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

Welcome, everyone, again, to the 27th Annual Needham Growth Conference. The next presentation will be a fireside with Clean Harbors. We're pleased to have with us today, the company's Co-CEO, Mike Battles; and CFO, Eric Dugas. Also with us today, Senior VP, Investor Relations, Jim Buckley. In the front row. My name is Jim Ricchiuti, senior analyst in the equity research department at Needham, covering industrial tech companies. I think most people are very familiar with Clean Harbors. Thank you both for joining us today.

My pleasure. Thanks for you, and thanks for the Needham...

Let's start off. I think just the discussion with the -- extremely unfortunate events that are taking place in Southern California have -- so a couple of questions. Have any of your operations being impacted. I know the situation is very fluid, but any broader implications for your operations as you think about this over the near term?

Yes. So kind of our first concern is the people of Clean Harbors and there were -- there are a handful of people who have lost their homes, which is tragic, and we're working with them to provide housing and other opportunities for them. None of our structures in Southern California have been affected. Certainly, routes have been disrupted, air quality problems that are existing in Southern California are slowing things down. The thing with -- and so we've established a command center, we've got our event team out there. We have the sales force kind of circling the wagons, if you will, to make sure that we can respond. Some parts, we can't even get into yet so it's not even an opportunity to go additionally to sell, but so there's going to be some push on that to clean it up. And then we should be in a good spot. Now the thing with fires and hazardous waste, they do the work for us, which is kind of a problem. It doesn't make the air any better, but it certainly doesn't help -- the waste is not on the ground, it's in the air so that's a bit of a challenge on balance. We think there's opportunity here, probably a net -- I have to say here on -- sitting here in mid-January about what the effect would be probably net neutral if I had to guess today because some things have slowed down, some sites are closed. Some people are not at work because they're dealing with personal situations. So it is -- more to come on that one, but we'll see. It's a tragedy. It's awful.

Yes. Let's turn to the Environmental Services business, where you guys have shown really solid organic growth, 6% or so each quarter or through the first 9 months, well above GDP. Remind us, was that always the case pre-pandemic.

Yes. So I'll take this and Eric, please feel free to chime in. When we think about going back or people who followed us for 10, 15 years, we always said it's a GDP-plus type of growth. And the pluses would be increased regulation enforcement events, large-scale events. East Palestine would be a good example of that. Pricing and also captives closing. And so there's 40 captives out there. They incinerate waste on-site and they can close because of increased regulation, increased compliance. So those 4 have been the driver of that. So -- and again, going back 5, 10 years, I've been with the company for 12, you'd say that -- if GDP is 3, well, that's like 4 or 5. And as you said, Jim, it's growing at a much faster rate than that. And why is that? A, because we think there's been the chemical renaissance more investment in the U.S., more investment in production and manufacturing. I also think that there's an ability for good competitive environment has been allowing us to price faster than inflation. And so all these things have been driving that. I don't think that changes with the turn of the calendar. I think those things kind of continue to grow. When you think about our business, and you said this as 6% for the first 9 months of the year, organic growth is probably closer to 7% and so I think that -- I don't think that changes. And even with that 7% in the Industrial Services business, which we'll talk about in a minute, that's been flat to down. So that -- the other parts of the business were growing at closer to 10%. I don't see that changing in 2025. I think that we've been able to price faster than inflation, and I think we'll be able to drive margin improvement over the next 4 or 5 years.

Yes. And you've been talking about pricing, and it has been clearly a tailwind for this part of the business. When did discussions begin with respect to pricing actions, do they start the year? Are these conversations that kind of roll through the year, depending on different factors, help us with that.

Sure. I'll take that one, Jim. And I would say just a real quick answer is they're ongoing throughout the year depending on the customers. So I think over the last 4 or 5 years, the team has done a great job. We have a team dedicated to pricing strategies. So we have a lot more empirical information around pricing. We look at our customers holistically. So we look at what is their pricing today? What type of margins do we drive from the customer? How many LOBs do they take from us. And we kind of look at that, as I said, holistically, and quartile to customers and develop good pricing strategies. We aim today to look at the pricing associated with all the customers we can. And sometimes there's contract limitations, but those are few and far between at this point, but try to look at them at least on an annual basis. During the periods of higher inflation, sometimes these discussions would take place multiple times a year. But we're kind of in a 1-year rotation right now or 1-year cadence, I should say. And we get that together. We meet strategically. We meet with our sales and ops folks and then we approach the customer and position ourselves and talk about the value we bring. Where there is pushback, we can leverage the different lines of businesses with one another to really bring the most value to our customer. But I mean, let's be clear, the #1 thing is that we deliver good, safe, consistent services to our customers that they value. That is what is driving our pricing so.

And the ability to -- there's limited opportunity for alternatives. And so I think that's been able to -- we've battled with our sales organization to drive pricing and the win rate has been flat. And so we've been able to drive this type of price increase without losing customers. In my mind, we got more to do there. And I think that when we hit that wall, customers will tell us with their feet and they haven't done that yet.

And Mike, you were starting -- you referenced one piece of the ES business. It might be helpful to remind investors because it has changed a little bit -- some of the largest components of that business. And then I have a follow-up to that, but...

Sure. So when you think about -- so look, the guidance has us around $6 billion of revenue. That's what the consensus estimate. It's a little under $6 billion for the year. About $5 billion of that is in Environmental Services, and that's broken down into 4 major pieces. The way I'll simply say it, you have the Technical Services business. Think about that as large-scale hazardous waste disposal going out to a Dow plant or a DuPont once so we can get in a tanker car, full of hazardous waste delivering that directly to an incinerator through a direct burn stream. That's large-scale waste. We have the SK branch business, similar type of business, only small scale, going to Jim's Autobody Shop, going to Jim's paint shop and picking up 5 drum, 3 drums on a route-based work, small plant generators still very profitable. Those drums are very profitable work, and that's been a good growth engine for us. That's kind of smaller quantity generator -- same type of profiling and hazardous waste needed for the large scale. Then in the more Industrial Services, think about that as going out and doing -- going through a refinery or a large chemical company, they shut down for 2 weeks a year, 3 weeks a year, and we go into a complete turnaround. They shut the plant down. We go in and clean out pipes, take the hazardous waste offsite and manage that through an industrial turnaround. And then we're on site every day to an insight program, managing their hazardous -- day-to-day hazardous waste needs. And the last piece, the piece we made an investment in with the HEPACO acquisition back in 2024, is in field service. And that was -- that grew for the first 9 months of the year at 48%, and about 12% of that is organic. And what drove -- and drive that is utilities with emergency response or emergency response at a customer site. There's 3 drums in there. It's built over and it's bubbling. We've got to get out there within the next couple of hours. And so that is -- those are the 4 major components of the business. I'd say Industrial Services, $1.4 billion, Field Services close to $1 billion now with the addition of HEPACO and the growth they've experienced. Tech services and SK branch about $1 billion each, $1.2 billion each. And so that kind of adds up to get to your $5 billion. Again, 3 of those businesses have grown double digits this year organically. Industrial Services actually went backwards. Why that happened is because oil prices went down all year. That put pressure on our refinery customers, which is a big part of our business, that put pressure on us to do -- we need to -- they need to generate their numbers. They don't want to do a big turnaround. They want to postpone those turnarounds until next year or the year after. They can't postpone them forever. And so that's creating, I think going to create an opportunity for us in 2025, as oil prices have recovered a little bit, we hope here to stay, and that's going to drive more investment in Industrial Services. So my point being is we're going to grow -- for the first 9 months of the year, we grew organically 7%. And that's with a big part of the business going negative 1 or 2.

Thank you for that. Field Services, I want to touch on HEPACO acquisition, it's coming up on a 1-year anniversary end of March so it sounds like the business has performed well. I don't know whether you characterize it as better than expected. How have you realized some of the synergies that you expected? Maybe just talk a little bit about that.

Sure. So I've been pretty close to that acquisition. So I'll take that one, Jim. But when you look back at HEPACO about a year ago, I think, so far so good, very pleased with the acquisition. We felt like it would be a great fit because it fit right in with our legacy field services business nicely. But when you think about the value we brought to this acquisition, some of the synergies we had targeted, I'd say we've probably done a little bit better, particularly on one front where HEPACO had a nationwide kind of 1800 hotline where they had developed established relationships with customers, but they could call in when a spill occurred, and they would essentially send out crews to respond. But a lot of times, those crews were made up of subcontracted parties. We were able to internalize a lot of that work. ES space was a synergy area that we were really excited about, but -- and we were able -- and we always had plans to internalize that work to our legacy field services folks because we have them across the country. HEPACO was more established kind of mid-Atlantic Midwest area. So when they had responses out West, we were able to respond this year at probably a higher frequency than we had anticipated. So that's been really, really good. I think the other thing too is HEPACO really had some really good relationships with railroad companies and some trucking companies. And we've seen some significant and large opportunities this year relative to emergency response in those areas. We talked about it in our Q2 call earlier this year, where we saw the volume of large responses kind of increase. But overall, we're really excited, really happy with the acquisition. I guess the last thing I would make and kind of speaks to how we look at the future, especially in our ES space and particularly as FS, we're seeing probably more emergency response calls coming in. And what is driving that? And we sit down and think about it, and I really do think companies today when bad things happen to the environment, they're handling them in a more appropriate way. They've always wanted to do the right thing. But I think there's more pressure on companies to bring in the experts, handle this environmental action, the appropriate way, do the right thing and avoid litigation, and we can help them do all that. So you really do think there's continued growth through that acquisition. And now that platform is a $1 billion platform under Clean Harbors is kind of that ER field services work. So it's gone well.

And when we think about field service prospectively. So we don't -- so when we think -- we call out kind of large-scale events, East Palestine is a perfect example of that in 2024. We did about $30 million, and we called that out in Q2 and Q3. So that's probably a headwind going into 2024. And so we're not going to -- as we give out guidance for 2025, we're not going to probably speak to any large-scale events, but there's more of them happening and that's the fact. And whether they're -- there's about 20,000, 21,000 calls a year. They have 21,000 lottery tickets as one of our -- one of my colleagues has said recently that could turn out to be a big deal. And so the fact that we have this footprint and we're growing this business gives us opportunity for us. Again, we don't really model it, but certainly, it's part of the value proposition of the company.

You guys had another important milestone for the ES business this year, ribbon cutting in October marked the opening of the Kimball, Nebraska incinerator. How do we think about the scale-up of Kimball in '25? I think you've suggested EBITDA contribution in the neighborhood of $8 million to $12 million.

Yes. That's right. So continue -- well, first off, we were successful in starting up the plant later on in Q4. We did the official ribbon cutting in October and then opened up the plant a little bit later. So far, so good from what we hear from the team. I know Mike was actually out there a few weeks back and saw it in person, and he's reiterated the opinion of just really proud of the team, really proud of this brand new asset that we brought on about a $200 million investment and couldn't be happier with his visit there. But as we look out into 2025, Jim, there's lots of tailwinds that we view in the business. We see tailwinds from reshoring. We see tailwinds from infrastructure. We see tailwinds from captive operators sending more waste streams to us, certainly PFAS. I'm sure we can talk about a little bit. But all those waste streams along with the demand that we're seeing today, we believe we'll fill up the capacity fairly quickly in the grand scheme of things. In 2025, as you said, $8 million to $12 million, we're going to be measured in terms of how we ramp up that facility. We want to make sure we ramp it up appropriately with the right types of materials so that we break it in correctly. Past experiences, we had a little more ups and downs when we opened up El Do 7 years ago than we would have liked and trying to take those learnings and utilize them here and really have a successful first year and then move towards kind of the $40 million EBITDA contribution that we're looking from this facility long term.

And that ties into that -- the next question I have is with El Dorado. Is there something that can help inform us about that. But it sounds like it was -- that was also a bit of a learning experience, and you apply those lessons.

Absolutely. But I think the last thing I'd make with the comparison to El Do. El Do, when we brought that plant online, the capabilities of that plant at the time were to be able to handle the high hazardous waste streams that are coming into the network. Kimball, again, taking some learnings Kimball, we did the exact same thing with some added capabilities in bells and whistles. So we've seen our drum count coming into the network being up roughly 15% from last year in 2024. So kind of towards the end of construction earlier this year, late last year, we decided to do some incremental capabilities to be able to take in more drums, things like that to upscale the facility. So again, a great asset, particularly with all these tailwinds behind us, Jim, just really excited that we got this thing going and looking forward to ramping it up.

And it looks like a timely investment just given...

And when you think about the $40 million, Eric has made a good point about kind of do the math on the $40 million, take 70,000 tons f you can do the math pretty quickly. But that doesn't include the trans. That does include the pickup and the movement of all that waste. So that's -- and the cost savings of having another incinerator kind of in the middle of the country, I think that's kind of -- we talk about $40 million, but it's actually probably much better than that, depending on kind of how you think about kind of the cost -- the pricing we're going to do on the pickup and the trans. So I think that's something to keep in mind as you're putting out your long-scale models, it's going to take a couple of years, as Eric said earlier, it's going to take a couple of years to kind of get to that kind of run rate. But I do believe that, that's going to be kind of -- just like we're seeing it today, we're seeing margin expansion today from the investment we made in El Dorado back in 2017 and that's including the incinerator plus all the trans and all the work to pick it up. So we're seeing that benefit. We're going to see -- we'll be here in 7 years, talking about that in the same way.

Yes. But I was going to say the timing of this also seems -- it seems well thought because what we were hearing, first of all, we all know there's increasingly complex waste streams that you guys are being called in for, but there are also expectations, there's going to be a stronger industrial economy. And then you touched on it, increased capacity in petrochemicals and whatnot. And what I wanted to get to on this also, and it ties into the idea of captive going after some of the captives, what is this going to enable. And we'll talk a little bit more about 3M and what happened there, but just in general, what -- trying to frame what Kimball does for you, other than that nice EBITDA contribution?

Sure. So I'd say that -- so we've gotten some questions over the -- since we did the deal and closed on the incinerator around increased capacity in our network, both between us and our competitor opening up whatever number you pick as far as incremental capacity. And is that going to put pressure on pricing? Is that going to put pressure on our network as far as -- and I'm here to tell you that I don't -- I couldn't -- I think the opposite. I think we should be thinking about opening up another incinerator like starting that planning process sooner than later because I'm of the view that we've been growing this drum capacity, as Eric said, we had a 15% drum capacity increase year-over-year, it's going to continue. And so we're going to fill up whenever Veolia opened up, they said midyear, Okay, great. Let's -- I think there's going to be so much need in the marketplace. Industrial production over the past few years has been met, down flat. And let's talk about it actually growing -- and if that were to happen, then what happens. I just -- I'm of the view that it really is going to be a need. I don't see it as pricing -- first of all, the stuff never goes on the sale. Incinerator capacity never goes on sale. We own 60%, 70% of the marketplace, pick a number. We're not going to slit our own wrist. We're never going to drop that price. And it's 1 incinerator in Veolia. They're not -- they spend a lot of money for that. We don't know how much. I don't really care. It's going to be -- they're going to need to get a return on that as well. So I'm of the view that not only is pricing going to continue to grow, we're going to need to start thinking about another incinerator. And when is that going to happen? Because it does take 5 years from the time we decide to actually get it kind of on waste, if you will, at least that. And so that's something that I'm of the different -- I'm of the view that the pricing is going to continue, and there's going to be no discounts happening here. And so I want to just be clear about that. We get a lot of questions on a lot of network capacity coming online. I just want to take this opportunity to kind of lay at least my view as a CEO of the company, that we're not going backwards on this. That's for sure. And when we think about captive. So captive had been -- we talked to our captives all the time. There's 40 captives out there. Captive incinerators for people who don't know, they're incinerators that sit on a customer site, the waste gets generated on site, never leaves the site and gets incinerated right there. Now the challenge with those things is that there's more regulations, more standards. And frankly, we couldn't take it. Like we have all these incinerators. We have 9 incinerators, now we have 10 with Kimball, we just -- we had a backup. We had a backlog. We couldn't even take it. And so the fact that we're hopefully getting after our backlog and getting that to a more reasonable levels, should give our customers and our captives more of a reason to say, "Hey, look, okay, I'll close my captive, I'll give you that waste because I have -- we have the capacity to handle it, where I'd say, a year ago, we did not. Well, I sat up on the stage and said we had backlog, deferred revenue is going up that's not necessarily a good thing. It's a good thing from a short-term investment standpoint, but we don't want to double handle that waste. We don't want to keep our waste on that site, we want to move it. We want to get it out of the network. It's expensive to hold on to that waste. So I think a more reasonable level of deferred and backlog, I think, is a healthier thing to our customers and allowing our customers -- our captive customers to make that big decision to close their incinerator and give us that waste.