Clean Harbors, Inc. ($CLH)

Thank you again, everybody. I appreciate everybody's participation. We are going to start the next company panel with Clean Harbors. I want to welcome Mike Battles, Co-CEO, Eric Dugas, the CFO. I appreciate your taking the time to talk with us. And Mike, this is your second time up here on the stage this morning.

I'm going for punishment. .

You must like it up here.

I do not.

Similar to the other company panels, I'm going to start this off, just basic questions. There's going to be some overarching questions and some company-specific questions, and we can kind of attack it that way from the industry perspective.

I thought I would just start out at high level. Maybe you could talk about some of the high-level trends that should provide tailwinds to your business. So there's the PFAS, you're on the panel, the reshoring onshoring captives closing you maybe take these one by one, talk about how investors should think about these trends impacting Clean Harbor's business over the next several years -- and to the extent possible, if there's a way to quantify?

Right? Well, so first of all, thanks for having us. We appreciate an opportunity to talk for Stifel and for you to have us here on stage and tell the story of Clean Harbors, which I think is a great story, and we're hitting on a lot of cylinders right now. So I'm here -- I'm happy -- Eric and I are happy to be up here sharing that with you and with the investor base. So when you think about the 2 -- the 3 big items you just highlighted, PFAS, I spent this morning, a good hour this morning talking about PFAS. And that's kind of -- that's probably the most actionable right now of the 3. And as I said this morning, I think that the market is very strong for us. I think that it really has been growing at a very good clip. I think that continues over the next few years. I don't see anything. Obviously, clear regulation will talk about that later. Clear regulation would be helpful. But I don't think that's stopping right now from our customers, whether they be the government, whether they be federal government, whether it be state governments, or private companies. So I think PFAS -- there are some questions on PFAS coming up, but I think PFAS is going to be a great grower for ConCobers over the next 5, 10 years easily. When I think about restoring, I mean, we definitely see PMI growing. The last 5 months has been a good run. People who may know this, it was the highest PMI in the month of May, was the highest it's been in 4 years. And so we're on the back end of that. We're waste. So we'll see that kind of later. But we certainly see from a pipeline standpoint, from a volume standpoint, things are picking up. And it's not just in areas where we've been growing, which has been retail and other areas, but really in where the high-margin waste streams are in the industrial -- in the chemical space, we've seen pretty decent growth. Again, still anecdotal versus actual revenue generator, but still very good growth there. When I think about captives, captives -- there's 41 captives out there. They are fit our profile. I think that we remain very close to these customers. We talk to them all the time. I mean that is a long selling cycle. And I think that there's -- it's coming, it's going to be here, but it's really hard to predict mine.

Okay. And then just in terms of how these different trends could impact your business? I mean I know Michael is trying to pin you down to a $0.5 billion market business in the next few years. I'm just thinking out, I don't know why it can't be a $1 billion business...

You said in your initiation report, $100 billion to $300 billion -- your words are God here.

Out in the industry. It's kind of hard to point this $10 billion from here.

I'm going to reference a very bright sell-side analyst, who told us it was $100 billion to $300 billion market, addressable market. I'm not sure we did that, but I would think it's solid as a rock. .

All right. Well, we're expecting to see some really strong growth from you.

I hope so. I hope so.

What are you seeing on the reshoring and offshore? And so is that -- how material is that to your business right now?

I think it's very real. -- when you think about growth in semiconductor or in pharma, you have to -- you're building new facilities, you need to make sure that you have an outlet for that waste stream, whatever wasting is being generated -- and we're having conversations with those customers today about that type of growth. And so I'm of the view that reshoring is very much alive, very good grower and very real from what we see from a pipeline standpoint. .

How much is it is the pipeline versus how much you're actually hey this is trying to hit us today.

I mean I think a lot of the reshoring is still on the come Shlomo, but in our business, we have a lot of forward-looking information that we get from customers, and we can see their plans around higher production levels. And that's what's on the come. But I think we are seeing and I know we're seeing in our revenues today, our volume growth in 2025 and 2026 was pretty solid, and that was against a baseline and maybe a macroeconomic environment that wasn't the strongest we have seen. So with the better macro factors. And currently in 2026, we're seeing greater volumes, and they're coming from some of the industries that Mike mentioned. And we're developing new locations and new hubs around those growing industries in specific regions of the country to realize that.

Yes, Eric makes a good point. We've been growing our tech service business, which is where most of the chemical company grows in mid- to high single digits in an environment where industrial production has been flat to down. And so I'm of the view that if we see any of this that you're talking about and if PMI is real and it's going to grow. I mean, the future is very bright. And so I feel like we've been able to do it in an environment that's been kind of met -- and so I'm of the view that, geez, I would hate -- I would love to see what would happen if industrial proaction does really start to pick up, but I think it is. .

Okay. Great. I want to pivot a little bit towards incineration. And just what's going on in the market. We obviously had the OEM North America, just here on the last panel, and they're talking about their Gum Springs incinerator coming on into the third quarter, some the fourth quarter of this year. And that brings extra capacity into market. And they talked about a little bit of how they kind of prefilled some of that. But just in general, between what you're doing with your Kimball facility, and what they're doing with the Gum Springs. How do you feel about the market's ability to absorb that capacity that's coming in without impacting pricing?

Yes. I think it's a great question, and it really comes down to kind of the laws of supply and demand dynamics. But I think the way the market is viewing it is for many of the reasons that Mike just alluded to, a lot of the tailwinds, just the natural tailwinds that we're seeing whether those be reshoring, near shoring, I heard a new term this week, home shoring, but I'll just call it greater domestic production, the PFAS opportunity that we spent a lot of time today speaking about and then captive incinerators, which I'm sure we can speak about as well. I think the general consensus is that this incremental capacity will be absorbed. The last 2 facilities, the new incinerators that we opened, we've seen that the demand pick up and that capacity be absorbed and continue to really garner some nice pricing kind of on the incinerator front. So it will be a little bit of a long-term add to the network, opening up a new incinerator as we've experienced twice in the last decade. It takes a year or 2 to kind of ramp it up and get the right waste streams through the plant. But again, we see a lot of tailwinds in the business. the latest being maybe some improved production conditions. And we think that will be absorbed just as it has in our case, the last 2 times that we've done this.

I mean, incinerator pricing never gone on sale. Maybe in some years, it's been slow growth, but we've never gone backwards. And so I don't see that happening. And as Eric just said, I think that you turn the plant on and we've seen it in -- in Eldo and in Kimball, Nebraska, it takes years to get fully operational. So it's going to take for that 100,000 tonne capacity incinerator, it will take years for that to kind of get up to full capacity, which makes sense to me, which is they have said that publicly themselves. .

So do you have a backlog as well in terms of like, hey, we know this capacity is coming on, but we also know there's stuff that's coming in, that we are able to point to like, hey, there's not a bunch of like 4 rent signs that are going to go up in capacity.

Capacity for sale? Yes. I think that, as Eric mentioned, we heard from had some large pharma companies, some large semiconductor companies, there's -- the waste is going to be there. I'm not -- I'm a little lot concerned about that. .

Okay. Maybe shift a little bit more to the captive -- it's hard to tell exactly when are they going to close -- there's obviously an issue of if you do close and you incur certain expenses to actually close, are there certain regulations that you see coming down the pike or what could be an impetus to spur some more of those closures? So you've been talking about that for a little while? 3M was the last big one, but what would it take to kind of push that forward a little bit more?

Yes. I mean again, I think captive closures is something that over time will happen. It's probably not a question of if. It's a question of when. And Certainly, there are some incremental things that are going on in the market around emissions and maybe some capital that certain captive incinerators we'll have to put in. that may drive some of these captives to make that decision, like did a number of years ago to close and kind of move those volumes into the commercial space. What I'd say Shlomo is that many of the operators of these captive incinerators, they're customers of ours today. We have relationships with these companies. We handle some of the waste streams that can't go through their captive or perhaps when they're down for a turnaround or maintenance, we take some of those waste streams. So there's a long-term kind of history with those captive operating companies. We have a gentleman on our team that keeps close contact with those captive operators, meets with them regularly. And we're continually showing them how a move like what 3M did, could benefit them, how we could save them money, how we could save them capital investment that's going to be required over time. How we could handle their waste in a very efficient and safe way. And we can give them surety that if and when they do close their captive, they can move their volumes to us and we'll be there for them in the long term. One of the advantages of our network is we have redundancy, which is really valued by all of our customers. But when you think about a captive closure and some material amounts of volumes moving into a new place for that customer, it being Clean Harbors they want to know that we're in it for the long term and that we can handle their waste, and that's what we do. So a huge opportunity, I think, for us, something that's going to kind of backfill the capacity that's opening up. It really turns into a little bit of a return on headache for these companies. They want to focus on making things. They don't want to focus on these complex facilities. So again, I'll go back to my earlier comment, it's probably not a question of if, but when. And that's the difficult part here is being able to tell all of you exactly when this is going to happen. But we are confident it will in time.

Yes. The good news is that I know everyone wants to model as to, okay, what to put in 2027, what to put in 2028? .

Which quarter?

Exactly -- that's my point. .

Right. So okay. will shift a little bit over here. Just there was a comment, I guess, on the first quarter call about the PFAS pipeline increasing 25% to 35%. How does the pipeline increasing impact revenue. So what do you -- how does that work in terms of converting over to revenue? That was pipeline? What is the qualified pipeline look like? Maybe you can explore that a little bit in as long as you're talking about how we should model? Maybe you can...

Modeling wise, I think the purpose of us sharing that with the investor base is not to say what does Q2 PFAS look like because it is a little lumpy. Right? It's more to give assurance to the investor base that the growth is real and is sustainable over the long horizon. We talked about 20% to 30% growth in our revenue growth for the year. in the quarter is much better. I just don't want to -- I don't want to start giving quarterly numbers on something that's a little lumpy and is a little event driven. And so you hate to kind of set yourself up for that type of failure -- so -- and so the pipeline was -- we thought -- we talked a lot about it as a team to give out the pipeline number because like now people are going to ask us what the pipeline is in Q2 and Q3? The answer was not to say the pipeline is x versus y. It's more to give you your assurance that growth is real and sustainable, and it's not just a one-off 25 event based on some events that we end up winning, right? So I'm of the view that the pipeline -- the qualified pipeline is also very strong, which I'd qualify is 60% more than likely of achieving. I think that's also growing at the same type of clip to answer your specific question. But I do think that the purpose of it wasn't to say, okay, what's the Q2 number? Because I think it's very dangerous to do that. I think it's -- overall, I think that it's a signal to the marketplace that it's real and sustainable. That's the purpose.

Perfect. And then -- is there a specific regulation that you're looking for in the next year or 2 that you think will kind of stimulate more activity in PFAS?

I mean I think that obviously clear regulation would be helpful. I mean as we talked about this morning, you have really good regulation at the -- on -- for like water treatment, that's kind of very clear. And maybe you have some general direction as to disposal outlets, right? So -- but otherwise, there's a lot of ambiguity out there. Now states aren't waiting around for the federal government to do that. So some states like Maine and New Mexico and New York State are doing some things around it. So I think that's very real. But I do think that having better regulation. Our framework, for example, with the reason why we put it in the Q1 earnings release is to tell our investing public and our customers that we have a great framework that we've been working on for years that does remediate PFAS based on levels of concentration. It's not just through incineration, there's solid waste in certain cases. There's deepwater, deep well injection in certain cases. So I think it's a very real and very -- and we just had a conversation with the EPA about our framework. They really like the framework. They're going to hopefully come up with some rules around that. We need better rules, we need funding and then the customers come from there.

Okay. And is there any visibility into the rulemaking process right now? Or it's just kind of...

We're partnering as much as we can partner. I mean I think that we understand that customers -- because the problem in Shlomo is that -- if you're going to spend -- if I'm a CEO, we're going to spend a lot of money to clean up a problem that exists in one of my sites. I want to make sure that it's clean, that I don't have to do it twice or 3 times. Like you want to make sure that if I'm doing it, I'm going to spend the money and get it done, I want to know how clean is clean. And so with that, without clear regulation, I'd be very concerned and I'm going to dig all this stuff up and find out it didn't go deep enough. And now I'm really screwed, now doing it again, which seems like something I would not want to do. .

Got it. And then what about some of the other emerging technologies in PFAS destruction? Are there other ones that you're using or other ones that you feel could be comparable super critical water oxidation, electrochemical oxidation, photochemical reduction process, coal plasma, other ones that are out There .

Yes. Yes. I think all those are legitimate. I mean, I think that all the different technologies you made are all -- have a home -- but I want to say that I want to make sure it's very clear to our customers and to the investor base is that you want to make sure that it's not just like pilot ready versus large-scale provable compliant and repeatable type of treatment and solution. I always worry that it may work well in a lab bench, but is it going to work out when it's 110 degrees outside or it's snowing outside because that's really what you have to make sure it works with. And we know through our testing with the Department of Work and the EPA that we do have a level of 69 of destruction, which is essentially destroying it completely, that's proven and compliant and gear assured destruction. And so I think -- but to be fair, since I was up this morning with someone who does the supercritical water oxidation, there's room for all of us. I think the pie is big enough that we're going to need -- PFAS, we call it as 1 thing, it's incredibly complex. And so probably we need all those technologies to work and work well to solve this problem. So I am of the view that I think the pool is big enough so that we all have a good home here.

Got it. I'm going to ask you a question that actually is a flip I asked you before about capacity in the market. But given all the demand that you're seeing, do you see another project like Kimball coming on the back of the ramp of Kimball of expanding or another incinerator in order to -- these things take a long time to build and then to ramp. So you can't build -- there's no just in time -- so how are you thinking about that? Are you already exploring other sites for potential expansion and how you're thinking about that? .

I mean, I'd start off answering the question by just saying what we were able to do in Eldorado, Arkansas, and more recently in Kimball, Nebraska was to be able to build an incinerator at an existing site where we had existing permits that needed modification. We had existing infrastructure. We had water rights and things like that, that are very important to an incinerator. In terms of kind of adding additional capacity, we'll see how these tailwinds play out. in making that decision. I think the tailwinds to your earlier question, they're very strong. And over time, we will consider kind of additional capacity, which could be a third new incinerator, if you will, and another site that we have. I imagine it will be very, very similar to what we've done with the last 2. But it's a type of a decision that we're actively thinking about. But to put a shovel in the ground and start that project. I think we'd rather be a little late to the game, let that capacity and the demand. The demand absorb the capacity that's out there now. and then make that decision in the future. It's about a 4, 4.5-year kind of time line is what we experienced in Kimball to kind of first shovel in the ground, the first waste stream going through. So -- it's something that totally -- we're totally able to do, I believe. And there's some other things we could probably do at existing sites to help get incremental capacity through in the meantime, if needed.

Are any of your other sites positions that it's similar to Kimball where you have -- the permits can be expanded. You feel good about that, you feel the relationship with the neighborhood is -- when we built the Kimball site.

We explored the opportunity at another site basically on the same land as our incinerator out in Utah, and that would likely be able to expand the same way out there.

Maybe shifting a little bit to some of the M&A that you guys have done recently. 2 acquisitions announced in the last 6 months or actually Depot Connect and Tera Nova. And maybe you could just explain to the investors what did you buy exactly? How does it fit with what you have? How are they growing margin profile? And where do they fit within your company?

Yes. So we're both excited for both Depot Connect and Tera Nova about $360 million of spend over the past 6 months, as you noted. And I think that they fit very well in our swim lanes. What we've learned probably the hard way is we want to make sure we're buying things that fit well with our swim lanes that are -- these are wastewater treatment, solidification pits, permanent facilities that draw -- that have a good list of customers and they're good growers that we can integrate into our business very well. They fit into our technical services business and our field service business, two areas that have been really growing with really good margins. And so I'm investing in both the businesses and the people who are running those businesses, our long-tenured Clean Harbors employees really know what they're doing. And so I'm excited about the opportunity. In early days for both acquisitions have been really positive and -- but they really are -- they fit our swim lanes, and we're going to -- we're probably going to continue on that going forward. I think companies that fit our swim lanes that are highly permitted that have high barriers to entry is where we want to go.

So dig deeper, what do they do?

Well, no, the -- sure, they do the same thing they do, Lab-Pack cleanups. They do wastewater treatment. They do solidification pits. We're taking sludge and ABD watering this sludge and that way, some of that water can go into POTW, some of that can go into incinerator to a landfill. I mean, they are very similar to what we do. And we spend a lot of time in the talk to you about incineration, which is certainly big, important. We own 10 of them. It's awesome, great. That type of work of wastewater treatment of solidification pits of the grind of cleaning up industrial wastewater, that that's a good margin business. That's a good growing business, and that's kind of what we want.

You talk a little about what you're doing in the railcar stuff on that. I thought that was interesting in cleanup so.

Yes. We do tank cleans all the time. So railcars just a natural step on that. We do thousands of tank cleans every day. So a railcar is just 1 more step beyond that, which DepotConnect does a great job with.

Can you talk a little bit about the pent-up demand for the industrial services and for the turnaround? So how do you quantify it? What are your clients telling you? Obviously, the narrative seems to have shifted to, hey, we're turnarounds are not happening because no one's making any money they want to put any money into it, and then to, "Hey, we're finally making money,we don't want to stop making money." so what -- how much demand do you see there? And what kind of visibility do you really have to when the demand shifts to, hey, guys, I got to use you before something breaks and I have a bigger issue.

Yes. Yes. It's a very interesting business. A little bit of a Goldilock syndrome there where you have a period of time where, hey, we're in cost-cutting mode, and we want to save money and our maintenance spend and our turnaround. And now the plants kind of the situation we're in now is those refinery customers and chemical customers, to some extent, are producing at high levels, and they don't want to slow down and take that important time to do the maintenance and turnaround that's required. And Shlomo, in terms of visibility, I would look at past cycles -- and I've been drawing an analogy to something I think is really real that when you think about the COVID period and the patterns and behavior that we saw amongst these same customers back in COVID, you think about kind of March 2020, the world coming to a halt. These same customers stopping the level of maintenance they're doing, doing smaller or no turnarounds. Then you kind of get to March 2021, perhaps and the world turns back on. These same customers are now ramping up production and producing at high levels. And again, they don't want to stop and do that important maintenance and turnarounds. That's kind of analogous to where we today -- and then if I just go back in time again kind of late '21 into '22, you saw these same customers begin to have disruptions and it was time to perform these important maintenance services and turnaround services. And in our Industrial Services business, you saw a pickup into '22 and into 2023. And when you speak to the members of the team that have been in this business a long time, they've seen patterns like this. So the visibility, I think we have into the future is that historical pattern that we've seen you are beginning to see some disruptions out there and some incidents at some of these types of facilities can't draw a direct link to kind of less maintenance and turnaround causing those, but it could be an early indicator. But I think past history and past cycles have told us that eventually, these are extremely large complex plants, millions and millions of dollars are invested in them. They need to run and they need to do those important services that we help them provide eventually.

So based on past history and using the -- would you start to think that this gets better in the second half of this year, the beginning of next year or...

We haven't planned any improvement in the back half of the year. .

You have not?

In the guidance we gave a month ago and you can.

We're hopeful that things will improve. And the reason I bring up past history is we've seen that. But in terms of our expectations for 2026 and the financial targets we've put out there, as we've said publicly, we kind of have the back half kind of flattish to last year. No real uptick baked into the guide. We'll see how that comes to fruition here in the back half, but you got to think eventually here, the tide is going to turn and hopefully, the latter half of '26. But certainly, in '27, we would think that more maintenance is going to be required. So not in guidance, but hopeful. That's the way to think about it.

And supported by past cycles.

That's right.

And when just on the ground, when clients see things like what happened in California with the core thing, does that push them more to do the maintenance? Or are they're like, hey, that's a little bit of a different business than us? Or do they -- how do they think about that?

Every refinery has tanks like that. And I'm sure if I was sitting -- if I was running a large refinery, I would think about it like that.

Do you send out e-mails, hey, did you see?

I think they read the same newspapers I read.

Okay. Can you walk us through the business, the business lines. And some are GDP growers, some are plus growers, which ones are which and what drives the plus?

Yes. I guess I'll start and just pointing to kind of our largest business line within , I should say, business unit within our Environmental Services segment, our tech services business. When you think about that business, about $1.6 billion in revenues. We think about that as a GDP plus-plus grower. And when you think about the normal GDP or industrial production, the pluses are some of the pricing power that we see in that business. So that's where our incinerators are. That's where we have the greatest pricing power kind of mid- to high single digits there historically. . You think about project work. So you think about sites that were contaminated and need some remediation work, that's in that business. And a lot of times, that type of contamination was done years ago. So it's outside the scope of kind of GDP or current industrial production. Obviously, regulation I think, is a perfect example. Regulation can drive incremental demand for us. So services that's kind of the plus. I'd say in our Safety-Kleen branch business, again, about $1 billion business, very similar to tech services, probably doesn't have the large remediation and project work in there. But certainly, when you think about those customers, a lot of nondiscretionary routine, almost like a subscription-like business and again, some nice pricing power kind of above inflation that drives to I look at that business, I love that business kind of every time we close the books, 7% top line grower here for the last few years. So...

Can I stop you for a minute on there. What's the secret sauce?

Yes. I think the secret sauce is some of the things that I mentioned about nondiscretionary spend, relatively low kind of percentage of their overall wallet. But I'd also say the secret sauce for Clean Harbors is in that business holding on to people getting them to be familiar. So when you think about the SK branch business, it's a driver in a box truck or something akin to that, going out, doing parts washer services, collecting containerized waste, maybe some special trucks get sent out to do back services as well. But we've been able to hold on to our drivers. They get to know their routes, they get to know their customers, they can take the opportunity to cross-sell into the current customer base, but also we give them time and we've set up incentive programs. To get them to do some prospecting during their day, stop by, introduce themselves to a potential customer, and that really has resulted in some incremental volumes coming through and taking some market share and helping to drive that top line and the margins in that business are 30% plus, so really attractive. So that's a little bit of the secret sauce thing.

Okay. So you did 2 of them. So maybe...

Field services, again, probably GDP plus there. I think the plus, again, a little bit like tech services, you have some large project work or large ER responses. -- that come up from time to time, a little bit of a lumpy part of the business, those ER responses. But there's about 50% of the business that's routine work. And then the other 50% is ER response where we respond to over 20,000 events every single year. So over such a large base of events, they're pretty routine and pretty stagnant. And then you think about Industrial Services, we spoke about that business a moment ago, more an industrial production type growth pattern there, a little bit of cyclical as we talked about, but still being able to price above inflation, which is a positive.

Okay. Great. Now just some numbers, we're going to finish off with the numbers question. What are the goals for really simple free cash flow conversion in improving in that area like -- what gets you to higher conversion rates as CapEx go down, interest expense go down, the tax rate, where -- what are you thinking about over there in terms of conversion?

Yes. I mean I think the greatest driver of our free cash flow conversion over the last several years and will continue to be going forward is our margin expansion. So when you look at our core Environmental Services segment, which is about 85% to 90% of the business, we've grown margins over the last 5 years by about 450 basis points. . If you go back 9 years, we've grown margins in that business by about 860 basis points. So it's -- that incremental margin growth is driving kind of the greater cash flow conversion. There's working capital advancements that we're making as well. we've had some nice growth projects. So that's not a thing, but it's really expanding those margins, getting our free cash flow conversion to where it is today at around 40% to 42% and looking to drive that up closer to 45% in long-term beyond.

Thank you very much. I appreciate you being here.

Thank you. Good job.