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

Yes. All right. So Clean Harbors is the largest hazardous industrial waste service company in the United States, North America actually, just framing that. And what you're seeing over the last 6, 7 years is the waste industry is becoming far more integrated in both ends of solid waste all the way through industrial medical hazards, but you're a pure play in hazardous so a little bit of medical in that thrown in there because of your incinerators.

I want to start with the marketplace, if we have a stock market angle on this for a second, looks at Clean Harbor is different and you're an industrial waste business. So they immediately , well, there's more cyclicality. How do you feel about your macroeconomic outlook today sitting here in May versus when you started the year and because a lot has happened.

Yes. So Michael, thanks for having us. Thanks for the Stifel team to have us here today at the Investor Summit. It's really quite an honor to be here. So I think that if you looked at January and February, and so we would -- we have our operating reviews, and they were saying weather is terrible and snowing in New Orleans and all what you kind of hear and read about. And so we were like, okay, but maybe it gets better. But we were concerned that this was bigger than just weather. It wasn't weather, it was weather plus. But February was better than January and March was better than February, and April is now going to be better than March. So I think that -- I think it really was weather. And I do think that our pipeline remains very strong. I think that the growth is solid. And I don't think that -- I don't see today.

You're not seeing the customer base pull their foot off of the accelerator at this juncture.

Not at all. As a matter of fact, we had -- as we talked about in our earnings call last week, we had kind of a great April from a drum count standpoint. And so that's really kind of a good indicator, not just of what goes into our landfill, but that feeds our whole waste network. That was actually a pretty good start as you look at some of the data points in kind of early April.

Okay. So now let's talk about the business. So Clean Harbors is structurally 2 business. You've got environmental services and then you have the used oil, Safety-Kleen Sustainable Solutions. We're going to tackle the Environmental Solutions business. And in my old hat, I would have thought of as a fixed facility, treatment storage disposal sort of that collect it, process it, final disposal. And then there was a lot of services side that may have driven a disposal piece. So I want to break -- I want to talk about the 2 pieces. But overall, you've improved the margins of that segment 500 basis points over the last 6, 8 years. As you sit here today, how much of that do you think is absolutely structural versus it's helped by a healthy underlying business climate?

Yes, I'll take that, Michael. And I think it's really both. So when you think about the things that have impacted our margins over the last 6, 8 years, I think you probably got to go back to our new incinerator in El Dorado, Arkansas. I think that really was kind of a jumping off point, giving us more volume in a very difficult to replicate high-margin asset. And then when you think about some of the other things that have happened, obviously, the arrangement we got into with 3M, closing their captive. I think that was another catalyst to drive more volumes through the network. And then I think internally, we've done a lot of great things around pricing. I think we're much better from an Intel perspective and a competition perspective, knowing what people are doing, looking at the services we're delivering across the board to our customers and really driving margins from that perspective. Certainly, in the high inflationary times that we saw coming out of COVID, pricing allowed us to really grow through that and continue to increase our margins. I guess the last thing I'd say, too, though, is just utilization of all of our assets and by driving more of the services, we are linking sales specialists to our general account managers. That's driving more volume into the network. And we're using all of our very hard to permit very accretive assets throughout the network to deliver service. So I think it's really been more volume...

So what I think I'm hearing though is that the macro is not a macroeconomic. It was macro choices. That's the repositioning of volume. Then there's a better operating leverage, just ran the business better. So what I'm hearing is you could be confident that the majority of that $500 million is really structural.

For the most part -- we've done a lot of great work at Clean Harbors really...

And so -- I mean, it's inevitable you'll have an economic cycle. And your business is on the margin a little more sensitive to that than a pure solid waste play, but it's not truly cyclical. But what I'm hearing is that there's not a -- you're not waking up going half of that margins at risk in a cycle.

Absolutely. I'd say we're not recession-proof, but we're recession-resistant. I'd also say that we've gone 12 straight quarters of year-over-year on the Environmental Services business since we brought it up, 12 straight quarters of year-over-year EBITDA margin growth. So that, in my mind, a consistent story, and it hasn't been all smooth for the past 3 years of what we're talking about. And I do think that tells you that I think people who followed us for many years see Clean Harbors as very cyclical because of our exposure to oil is going back 10, 15 years ago. That's a much smaller piece of the puzzle these days.

Yes, the oilfield.

Western Canada oilfield, that's a very small piece of the puzzle these days.

$20 million EBITDA...

And so I think that we are more like to solid waste than we ever have been. And I think that shows in our ability to grow margins consistently regardless of the cycle. As you know, Michael, industrial production has been kind of met for years, yet we've still been able to grow.

Okay. Lots of strong and drum in the media about tariffs and what have you and everybody saying it's going to trigger a recession, this that and another. But other than a business making and the opportunity I'm going to take advantage of it and pass a price increase through, has it actually affected volume?

No. As Mike was saying earlier, we haven't seen that yet.

Nor services demand because that tends to be a really discretionary.

Services is still strong. So we talked about last week when we did earnings, you think about our field services business, still did about 5,000 emergency response services. So really kind of on the same pace that we were last year, maybe a little bit more in terms of pure kind of emergency response. So there's pockets here and there, but there's also areas of growth that we're seeing.

So in part of that conversation, people forget there's been this reshoring thing going on for a while. We're adding 300,000, 400,000 new jobs a year from that. It looks like that pace is about the same in 2025.

I see no sign of slowing down. I would say, though, it has nothing to do really with tariffs. But the low price of crude has put pressure on refiners, which has put pressure on our Industrial Services business. If you think about kind of where we were last year, Michael, and kind of where we were in Q1, I'd say that's one area where...

And that's discretionary maintenance choices of.

To a point, you know to a point.

You can't string it out forever -- playing out...

That's right. So I think that's kind of the one area where you think about, what's impacting you? Well, low price of crude has put a lot of pressure on our customers. Our Industrial Services business is a big part of that, and that's been under pressure.

So if we start living in a $50 to $70 range instead of $70 to $100, what does the customer rightsize? Or is it just more of a mindset?

I mean I think you can't postpone these forever. And as you know, you get an upset that cost you tens of millions, not millions. So I think that's the balancing act to playing. And so we're working with our customers.

And they're just -- they're trying to play out that they think maybe we'll get a lift in the price here sooner than later and therefore...

I guess my view on it is that our turnaround schedule looks pretty bullish, pretty good. So I'm hopeful that we kind of get back in that Industrial Services for the year is slightly positive, and we had a tough start to the year. We're down 10% revenue growth in Q1 year-over-year. So that was tough.

How much of that was weather?

I think some of it was weather. I think some of it was slowdown.

Okay. Okay. Capacity, disposal capacity, which is predominantly a conversation about incineration. The reality is there's probably an ample amount of landfill capacity. You're a big landfill player, probably because of big land. But the incineration capacity has been one that I think in some levels, actually surprises players in the market, not necessarily you as a company, but the overall marketplace, and it absolutely seems to have surprised the regulators that as the composition of the waste stream has become more and more complicated, more high hazard, the ability to process that through incineration has become more constrained. Where do we stand in that marketplace today? Because you've added capacity now twice in the last 6 years. You have another major competitors extensively going to open up new capacity sometime in '25. Where is that capacity issue around that segment of the disposal market?

Yes I mean, I think, as you mentioned, we've opened up some new capacity here with our new Kimball incinerator, opened it up in December. I'd say so far, kind of our expectations of both from that plant, how many volumes we can get in and it's operating has been right online. I think when you -- the way we look at it, when we look at the market and some of our competitors and many of our customers look at the market, I think general consensus is that this incremental capacity will be soaked up because of the complex nature of waste streams, because of some of the longer-term tailwinds that we're seeing around reshoring, around infrastructure investments. Certainly, there's a lot of captive incinerator operators out there. And you would think that logic would tell you that now with additional capacity coming online, they'd be interested in making a move like 3M did. Now I don't think we need that, Michael, to fill the new incinerator or to soak up the capacity, but I do think that could be a catalyst here in the next couple of years.

Do you think we stay short though?

I don't see that. I think that there's plenty of opportunity there. I think we're open for business. Just so I know there's some customers here in the room. We're certainly open for business, and we're happy. We'll welcome kind of all your waste streams that you provide to us. But I do think that just along the same page, incineration pricing has never gone backwards. Never gone backwards. So I mean, I don't see that happening no matter what happens with Gum Springs and when our competitors open up their new plant. I'm of the view that this is a constrained industry and it needs to be priced accordingly.

Yes. So the generator is still going to seek storage capacity expansion extensions then because the marketplace even with the new capacity coming on is still tight.

Yes. I mean I think that's a good ask for them. Again, like everything else, you can delay the clock, you can't stop the clock.

What was it that motivated 3M? Did you all help get them to make that decision? Or do they come to that conclusion on their own?

Yes. I think that 3M had problems with their incinerator, with their capacity, and they were getting fine and they're looking for a solution. It came down to math, though. And we had to prove to them and prove to ourselves that we could do that work for them at a way cheaper than they could do it themselves. And so that was really the math. Obviously, they wanted to get that plant closed. They were having problems with -- where they keep getting dinged by regulators. So it's kind of all worked together with the perfect storm. They could get a good win. They can close that incinerator, and we can become a great partner with them, and it's been a true win-win. I mean they've been a great reference for us as we've gone and talked to other potential cap, not as many as big as 3M, 3M was the biggest.

Yes, that's -- I mean they were 40,000 tons.

Right. So I think my point being though is that, that relationship has done really well. I mean -- and we've been a win-win for both parties, and we've been using them as a reference for others.

So the captive insurance incinerator market is roughly 1 million tons, roughly. Not all of that is applicable to your infrastructure.

That's right.

Is it a couple of hundred thousand potentially if it were -- it would fit you as far as waste streams, categories?

It's tough to say for sure. We'd always say that there's an equal amount of what we have capacity in the network. There's another equal amount out there in the marketplace. So let's say there's -- we have 549,000 tons of capacity, maybe there's another 500,000 tons out there.

Well, now you're at a higher number.

Yes, with Kimball opening up, right.

Open Kimball. So there's an opportunity that not all of that's going to close. I mean but some portion would. So there's...

But I wouldn't -- again, as Eric said earlier, I wouldn't need captive to close to fill Kimball. I mean that would be helpful, but I don't think that.

No, no, I get it.

Internal model with reshoring and moving waste through our network should kind of fill that thing up.

But there's a realistic prospect that 10% to 20% of that over a 10-year period is likely to close. It means the point of this -- this market remains tight. There's a prospective here of a tight market for a while.

I would agree with that.

I think that's the observation. And...

I guess I wouldn't -- I guess to answer the broader question, I'm not worried that when a competitor opens up their plant and where our plant is running at a higher capacity than it is this year, there's going to be concern around pricing pressure, which is what I hear from some investors.

Okay. You did a lot of M&A on the services side, taking yourself from a high teens, low 20s percent share to much bigger. How has that changed that business model? Because this was -- that was -- that's a discretionary action within limits, those services because they tend to be kind of maintenance cycles. Your turnarounds are an example of that. How has the M&A helped make that a more stable or a more predictable business that can absorb end market variability on what's happening?

I just think it's a much bigger business than it was when we made a large acquisition in 2021 with HPC Industrial. And I think that's allowed us to be a little more price discipline in the marketplace since we're such a larger share now and to survive the bumps that we're talking about here.

And introduce more end markets. So you diversified the end markets for...

Of course, we provide kind of a bigger share of wallet to our customers, which I think has always been helpful because -- and these customers are all the same chemical companies are going picking up their hazardous waste.

Right. Right. Okay. When you think about M&A as part of a growth strategy in the ES segment, is this more of a now fill around the edges? Or is there something big out there that you should do?

Yes. I mean I think when we think about it on the ES side, it's looking at -- there's probably a few geographies out there that we could fill in. I think it's looking at areas where we can continue to increase our capabilities around certain of our -- the nature of our assets. So obviously, we have a new incinerator, but there's lots of other disposal activities that we undertake, and it's maybe plugging in some of those hard to replicate permitted sites in some other areas, whether that be wastewater or something like that. But ultimately, on the ES side, Michael, we're really looking for things that can feed the beast. You've heard us say that before, but really taking more volumes, leverage our fixed costs and leverage our strong infrastructure. Those are the types of things we're looking for. And then if there's adjacencies there that can provide like a really nice platform for further growth, we'll look at those things as well. So...

I've seen the math. I've seen it dynamically in the office. And when you see all the dots in it, all of a sudden, you lose sight of the country because it just blurs the whole thing. But the manufacturing and industrial production and industrial activity in this country has changed dramatically. They've engineered out a lot of things as far as waste streams and the like. How have you continually revisited your portfolio and said, okay, well, this was an asset that worked really brilliantly in the '90s, loses its relevance in the 2000s. Where are we in that life cycle aspect?

I think a perfect example of that is retail. I mean retail went -- that was a rounding error that it was, let's say, 5 years ago, Michael. And now it's 3% to 4% of our overall revenue, which is on $6 billion. It's a pretty big number. And that's retail just going after like containerized waste, bringing it into our network. Not all of it goes into incineration or into and disposal, but that retail business has been growing for us. And that's where -- because you're right, ultimately, things get engineered out over some period of time. But at the same time, there's more waste streams that get and the regulators never stop and they're going after these large retailers around putting lithium batteries in the dumpster, if you will. And so that type of work has been a big win for us.

Okay. And when you think of the complexity of the waste stream, and I got to imagine if I looked at the waste categories between the 4 characteristics and the listed waste and what was in the actual manifest in 1990. And what I'm looking at in those manifests in 2025, there's a huge difference in what those waste streams are.

I think they're much more complex, to be fair.

And they're only getting more complex, is a fair observation.

Hence, the need for these -- for our plants to be MAC 2 compliant to be kind of up to the latest standards to kind of incinerate kind of the nasty of the nasty...

Okay. PFAS. I'm still a believer that PFAS from a stock market standpoint is a very investable thesis. Sadly, the market got -- I think, got ahead of itself in the expectation of the win. But where are you as a company in a PFAS journey?

Yes. I mean I think we're definitely in the early innings there. But what I would say, Michael, and I think everybody is, to your point, I think it's evolving and it's going to have a really long tail to it. I mean, Mike and I were even sharing some e-mails as early as yesterday about PCBs, and we're still collecting PCBs and when did the rules change around those. So I think it's got a very long tail. We, as an organization, I mean, we introduced our total PFAS solution about a year ago this time, which really is a complete suite of services that we can provide to folks from the initial testing upfront right on through remediation, collection and ultimate disposal. And we believe we're really the only company that can provide that full suite of services at scale. And if you think about revenue levels, we've mentioned $80 million to $100 million is what we did last year. I give a range because there are some aspects of those revenues that have multiple components, but certainly, PFAS is part of that. And we see that growing 10% to 15%, 20% this year as we gain more traction.

And just to put this in perspective, 5 years ago, when I was an analyst and I did write that I thought this is an investable thesis, that business was $20 million, $25 million range.

That's right.

So you've tripled it in a 5-year period. I mean the real panacea, though, is ultimately broad-based comprehensive remediation. DoD is desperate to do this work. What's in the way of that work happening at this point?

Well, I think if you've been following what the EPA and the new administrator Lee Zeldin has talked about, he's an advocate. He came out last week, as you may know, with kind of hiring a PFAS leader to wake up every morning thinking about how to PFAS, how to remediate PFAS and also soil and water and everywhere. Also, they're going to do more update testing once a year versus once every 3 years. So these types of things are winners for us. And so we feel like -- so you say, well, we need more regulations. I don't know. I think the states are very active. There's over 61 lawsuits in the courts with over 16 different states to push PFAS along faster. So it's not just a government when they're going to come up with new regulation, it's happening either way. And to Eric's point, when you think about the journey of PFAS, and you talked about this earlier where we're over our skis. I mean, PCBs, for example, it took over 13 years. From the time it was...

When do they actually stop saying, okay, I keep my -- I want you to keep testing it and say, we prove it.

We're hopeful this is it, and this is going to -- if nothing else is going to show the companies who are polluting making this, there is a solution out there.

There's a form of assured destruction.

That's right.

And you're a -- I mean it's a niche in a good way. Not everybody is going to take their PFAS -- summer of '23. They promulgated their own disposal hierarchy, EPA going to worked up, blah, blah, blah. But this is a whole new world politically.

I think they're very supportive of moving forward and cleaning up their military bases and airfields.

And they had 700 sites. They've gotten it down to like 275. They were told to go back and retest. Where do you think we land about 300, 350?

Tough to say.

I think just to put a final point on it along the same lines, though, when you think non-DoD sites, when you think of private sites, if you will, for lack of a better term, I think we're seeing a lot of customers -- I know we're seeing a lot of customers that they find some PFAS issue and they're looking to deal with it now to avoid future litigation. Some of the work that we're seeing come in regardless of whatever the regulations are, people are doing the right thing now and getting ahead of it.

Okay. So I say it to the very end, so we didn't have to spend more than 5% or 6% of this conversation talking about used oil. So the opening question would be, why not position that as there is a minimum level this will always produce at. And when it's better, it's better and when -- and we'll tell you what that is. But it will always be x and as opposed to hopefully returning back to it's a $200 million EBITDA business.

Yes. So I got to take a step back, Michael, and explain to the audience a little bit about what we're doing with our SKSS business. So we go out and pick up 250 million gallons of used motor oil at automotive dealerships and other industrial services, and we process that through 9 re-refineries that we take that dirty motor oil and make base oil out of it, which is the building block of motor oil. So that process, we take that 250 million and make about 150 million gallons of base and blended oil. And so what's happened is that right after the pandemic, oil prices spiked and there was a credit demand for oil and our profitability because the price of the base oil that we were selling went up quite a bit. And yet -- and so we were collecting and we had a $300 million plus year. And so then over the past -- in EBITDA. And over the past couple of years, it's kind of been steadily on a drumbeat down. And I think that the mindset at Clean Harbors has always been we have these great re-refineries and to make sure that our cost per gallon is at its lowest level from a cost accounting standpoint, we have to maximize the volume. We never want to have a plant run low because it makes the cost per gallon go up. And so that's always been the mindset. So when we push pricing on our used motor oil collection, at some point, we've lose gallons to the point where the plants couldn't run efficiently, we'd be like stop, stop. We have to go fill the plants and pay what we need to pay to get the plants full. And so that was the mindset since I've been here for 13 years or 12 of those 13 years. And last year, we changed the mindset. We said, you know what, some of these plants are marginally profitable anyway, especially one in California that we closed and others that we should think about not thinking about it from keep the plants full, but let's keep the price right of our UMO collection and let the gallons kind of fall where they may. And if that means closing a plant or 2 to maintain a level of profitability, well, that's what we have to do. And so we kind of lockdowns in the [indiscernible]. That's what we did, and we held price. And we did lose some gallons in the fall and the winter. We did lose some gallons, and we were concerned. But what's happened now is terrific. The price has stabilized, the industry has followed and we didn't really lose as many gallons as we thought we were going to lose, and we kind of changed the game a little bit because now what happens is that since we are the biggest player, we started acting like it. And that affords them a much higher level, a much more consistent level of profitability than we have in the past. And really just a different mindset.

What's that number?

I think the $140 million number we've given that we beat Q1 by $8 million. We didn't raise guidance for the year because once coming into April, we're getting some gallons back that we lost in the wintertime. So that really is -- really is very positive for us. And we're hopeful that we turn the corner on this and stop the drumbeat of negative, do exactly what you said, keep it the same and grow from there.

Okay. So a shameless plug for them actually, and they're not a member, but I'd like to get them to be a member. So Castrol is out there as a booth. I don't actually know the booth number. As you come in, they're going to be on the near wall. That's their partner. Everybody who's in the services side, if you're not actually using re-refined oil as your underlying lubricant, you're spending too much money. They can save you money in your total lubricant equation. And here's the important thing to know is that base oil, you can step on that molecule an infinite number of times. And in fact, the process makes it purer and purer and purer every single time. You get back to a clear liquid lubricant, you then put the additives in, which gives it a bluish hue. And you know your oil is bad because it turns black because the additive package basically bakes down. Go talk to Castrol. You will be stunned what you could save in money. And they're a major provider of that base oil for Castrol and then blend it and make it into...

That was a plug right there. It's a good plug. I do appreciate that.

All right. We're at the end of our time. Thanks for coming. I do appreciate it.

Thanks for having us.