Thank you. Appreciate it.

Thank you.